As filed with the Securities and Exchange Commission on June 23, 2006
Registration No. 333-134018
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 1
to
Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
ICF INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware | 8742 | 22-3661438 | ||
(State or other jurisdiction of incorporation or organization) | (Primary Standard Industrial Classification Code Number) | (I.R.S. Employer Identification Number) |
9300 Lee Highway
Fairfax, VA 22031
(703) 934-3000
(Address, including zip code, and telephone number including area code, of registrants principal executive offices)
Sudhakar Kesavan
Chairman & Chief Executive Officer
ICF INTERNATIONAL, INC.
9300 Lee Highway
Fairfax, VA 22031
(703) 934-3000
(Name, address, including zip code, and telephone number, including area code, of agent for service)
With copies to:
James J. Maiwurm, Esq. SQUIRE, SANDERS & DEMPSEY L.L.P. 8000 Towers Crescent Drive, Suite 1400 Tysons Corner, Virginia 22182-2700 Telephone: (703) 720-7800 Telecopy: (703) 720-7801 |
Richard J. Sandler, Esq. DAVIS POLK & WARDWELL 450 Lexington Avenue New York, New York 10017 Telephone: (212) 450-4000 Telecopy: (212) 450-3800 |
Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date hereof.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. ¨
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
PRELIMINARY PROSPECTUS Subject to Completion |
June 23, 2006 |
Shares
ICF INTERNATIONAL, INC.
Common Stock
This is the initial public offering of our common stock. No public market currently exists for our common stock. We are offering shares of our common stock and the selling stockholders identified in this prospectus are offering shares of our common stock. We will not receive any proceeds from the sale of common stock by the selling stockholders. We expect the public offering price to be between $ and $ per share.
We have applied to have our common stock approved for listing on The Nasdaq National Market under the symbol ICFI.
Investing in our common stock involves a high degree of risk. Before buying any shares, you should read the discussion of material risks of investing in our common stock in Risk factors beginning on page 10 of this prospectus.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.
Per share | Total | |||
Public offering price | $ | $ | ||
Underwriting discounts and commissions | $ | $ | ||
Proceeds, before expenses, to us | $ | $ | ||
Proceeds, before expenses, to the selling stockholders | $ | $ |
The underwriters may also purchase up to an additional shares of our common stock within 30 days of the date of this prospectus, solely to cover over-allotments. Of these additional shares, up to may be purchased from us and up to may be purchased from the selling stockholders. If the underwriters exercise this option in full, the total underwriting discounts and commissions will be $ , our total proceeds, before expenses, will be $ , and the total proceeds, before expenses, to the selling stockholders will be $ .
The underwriters are offering the common stock as set forth under Underwriting. Delivery of the shares will be made on or about , 2006.
Sole book-running manager
UBS Investment Bank |
Stifel Nicolaus |
William Blair & Company |
Jefferies & Company |
Until , 2006 (25 days after the date of this prospectus), federal securities laws may require all dealers that effect transactions in our common stock, whether or not participating in this offering, to deliver a prospectus. This is in addition to the dealers obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
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Managements discussion and analysis of financial condition and results of operations |
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U.S. federal tax considerations for non-U.S. holders of common stock |
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F-1 |
Unless the context requires otherwise, the words ICF, we, company, us and our refer to ICF International, Inc. and, where appropriate, its subsidiaries.
Unless the context requires otherwise, the term CMEP refers to our principal stockholder, CM Equity Partners, L.P. and its affiliated partnerships that hold shares of our common stock, who are also the selling stockholders identified under Principal and selling stockholders.
Our fiscal year ends on December 31. We currently derive more than 70% of our revenue from departments and agencies of the U.S. federal government, which has a fiscal year ending on September 30. Unless the context requires otherwise, references in this prospectus to fiscal year mean the applicable fiscal year of the U.S. federal government.
Unless the context requires otherwise, all share numbers in this prospectus give effect to the -for- stock split of our common stock to be effected immediately prior to the closing of this offering.
The names ICF International, CommentWorks, Integrated Planning Model, International Carbon Pricing Tool, IPM, K-PRISM, UAM and Urban Airshed Model are our trademarks. This prospectus also contains trademarks and service marks of other companies.
This summary highlights selected information appearing elsewhere in this prospectus and may not contain all of the information that is important to you. This prospectus includes information about the shares offered as well as information regarding our business and detailed financial data. You should read this prospectus in its entirety.
ICF INTERNATIONAL, INC.
We provide management, technology and policy consulting and implementation services primarily to the U.S. federal government, as well as to other government, commercial and international clients. We help our clients conceive, develop, implement and improve solutions that address complex economic, social and national security issues. Our services primarily address four key markets: defense and homeland security; energy; environment and infrastructure; and health, human services and social programs. Increased government involvement in virtually all aspects of our lives has created increasing opportunities for us to resolve issues at the intersection of the public and private sectors.
Our U.S. federal government clients include every cabinet-level department, including the Department of Defense, the Environmental Protection Agency, the Department of Homeland Security, the Department of Transportation, the Department of Health and Human Services, the Department of Housing and Urban Development, the Department of Justice and the Department of Energy. U.S. federal government clients generated 72% of our revenue in 2005. Our state and local government clients include the states of California, Massachusetts, New York and Pennsylvania. State and local government clients generated 9% of our revenue in 2005. We also serve commercial and international clients, primarily in the energy sector, including electric and gas utilities, oil companies and law firms. Our commercial and international clients generated 19% of our revenue in 2005.
Across our markets, we provide end-to-end services that deliver value throughout the entire life of a policy, program, project or initiative:
Ø | Advisory Services. We provide advisory and management consulting services including needs and markets assessment, policy analysis, strategy and concept development, change management strategy, enterprise architecture and program design. |
Ø | Implementation Services. Often based on the results of our advisory services, we provide implementation services including information technology solutions, project and program management, project delivery, strategic communications and training. |
Ø | Evaluation and Improvement Services. In support of our advisory and implementation services, we provide evaluation and improvement services, including program evaluation, continuous improvement initiatives, performance management, benchmarking and return-on-investment analyses. |
We have more than 1,600 employees and serve clients globally from our headquarters in the metropolitan Washington, D.C. area, our 15 domestic regional offices throughout the United States and our five international offices in London, Moscow, New Delhi, Rio de Janeiro and Toronto.
We generated revenue of $177.2 million and $53.4 million in 2005 and the quarter ended March 31, 2006, respectively. Our total backlog was $226.8 million and $216.8 million as of December 31, 2005 and March 31, 2006, respectively. We define total backlog as the future revenue we expect to receive from our contracts and other engagements. See BusinessContract Backlog for a discussion of how we calculate backlog.
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MARKET OPPORTUNITY
An increasing number of complex, long-term factors are changing the way we live and the way in which government and industry must operate and interact. Some of these factors include terrorism, increasing federal budget deficits, emergency preparedness for natural disasters and national security threats, rising energy demands, environmental changes and an aging federal civilian workforce, among others. In response, government and industry stakeholders are continually evaluating, formulating and implementing new policies and modifying business processes, creating opportunities for professional services firms that understand these factors and the associated policy, technology and management implications. Our services address these opportunities primarily in the following four key markets:
Defense and Homeland Security. The U.S. Department of Defense (DoD) and the Department of Homeland Security are undergoing major transformations due to the changing nature of security threats, implications of the information age, logistics modernization requirements, emergency preparedness and the social issues associated with globally deployed armed forces. These factors, combined with a retiring federal civilian workforce, create opportunities for qualified professional services firms.
Energy. Rising global energy demands and constrained oil and gas supplies have prompted the search for alternative fuels and the implementation of energy efficiency initiatives. In addition, deregulation of utilities, capacity expansions, the emergence of emissions trading markets, and mergers and acquisitions in the energy sector are creating demand for professional services firms with knowledge of relevant economic and regulatory forces affecting the industry.
Environment and Infrastructure. Global warming, environmental degradation, depletion of natural resources, growth of city centers and underinvestment in transportation infrastructure are creating demand for professional services providers that can help reconcile the competing concerns of government and industry stakeholders in addressing these issues.
Health, Human Services and Social Programs. An aging U.S. population, continued immigration, population growth among lower income levels and rising health care costs are expected to drive an increased need for public spending in the areas of health, human services and social programs. Governments are increasingly turning to professional services firms that have strong expertise in designing and executing programs in these areas.
COMPETITIVE STRENGTHS
We possess the following key business strengths:
We have a highly educated professional staff with deep subject matter knowledge. Our institutional thought leadership and experience in areas of policy, technology and management consulting, combined with our ability to assemble multi-disciplinary teams, enable us to deliver superior client service.
We have long-standing relationships with our clients. We have performed work for many of our clients for decades. This experience, combined with our prime contractor positions and multi-level client access, gives us better visibility into our clients upcoming requirements.
Our advisory services position us to capture a full range of engagements. We believe our advisory services position us favorably to offer our clients end-to-end services across the entire life cycle of a particular policy or program, including implementation and improvement services.
Our technology solutions are driven by our deep subject matter expertise. We combine our information technology skills with our deep subject matter expertise and thorough understanding of organizational processes to deliver differentiated technology-enabled solutions.
Our proprietary analytics and methods allow us to deliver superior solutions to clients. We have developed proprietary tools, project management methodologies and models in the areas of energy
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planning, air-quality analysis and carbon emissions that are used by governments and commercial entities around the world.
We are led by an experienced management team. Our senior management team has successfully grown the business organically and through acquisitions and possesses extensive industry and management experience.
STRATEGY
Our strategy to increase our revenue, grow our company and increase stockholder value involves the following key elements:
Ø | Strengthen our end-to-end service offerings |
Ø | Grow our client base and increase scope of services provided to existing clients |
Ø | Expand into additional markets at the intersection of the public and private sectors |
Ø | Focus on high margin projects |
Ø | Capitalize on operating leverage |
Ø | Pursue strategic acquisitions |
RISK FACTORS
Our business is subject to risks. Many of these risks result from our dependence on contracts with U.S. federal government agencies and departments for the majority of our revenue and profit. As a result, we are exposed to a number of considerations, such as:
Ø | We derived 72% of our revenue from each of 2004 and 2005 from contracts with the U.S. federal government agencies; therefore, a change in federal government spending priorities could be adverse to our business. |
Ø | Congress may not approve budgets in a timely manner for the federal agencies and departments we support, which could delay and reduce spending, and therefore cause us to lose revenue and profit. |
Ø | Our failure to comply with complex laws, rules and regulations relating to federal government contracts could cause us to lose business and subject us to a variety of penalties. |
Ø | Unfavorable government audit results could force us to adjust previously reported operating results, affect future operating results and subject us to a variety of penalties and sanctions. |
Ø | Our federal government contracts contain provisions that are unfavorable to us and permit our government clients to terminate our contracts partially or completely at any time prior to completion. |
Ø | The adoption of new procurement laws, rules and regulations, and changes in existing laws, rules and regulations, could impair our ability to obtain new contracts and could cause us to lose revenue and profit. |
Our business with commercial clients depends primarily on the energy sector of the global economy, which is highly cyclical.
For a discussion of these and other risks we face, see Risk factors.
OUR CORPORATE INFORMATION
Our principal operating subsidiary was founded in 1969. ICF International, Inc. was formed as a Delaware limited liability company in 1999 under the name ICF Consulting Group Holdings, LLC in
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connection with the purchase of our business from a larger services organization. Several of our current senior managers participated in this buyout transaction along with private equity investors. We converted to a Delaware corporation in 2003 and changed our name to ICF International, Inc. in 2006.
Our principal executive office is located at 9300 Lee Highway, Fairfax, Virginia 22031, and our telephone number is (703) 934-3000. We maintain an Internet website at www.icfi.com. We have not incorporated by reference into this prospectus the information on our website and you should not consider it to be a part of this prospectus.
