| SI INTERNATIONAL INC Item 1A Risk Factors Risks Related to Our Industry We depend on contracts with the Federal Government for most of our revenue, and our business would be seriously harmed if the government ceased doing business with us or significantly decreased the amount of business it does with us |
| We derived 98dtta1prca and 96dtta6prca of our total revenue in fiscal 2005 and in fiscal 2004, respectively, from Federal Government contracts, either as a prime contractor or a subcontractor |
| This includes 46dtta9prca and 52dtta8prca of our total revenue in fiscal 2005 and in fiscal 2004, respectively, that we derived, either as a prime contractor or a subcontractor, from contracts with agencies of the DoD and Intelligence community |
| We expect that we will continue to derive most of our revenue for the foreseeable future from work performed under Federal Government contracts |
| If we were suspended or otherwise prohibited from contracting with the Federal Government generally, or with any significant agency of the DoD or the Intelligence community, or if our reputation or relationship with the Federal Government or any significant agency of the DoD or the Intelligence community were impaired, or if any of the foregoing otherwise ceased doing business with us or significantly decreased the amount of business it does with us, our business, prospects, financial condition and operating results would be materially adversely affected |
| The following chart provides certain information regarding our four largest contracts for fiscal year 2005, in terms of revenues: Percent of Revenues in Contract Customer 2005 2004 Expiration Date Command, Control, Communications, Computer, Intelligence, Information, Technology, Surveillance, and Reconnaissance (C4I2TSR) US Air Force Space Command 18dtta8 17dtta3 2013* National Visa Center (NVC) Department of State 9dtta1 9dtta2 2011* _________________________________________________________________ * Includes option periods |
| Our business could be adversely affected by changes in budgetary priorities of the Federal Government |
| Because we derive a significant portion of our revenue from contracts with the Federal Government, we believe that the success and development of our business will continue to depend on our successful participation in Federal Government contract programs |
| Changes in Federal Government budgetary priorities could directly affect our financial performance |
| A significant decline in government expenditures, a shift of expenditures away from programs that call for the types of services that we provide, or a change in Federal Government contracting policies could cause Federal Governmental agencies to reduce their expenditures under contracts, to exercise their right to terminate contracts at any time without penalty, not to exercise options to extend contracts, or to delay or not enter into new contracts |
| Moreover, although our contracts with governmental agencies often contemplate that our services will be performed over a period of several years, Congress usually must approve funds for a given program each government fiscal year and may significantly reduce or eliminate funding for a program |
| Significant reductions in these appropriations by Congress could have a material adverse effect on our business |
| Additional factors that could have a serious adverse effect on our Federal Government contracting business include: · changes in Federal Government programs or requirements; · budgetary priorities limiting or delaying Federal Government spending generally, or by specific departments or agencies in particular, and changes in fiscal policies or available funding, including potential governmental shutdowns; 18 ______________________________________________________________________ · reduction in the Federal Government’s use of technology solutions firms; and · an increase in the number of contracts reserved for small businesses which could result in our inability to compete directly for these prime contracts |
| Our contracts with the Federal Government may be terminated or adversely modified prior to completion, which could adversely affect our business |
| Federal Government contracts generally contain provisions, and are subject to laws and regulations, that give the Federal Government rights and remedies not typically found in commercial contracts, including provisions permitting the Federal Government to: · terminate our existing contracts; · reduce potential future income from our existing contracts; · modify some of the terms and conditions in our existing contracts; · suspend or permanently prohibit us from doing business with the Federal Government or with any specific government agency; · impose fines and penalties; · subject us to criminal prosecution; · subject the award of some contracts to protest or challenge by competitors, which may require the contracting federal agency or department to suspend our performance pending the outcome of the protest or challenge and which may also require the government to solicit new proposals for the contract or result in the termination, reduction or modification of the awarded contract; · suspend work under existing multiple year contracts and related task orders if the necessary funds are not appropriated by Congress; · decline to exercise an option to extend an existing multiple year contract; and · claim rights in technologies and systems invented, developed or produced by us |
| The Federal Government may terminate a contract with us either “for convenience” (for instance, due to a change in its perceived needs or its desire to consolidate work under another contract) or if we default by failing to perform under the contract |
| If the Federal Government terminates a contract with us for convenience, we generally would be entitled to recover only our incurred or committed costs, settlement expenses and profit on the work completed prior to termination |
| If the Federal Government terminates a contract with us based upon our default, we generally would be denied any recovery for undelivered work, and instead may be liable for excess costs incurred by the Federal Government in procuring undelivered items from an alternative source and other damages as authorized by law |
| As is common with government contractors, we have experienced and continue to experience occasional performance issues under some of our contracts |
| We may in the future receive show-cause or cure notices under contracts that, if not addressed to the Federal Government’s satisfaction, could give the government the right to terminate those contracts for default or to cease procuring our services under those contracts |
| Our Federal Government contracts typically have terms of one or more base years and one or more option years |
| Many of the option periods cover more than half of the contract’s potential term |
| Federal governmental agencies generally have the right not to exercise options to extend a contract |
| A decision to terminate or not to exercise options to extend our existing contracts could have a material adverse effect on our business, prospects, financial condition and results of operations |
| Certain of our Federal Government contracts also contain “organizational conflict of interest” clauses that could limit our ability to compete for certain related follow-on contracts |
| For example, when we work 19 ______________________________________________________________________ on the design of a particular solution, we may be precluded from competing for the contract to install that solution |
| While we actively monitor our contracts to avoid these conflicts, we cannot guarantee that we will be able to avoid all organizational conflict of interest issues |
| If we fail to establish and maintain important relationships with government entities and agencies, our ability to successfully bid for new business may be adversely affected |
| To develop new business opportunities, we primarily rely on establishing and maintaining relationships with various government entities and agencies |
| We may be unable to successfully maintain our relationships with government entities and agencies, and any failure to do so could materially adversely affect our ability to compete successfully for new business |
| We derive significant revenue from contracts and task orders awarded through a competitive acquisition process |
| If we are unable to win new awards or successfully compete for renewal contracts, our business and prospects may be adversely affected |
| A significant number of our contracts and task orders with the Federal Government are awarded through a competitive process |
| We expect that much of the business that we will seek in the foreseeable future will continue to be awarded through competitive bidding of new contracts and task orders and contracts subject to renewal |
| Recently, members of Congress and administration officials have authorized changes to the procurement process intended to increase competition among suppliers to the Federal Government |
| Budgetary pressures and reforms in the procurement process have caused many Federal Government clients to increasingly purchase goods and services through ID/IQ, contracts, including GSA contracts, and other GWACs |
| These contracts have increased competition and pricing pressure by concentrating work under fewer contracts, and requiring competition both prior to the initial award of the contract and throughout the term of the contract in order to obtain task orders for the services we provide, requiring that we make sustained post-award marketing efforts to realize revenue under each such contract |
| These contracts generally approve particular contractors to provide specified goods and services to the applicable governmental agency but generally do not obligate the agency to purchase any particular amount of goods or services |
| To procure goods or services under the contract, the agency generally awards task orders to perform specified services or to supply specified goods pursuant to competition among approved contractors |
| Thus, the existence of a contract does not ensure future revenue; rather, the contract merely provides us the opportunity to compete for additional work |
| An agency may administer an ID/IQ contract in which it procures goods and services for itself |
| When multiple prime contractors hold GWACs for the same goods and services, all of them are eligible to supply goods and services under the contract |
| As a result, qualified contractors often compete with each other to obtain task orders under a GWAC Similarly, GSA contracts, including contracts commonly known as GSA Schedule contracts, are procurement contracts administered by the GSA on behalf of the entire Federal Government |
| Like many other ID/IQ contracts, multiple contractors may be awarded GSA contracts for the same goods and services |
| As a result, an agency may procure goods and services from any contractor awarded the GSA contract at the prices and on the terms stated in the contract |
| Moreover, even if we are highly qualified to work on a particular new contract or a contract subject to renewal, we might not be awarded business because of the Federal Government’s policy and practice of procuring goods and services from multiple contractors in order to maintain a diverse base of contractors |
| The competitive process presents a number of risks, including the following: · we expend substantial funds, managerial time and effort to prepare bids and proposals for contracts that we may not win; · we may be unable to estimate accurately the resources and cost that will be required to service any contract we win, which could result in substantial cost overruns; and 20 ______________________________________________________________________ · we may encounter expense and delay if our competitors protest or challenge awards of contracts to us in competitive bidding, and any such protest or challenge could result in a requirement to resubmit proposals on modified specifications or in the termination, reduction or modification of the awarded contract |
| The government contracts for which we compete typically have multiple year terms, and if we are unable to win a particular contract, we generally will be foreclosed from competing again for that contract until its expiration several years later |
| If we are unable to win new contract awards, our business and prospects will be adversely affected |
| In addition, upon the expiration of a contract, if the client requires further services of the type provided by the contract, there is frequently a competitive rebidding process |
| Approximately 19dtta5prca of our revenue recognized during fiscal 2005 was derived from contracts that, as of February 28, 2006, are, or are expected to become, subject to recompetition bids prior to the end of government fiscal 2006 (ending September 30, 2006) |
| There can be no assurance that we will win any particular bid or recompetition bid, or that we will be able to replace business lost upon expiration or completion of a contract, and the termination or nonrenewal of any of our significant contracts or a substantial portion of our other contracts could materially adversely affect our operating results |