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The offering
Common stock we are offering |
shares |
Common stock being offered by the selling stockholders |
shares |
Total shares of common stock being offered |
shares |
Common stock to be outstanding immediately after this offering |
shares |
Over-allotment option |
shares. Of the shares covered by this option, shares are provided by us and shares are provided by the selling stockholders. If the over-allotment option is exercised in full, there will be shares of common stock outstanding immediately after this offering. |
Use of proceeds |
We estimate that the net proceeds to us from this offering will be approximately $ , or approximately $ if the underwriters exercise their over-allotment option in full, assuming an initial public offering price of $ per share (the midpoint of the range set forth on the cover page of this prospectus), after deducting estimated underwriting discounts and commissions and estimated offering expenses. Each $1 increase (decrease) in the public offering price per share would increase (decrease) our net proceeds, after deducting estimated underwriting discounts and commissions, by $ (assuming no exercise of the underwriters over-allotment option). |
We intend to use $ of the net proceeds for repayment of a portion of our existing indebtedness under our revolving credit facility and term loan facility, $2.7 million for payments due to employees as a one-time bonus under our amended and restated employee annual incentive compensation pool plan and the balance for general corporate purposes. See Use of proceeds.
We will not receive the proceeds from any sale of common stock by the selling stockholders.
Proposed Nasdaq National Market symbol |
ICFI |
Risk factors |
Investing in our common stock involves a high degree of risk, including risks associated with the fact that we earn most of our revenue under |
contracts with departments and agencies of the
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federal government. For a discussion of these and other risks that affect our business and operations, see Risk factors.
Unless otherwise specified, all share and net proceeds amounts in this prospectus assume that the underwriters do not exercise their over-allotment option to purchase up to an additional shares of common stock from us and shares of common stock from the selling stockholders.
Unless otherwise specified, the number of shares of our common stock outstanding is based on shares outstanding as of March 31, 2006 after giving effect to the -for- stock split of our common stock to be effected immediately prior to the closing of this offering, and excludes:
Ø | shares issuable upon exercise of options outstanding as of March 31, 2006, at a weighted average exercise price of per share, of which options to purchase shares were exercisable as of that date; |
Ø | shares issuable upon exercise of warrants outstanding as of March 31, 2006, at an exercise price of per share, all of which were exercisable as of that date; and |
Ø | shares available for future grant under our stock plans as of March 31, 2006. |
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Summary consolidated financial and other data
The following summarizes our historical consolidated financial and other information. We derived the historical financial and other information for each of the three years ended December 31, 2003, 2004 and 2005 from our audited consolidated financial statements. We derived the historical financial and other information for the quarters ended April 1, 2005 and March 31, 2006 from our unaudited financial statements appearing elsewhere in this prospectus. Results for any interim period are not necessarily indicative of the results to be expected for a full year.
We have presented the balance sheet data as of March 31, 2006:
Ø | on an actual basis; and |
Ø | on an adjusted basis to reflect our sale of common stock in this offering at an assumed public offering price of $ per share (the midpoint of the range set forth on the cover page of this prospectus), and receipt of the net proceeds, after deducting estimated underwriting discounts and commissions and estimated offering expenses. Each $1 increase (decrease) in the public offering price per share would increase (decrease) the as-adjusted figure shown below for cash and cash equivalents and total stockholders equity by $ (assuming no exercise of the underwriters over-allotment option), after deducting estimated underwriting discounts and commissions. |
Effective October 1, 2005, we consummated the acquisition of Caliber Associates, Inc. for $20.8 million in cash. The unaudited pro forma condensed consolidated statement of operations data for the year ended December 31, 2005 gives effect to the acquisition of Caliber Associates, Inc. as if it had occurred on January 1, 2005. Operating results for Caliber Associates, Inc. from the date of the acquisition, October 1, 2005, through December 31, 2005 are included in our statement of operations data for the year ended December 31, 2005. The pro forma information does not necessarily indicate what the operating results would have been had the acquisition been completed at the beginning of the period presented. Moreover, this information does not necessarily indicate what our future operating results or financial position will be.
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This information should be read in conjunction with Managements discussion and analysis of financial condition and results of operations and our financial statements and related notes appearing elsewhere in this prospectus.
Year ended December 31, |
Quarter ended |
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Consolidated statement of operations data: |
2003 | 2004 | 2005 | Pro forma 2005 | April 1, 2005 |
March 31, 2006 |
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(unaudited) | (unaudited) | |||||||||||||||||||||||
(In thousands, except per share amounts) | ||||||||||||||||||||||||
Revenue |
$ | 145,803 | $ | 139,488 | $ | 177,218 | $ | 207,794 | $ | 41,212 | $ | 53,448 | ||||||||||||
Direct costs |
91,022 | 83,638 | 106,078 | 122,192 | 23,969 | 31,626 | ||||||||||||||||||
Operating expenses |
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Indirect and selling expenses |
45,335 | 46,097 | 60,039 | (1) | 71,782 | (1) | 13,905 | 17,883 | ||||||||||||||||
Depreciation and amortization |
3,000 | 3,155 | 5,541 | 6,706 | 777 | 772 | ||||||||||||||||||
Earnings from operations |
6,446 | 6,598 | 5,560 | 7,114 | 2,561 | 3,167 | ||||||||||||||||||
Other (expense) income |
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Interest expense, net |
(3,095 | ) | (1,266 | ) | (2,981 | ) | (4,054 | ) | (473 | ) | (1,026 | ) | ||||||||||||
Other |
33 | (33 | ) | 1,308 | 1,308 | 1 | | |||||||||||||||||
Total other (expense) income |
(3,062 | ) | (1,299 | ) | (1,673 | ) | (2,746 | ) | (472 | ) | (1,026 | ) | ||||||||||||
Income from continuing operations before income taxes |
3,384 | 5,299 | 3,887 | 4,368 | 2,089 | 2,141 | ||||||||||||||||||
Income tax expense |
1,320 | 2,466 | 1,865 | 2,420 | 1,002 | 1,047 | ||||||||||||||||||
Income from continuing operations |
2,064 | 2,833 | 2,022 | 1,948 | 1,087 | 1,094 | ||||||||||||||||||
Income from discontinued operations |
308 | 184 | | | | | ||||||||||||||||||
Net income |
$ | 2,372 | $ | 3,017 | $ | 2,022 | $ | 1,948 | $ | 1,087 | $ | 1,094 | ||||||||||||
Earnings per share from continuing operations |
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Basic |
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Diluted |
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Earnings per share |
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Basic |
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Diluted |
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Weighted-average shares |
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Basic |
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Diluted |
Year ended December 31, |
Quarter ended | ||||||||||||||
Other operating data: | 2003 | 2004 | 2005 | April 1, 2005 |
March 31, 2006 | ||||||||||
(unaudited) (In thousands) | |||||||||||||||
EBITDA from continuing operations(2) |
$ | 9,446 | $ | 9,753 | $ | 11,101 | $ | 3,338 | $ | 3,939 | |||||
Non-cash compensation charge included in EBITDA from continuing operations(1) |
| | 2,138 | | |
(footnotes on following page)
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As of March 31, 2006 | ||||||
Consolidated balance sheet data: | Actual | As adjusted | ||||
(unaudited) (In thousands) | ||||||
Cash and cash equivalents |
$ | 1,296 | $ | |||
Net working capital |
19,374 | |||||
Total assets |
155,953 | |||||
Current portion of long-term debt |
12,400 | |||||
Long-term debt, net of current portion |
53,944 | |||||
Total stockholders equity |
54,160 |
(1) | Includes a one-time, non-cash compensation charge of $2.1 million in December 2005 resulting from the acceleration of the vesting of all then outstanding stock options. See Managements discussion and analysis of financial condition and results of operations Results of Operations Year ended December 31, 2005 compared to year ended December 31, 2004. |
(2) | EBITDA from continuing operations, a measure used by us to evaluate performance, is defined as net income plus (less) loss (income) from discontinued operations, less gain from sale of discontinued operations, less other income, plus other expenses, net interest expense, income tax expense and depreciation and amortization. We believe EBITDA from continuing operations is useful to investors because similar measures are frequently used by securities analysts, investors and other interested parties in the evaluation of companies in our industry. EBITDA from continuing operations is not a recognized term under generally accepted accounting principles and does not purport to be an alternative to net income as a measure of operating performance or to cash flows from operating activities as a measure of liquidity. Because not all companies use identical calculations, this presentation of EBITDA from continuing operations may not be comparable to other similarly titled measures used by other companies. EBITDA from continuing operations is not intended to be a measure of free cash flow for managements discretionary use, as it does not consider certain cash requirements such as interest payments, tax payments, capital expenditures and debt service. Our credit agreement includes covenants based on EBITDA from continuing operations, subject to certain adjustments. See Managements discussion and analysis of financial condition and results of operations Liquidity and Capital Resources. A reconciliation of net income to EBITDA from continuing operations follows: |
Year ended December 31, |
Quarter ended | ||||||||||||||||||
2003 | 2004 | 2005 | April 1, 2005 |
March 31, 2006 | |||||||||||||||
(unaudited) | |||||||||||||||||||
(In thousands) | |||||||||||||||||||
Net income |
$ | 2,372 | $ | 3,017 | $ | 2,022 | $ | 1,087 | $ | 1,094 | |||||||||
Loss (income) from discontinued operations |
(308 | ) | 196 | | | | |||||||||||||
Gain from sale of discontinued operations |
| (380 | ) | | | | |||||||||||||
Other expense (income) |
(33 | ) | 33 | (1,308 | ) | (1 | ) | | |||||||||||
Interest expense, net |
3,095 | 1,266 | 2,981 | 473 | 1,026 | ||||||||||||||
Income tax expense |
1,320 | 2,466 | 1,865 | 1,002 | 1,047 | ||||||||||||||
Depreciation and amortization |
3,000 | 3,155 | 5,541 | 777 | 772 | ||||||||||||||
EBITDA from continuing operations |
$ | 9,446 | $ | 9,753 | $ | 11,101 | $ | 3,338 | $ | 3,939 | |||||||||
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Investing in our common stock involves a high degree of risk. In addition to the other information in this prospectus, you should carefully consider the risks described below before purchasing our common stock. If any of the following risks actually occurs, our business, prospects, results of operations or financial condition could suffer. As a result, the trading price of our common stock may decline, and you might lose part or all of your investment.
RISKS RELATED TO OUR INDUSTRY
Federal government spending priorities may change in a manner adverse to our business.
We derived 72% of our revenue for each of 2004 and 2005 from contracts with U.S. federal government agencies and departments. Virtually all of our major government clients have experienced reductions in budgets at some time, often for a protracted period, and we expect similar changes in the future. In addition, the Office of Management and Budget (OMB) may restrict expenditures by our federal government clients. A decline in expenditures, or a shift in expenditures away from agencies, departments, projects, or programs that we support, whether to pay for other projects or programs within the same or other agencies or departments, to reduce federal budget deficits, to fund tax reductions, or for other reasons, could materially adversely affect our business, prospects, financial condition or operating results. Moreover, the perception that a cut in Congressional appropriations and spending may occur could adversely affect investor sentiment about our common stock and cause our stock price to fall.
The failure by Congress to approve budgets in a timely manner for the federal agencies and departments we support could delay and reduce spending and cause us to lose revenue and profit.
On an annual basis, Congress must approve budgets that govern spending by each of the federal agencies and departments we support. When Congress is unable to agree on budget priorities, and thus is unable to pass the annual budget on a timely basis, then Congress typically enacts a continuing resolution. Continuing resolutions generally allow government agencies and departments to operate at spending levels based on the previous budget cycle. When government agencies and departments must operate on the basis of a continuing resolution, funding we expect to receive from clients for work we are already performing and new initiatives may be delayed or cancelled. Thus, the failure by Congress to approve budgets in a timely manner can result in either loss of revenue and profit in the event government agencies are required to cancel existing or new initiatives, or the deferral of revenue and profit to later periods due to delays in the implementation of existing or new initiatives.
Our failure to comply with complex laws, rules and regulations relating to federal government contracts could cause us to lose business and subject us to a variety of penalties.
We must comply with laws, rules and regulations relating to the formation, administration and performance of federal government contracts, which affect how we do business with our government clients and impose added costs on our business. Among the more significant are:
Ø | the Federal Acquisition Regulation, and agency regulations analogous or supplemental to the Federal Acquisition Regulation, which comprehensively regulate the formation, administration and performance of government contracts; |
Ø | the Truth in Negotiations Act, which requires certification and disclosure of cost and pricing data in connection with some contract negotiations; |
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Risk factors
Ø | the Procurement Integrity Act, which, among other things, defines standards of conduct for those attempting to secure government contracts, prohibits certain activities relating to government procurements, and limits the employment activities of certain former government employees; |
Ø | the Cost Accounting Standards, which impose accounting requirements that govern our right to reimbursement under cost-based government contracts; and |
Ø | laws, rules and regulations restricting (i) the use and dissemination of information classified for national security purposes, (ii) the exportation of specified products, technologies and technical data, and (iii) the use and dissemination of sensitive but unclassified data. |
The government may in the future change its procurement practices and/or adopt new contracting laws, rules and/or regulations, including cost accounting standards, that could be costly to satisfy or that could impair our ability to obtain new contracts. Any failure to comply with applicable laws, rules and regulations could subject us to civil and criminal penalties and administrative sanctions, including termination of contracts, repayments of amounts already received under contracts, forfeiture of profit, suspension of payments, fines and suspension or debarment from doing business with U.S. federal and even state and local government agencies and departments, any of which could substantially adversely affect our reputation, our revenue and operating results, and the value of our stock. Unless the content requires otherwise, we use the term contracts to refer to contracts and any task orders or delivery orders issued under a contract.
Unfavorable government audit results could force us to adjust previously reported operating results, could affect future operating results and could subject us to a variety of penalties and sanctions.
The federal government audits and reviews our contract performance, pricing practices, cost structure, and compliance with applicable laws, regulations and standards. Like most major government contractors, we have our government contracts audited and reviewed on a continual basis by federal agencies, including the Defense Contract Audit Agency. Audits, including audits relating to companies we have acquired or may acquire or subcontractors we have hired or may hire, could raise issues that have significant adverse effects on our operating results. For example, audits could result in substantial adjustments to our previously reported operating results if costs that were originally reimbursed, or that we believed would be reimbursed, are subsequently disallowed. In addition, cash we have already collected may need to be refunded, past and future operating margins may be reduced, and we may need to adjust our practices, which could reduce profit on other past, current and future contracts. Moreover, a government agency could withhold payments due to us under a contract pending the outcome of any investigation with respect to a contract or our performance under it.
If a government audit, review, or investigation uncovers improper or illegal activities, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, repayments of amounts already received under contracts, forfeiture of profit, suspension of payments, fines and suspension or debarment from doing business with U.S. federal and even state and local government agencies and departments. In addition, we could suffer serious harm to our reputation if allegations of impropriety were made against us, whether or not true. Government audits have been completed on our incurred contract costs only through 2001; audits for costs incurred on work performed since then have not yet been completed. In addition, non-audit reviews by the government may still be conducted on all our government contracts.
If we were suspended or debarred from contracting with the federal government generally, or any specific agency, if our reputation or relationship with government agencies and departments were impaired, or if the government otherwise ceased doing business with us or significantly decreased the amount of business it does with us, our revenue and operating results would be materially harmed.
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Risk factors
Our federal government contracts contain provisions that are unfavorable to us and permit our government clients to terminate our contracts partially or completely at any time prior to completion.
Our federal government contracts contain provisions not typically found in commercial contracts, including provisions that allow our government clients to terminate or modify these contracts at the governments convenience upon short notice. If a government client terminates one of our contracts for convenience, we may recover only our incurred and committed costs, settlement expenses, and any fee due on work completed prior to the termination but not the cost for or lost fees on the terminated work. In addition, many of our government contracts and task and delivery orders are incrementally funded as appropriated funds become available. The reduction or elimination of such funding can result in options not being exercised and further work on existing contracts and orders being curtailed. In any such event, we would have no right to seek lost fees or other damages. If a federal government client were to terminate, decline to exercise an option or to curtail further performance with respect to one or more of our significant contracts, our revenue and operating results would be materially harmed.
The adoption of new procurement practices or contracting laws, rules, and regulations and changes in existing procurement practices or contracting laws, rules and regulations could impair our ability to obtain new contracts and could cause us to lose revenue and profit.
In the future, the federal government may change its procurement practices and/or adopt new contracting laws, rules or regulations that could cause federal agencies and departments to curtail the use of services firms or increase the use of companies with a preferred status, such as small businesses. For example, legislation restricting the procedure by which services are outsourced to government contractors has been proposed in the past, and if such legislation were to be enacted, it would likely reduce the amount of services that could be outsourced by the federal government. Any such changes in procurement practices or new contracting laws, rules or regulations could impair our ability to obtain new contracts and materially reduce our revenue and profit.
Our business activities may be or may become subject to international, foreign, U.S., state or local laws or regulatory requirements that may limit our strategic options and growth and may increase our expenses and reduce our profit, negatively affecting the value of our stock. We generally have no control over the effect of such laws or requirements on us and they could affect us more than they affect other companies.
RISKS RELATED TO OUR BUSINESS
We have been dependent on contracts with U.S. federal government agencies and departments for the majority of our revenue and profit, and our business, revenue and profit levels could be materially and adversely affected if our relationships with these agencies and departments deteriorate.
Contracts with U.S. federal government agencies and departments accounted for approximately 72% of our revenue for each of 2004 and 2005. Revenue from contracts with clients in the Environmental Protection Agency (EPA), the Department of Transportation (DOT) and the Department of Homeland Security (DHS) accounted for approximately 39% of our revenue for 2004. Revenue from contracts with clients in the Department of Defense (DoD), EPA and DHS accounted for approximately 41% of our revenue for 2005. We believe that federal government contracts will continue to be the source of the vast majority of our revenue and profit for the foreseeable future.
Because we have a large a number of contracts with clients, we continually bid for and execute new contracts and our existing contracts continually become subject to recompetition and expiration. Upon
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the expiration of a contract, we typically seek a new contract or subcontractor role relating to that client to replace the revenue generated by the expired contract, although there is no assurance that we will be successful in doing so. Of our 20 largest contracts, based on their contribution to revenue for the quarter ended December 31, 2005, 13 are expected to expire or become subject to recompetition in 2006. Collectively, these contracts represented approximately 26% of our revenue for the quarter ended December 31, 2005. There can be no assurance that the government requirements those expired contracts were satisfying will continue after their expiration, that the government will re-procure those requirements, that any such re-procurement will not be restricted in a way that would eliminate us from the competition (e.g., set aside for small business), or that we will be successful in any such re-procurements. If we are not able to replace the revenue from these contracts, either through follow-on contracts for those requirements or new contracts for new requirements, our revenue and operating results will be materially harmed.
Among the key factors in maintaining our relationships with federal government agencies and departments are our performance on individual contracts, the strength of our professional reputation, and the relationships of our senior management with client personnel. Because we have many government contracts, we expect disagreements and performance issues with government clients to arise from time to time. To the extent that such disagreements arise, our performance does not meet client expectations, our reputation or relationships with one or more key clients are impaired, or one or more important client personnel leave their employment, are transferred to other positions, or otherwise become less involved with our contracts, our revenue and operating results could be materially harmed. Our reputation could also be harmed if we work on or are otherwise associated with a project that receives significant negative attention in the news media or otherwise for any reason.
Our increasing dependence on GSA Schedule and other Indefinite Delivery/Indefinite Quantity contracts creates the risk of increasing volatility in our revenue and profit levels.
We believe that one of the key elements of our success is our position as a prime contractor under General Services Administration Multiple-Award Schedule (GSA Schedule) contracts and other Indefinite Delivery/Indefinite Quantity (IDIQ) contracts. As these types of contracts have increased in importance over the last several years, we believe our position as a prime contractor on these contracts has become increasingly important to our ability to sell our services to federal government clients. However, these contracts require us to compete for each delivery order and task order rather than having a more predictable stream of activity and, therefore, revenue and profit, during the term of a contract. There can be no assurance that we will continue to obtain revenue from such contracts at these levels, or in any amount, in the future. To the extent that federal agencies and departments choose to employ GSA Schedule and other contracts on which we are not qualified to compete or provide services, we could lose business, which would negatively affect our revenue and profitability.
Our commercial business depends on the energy sector of the global economy, which is highly cyclical and can lead to substantial variations in revenue and profit from period to period.
Our commercial business is heavily concentrated in the energy industry, which is highly cyclical. Our clients in the energy industry go through periods of high demand and high pricing followed by periods of low demand and low pricing. Their demand for our services has historically risen and fallen accordingly. We expect that demand for our services from energy industry clients, which is strong at the current time, will drop when the energy industry experiences its next downturn. Factors that could cause a downturn include a decline in general economic conditions, changes in political stability in the Middle East and other oil producing regions, and changes in government regulations impacting the energy sector. There
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are other factors, unrelated to the price or demand for energy, that have in the past affected demand for our services or may in the future affect it, such as the fate of a major corporation in the energy industry.
We may not receive revenue corresponding to the full amount of our backlog, or may receive it later than we expect, which could materially and adversely affect our revenue and operating results.
We have included backlog data under Business Contract Backlog and elsewhere in this prospectus. 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 contracts potential value is based upon factors such as the amount of revenue we have recently recognized on that contract, our experience in utilizing contract capacity on similar types of contracts, and our professional judgment. 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 rely upon Congressional appropriation of funding, which is typically provided only partially at any point during the term of federal contracts, and all or some of the work to be performed under a contract may require future appropriations by Congress and the subsequent allocation of funding by the procuring agency to the contract. Our estimate of the portion of backlog that we expect to recognize as revenue in any future period is likely to be inaccurate because the receipt and timing of this revenue is often dependent upon subsequent appropriation and allocation of funding and is subject to various contingencies, such as timing of task orders and delivery orders, many of which are beyond our control. In addition, we may never receive revenue from some of the engagements that are included in our backlog, and this risk is greater with respect to unfunded backlog.
The actual receipt of revenue 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 or other client 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 periodically to reflect modifications to or renewals of existing contracts, awards of new contracts, or approvals of expenditures. Additionally, the maximum contract value specified under a contract awarded to us is not necessarily indicative of the revenue that we will realize under that contract. We also derive revenue from IDIQ 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 corresponding to our backlog, our revenue and operating results for the then current fiscal period as well as future reporting periods could be materially adversely affected.
Because much of our work is performed under task orders, delivery orders and short-term assignments, we are exposed to the risk of not having sufficient work for our staff, which can affect both revenue and profit.
We perform some of our work under short-term contracts. Even under many of our longer-term contracts, we perform much of our work under individual task orders and delivery orders, many of which are awarded on a competitive basis. If we can not obtain new work in a timely fashion, whether through new task orders or delivery orders, modifications to existing task orders or delivery orders, or otherwise, we may not be able to keep our staff profitably utilized. It is difficult to predict when such new work or modifications will be obtained. Moreover, we need to manage our staff carefully in order to ensure that staff with appropriate qualifications are available when needed and that staff do not have excessive down-time when working on multiple projects, or as projects are beginning or nearing completion. There can be no assurance that we can profitably manage the utilization of our staff. In the short run, our costs are relatively fixed, so lack of staff utilization hurts revenue, profit and operating results.
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The loss of key members of our senior management team could impair our relationships with clients and disrupt the management of our business.
We believe that our success depends on the continued contributions of the members of our senior management team, particularly Sudhakar Kesavan, our Chief Executive Officer, John Wasson, our Chief Operating Officer, and Alan Stewart, our Chief Financial Officer. We rely on our senior management to generate business and manage and execute projects and programs successfully. In addition, the relationships and reputation that many members of our senior management team have established and maintain with client personnel contribute to our ability to maintain good client relations and identify new business opportunities. We do not generally have employment agreements with members of our senior management team providing for a specific term of employment. The loss of any member of our senior management could impair our ability to identify and secure new contracts, to maintain good client relations, and otherwise manage our business.
If we fail to attract and retain skilled employees, we will not be able to continue to win new work, to staff engagements and to sustain our profit margins and revenue growth.