| Our business may suffer if our facilities or our employees are unable to obtain or retain the security clearances or other qualifications needed to perform services for our clients |
| Many of our Federal Government contracts require employees and facilities used in specific engagements to hold security clearances and to clear agency checks and Defense Security Service checks |
| Many of our contracts require us to employ personnel with specified levels of education, work experience and security clearances |
| Depending on the level of clearance, security clearances can be difficult and time-consuming to obtain |
| If our employees or our facilities lose or are unable to obtain necessary security clearances or successfully clear necessary agency or Defense Security Service checks, we may not be able to win new business and our existing clients could terminate their contracts with us or decide not to renew them |
| To the extent we cannot obtain or maintain the security clearances necessary for our facilities or our employees working on a particular contract or to the extent our facilities or our employees do not successfully clear necessary agency checks or Defense Security Service checks, we may not derive the revenue anticipated from the contract, and our operating results could be materially adversely affected |
| We must comply with a variety of laws, regulations and procedures and our failure to comply could harm our operating results |
| We must observe laws and regulations relating to the formation, administration and performance of Federal Government contracts which affect how we do business with our clients and impose added costs on our business |
| For example, the Federal Acquisition Regulation and the industrial security regulations of the Department of Defense and related laws include provisions that: · allow our Federal Government clients to terminate or not renew our contracts if we come under foreign ownership, control or influence; · require us to disclose and certify cost and pricing data in connection with contract negotiations; · require us to prevent unauthorized access to classified information; and · require us to comply with laws and regulations intended to promote various social or economic goals |
| 21 ______________________________________________________________________ Some of our activities are subject to the export control laws and regulations administered by the Department of State, Department of Commerce, Treasury Office of Foreign Assets Control, and the Bureau of Customs and Boarder Protection Additionally, we are subject to industrial security regulations of the DoD and other federal agencies that are designed to safeguard against foreigners’ access to classified information |
| If we were to come under foreign ownership, control or influence, we could lose our facility security clearances, which could result in our Federal Government customers terminating or deciding not to renew our contracts, and could impair our ability to obtain new contracts |
| In addition, our employees often must comply with procedures required by the specific agency for which work is being performed, such as time recordation or prohibition on removal of materials from a location |
| Our failure to comply with applicable laws, regulations or procedures, including federal procurement regulations and regulations regarding the protection of classified information, could result in contract termination, loss of security clearances, suspension or prohibition from contracting with the Federal Government, civil fines and damages and criminal prosecution and penalties, any of which could materially adversely affect our business |
| The Federal Government may revise its procurement or other practices in a manner adverse to us |
| The Federal Government may revise its procurement practices or adopt new contracting rules and regulations, such as cost accounting standards |
| It could also adopt new contracting methods relating to GSA contracts, GWACs or other government-wide contracts, or adopt new standards for contract awards intended to achieve certain social or other policy objectives, such as establishing new set-aside programs for small or minority-owned businesses |
| In addition, the Federal Government may face restrictions from new legislation or regulations, as well as pressure from government employees and their unions, on the nature and amount of services the Federal Government may obtain from private contractors |
| These changes could impair our ability to obtain new contracts or contracts under which we currently perform when those contracts are put up for recompetition bids |
| Any new contracting methods could be costly or administratively difficult for us to implement, and, as a result, could harm our operating results |
| For example, the Truthfulness, Responsibility and Accountability in Contracting Act, proposed in 2001, would have limited and severely delayed the Federal Government’s ability to use private service contractors |
| Although this proposal was not enacted, it or similar legislation could be proposed at any time |
| Any reduction in the Federal Government’s use of private contractors to provide federal information technology services could materially adversely impact our business |
| Our contracts and administrative processes and systems are subject to audits and cost adjustments by the Federal Government, which could reduce our revenue, disrupt our business or otherwise adversely affect our results of operations |
| Federal governmental agencies, including the DCAA, routinely audit and investigate government contracts and government contractors’ administrative processes and systems |
| These agencies review our performance on contracts, pricing practices and cost structure |
| They also review our compliance with applicable laws, government regulations, policies and standards and the adequacy of our internal control systems and policies, including our purchasing, property, estimating, compensation and management information systems |
| Any costs found to be improperly allocated to a specific contract will not be reimbursed, and any such costs already reimbursed must be refunded |
| Moreover, if any of our administrative processes and systems are found not to comply with the applicable requirements, we may be subjected to increased government scrutiny or required to obtain additional governmental approvals that could delay or otherwise adversely affect our ability to compete for or perform contracts |