We must continue to hire significant numbers of highly qualified individuals who have technical skills and who work well with our clients. These employees are in great demand and are likely to remain a limited resource for the foreseeable future. If we are unable to recruit and retain a sufficient number of these employees, our ability to staff engagements and to maintain and grow our business could be limited. In such a case, we may be unable to win or perform contracts, and we could be required to engage larger numbers of subcontractor personnel, any of which could cause a reduction in our revenue, profit and operating results and harm our reputation. We could even default under one or more contracts for failure to perform properly in a timely fashion, which could expose us to additional liability and further harm our reputation and ability to compete for future contracts. In addition, some of our contracts contain provisions requiring us to commit to staff an engagement with personnel the client considers key to our successful performance under the contract. In the event we are unable to provide these key personnel or acceptable substitutes, or otherwise staff our work, the client may reduce the size and scope of our engagement under a contract or terminate it, and our revenue and operating results may suffer.
We may not be successful in identifying acquisition candidates, and if we undertake acquisitions, they could fail to perform as we expect, increase our costs and liabilities, and disrupt our business.
One of our strategies is to pursue growth through strategic acquisitions. Although much of our recent growth has been through acquisitions, we have relatively limited acquisition experience to date. We may not be able to identify suitable acquisition candidates at prices that we consider appropriate. If we do identify an appropriate acquisition candidate, we may not be able to negotiate the terms of the acquisition successfully, finance the acquisition on terms satisfactory to us, or, if the acquisition occurs, integrate the acquired business into our existing business. Our out-of-pocket expenses in identifying, researching and negotiating potential acquisitions will likely be significant, even if we do not ultimately acquire identified businesses. In addition, negotiations of potential acquisitions and the integration of acquired business operations could disrupt our business by diverting management attention away from day-to-day operations and by reducing staff utilization during a transition period. Acquisitions of businesses or other material operations may require additional debt or equity financing or both, resulting in additional leverage or dilution of ownership, or both. Moreover, we may need to record write-downs from future impairments of identified intangible assets and goodwill, which could reduce our future reported earnings.
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Risk factors
It may be difficult and costly to integrate acquisitions due to geographic differences in the locations of personnel and facilities, differences in corporate cultures, disparate business models or other reasons. If we are unable to integrate companies we acquire successfully, our revenue and operating results could suffer. In addition, we may not be successful in achieving the anticipated cost efficiencies and synergies from these acquisitions, including our strategy of offering our services to existing clients of acquired companies to increase our revenue and profit. In fact, our costs for managerial, operational, financial and administrative systems may increase and be higher than anticipated. In addition, we may experience attrition, including key employees of acquired and existing businesses, during and following the integration of an acquired business into our company. This attrition could adversely affect our future revenue and operating results and prevent us from achieving the anticipated benefits of the acquisition.
Businesses that we acquire may have greater-than-expected liabilities for which we become responsible.
Businesses we acquire may have liabilities or adverse operating issues, or both, that we fail to discover through due diligence or the extent of which we underestimate prior to the acquisition. For example, to the extent that any prior owners, employees or agents of any acquired businesses or properties failed to comply with or otherwise violated applicable laws, rules or regulations, or failed to fulfill their obligations, contractual or otherwise, to applicable government authorities, their customers, suppliers or others, we, as the successor owner, may be financially responsible for these violations and failures and may suffer harm to our reputation and otherwise be adversely affected. An acquired business may have problems with internal controls over financial reporting, which could be difficult for us to discover during our due diligence process and could in turn lead us to have significant deficiencies or material weaknesses in our own internal controls over financial reporting. These and any other costs, liabilities and disruptions associated with any of our past acquisitions and any future acquisitions we may pursue could harm our operating results.
We face intense competition from many competitors that have greater resources than we do, which could result in price reductions, reduced profitability and loss of market share.
We operate in highly competitive markets and generally encounter intense competition to win contracts. We also compete with these competitors for the acquisition of new business. If we are unable to compete successfully for new business, our revenue and operating margins may decline. Many of our competitors are larger and have greater financial, technical, marketing and public relations resources, larger client bases, and greater brand or name recognition than we do. Some of our principal competitors include BearingPoint, Inc., Booz Allen Hamilton, Inc., CRA International, Inc., L-3 Communications Corporation, Lockheed Martin Corporation, Navigant Consulting, Inc., Northrop Grumman Corporation, PA Consulting Group, SAIC, Inc. and SRA International, Inc. We also have numerous smaller competitors, many of which have narrower service offerings and serve niche markets. Our competitors may be able to compete more effectively for contracts and offer lower prices to clients, causing us to lose contracts and lowering our profit or even causing us to suffer losses on contracts that we do win. Some of our subcontractors are also competitors, and some of them may in the future secure positions as prime contractors, which could deprive us of work we might otherwise have won under such contract. Our competitors also may be able to provide clients with different and greater capabilities and benefits than we can provide in areas such as technical qualifications, past performance on relevant contracts, geographic presence, ability to keep pace with the changing demands of clients and the availability of key professional personnel. Our competitors also have established or may establish relationships among themselves or with third parties, including through mergers and acquisitions, to increase their ability to address client needs. Accordingly, it is possible that new competitors or alliances
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among competitors may emerge. Our competitors may also be able to offer higher prices for attractive acquisition candidates, which could harm our strategy of growing through selected acquisitions. In addition, our competitors may engage in activities, whether proper or improper, to gain access to our proprietary information, to encourage our employees to terminate their employment with us, to disparage our company, and otherwise to gain competitive advantages over us. For further information regarding competition, see section entitled Business Competition.
We derive significant revenue and profit from contracts awarded through a competitive bidding process, which can impose substantial costs upon us, and we will lose revenue and profit if we fail to compete effectively.
We derive significant revenue and profit from federal government contracts that are awarded through a competitive bidding process. We expect that most of the government business we seek in the foreseeable future will be awarded through competitive bidding. Competitive bidding imposes substantial costs and presents a number of risks, including:
Ø | the substantial cost and managerial time and effort that we spend to prepare bids and proposals for contracts that may or may not be awarded to us; |
Ø | the need to estimate accurately the resources and costs that will be required to service any contracts we are awarded, sometimes in advance of the final determination of their full scope; |
Ø | the expense and delay that may arise if our competitors protest or challenge awards made to us pursuant to competitive bidding, and the risk that any such protest or challenge could result in the resubmission of bids on modified specifications, and in termination, reduction or modification of the awarded contracts; and |
Ø | the opportunity cost of not bidding on and winning other contracts we might otherwise pursue. |
To the extent we engage in competitive bidding and are unable to win particular contracts, we not only incur substantial costs in the bidding process that would negatively affect our operating results, but we may lose the opportunity to operate in the market for services that are provided under those contracts for a number of years. Even if we win a particular contract through competitive bidding, our profit margins may be depressed or we may even suffer losses as a result of the costs incurred through the bidding process and the need to lower our prices to overcome competition.
We may lose money on some contracts if we underestimate the resources we need to perform under the contract.
We provide services to clients primarily under three types of contracts: time-and-materials contracts; cost-based contracts; and fixed-price contracts. For fiscal 2003, we derived 40%, 44%, and 16% of our revenue from time-and-materials, cost-based contracts and fixed-price contracts, respectively. For fiscal 2004, the corresponding percentages were 37%, 41% and 22%, respectively. For fiscal 2005, the corresponding percentages were 42%, 34%, and 24%, respectively. Each of these types of contracts, to differing degrees, involves the risk that we could underestimate our cost of fulfilling the contract, which may reduce the profit we earn or lead to a financial loss on the contract.
Ø | Under time-and-materials contracts, we are paid for labor at negotiated hourly billing rates and for certain expenses, and we assume the risk that our costs of performance may exceed the negotiated hourly rates. |
Ø | Under our cost-based contracts, which frequently cap many of the various types of costs we can charge and which impose overall and individual task order or delivery order ceilings, we are reimbursed for certain costs incurred, which must be allowable and at or below these caps under the terms of the |
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contract and applicable regulations. If we incur unallowable costs in performance of the contract, the client will not reimburse those costs, and if our allowable costs exceed any of the applicable caps or ceilings, we will not be able to recover those costs. In some cases, we receive no fees. |
Ø | Under fixed-price contracts, we perform specific tasks for a fixed price. Compared to cost-plus-fee contracts and time-and-materials contracts, fixed-price contracts involve greater financial risk because we bear the full impact of cost overruns. |
For all three contract types, we bear varying degrees of risk associated with the assumptions we use to formulate our pricing for the work. To the extent our working assumptions prove inaccurate, we may lose money on the contract, which would adversely affect our operating results.
Our operating margins and operating results may suffer if cost-based contracts increase in proportion to our total contract mix.
Our clients typically determine what type of contract will be awarded to us. In general, cost-based contracts are the least profitable of our contract types. To the extent that we enter into more or larger cost-based contracts in proportion to our total contract mix or our indirect rates change for any reason, our operating margins and operating results may suffer. We do not know how, if at all, our contract mix or our indirect rates will change in the future.
We have incurred substantial amounts of debt and expect to incur additional debt in the future, which could substantially reduce our profitability, limit our ability to pursue certain business opportunities, and reduce the value of your investment.
As a result of our business activities and acquisitions, we have incurred a substantial amount of debt. Although we will reduce our borrowings with the proceeds of this offering, we may incur significant additional debt in the future, which could increase the risks described here and lead to other risks. The amount of our debt could have important consequences for holders of our stock, including, but not limited to:
Ø | our future ability to obtain additional financing for working capital, capital expenditures, product and service development, acquisitions, general corporate purposes, and other purposes may be impaired; |
Ø | a substantial portion of our cash flow from operations could be dedicated to the payment of the principal and interest on our debt; |
Ø | our vulnerability to economic downturns and rises in interest rates will be increased; |
Ø | our flexibility in planning for and reacting to changes in our business and the marketplace may be limited; and |
Ø | we may be placed at a competitive disadvantage relative to other firms. |
Servicing our debt in the future may require a significant amount of cash. Our ability to repay or refinance our debt depends on our successful financial and operating performance. Our financial and operational performance depends upon a number of factors, many of which are also beyond our control.
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 indebtedness, or selling additional stock, perhaps under unfavorable conditions. Any of these factors could adversely affect the value of our stock.
Our continued success depends on our ability to raise capital on commercially reasonable terms when, and in the amounts, needed. If additional financing is required, including refinancing then existing debt, there can be no assurances that we will be able to obtain such additional financing on terms acceptable
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Risk factors
to us and at the times required, if at all. In such event, we may be required to raise additional equity by issuing additional stock, alter our business plan materially, curtail all or part of our business expansion plans, or be subject to the actions listed below in the event of default. Any of these results could have a significant adverse effect on the value of our stock.
A default under our debt could lead to a bankruptcy or other financial restructuring that would significantly adversely affect the value of our stock.
In the event of a default under our financing arrangements, the lenders could, among other things, (i) declare all amounts borrowed to be due and payable, together with accrued and unpaid interest, (ii) terminate their commitments to make further loans, and (iii) proceed against the collateral securing the obligations owed to them. Our senior debt is and will continue to be secured by substantially all of our assets. Defaults under additional indebtedness we incur in the future could have these and other effects. Any such default could have a significant adverse effect on the value of our stock.
A default under our debt could lead to the bankruptcy, insolvency, financial restructuring or liquidation of our company. In any such event stockholders would be entitled to share ratably in our assets available for distribution only after the payment in full to the holders of all of our debt and other liabilities. There can be no assurance that, in any such bankruptcy, insolvency, financial restructuring or liquidation, stockholders would receive any distribution whatsoever.
Our existing and future debt will include covenants that restrict our activities and create the risk of defaults, which could impair the value of your stock.