| Therefore, an unfavorable outcome to an audit by the DCAA or another government agency, such as the Defense Security Service, or DSS, which verifies security compliance, could materially adversely affect our 22 ______________________________________________________________________ competitive position and result in a substantial reduction of our revenues |
| If a government investigation uncovers improper or illegal activities, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeitures of profits, suspension of payments, fines and suspension or debarment from doing business with the Federal Government |
| In addition, we could suffer serious reputational harm if allegations of impropriety were made against us |
| Failure to maintain strong relationships with other government contractors could result in a decline in our revenue |
| We derived 24dtta6prca of our total revenue in fiscal 2005 and 19dtta4prca of our total revenue in fiscal 2004 from contracts under which we acted as a subcontractor or from “teaming” arrangements in which we and other contractors bid together on particular contracts or programs |
| As a subcontractor or team member, we often lack control over fulfillment of a contract, and poor performance on the contract could tarnish our reputation, even when we perform as required |
| We expect to continue to depend on relationships with other contractors for a portion of our revenue in the foreseeable future |
| Moreover, our revenue and operating results could be materially adversely affected if any prime contractor or teammate chooses to offer a client services of the type that we provide or if any prime contractor or teammate teams with other companies to independently provide those services |
| The calculation of our backlog is subject to numerous uncertainties, and we may not receive the full amounts of revenue estimated under the contracts included in our backlog, which could reduce our revenue in future periods |
| Backlog is our estimate of the amount of revenue we expect to realize over the remaining life of the awarded contracts and task orders we have in hand as of the measurement date |
| Our total backlog consists of funded and unfunded backlog |
| We define funded backlog as estimated future revenues under government contracts and task orders for which funding has been appropriated by Congress and authorized for expenditure by the applicable agency under our contracts, plus estimated future revenues we expect to receive under signed purchase orders with commercial clients |
| Unfunded backlog is the difference between total backlog and funded backlog |
| Unfunded backlog reflects our estimate of future revenues under awarded government contracts and task orders for which either funding has not been appropriated or expenditures have not been authorized |
| Our total backlog does not include estimates of revenue from GWAC or GSA schedules beyond contract or task order awards, but our unfunded backlog does include estimates of revenue beyond contract or task order awards for other types of ID/IQ contracts, including our Command, Control, Communications, Computer, Intelligence, Information, Technology, Surveillance, and Reconnaissance (C4I2TSR) contract with the US Air Force Space Command |
| The calculation of backlog is highly subjective and is subject to numerous uncertainties and estimates, and there can be no assurance that we will in fact receive the amounts we have included in our backlog |
| Our assessment of a contract’s potential value is based upon factors such as historical trends, competition and budget availability |
| In the case of contracts which may be renewed at the option of the applicable agency, we generally calculate backlog by assuming that the agency will exercise all of its renewal options; however, the applicable agency may elect not to exercise its renewal options |
| In addition, federal contracts typically are only partially funded at any point during their term, and all or some of the work to be performed under a contract may remain unfunded unless and until Congress makes subsequent appropriations and the procuring agency allocates funding to the contract |
| Our estimate of the portion of backlog from which we expect to recognize revenues in fiscal 2005 or any future period is likely to be inaccurate because the receipt and timing of any of these revenues is dependent upon subsequent appropriation and allocation of funding and is subject to various contingencies, such as timing of task orders, many of which are beyond our control |
| In addition, we may never receive revenues from some of the engagements that are included in our backlog and this risk is greater with respect to unfunded backlog |
| 23 ______________________________________________________________________ The actual receipt of revenues on engagements included in backlog may never occur or may change because a program schedule could change, the program could be canceled, the governmental agency could elect not to exercise renewal options under a contract or could select other contractors to perform services, or a contract could be reduced, modified or terminated |
| We adjust our backlog on a quarterly basis to reflect modifications to or renewals of existing contracts or task orders, awards of new contracts or task orders, or approvals of expenditures |
| Additionally, the maximum contract value specified under a government contract or task order awarded to us is not necessarily indicative of the revenues that we will realize under that contract |
| We also derive revenues from ID/IQ contracts, which typically do not require the government to purchase a specific amount of goods or services under the contract other than a minimum quantity which is generally very small |
| If we fail to realize revenue included in our backlog, our revenues and operating results for the then current fiscal year as well as future reporting periods could be materially adversely affected |
| Loss of our GSA contracts or GWACs would impair our ability to attract new business |
| We are a prime contractor under several GSA contracts and GWAC schedule contracts |
| We believe that our ability to continue to provide services under these contracts will continue to be important to our business because of the multiple opportunities for new engagements each contract provides |
| If we were to lose our position as prime contractor on one or more of these contracts, we could lose substantial revenues and our operating results could suffer |