Our financing arrangements contain and will continue to contain a number of significant covenants that, among other things, restrict our ability to dispose of assets; incur additional indebtedness; make capital expenditures; pay dividends; create liens on assets; enter into leases, investments and acquisitions; engage in mergers and consolidations; engage in certain transactions with affiliates; and otherwise restrict corporate activities (including change of control and asset sale transactions). In addition, our financing arrangements require us to maintain specified financial ratios and comply with financial tests, some of which may become more restrictive over time. At times we have not fulfilled the covenants, maintained the ratios, or complied with the financial tests specified in our financial arrangements or have only marginally fulfilled the covenants, maintained the ratios, or complied with the financial tests. The failure to fulfill the requirements of debt covenants, if not cured through performance or an amendment of the financing arrangements, could have the consequences of a default described in the risk factor above. At the times when we only marginally fulfill the requirements of debt covenants, our day-to-day business decisions may be affected. For example, concern over satisfying debt restrictions and covenants might cause us to forego contract bidding or acquisition opportunities or otherwise cause us to focus on short-term rather than long-term results. There is no assurance that we will be able to fulfill our debt covenants, maintain these ratios, or comply with these financial tests in the future, nor is there any assurance that we will not be in default under our financial arrangements in the future.
Our international operations pose special and unusual risks to our profitability and operating results.
We currently have offices in London, Moscow, New Delhi, Rio de Janeiro and Toronto; we also perform work in other foreign countries, some of which have a history of political instability or may expose our employees and subcontractors to physical danger; and we expect to continue to expand our international operations and offices. One element of our strategy to improve our competitiveness is to perform some of our work in countries with lower cost structures, such as India. There can be no assurance, however, that this strategy will be successful. Moreover, this particular element of our strategy could create problems
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Risk factors
for our ability to compete for government contracts, to the extent government agencies prefer or mandate that work under their contracts be executed in the United States or by U.S. citizens. In addition, expansion into new geographic regions requires considerable management and financial resources, the expenditure of which may negatively impact our results, and we may never see any return on our investment. Moreover, we are required to comply with the U.S. Foreign Corrupt Practices Act, or FCPA, which generally prevents the making of payments to foreign officials in order to obtain or retain business. Some of our competitors may not be subject to FCPA restrictions. Our operations are subject to risks associated with operating in, and selling to and in, foreign countries, including, but not limited to those listed elsewhere in this Risk factors section and:
Ø | compliance with the laws, regulations, policies, legal standards and enforcement mechanisms of the United States and the other countries in which we operate, which are sometimes inconsistent; |
Ø | currency fluctuations and devaluations and limitations on conversion of foreign currencies into U.S. dollars; |
Ø | recessions, depressions, inflation, hyperinflation, strikes and political and economic instability; |
Ø | rapid changes in and high interest rates; |
Ø | restrictions on the ability to repatriate profits to the United States or otherwise move funds; |
Ø | potential personal injury to personnel who may be exposed to military conflicts and other hostile situations in foreign countries, including Afghanistan and Iraq; |
Ø | civil disturbances, terrorist activities, acts of war, natural disasters, epidemics, pandemics and other catastrophic events; |
Ø | expropriation and nationalization of our assets or those of our subcontractors; |
Ø | difficulties in managing and staffing foreign operations and collecting accounts receivable; |
Ø | longer sales cycles; |
Ø | confiscatory taxes or other adverse tax consequences; |
Ø | tariffs, duties, export controls and other trade barriers; and |
Ø | investment and other restrictions and requirements by United States and foreign governments, including activities that disrupt markets, restrict payments or limit, change or deprive us of the ability to enforce contracts or obtain and retain licenses and other rights necessary to conduct our business. |
Any or all of these factors could, directly or indirectly, adversely affect our international and domestic operations and our overall revenue, profit and operating results.
Systems and/or service failures could interrupt our operations, leading to reduced revenue and profit.
Any interruption in our operations or any systems failures, including, but not limited to: (1) inability of our staff to perform their work in a timely fashion, whether caused by limited access to, and/or closure of, our and/or our clients offices or otherwise, (2) failure of network, software and/or hardware systems, and (3) other interruptions and failures, whether caused by us, a third-party service provider, unauthorized intruders and/or hackers, computer viruses, natural disasters, power shortages, terrorist attacks or otherwise, could cause loss of data and interruptions or delays in our business or that of our clients, or both. In addition, the failure or disruption of mail, communications and/or utilities could cause an interruption or suspension of our operations or otherwise harm our business.
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Risk factors
If we fail to meet client expectations or otherwise fail to perform our contracts properly, the value of our stock could decrease.
We could lose revenue, profit and clients and be exposed to liability if we have disagreements with our clients or fail to meet client expectations. We create, implement and maintain solutions that are often critical to our clients operations, and the needs of our clients are rapidly changing. Our ability to secure new work and hire and retain qualified staff depends heavily on our overall reputation as well as the individual reputations of our staff. Perceived poor performance on even a single contract could seriously impair our ability to secure new work and hire and retain qualified staff. In addition, we have experienced, and may experience in the future, some systems and service failures, schedule or delivery delays, and other problems in connection with our work.
Moreover, a failure by one or more of our subcontractors to perform satisfactorily the agreed-upon services on a timely basis may compromise our ability to perform our obligations as a prime contractor. In some cases, we have limited involvement in the work performed by the subcontractor and may have exposure as a result of problems caused by the subcontractor. In addition, we may have disputes with our subcontractors that could impair our ability to execute our contracts as required and could otherwise increase our costs.
If our work or the work of one or more of our subcontractors has significant defects or errors, fails to meet our clients expectations, or fails to keep up with clients ever-changing needs, we may, among other things:
Ø | lose future contract opportunities due to receipt of poor past performance evaluations from our customers; |
Ø | be required to provide additional services to clients at no charge; |
Ø | have contracts terminated for default and be liable to our customers for reprocurement costs and other damages; |
Ø | suffer reduced profit and loss of revenue if clients postpone additional work or fail to exercise options or to award contracts; |
Ø | receive negative publicity, which could damage our reputation and the reputation of our staff and adversely affect our ability to attract and retain clients and hire and retain qualified staff; and |
Ø | incur substantial costs and suffer claims for substantial damages against us, regardless of our responsibility for the problem. |
Any of these outcomes could have a material adverse effect upon our operations, our financial performance, and the value of our stock.
Our failure to obtain and maintain necessary security clearances may limit our ability to perform classified work for government clients, which could cause us to lose business.
Some federal government contracts require us to maintain facility security clearances and require some of our employees to maintain individual security clearances. The federal government has the right to grant and terminate such clearances. If our employees lose or are unable to obtain needed security clearances in a timely manner, or we lose or are unable to obtain a needed facility clearance, government clients can limit our work under or terminate some contracts. To the extent we cannot obtain the required facility clearances or security clearances for our employees or we fail to obtain them on a timely basis, we may not derive our anticipated revenue and profit, which could harm our operating results. In addition, a
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security breach relating to any classified or sensitive but unclassified information entrusted to us for protection could cause serious harm to our business, damage our reputation and result in a loss of our facility or individual employee security clearances.
Our relations with other contractors are important to our business and, if disrupted, could cause us damage.
We derive a portion of our revenue from contracts under which we act as a subcontractor or from teaming arrangements in which we and other contractors jointly bid on particular contracts, projects or programs. During 2004 and 2005, our revenue as a subcontractor was between 12% and 14% of our revenue. 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, result in reduction of the amount of our work under or termination of that contract, and could cause us not to obtain future work, even when we perform as required. We expect to continue to depend on relationships with other contractors for a portion of our revenue and profit in the foreseeable future. Moreover, our revenue and operating results could be materially and adversely affected if any prime contractor or teammate does not pay our invoices in a timely fashion, chooses to offer products or services of the type that we provide, teams with other companies to provide such products or services, or otherwise reduces its reliance upon us for such products or services.
The diversity of the services we provide and the clients we serve may create actual, potential and perceived conflicts of interest and conflicts of business that limit our growth and lead to liability for us.
Because we provide services to a wide array of both government and commercial clients, occasions arise where, due to actual, potential or perceived conflicts of interest or business conflicts, we cannot perform work for which we are qualified. A number of our contracts contain limitations on the work we can perform for others, such as, for example, when we are assisting a governmental agency or department in the development of regulations or enforcement strategies. Our internal procedure requires that, whenever a project we are pursuing may pose a potential conflict of interest or business, our Contracts Conflict of Interest Manager, or COI Manager, is notified in writing prior to initiation of work. The COI Manager is then responsible for determining the extent of any possible conflict. As a result of these actions, we may determine that no actual or potential conflict is likely and the pursuit of the project should proceed, the likelihood of actual or potential conflict is sufficiently great that we should not pursue the project at all, or there is an actual or potential conflict of interest that can be mitigated by an appropriately fashioned mitigation plan, which must then be created and implemented. However, there can be no assurance that this process will work properly. Actual, potential and perceived conflicts limit the work we can do and, consequently, can limit our growth, adversely affect our operating results, and reduce the value of our company. In addition, if we fail to address actual or potential conflicts properly, even if we simply fail to recognize a perceived conflict of interest, we may be in violation of our existing contracts, may otherwise incur liability and lose future business for not preventing the conflict from arising, and our reputation may suffer. As we grow and further diversify our service offerings, client base and geographic reach, the potential for actual and perceived conflicts will increase, further adversely affecting our operating results.
We sometimes incur costs before a contract is executed or appropriately modified. To the extent a suitable contract or modification is not later signed or we are not paid for our work, our revenue and profit will be reduced.
When circumstances warrant, we sometimes incur expenses and perform work without a signed contract or appropriate modification to an existing contract to cover such expenses or work. When we do so, we
22
Risk factors
are working at-risk, and there is a chance that the subsequent contract or modification will not ensue, or if it does, that it will not allow us to be paid for the expenses already incurred or work already performed or both. In such cases, we have generally been successful in obtaining the required contract or modification, but any failure to do so in the future could affect our operating results.
As we develop new services, new clients and new practices, enter new lines of business, and focus more of our business on providing more implementation and improvement services rather than advisory services, our risks of making costly mistakes increases.
We currently assist our clients both in advisory capacities and by helping them implement and improve the solutions to their problems. As part of our corporate strategy, we will attempt to sell more services relating to implementation and improvement, and we are regularly searching for ways to provide new services to clients. In addition, we plan to extend our services to new clients, into new lines of business, and into new geographic locations. As we change our focus towards implementation and improvement; attempt to develop new services, new clients, new practice areas and new lines of business; open new offices; and do business in new geographic locations, those efforts could harm our results of operations and could be unsuccessful.
In addition, there can be no assurance that we can maintain our current revenue or profitability or achieve any growth at all or that, if we grow our revenue, we can do so profitably. Competitive pressures may require us to lower our prices in order to win new work. In addition, growth and attempts to grow place substantial additional demands on our management and staff, as well as on our information, financial, administrative and operational systems, demands that we may not be able to manage successfully. Growth may require increased recruiting efforts, opening new offices, increased business development, selling, marketing and other actions that are expensive and entail increased risk. We may need to invest more in our people and systems, controls, policies and procedures than we anticipate. Therefore, even if we do grow, the demands on our people and systems, controls, policies and procedures may be sufficiently great that the quality of our work, our operating margins and our operating results suffer.
Efforts involving a different focus, new services, new clients, new practice areas, new lines of business, new offices and new geographic locations entail inherent risks associated with inexperience and competition from mature participants in those areas. Our inexperience may result in costly decisions that could harm our profit and operating results. In particular, implementation services often relate to the development and implementation of critical infrastructure or operating systems that our clients may view as mission critical, and if we fail to satisfy the needs of our clients in providing these services, our clients could incur significant costs and losses for which they could seek compensation from us.
Claims in excess of our insurance coverage could harm our business and financial results.
When entering into contracts with commercial clients, we attempt, where feasible and appropriate, to negotiate indemnification protection from our clients as well as monetary limitation of liability for professional acts, errors and omissions, but it is not always possible to do so. In addition, we cannot be sure that these contractual provisions will protect us from liability for damages if action is taken against us. Claims against us, both under our client contracts and otherwise, have arisen in the past, exist currently, and will arise in the future. These claims include actions by employees, clients and third parties. Some of the work we do, for example, in the environmental area, is potentially hazardous to our employees, our clients and third parties, and they may suffer damage because of our actions or inaction. We have various policies and programs in the environmental, health and safety area, but they may not
23
Risk factors
prevent harm to clients, employees and third parties. Our insurance coverage may not be sufficient to cover all of the claims against us, insurance may not continue to be available on commercially reasonable terms in sufficient amounts to cover such claims, or at all, and our insurers may disclaim coverage as to any or all such claims, and otherwise may be unwilling or unable to cover such claims. The successful assertion of any claim or combination of claims against us could seriously harm our business. Even if not successful, such claims could result in significant legal and other costs, harm our reputation, and be a distraction to management.
We depend on our intellectual property and our failure to protect it could enable competitors to market services and products with similar features, which may reduce demand for our services and products.
Our success depends in part upon the internally developed technology and models, proprietary processes and other intellectual property that we utilize to provide our services and incorporate in our products. If we are unable to protect our intellectual property, our competitors could market services or products similar to our services and products, which could reduce demand for our offerings. Federal government clients typically retain a perpetual, world-wide, royalty-free right to use the intellectual property we develop for them in any manner they deem appropriate, including providing it to our competitors in connection with their performance of federal government contracts. When necessary, we seek governmental authorization to re-use intellectual property developed for the federal government or to secure export authorization. Federal government clients may grant contractors the right to commercialize software developed with federal funding, but they are not required to do so. In any event, if we were to use improperly intellectual property even partially funded by the federal government, the federal government could seek damages and royalties from us, sanction us and prevent us from working on future government contracts.
We may be unable to prevent unauthorized parties from copying or otherwise obtaining and using our technology and models. Policing unauthorized use of our technology and models is difficult, and we may not be able to prevent misappropriation, particularly in foreign countries where the laws, and enforcement of those laws, may not protect our intellectual property as fully as those in the United States. Others, including our employees, may compromise the trade secrets and other intellectual property that we own. Although we require our employees to execute non-disclosure and intellectual property assignment agreements, these agreements may not be legally or practically sufficient to protect our rights. Litigation may be necessary to enforce our intellectual property rights, to protect our trade secrets, and to determine the validity and scope of the proprietary rights of others. Any litigation could result in substantial costs and diversion of resources, with no assurance of success.
In addition, we need to invest in our intellectual property regularly to maintain it, keep it up to date, and improve it. There can be no assurance that we will be able to do so in a timely manner, effectively, efficiently, or at all. To the extent that we do not maintain and improve our intellectual property, our reputation may be damaged, we may lose business, and we may subject the company to costly claims that we have failed to perform our services properly.
We may be harmed by intellectual property infringement claims.
We may become subject to claims from our employees and third parties who assert that intellectual property we use in delivering services and business solutions to our clients infringe upon intellectual property rights of such employees or third parties. Our employees develop much of the intellectual property that we use to provide our services and business solutions to our clients, but we also engage third parties to assist us and we license technology from other vendors. If our vendors, our employees or
24
Risk factors
third parties assert claims that we or our clients are infringing on their intellectual property, we could incur substantial costs to defend those claims, even if we prevail. In addition, if any of these infringement claims are ultimately successful, we could be required to:
Ø | pay substantial damages; |
Ø | cease selling and using products and services that incorporate the challenged intellectual property; |
Ø | obtain a license or additional licenses from our vendors or other third parties, which may not be available on commercially reasonable terms or at all; and |
Ø | redesign our products and services that rely on the challenged intellectual property, which may be very expensive or commercially impractical. |
Any of these outcomes could further adversely affect our operating results.
Our business will be negatively affected if we are not able to anticipate and keep pace with rapid changes in technology or if growth in the use of technology by our clients is not as rapid as in the past.
Our success depends, in part, on our ability to develop and implement technology services and solutions that anticipate and keep pace with rapid and continuing changes in technology, industry standards and client preferences. We may not be successful in anticipating or responding to these developments on a timely basis, and our offerings may not be successful in the marketplace. In addition, the costs we incur in anticipation or response may be substantial and may be greater than we anticipate, and we may never recover these costs. Also, technologies developed by our competitors may make our service or solution offerings uncompetitive or obsolete. Any one of these circumstances could have a material adverse effect on our ability to obtain and successfully complete client engagements. Moreover, we use technology-enabled tools to differentiate ICF from our competitors and to facilitate our service offerings that do not require the delivery of technology services or solutions. If we fail to keep these tools current and useful, our ability to sell and deliver our services and, as a result, our operating results could suffer.
RISKS RELATED TO THIS OFFERING
There is no prior public market for our common stock and the market price of our common stock could be extremely volatile and could decline following this offering, resulting in a substantial loss on, or total loss of, your investment.
Prior to this offering, there has not been a public market for our common stock. An active trading market for our common stock may never develop nor be sustained, which could adversely affect your ability to sell your shares and could depress the market price of your shares. In addition, the initial public offering price will be determined through negotiations among us, the selling stockholders, and the representatives of the underwriters, and may bear no relationship to the price at which the common stock will trade upon completion of this offering.
The stock market in general has been highly volatile. As a result, the market price of our common stock is likely to be similarly volatile, and investors in our common stock may experience a decrease in the value of their stock, including decreases unrelated to our operating performance or prospects. The price of our common stock could be subject to wide fluctuations in response to a number of factors, including those listed elsewhere in this Risk factors section and others such as:
Ø | our operating performance and the performance of other similar companies and companies deemed to be similar; |
Ø | actual or anticipated fluctuations in our operating results from quarter to quarter; |
25
Risk factors
Ø | changes in estimates of our revenue, earnings or operating results or recommendations by securities analysts; |
Ø | revenue, earnings or operating results that differ from securities analysts estimates; |
Ø | publication of reports about us or our industry; |
Ø | speculation in the press and investment community; |
Ø | commencement, completion and termination of contracts, any of which can cause us to incur significant expenses without corresponding payments or revenue, during any particular quarter; |
Ø | timing of significant costs and investments, such as bid and proposal costs; |
Ø | variations in purchasing patterns under GSA Schedule contracts, IDIQ contracts and other contracts; |
Ø | our contract mix and the extent of use of subcontractors and changes in either; |
Ø | changes in our staff utilization rates, which can be caused by various factors outside of our control, including inclement weather that prevents our professional staff from traveling to work sites; |
Ø | any seasonality of our business; |
Ø | the level and cost of our debt; |
Ø | changes in presidential administrations and federal government officials; |
Ø | changes or perceived changes in policy and budgetary measures that affect government contracts; |
Ø | the unwillingness of certain parties to purchase our stock because of limitations on foreign ownership, control or influence or for other reasons; |
Ø | changes in accounting principles and policies; |
Ø | general market conditions, including economic factors unrelated to our performance; and |
Ø | military and other actions related to international conflicts, wars or otherwise. |
In the past, securities class action litigation has often been instituted against companies following periods of volatility in their stock price. This type of litigation could result in substantial costs and divert our managements attention and resources.
Our principal investor will have significant influence over us, which could result in actions of which you or other stockholders do not approve.
Following this offering, CMEP, our principal stockholder, will beneficially own shares of common stock, or % of our outstanding common stock based on shares outstanding on May 31, 2006. If the underwriters exercise their over-allotment option in full, CMEP will beneficially own shares, or % of our outstanding common stock. In either case, CMEP will have significant influence over the outcome of all matters that our stockholders vote upon, including the election of directors, amendments to our certificate of incorporation and by-laws, and mergers and other business combinations. CMEPs interests may not be aligned with the interests of our other investors. This concentration of ownership and voting power may also have the effect of delaying or preventing a change in control of our company and could prevent stockholders from receiving a premium over the market price if a change in control is proposed.
26
Risk factors
Our principal investor and some members of our board of directors may have conflicts of interest that could hinder our ability to make acquisitions.
One of our principal growth strategies following completion of this offering will be to make selective acquisitions of complementary businesses. CMEP, which will continue to be our principal stockholder following the closing of this offering, sponsors private equity funds. Some of these funds are focused on investments in, among other things, businesses in the federal services sector. Our directors Peter M. Schulte and Joel R. Jacks are principals of CMEP. In addition, Messrs. Schulte and Jacks, as well as our director Dr. Edward H. Bersoff, are directors and officers of Federal Services Acquisition Corporation (FSAC), a publicly held special purpose acquisition company formed to acquire federal services businesses. FSAC has approximately $120 million available for this purpose. To date, there has not been a situation in which CMEP, FSAC and we have simultaneously pursued the same acquisition target. However, it is possible that CMEP and related funds and FSAC could be interested in acquiring businesses that we would also be interested in, and that these relationships could hinder our ability to carry out our acquisition strategy. In the event this situation arises in the future, we plan to refer the matter to independent members of our board of directors who are neither members of management nor affiliated with either CMEP nor FSAC.
We have never operated as a public company, and fulfilling our obligations incident to being a public company will be expensive and time consuming.
As a private company, we have maintained a relatively small finance and accounting staff. We currently do not have an internal audit group, and we have not been required to maintain and establish disclosure controls and procedures and internal control over financial reporting as required under the federal securities laws. As a public company, the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the SEC, as well as the rules of the Nasdaq National Market, will require us to implement additional corporate governance practices and adhere to a variety of reporting requirements and complex accounting rules. Compliance with these public company obligations will require significant management time, place significant additional demands on our finance and accounting staff and on our financial, accounting and information systems. We may need to hire additional accounting and financial staff with appropriate public company reporting experience and technical accounting knowledge. Other expenses associated with being a public company include increased auditing, accounting and legal fees and expenses, investor relations expenses, increased directors fees and director and officer liability insurance costs, registrar and transfer agent fees, listing fees, as well as other miscellaneous expenses. We cannot accurately predict the amount of additional costs that we may incur or the timing of such costs, but we have estimated that such costs will exceed $2 million during our first 12 months of being a public company. We believe, but cannot be certain, that the level of such costs will be higher during the first year or two of being a public company than in later years.
Section 404 of the Sarbanes-Oxley Act of 2002 will require us to document and test our internal controls over financial reporting for fiscal 2007 and beyond and will require an independent registered public accounting firm to report on our assessment as to the effectiveness of these controls. Any delays or difficulty in satisfying these requirements could adversely affect our future results of operations and our stock price.
Section 404 of the Sarbanes-Oxley Act of 2002 will require us to document and test the effectiveness of our internal controls over financial reporting in accordance with an established internal control framework and to report on our conclusion as to the effectiveness of our internal controls. It will also require an independent registered public accounting firm to test our internal controls over financial reporting and report on the effectiveness of such controls for our fiscal year ending December 31, 2007
27
Risk factors
and subsequent years. An independent registered public accounting firm will also be required to test, evaluate and report on the completeness of our assessment. In addition, upon completion of this offering, we will be required under the Securities Exchange Act of 1934 to maintain disclosure controls and procedures and internal control over financial reporting. Moreover, it may cost us more than we expect to comply with these control- and procedure-related requirements.
We may in the future discover areas of our internal controls that need improvement, particularly with respect to businesses that we have recently acquired or may acquire in the future. We cannot be certain that any remedial measures we take will ensure that we implement and maintain adequate internal controls over our financial processes and reporting in the future. Any failure to implement required new or improved controls, or difficulties encountered in their implementation could harm our operating results or cause us to fail to meet our reporting obligations. If we are unable to conclude that we have effective internal controls over financial reporting, or if our independent auditors are unable to provide us with an unqualified report regarding the effectiveness of our internal controls over financial reporting as of December 31, 2007 and in future periods as required by Section 404, investors could lose confidence in the reliability of our financial statements, which could result in a decrease in the value of our common stock. Failure to comply with Section 404 could potentially subject us to sanctions or investigations by the SEC, the Nasdaq National Market or other regulatory authorities.
A substantial number of shares will become eligible for sale in the near future, which could cause our common stock price to decline significantly.
If our stockholders sell, or the market perceives that our stockholders intend to sell, substantial amounts of our common stock in the public market, the market price of our common stock could decline significantly. These sales also might make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate. In 2006, shares will become available for sale in the public market following the expiration of lock-up agreements by CMEP and certain other stockholders. As these restrictions on resale end, the market price of our common stock could drop significantly if the holders of these shares sell them or are perceived by the market as intending to sell them. Also, as of May 31, 2006, options to purchase shares of our common stock were exercisable and additional options will become exercisable in the future. Shares issued upon the exercise of any of these stock options would generally be available for sale in the public market.