| GSA contracts and other GWACs typically have a one or two-year initial term with multiple options exercisable at the government client’s discretion to extend the contract for one or more years |
| We cannot be assured that our government clients will continue to exercise the options remaining on our current contracts, nor can we be assured that our future clients will exercise options on any contracts we may receive in the future |
| If subcontractors on our prime contracts are able to secure positions as prime contractors, we may lose revenue |
| For each of the past several years, as the GSA schedule contracts and GWACs have increasingly been used as contract vehicles, we have received substantial revenue from government clients relating to work performed by other information technology providers acting as subcontractors to us |
| In some cases, companies that have not held GSA schedule contracts or secured positions as prime contractors on GWACs have approached us in our capacity as a prime contractor, seeking to perform services as our subcontractor for a government client |
| Some of these providers that are currently acting as subcontractors to us may in the future secure positions as prime contractors |
| If one or more of our current subcontractors are awarded prime contractor status in the future, it could reduce or eliminate our revenue for the work they were performing as subcontractors to us |
| Risks Associated with International Operations Our international business exposes us to additional risks including exchange rate fluctuations, foreign tax and legal regulations and political or economic instability that could materially adversely affect our operating results |
| In connection providing services to our clients, we are sometimes required to engage in international operations (including international operations under US government contracts) |
| Conducting international business subjects us to risks associated with operating in and selling to foreign countries, including: · devaluations and fluctuations in currency exchange rates; 24 ______________________________________________________________________ · changes in or interpretations of foreign regulations that may adversely affect our ability to sell all of our products or repatriate profits to the United States; · imposition of limitations on conversions of foreign currencies into dollars; · imposition of limitations on or increase of withholding and other taxes on remittances and other payments by foreign subsidiaries or joint ventures; · compliance with US laws and regulations that apply extraterritorially which may conflict, in whole or in part, with local laws and regulations in countries where we operate; · compliance with the local labor laws of the countries in which we operate; · hyperinflation or political instability in foreign countries; · potential personal injury to our personnel who may be exposed to military conflict situations in foreign countries; · imposition or increase of investment and other restrictions or requirements by foreign governments; · compliance with US export control laws and regulations, which may effect our ability to provide goods and services abroad |
| To the extent that our customers request us to provide services and support outside of the United States, 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 materially adversely affect our operating results in the future |
| Risks Related to Our Business We may lose money or generate less than anticipated profits if we do not accurately estimate the cost of our performance under fixed price or time and materials contracts |
| We derived 26dtta2prca of our total revenue in fiscal 2005 and 22dtta6prca of our total revenue in fiscal 2004 from fixed price contracts |
| A fixed price contract generally provides that we will receive a specified price for our performance under the contract, regardless of the cost to us of such performance |
| This requires that we accurately estimate the cost that we will incur to perform our obligations under any contract at the time that we submit our proposal to the applicable government agency |
| When making proposals for engagements on a fixed price basis, we rely on our estimates of costs and timing for completing the projects |
| These estimates are subject to numerous variables and uncertainties, and there can be no assurance that the costs of performing under any fixed price contract will not exceed, perhaps substantially, our estimates |
| Any increased or unexpected costs or unanticipated delays in connection with the performance of fixed price contracts, including costs and delays caused by factors outside our control, could make these contracts less profitable than anticipated or could cause us to incur losses, which could be substantial, on these contracts |
| Our operating results could be materially adversely affected if the actual costs of performing under these contracts exceed our estimates |
| A time and materials contract typically provides that we are paid a fixed hourly rate for direct labor costs expended and reimbursed for allowable materials, costs and expenses |
| We derived 43dtta8prca of our total revenues in fiscal 2005 and 46dtta3prca of our total revenues for fiscal 2004 from time and materials contracts |
| While time and materials contracts are generally subject to less uncertainty than fixed price contracts, to the extent that our actual labor costs are higher than the contract rates, we may lose money on the contract |
| 25 ______________________________________________________________________ Our margins and operating results may suffer if cost reimbursable contracts increase as a percentage of our total government contracts |
| In general, cost reimbursable contracts are the least profitable of our government contracts |
| Our cost reimbursable contracts generally provide for reimbursement of costs, which are determined to be reasonable, allowable and allocable to the contract, as well as payment of a fee representing the profit margin negotiated between us and the contracting agency, which may be fixed or performance based |
| Our time and materials contracts generally are more profitable than our cost reimbursable contracts |
| Cost reimbursable contracts contributed 30dtta0prca and 31dtta1prca of our total revenues in fiscal 2005 and fiscal 2004, respectively |
| To the extent that cost reimbursable contracts represent an increased proportion of our total government contracts, our operating results could be materially adversely affected |