We do not intend to pay dividends.
We intend to retain our earnings, if any, for general corporate purposes, and we do not anticipate paying cash dividends on our stock in the foreseeable future. In addition, existing financing arrangements prohibit us from paying such dividends. This lack of dividends may make our stock less attractive to investors.
Provisions of our charter documents and Delaware law may inhibit potential acquisition bids and other actions that you and other stockholders may consider favorable, and the market price of our common stock may be lower as a result.
There are provisions in our amended and restated certificate of incorporation and amended and restated bylaws that make it more difficult for a third party to acquire, or attempt to acquire, control of our company, even if a change in control were considered favorable by you and other stockholders. For example, our board of directors has the authority to issue up to 5,000,000 shares of preferred stock. The board of directors can fix the price, rights, preferences, privileges and restrictions of the preferred stock without any further vote or action by our stockholders. The issuance of shares of preferred stock may delay or prevent a change-in-control transaction. As a result, the market price of our common stock and
the voting and other rights of our stockholders may be adversely affected. This issuance of shares of preferred stock may result in the loss of voting control to other stockholders.
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Risk factors
Our charter documents contain other provisions that could have an anti-takeover effect. These provisions:
Ø | divide our board of directors into three classes, making it more difficult for stockholders to change the composition of the board; |
Ø | allow directors to be removed only for cause; |
Ø | do not permit our stockholders to call a special meeting of the stockholders; |
Ø | require all stockholder actions to be taken by a vote of the stockholders at an annual or special meeting or by a written consent signed by all of our stockholders; |
Ø | require our stockholders to comply with advance notice procedures to nominate candidates for election to our board of directors or to place stockholders proposals on the agenda for consideration at stockholder meetings; and |
Ø | require the approval of the holders of capital stock representing at least two-thirds of the companys voting power to amend our indemnification obligations, director classifications, stockholder proposal requirements and director candidate nomination requirements set forth in our amended and restated certificate of incorporation and amended and restated bylaws. |
In addition, we are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which regulates corporate acquisitions. These provisions could discourage potential acquisition proposals and could delay or prevent a change-in-control transaction. They could also have the effect of discouraging others from making tender offers for our common stock. These provisions may also prevent changes in our management.
We indemnify our officers and the members of our board of directors under certain circumstances. Such provisions may discourage stockholders from bringing a lawsuit against officers and directors for breaches of fiduciary duty and may also have the effect of reducing the likelihood of derivative litigation against officers and directors even though such action, if successful, might otherwise have benefited you and other stockholders. In addition, your investment may be adversely affected to the extent that we pay the costs of settlement and damage awards against our officers or directors pursuant to such provisions.
Because our management will have broad discretion over the use of the net proceeds to us from this offering, you may not agree with how we use them and the proceeds may not be invested successfully.
Our management will have broad discretion as to the use of the offering proceeds. Although we currently anticipate that the net proceeds of this offering to us will be used primarily for repayment of our existing indebtedness under our revolving credit facility and term loan facilities and one-time bonus payments due to employees under our amended and restated employee annual incentive compensation pool plan, with the balance to be used for general corporate purposes, including working capital and potential acquisitions, our management may allocate our net proceeds among these purposes as it determines is necessary. Even if our existing indebtedness is reduced, we may subsequently decide to incur additional debt. In addition, market or other factors may require our management to allocate portions of our net proceeds for other purposes. Accordingly, you will be relying on the judgment of our management with regard to the use of the net proceeds to us from this offering, and you will not have the opportunity, as part of your investment decision, to assess whether these proceeds are being used appropriately. It is possible that we will invest our portion of the net proceeds in a way that does not yield a favorable, or any, return for our company.
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Risk factors
If you invest in this offering, you will experience immediate and substantial dilution.
The initial public offering price of our common stock will be substantially higher than the net tangible book value per share of the outstanding common stock. As a result, investors purchasing common stock in this offering will incur immediate dilution in the net tangible book value per share of the common stock. Investors who purchase shares in this offering:
Ø | will pay a price per share that substantially exceeds the per share tangible book value of our assets after subtracting our liabilities; and |
Ø | will have contributed approximately % of the total amount of our equity funding since inception, but will only own approximately % of the shares outstanding immediately after this offering, based on shares outstanding on March 31, 2006, calculated on a pro forma basis. |
In the past, we have offered, and we expect to continue to offer, stock to our employees and directors. Such stock is likely to be offered to our employees and directors at prices below the then current market prices and may be offered at prices below the initial public offering price. Our employee stock purchase plan will allow employees to purchase our stock at a five percent discount to market price. Options issued in the past have had per share exercise prices below the initial public offering price per share. As of March 31, 2006, there were shares of common stock issuable upon exercise of outstanding stock options at a weighted average exercise price of $ per share. Additional options may be granted to employees and directors in the future at per-share exercise prices below the then current market prices and below the initial public offering price per share.
In addition, we may be required, or could elect, to seek additional equity financing in the future or to issue preferred or common stock to pay all or part of the purchase price for any businesses, products, technologies, intellectual property and/or other assets or rights we may acquire or to pay for a reduction, change and/or elimination of liabilities in the future. If we issue new equity securities under these circumstances, our stockholders may experience additional dilution and the holders of any new equity securities may have rights, preferences and privileges senior to those of the holders of our common stock.
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Special note regarding forward-looking statements
Some of the statements under Summary, Risk factors, Managements discussion and analysis of financial condition and results of operations, Business, and elsewhere in this prospectus constitute forward-looking statements. These statements involve known and unknown risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. In some cases, you can identify these statements by forward-looking words such as anticipate, believe, could, estimate, expect, intend, may, plan, potential, should, will, and would or similar words. You should read statements that contain these words carefully because they discuss our future expectations, contain projections of our future results of operations or of our financial position, or state other forward-looking information. We believe that it is important to communicate our future expectations to our investors. However, there may be events in the future that we are not able to predict or control accurately. The factors listed above in the section captioned Risk factors, as well as any cautionary language in this prospectus, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements, including but not limited to:
Ø | changes in federal government spending priorities; |
Ø | failure by Congress to timely approve budgets; |
Ø | our dependency on contracts with federal government agencies and departments for the majority of our revenue; |
Ø | an economic downturn in the energy sector; |
Ø | failure to receive the full amount of our backlog; |
Ø | loss of members of management or other key employees; |
Ø | difficulties implementing our acquisition strategy; and |
Ø | difficulties expanding our service offerings and client base. |
Before you invest in our common stock, you should be aware that the occurrence of the events described above, in the section captioned Risk factors and elsewhere in this prospectus could have a material adverse effect on our business, results of operations and financial position.
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. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this prospectus. We undertake no obligation to update these forward-looking statements, even if our situation changes in the future.
NOTICE TO INVESTORS
You should rely only on the information contained in this prospectus. We, the selling stockholders and the underwriters have not authorized anyone to give you different or additional information. We are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where those offers and sales are permitted. You should not assume that the information in this prospectus is accurate as of any date after the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of shares of common stock.
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We estimate that the net proceeds to us from this offering will be approximately $ , or approximately $ if the underwriters exercise their over-allotment option in full, assuming an initial public offering price of $ per share (the midpoint of the range set forth on the cover page of this prospectus), after deducting estimated underwriting discounts and commissions and estimated offering expenses. Each $1 increase (decrease) in the public offering price per share would increase (decrease) our net proceeds, after deducting estimated underwriting discounts and commissions, by $ (assuming no exercise of the underwriters over-allotment option).
We intend to use:
Ø | approximately $ of the net proceeds of this offering to repay a portion of the existing indebtedness under our revolving credit and term loan facilities; |
Ø | $2.7 million for one-time bonus payments due to employees under our amended and restated employee annual incentive compensation pool plan (see Management Employment Agreements); and |
Ø | the balance for general corporate purposes, including working capital and potential acquisitions. |
We are often engaged in preliminary discussions with acquisition candidates. As of the date of this prospectus, we have no binding commitments or agreements to enter into any acquisitions.
We expect to refinance our revolving credit facility and two term loan facilities in connection with the completion of this offering. Those facilities include:
Ø | An $8 million short-term term loan facility that matures in January 2007 (sometimes referred to herein as the time loan facility). As of May 26, 2006, the outstanding principal amount under this facility was $8.0 million. |
Ø | A $22 million term loan facility that matures in October 2010. As of May 26, 2006, the outstanding principal amount under this facility was $19.8 million. |
Ø | A revolving credit facility that allows us to borrow up to the lesser of $45 million or the applicable borrowing base and matures in October 2010. As of May 26, 2006, the principal amount outstanding under our revolving credit facility was $37.5 million. |
The indebtedness to be repaid under our short-term term loan facility, our term loan facility and our revolving credit facility bears interest at rates equal to an applicable margin, or spread, plus, at our option, either a base rate equal to the U.S. prime rate or a LIBOR rate determined by reference to the interest period relevant to the indebtedness. The applicable margins for base rate indebtedness and applicable spread for LIBOR rate indebtedness under the short-term term loan and term loan facilities and the revolving credit loan facility are variable subject to certain leverage ratio tests. As of May 26, 2006, the base rate margin and LIBOR spread were 0.75% and 3.50%, respectively, for borrowings under the short-term term loan facility; 0.25% and 3.00%, respectively, for borrowings under the term loan facility; and 0.25% and 3.00%, respectively, for borrowings under the revolving credit facility.
A substantial amount of the debt to be repaid with the proceeds of the offering was incurred in 2005 in connection with the Synergy and Caliber acquisitions and the repayment of $6.4 million of subordinated debt due to our former parent. In connection with the Synergy acquisition in January 2005, we increased the capacity under our credit facilities by $10 million. In October 2005, in connection with the Caliber acquisition and the repayment of debt to our former parent, we increased the capacity under our credit facilities by an additional $25 million.
We will not receive any proceeds from the sale of common stock by the selling stockholders.
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We have never declared or paid any cash dividends on our common stock. We currently intend to retain all future earnings, if any, for use in the operations and expansion of our business. As a result, we do not anticipate paying cash dividends in the foreseeable future. Any future determination as to the declaration and payment of cash dividends will be at the discretion of our board of directors and will depend on factors our board of directors deems relevant, including among others, our results of operations, financial condition and cash requirements, business prospects, and the terms of our credit facilities and other financing arrangements.
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The following table sets forth our cash and cash equivalents, short-term debt and capitalization as of March 31, 2006:
Ø | on an actual basis; and |
Ø | on an adjusted basis to reflect our sale of common stock in this offering at an assumed public offering price of $ per share (the midpoint of the range set forth on the cover page of this prospectus), and receipt of the net proceeds, after deducting estimated underwriting discounts and commissions and estimated offering expenses. Each $1 increase (decrease) in the public offering price per share would increase (decrease) the as-adjusted figure shown below for cash and cash equivalents, additional paid-in capital and total stockholders equity by $ (assuming no exercise of the underwriters over-allotment option), after deducting estimated underwriting discounts and commissions. |
As of March 31, 2006 | |||||||
Actual | As adjusted | ||||||
(In thousands) | |||||||
Cash and cash equivalents |
$ | 1,296 | $ | ||||
Current portion of long-term debt |
$ | 12,400 | $ | ||||
Long-term debt, net of current portion(1) |
$ | 53,944 | $ | ||||
Stockholders equity: |
|||||||
Common stock, $0.01 par value per share; 20,000,000 shares authorized; shares issued and shares outstanding, actual; shares issued and shares outstanding, as adjusted |
93 | ||||||
Additional paid-in capital |
51,011 | ||||||
Retained earnings |
4,928 | ||||||
Treasury stock |
(628 | ) | |||||
Stockholder notes receivable(2) |
(1,446 | ) | |||||
Accumulated other comprehensive income |
202 | ||||||
Total stockholders equity |
54,160 | ||||||
Total capitalization |
$ | 120,504 | $ | ||||
You should read this table along with Managements discussion and analysis of financial condition and results of operations and our financial statements and related notes appearing elsewhere in this prospectus.