| Our markets are highly competitive, and many of the companies we compete against have substantially greater resources |
| We operate in highly competitive markets that include a large number of participants and involve intense competition to win contracts |
| Many of our competitors may compete more effectively than we can because they are larger, have greater financial and other resources, have better or more extensive relationships with government officials involved in the procurement process and have greater brand or name recognition |
| In order to stay competitive in our industry, we must attract and retain the highly skilled employees necessary to provide our services and keep pace with changing technologies and client preferences |
| In addition, some of our competitors have established alliances or strategic relationships among themselves or with third parties in order to increase their ability to address client needs |
| As a result, new competitors or alliances among competitors may emerge and compete more effectively than we can |
| There is also a significant industry trend towards consolidation which may result in the emergence of larger companies that may be better able to compete with us |
| If we are unable to compete effectively, our business could be materially adversely affected |
| Our failure to attract and retain qualified employees, including our executive and senior management team, may adversely affect our business |
| Our continued success depends to a substantial degree on our ability to recruit and retain the technically skilled personnel we need to serve our clients effectively |
| Our business involves the development of tailored technology solutions for our clients, a process that relies heavily upon the expertise and services of our employees |
| Competition for skilled personnel in the information technology services industry is intense, and technology service companies often experience high attrition among their skilled employees |
| Recruiting and training these employees require substantial resources |
| These Acts require that the contractor pay to all personnel assigned to the contract at least the prevailing wage and fringe benefits, as established by and in accordance with the regulations promulgated by the Department of Labor |
| We have an established policy pursuant to which we evaluate RFP’s that include Service Contract Act and Davis-Bacon Act requirements and, in the event of an award to us, ensure our compliance with these requirements |
| We may be affected by intellectual property infringement claims |
| Our business operations may rely on intellectual property |
| Our employees develop some of the software solutions and other forms of intellectual property that we use to provide IT solutions to our customers, but we also may license technology from other entities |
| Typically, under Federal Government contracts, our customers may claim rights in the intellectual property we develop, making it impossible for 26 ______________________________________________________________________ us to prevent their future use of our intellectual property |
| We are and may in the future be subject to claims from our employees or third parties who assert that software solutions and other forms of intellectual property that we used in delivering services and solutions to our customers infringe upon intellectual property rights of such employees or third parties |
| If our vendors, employees or third parties assert claims that we or our customers are infringing on their intellectual property, we could incur substantial costs to defend these claims |
| In addition, if any of these infringement claims are ultimately successful, we could be required to: · cease selling or using products or services that incorporate the challenged software or technology; · obtain a license or additional licenses; or · redesign our products and services that rely on the challenged software or technology |
| A substantial majority of our historical growth has been due to acquisitions and we may have difficulty identifying and executing future acquisitions on favorable terms, which may adversely affect our results of operations and stock price |
| A substantial majority of our historical growth was the result of acquisitions, and the selective pursuit of acquisitions remains one of our key growth strategies |
| We cannot assure you that we will be able to identify and execute suitable acquisitions in the future on terms that are favorable to us, or at all |
| We may encounter other risks in executing our acquisition strategy, including: · increased competition for acquisitions which may increase the price of our acquisitions; and · our failure to discover material liabilities during the due diligence process, including the failure of prior owners of any acquired businesses or their employees to comply with applicable laws or regulations such as the Federal Acquisition Regulation and health, safety, employment and environmental laws and regulations, or their failure to fulfill their contractual obligations to the Federal Government or other clients |
| In connection with any future acquisitions, we may decide to consolidate the operations of any acquired business with our existing operations or to make other changes with respect to the acquired business, which could result in special charges or other expenses |
| Our results of operations also may be adversely affected by expenses we incur in making acquisitions and, in the event that any goodwill resulting from present or future acquisitions is found to be impaired, by goodwill impairment charges |
| As of December 31, 2005, assuming that the Zen acquisition had occurred on such date, we had approximately dlra225dtta3 million of goodwill resulting from acquisitions on our balance sheet and, to the extent we make future acquisitions, the amount of goodwill could increase, perhaps substantially |
| Any of the businesses we acquire may also have liabilities or adverse operating issues |
| In addition, our ability to make future acquisitions may require us to obtain additional financing and we may be materially adversely affected if we cannot obtain additional financing for any future acquisitions |
| To the extent that we seek to acquire other businesses in exchange for our common stock, fluctuations in our stock price could have a material adverse effect on our ability to complete acquisitions and the issuance of common stock to acquire other businesses could be dilutive to our stockholders |
| To the extent that we use borrowings to acquire other businesses, our debt service obligations could increase substantially and relevant debt instruments may, among other things, impose additional restrictions on our operations, require us to comply with additional financial covenants or require us to pledge additional assets to secure our borrowings |
| 27 ______________________________________________________________________ We may have difficulty integrating the operations of any companies we acquire, which may adversely affect our results of operations |
| The success of our acquisition strategy will depend upon our ability to successfully integrate any businesses we may acquire in the future |
| The integration of these businesses into our operations may result in unforeseen events or operating difficulties, absorb significant management attention and require significant financial resources that would otherwise be available for the ongoing development of our business |
| These integration difficulties could include the integration of personnel with disparate business backgrounds, the transition to new information systems, coordination of geographically dispersed organizations, loss of key employees of acquired companies and reconciliation of different corporate cultures |
| Any of these outcomes could materially adversely affect our operating results |
| If we are unable to manage our growth, our business may be adversely affected |
| If we continue to grow, we must improve our operational, financial and management information systems and expand, motivate and manage our workforce |
| If we are unable to do so, or if new systems that we implement to assist in managing any future growth do not produce the expected benefits, our business, prospects, financial condition or operating results could be materially adversely affected |
| Systems failures may disrupt our business and have an adverse effect on our results of operations |
| Any systems failures, including failure of network, software or hardware systems, whether caused by us, a third-party service provider, unauthorized intruders and hackers, computer viruses, natural disasters, power shortages or terrorist attacks, could cause loss of data and interruptions or delays in our business or that of our clients |
| In addition, the failure or disruption of mail, communications or utilities could cause us to interrupt or suspend our operations or otherwise harm our business |
| Our property and business interruption insurance may be inadequate to compensate us for losses that may occur as a result of any system or operational failure or disruption, and insurance to cover these types of risks may not be available in the future on terms that we consider acceptable, if at all |
| If a system or network we maintain were to fail or experience service interruptions, we might experience loss of revenue or face claims for damages or contract termination |
| Our liability insurance may be inadequate to compensate us for damages that we might incur and liability insurance to cover these types of risks may not be available in the future on terms that we consider acceptable, or at all |
| If our subcontractors fail to perform their contractual obligations, our performance as a prime contractor and our ability to obtain future business could be materially and adversely impacted |
| Approximately 15prca and 16prca, respectively, of our total revenue in each of fiscal 2005 and fiscal 2004 was generated by work performed by subcontractors who perform a portion of the work we are obligated to deliver to our clients |
| 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 affect our ability to perform our obligations as a prime contractor |
| In extreme cases, a subcontractor’s performance deficiency could result in the Federal 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 |
| 28 ______________________________________________________________________ Our indebtedness and debt service obligations may increase substantially and we will be subject to restriction under debt instruments |
| As of December 31, 2005, we had approximately dlra99dtta3 million of debt outstanding under our Credit Agreement which had a borrowing capacity of dlra160 million, comprised of a dlra60 million five-year revolving credit facility and a dlra100 million six-year term loan facility |
| We further amended this Credit Agreement, pursuant to the First Amendment entered into contemporaneously with the closing of our acquisition of Zen on February 27, 2006, which increased the available term loan amount to approximately dlra129dtta3 million |
| We had approximately dlra129dtta3 million of debt outstanding under our Amended Credit Agreement on February 27, 2006 following the closing of our acquisition of Zen |
| Our leverage may increase as a result of any future acquisitions and, accordingly, the amount of our indebtedness will likely increase, perhaps substantially |
| Our indebtedness could have significant negative consequences, including: · increasing our vulnerability to general adverse economic and industry conditions; · limiting our ability to obtain additional financing; · requiring that a substantial portion of our cash flow from operations be applied to pay our debt service obligations, thus reducing cash available for other purposes; · limiting our flexibility in planning for or reacting to changes in our business or in the industry in which we compete; and · placing us at a possible disadvantage compared to our competitors with less leverage or better access to capital |
| Also, our Amended Credit Agreement requires that we comply with various financial covenants and impose restrictions on us, including restrictions on, among other things, our ability to incur additional indebtedness or liens, make acquisitions and pay dividends on our capital stock |
| Our ability to make scheduled payments of the principal of, to pay interest on, or to refinance, our debt will depend primarily on our future performance, which to a certain extent is subject to the economic, financial, competitive and other factors beyond our control |
| There can be no assurance that our business will continue to generate sufficient cash flow from operations in the future to service our debt or meet our other cash needs |
| If we are unable to generate this cash flow from our business, we may be required to refinance all or a portion of our existing debt, sell assets or obtain additional financing to meet our debt obligations and other cash needs |
| We cannot assure you that any such refinancing, sale of assets or additional financing would be possible on terms that we would find acceptable |
| 29 ______________________________________________________________________ If we fail to comply with the financial covenants in our Amended Credit Agreement, our lenders may exercise remedies, including requiring immediate repayment of all outstanding amounts |
| These financial covenants are calculated according to the definition of terms contained in the Amended Credit Agreement, which may differ from calculations using generally accepted accounting principles, or GAAP The financial covenants in our credit facility following the acquisition of Zen include the following: · the First Amendment to Credit Agreement amended the leverage ratio that requires us to maintain a ratio of funded debt to consolidated EBITDA for such period as follows: Period Amended Term Loan Maximum Ratio First Amendment Effective Date through fiscal quarter ending June 30, 2006 3dtta75 to 1dtta00 July 1, 2006 through fiscal quarter ending June 29, 2007 3dtta50 to 1dtta00 June 30, 2007 through fiscal quarter ending June 27, 2008 3dtta00 to 1dtta00 June 28, 2008 and thereafter 2dtta75 to 1dtta00 · a fixed charge coverage ratio that requires us to maintain a ratio, on a consolidated basis for the twelve month period ending on the last day of any fiscal quarter, of (i) consolidated EBITDA less consolidated capital expenditures for such period, to (ii) the sum of consolidated interest expense plus scheduled funded debt payments plus cash taxes for such period, of greater than or equal to 1dtta25 to 1dtta00; and · the amount of consolidated capital expenditures made in cash during any fiscal year is limited to 2dtta00prca of consolidated gross revenues plus the unused portion on consolidated capital expenditures that would have been permitted in the previous fiscal year in an amount not to exceed dlra1cmam000cmam000 |
| The borrowings and other amounts due under our Amended Credit Agreement are secured by substantially all of our current and future tangible and intangible assets, including accounts receivable, inventory and capital stock of our existing or future subsidiaries |
| Our ability to obtain other debt financing may therefore be adversely affected because the lenders under our Amended Credit Agreement will have a prior lien on our assets to secure amounts we owe to them |
| In addition, upon the occurrence of specified events of default under the Amended Credit Agreement, the lenders would be entitled to demand immediate repayment of all borrowings and other amounts outstanding under the Amended Credit Agreement and to realize upon the collateral pledged under the Amended Credit Agreement to satisfy our obligations to them |
| The Amended Credit Agreement also requires us to comply with certain covenants, including, among others, provisions: · relating to the maintenance of our assets securing the debt; · restricting our ability to pledge assets or create other liens; · restricting our ability to incur additional debt beyond certain levels and in certain circumstances; · restricting our ability to make certain distributions, investments and restricted payments, including dividend payments on our equity securities; · restricting our ability to alter the conduct of our business or corporate existence; · restricting our ability to amend, modify, cancel, terminate or fail to renew material contracts; · restricting our ability to enter into transactions with affiliates; · restricting our ability to consolidate, merge, or sell our assets; · restricting our ability to purchase property or assets other than in the ordinary course of business; and 30 ______________________________________________________________________ · restricting our ability to amend, modify or change our organizational documents, including our charter and bylaws |
| Risks Related to Our Common Stock Provisions of our charter and bylaws and Delaware law make a takeover of our company more difficult |
| Our basic corporate documents and Delaware law contain provisions that might enable our management to resist an attempt to take over our company |
| For example, our Board of Directors can issue shares of common stock and preferred stock without stockholder approval, and the board could issue stock to dilute and adversely affect various rights of a potential acquiror |
| Other provisions of our charter and bylaws that could deter or prevent a third party from acquiring us include: · the division of our Board of Directors into three separate classes serving staggered three-year terms; · the absence of cumulative voting in the election of our directors, which means that the holders of a majority of the voting power of our outstanding capital stock have the power to elect all of our directors; · limitations on the ability of our stockholders to remove directors and the provisions requiring that vacancies in our board of directors must be filled by the remaining directors; · prohibitions on our stockholders from acting by written consent or calling special meetings; and · procedures for advance notification of stockholder nominations |
| We are subject to Section 203 of the Delaware General Corporation Law that, subject to exceptions, would prohibit us from engaging in any business combination with any interested stockholder, as defined in that section, for a period of three years following the date on which that stockholder became an interested stockholder |
| The board could use these and other provisions to discourage, delay or prevent a change in the control of our company or a change in our management |
| These provisions might also discourage, delay or prevent an acquisition of our company at a price that you may find attractive |
| These provisions could also make it more difficult for you and our other stockholders to elect directors and take other corporate actions and could limit the price that investors might be willing to pay for shares of our common stock |
| Future sales of shares of our common stock and the resulting dilution that would occur with such sales could cause the market price of our common stock to decline |
| Sales of a substantial number of shares of common stock in the public market in the course of any offering made pursuant to a registration statement, including any subsequent registration statement, or the perception that such sales could occur, could materially adversely affect the market price of our common stock and make it more difficult for us to sell equity securities in the future at a time and price we deem appropriate |