The actual outstanding share information is retroactively adjusted to give effect to the -for- stock split of our common stock to be effected immediately prior to the closing of this offering and excludes:
Ø | shares issuable upon exercise of options outstanding as of March 31, 2006, at a weighted average exercise price of per share, of which options to purchase shares were exercisable as of that date; |
Ø | shares issuable upon exercise of warrants outstanding as of March 31, 2006, at an exercise price of per share, all of which were exercisable as of that date; and |
Ø | shares available for future grant under our stock plans as of March 31, 2006. |
(1) | At May 26, 2006, we had approximately $52.9 million in long-term debt, net of current portion, outstanding. |
(2) | Represents loans provided by us to certain employees for the purpose of purchasing shares of our common stock. As of May 5, 2006, certain of those loans, with an aggregate principal balance of $703,027, were repaid. See Certain relationships and related party transactionsLoans to Executive Officers. |
34
If you invest in our common stock in this offering, your ownership will be diluted to the extent of the difference between the initial public offering price per share and the pro forma net tangible book value per share of our common stock after this offering. Our net tangible book value, as of March 31, 2006, was approximately $ , or $ per share of common stock. Net tangible book value per share represents the amount of total tangible assets less total liabilities, divided by the number of shares of common stock outstanding.
Dilution per share to new investors represents the difference between the amount per share paid by purchases of our common stock in this offering and the net tangible book value per share of common stock immediately after completion of this offering. As of March 31, 2006, after giving effect to:
Ø | the -for- stock split of our common stock to be effected immediately prior to the closing of this offering; |
Ø | the sale by us of shares of common stock in this offering at an assumed initial public offering price of $ per share (the midpoint of the range set forth on the cover page of this prospectus); and |
Ø | the deduction of the underwriting discounts and commissions and estimated offering expenses payable by us, |
our pro forma net tangible book value would have been approximately $ , or $ per share. The assumed initial public offering price of $ per share exceeds $ per share, which is the per share pro forma value of our total tangible assets less total liabilities after this offering. This represents an immediate increase in pro forma net tangible book value of $ per share to existing stockholders. Accordingly, new investors in the offering will suffer an immediate dilution of their investment of approximately $ per share. The table below illustrates this per share dilution as of March 31, 2006:
Assumed initial public offering price per share |
$ | ||
Increase in pro forma net tangible book value per share attributable to new investors |
|||
Pro forma as adjusted net tangible book value per share after giving effect to the offering |
|||
Pro forma net tangible book value per share dilution to new stockholders |
$ |
Each $1 increase (decrease) in the public offering price per share would increase (decrease) the as-adjusted pro forma net tangible book value by $ per share (assuming no exercise of the underwriters over-allotment option) and the dilution to investors in this offering by $ per share, assuming that the number of shares offered in this offering, as set forth on the cover page of this prospectus, remains the same.
If the underwriters over-allotment option is exercised in full, the as-adjusted pro forma net tangible book value will increase to approximately $ per share, representing an increase to existing stockholders of approximately $ per share, and there will be an immediate dilution of approximately $ per share to new investors.
The following table summarizes, as of March 31, 2006, the difference between the number of shares of common stock purchased from us, the total consideration paid for such shares and the average price per share paid by existing stockholders and by new investors. As shown in the following table, new investors will contribute % of the total consideration paid to us to date in exchange for shares of our stock, in exchange for which they will own % of our outstanding shares of common stock. The calculation
35
Dilution
below is based on the assumed initial offering price of $ per share, before deducting underwriting discounts and commissions and our estimated expenses for this offering:
Shares Purchased |
Total Consideration |
|||||||||||||
Number | Percent | Amount | Percent | Average Price Per Share | ||||||||||
Existing Stockholders |
% | $ | % | $ | ||||||||||
New Investors |
||||||||||||||
Total |
100 | % | $ | 100 | % | $ |
Each $1 increase (decrease) in the public offering price per share would increase (decrease) the total consideration paid by new investors, total consideration paid by all stockholders and the price per share paid by new stockholders by $ , $ and $ , respectively, assuming that the number of shares offered in this offering, as set forth on the cover page of this prospectus, remains the same.
If the underwriters over-allotment option is exercised in full, the number of shares held by new investors will increase to shares, or %, of the total number of shares of common stock outstanding immediately after this offering.
The tables and calculations above are based on shares outstanding as of March 31, 2006 after giving effect to the -for- stock split of our common stock to be effected immediately prior to the closing of this offering, and exclude:
Ø | shares issuable upon exercise of options outstanding as of March 31, 2006, at a weighted average exercise price of per share, of which options to purchase shares were exercisable as of that date; |
Ø | shares issuable upon exercise of warrants outstanding as of March 31, 2006, at an exercise price of per share, all of which were exercisable as of that date; and |
Ø | shares available for future grant under our stock plans as of March 31, 2006. |
To the extent that any of these options or warrants are exercised, new options or warrants are issued or we issue additional shares of common stock in the future, there will be further dilution to new investors.
36
Selected consolidated financial and other data
The following selected consolidated financial and other data should be read in conjunction with our financial statements and the related notes, and with Managements discussion and analysis of financial condition and results of operations, included elsewhere in this prospectus. The statement of operations data for 2003, 2004 and 2005 and the balance sheet data as of December 31, 2004 and 2005 are derived from, and are qualified by reference to, our audited financial statements included in this prospectus. The statement of operations data for 2001 and 2002 and the balance sheet data as of December 31, 2001, 2002 and 2003 are derived from our corresponding audited financial statements. The statement of operations data for the quarters ended April 1, 2005 and March 31, 2006 and the balance sheet data as of April 1, 2005 and March 31, 2006 are derived from our unaudited financial statements included in this prospectus. In the opinion of management, those unaudited financial statements have been prepared on a basis substantially consistent with the audited financial statements and include all adjustments, consisting of normal and recurring adjustments, necessary for the fair presentation of the results for these periods and as of such dates. Results for any interim period are not necessarily indicative of the results to be expected for a full year.
We have presented the balance sheet data as of March 31, 2006:
Ø | on an actual basis; and |
Ø | on an adjusted basis to reflect our sale of common stock in this offering at an assumed public offering price of $ per share (the midpoint of the range set forth on the cover page of this prospectus), and receipt of the net proceeds, after deducting estimated underwriting discounts and commissions and estimated offering expenses. Each $1 increase (decrease) in the public offering price per share would increase (decrease) the as-adjusted figure shown below for cash and cash equivalents and total stockholders equity by $ (assuming no exercise of the underwriters over-allotment option), after deducting estimated underwriting discounts and commissions. |
We adopted the provisions of SFAS 123(R) on January 1, 2006, and our results for the quarter ended March 31, 2006 reflect $76,359 of stock-based compensation expense.
Effective October 1, 2005, we consummated the acquisition of Caliber Associates, Inc. for $20.8 million in cash. The unaudited pro forma condensed consolidated statement of operations data for the year ended December 31, 2005 gives effect to the acquisition of Caliber Associates, Inc. as if it had occurred on January 1, 2005. Operating results for Caliber Associates, Inc. from the date of the acquisition, October 1, 2005, through December 31, 2005 are included in our statement of operations data for the year ended December 31, 2005. The pro forma information has been prepared for illustrative purposes only, and is not necessarily indicative of the operating results that would have occurred if the acquisition had been consummated on January 1, 2005, nor is it necessarily indicative of any future operating results.
37
Selected consolidated financial and other data
Year ended December 31, |
Quarter ended |
|||||||||||||||||||||||||||||||
2001 | 2002 |
2003 |
2004 |
2005 |
Pro forma 2005 |
April 1, 2005 |
March 31, 2006 |
|||||||||||||||||||||||||
(unaudited) | (unaudited) | |||||||||||||||||||||||||||||||
(In thousands, except per share amounts) | ||||||||||||||||||||||||||||||||
Revenue |
$ | 111,733 | $ | 143,496 | $ | 145,803 | $ | 139,488 | $ | 177,218 | $ | 207,794 | $ | 41,212 | $ | 53,448 | ||||||||||||||||
Direct costs |
62,258 | 87,345 | 91,022 | 83,638 | 106,078 | 122,192 | 23,969 | 31,626 | ||||||||||||||||||||||||
Operating expenses |
||||||||||||||||||||||||||||||||
Indirect and selling expenses |
41,068 | 47,156 | 45,335 | 46,097 | 60,039 | (1) | 71,782 | (1) | 13,905 | 17,883 | ||||||||||||||||||||||
Depreciation and amortization |
5,196 | 3,664 | 3,000 | 3,155 | 5,541 | 6,706 | 777 | 772 | ||||||||||||||||||||||||
Earnings from operations |
3,211 | 5,331 | 6,446 | 6,598 | 5,560 | 7,114 | 2,561 | 3,167 | ||||||||||||||||||||||||
Other (expense) income |
||||||||||||||||||||||||||||||||
Interest expense, net |
(3,688 | ) | (2,940 | ) | (3,095 | ) | (1,266 | ) | (2,981 | ) | (4,054 | ) | (473 | ) | (1,026 | ) | ||||||||||||||||
Other |
| | 33 | (33 | ) | 1,308 | 1,308 | 1 | | |||||||||||||||||||||||
Total other (expense) income |
(3,688 | ) | (2,940 | ) | (3,062 | ) | (1,299 | ) | (1,673 | ) | (2,746 | ) | (472 | ) | (1,026 | ) | ||||||||||||||||
Income (loss) from continuing operations before income taxes |
(477 | ) | 2,391 | 3,384 | 5,299 | 3,887 | 4,368 | 2,089 | 2,141 | |||||||||||||||||||||||
Minority interest in net loss |
94 | | | | | | | | ||||||||||||||||||||||||
Income tax expense |
716 | 1,099 | 1,320 | 2,466 | 1,865 | 2,420 | 1,002 | 1,047 | ||||||||||||||||||||||||
Income (loss) from continuing operations |
(1,099 | ) | 1,292 | 2,064 | 2,833 | 2,022 | 1,948 | 1,087 | 1,094 | |||||||||||||||||||||||
Discontinued operations |
||||||||||||||||||||||||||||||||
Income (loss) from discontinued operations, net |
251 | (503 | ) | 308 | (196 | ) | | | | | ||||||||||||||||||||||
Gain from disposal of subsidiary, net |
| | | 380 | | | | | ||||||||||||||||||||||||
Income (loss) from discontinued operations |
251 | (503 | ) | 308 | 184 | | | | | |||||||||||||||||||||||
Net income (loss) |
$ | (848 | ) | $ | 789 | $ | 2,372 | $ | 3,017 | $ | 2,022 | $ | 1,948 | $ | 1,087 | $ | 1,094 | |||||||||||||||
Earnings from continuing operations per share |
||||||||||||||||||||||||||||||||
Basic |
||||||||||||||||||||||||||||||||
Diluted |
||||||||||||||||||||||||||||||||
Earnings per share |
||||||||||||||||||||||||||||||||
Basic |
||||||||||||||||||||||||||||||||
Diluted |
||||||||||||||||||||||||||||||||
Weighted-average shares |
||||||||||||||||||||||||||||||||
Basic |
||||||||||||||||||||||||||||||||
Diluted |
Year ended December 31, |
Quarter ended | ||||||||||||||||||||
Other operating data: | 2001 |
2002 |
2003 | 2004 |
2005 |
April 1, 2005 |
March 31, 2006 | ||||||||||||||
(unaudited) (In thousands) | |||||||||||||||||||||
EBITDA from continuing operations(2) |
$ | 8,407 | $ | 8,995 | $ | 9,446 | $ | 9,753 | $ | 11,101 | $ | 3,338 | $ | 3,939 | |||||||
Non-cash compensation charge included in EBITDA from continuing operations(1) |
| | | | 2,138 | | |
(footnotes on following page)
38
Selected consolidated financial and other data
As of December 31, |
As of March 31, 2006 | ||||||||||||||||||||
Consolidated balance sheet data: | 2001 | 2002 | 2003 | 2004 | 2005 | Actual | Adjusted | ||||||||||||||
(unaudited) | |||||||||||||||||||||
(In thousands) | |||||||||||||||||||||
Cash and cash equivalents |
$ | 1,011 | $ | 660 | $ | 1,643 | $ | 797 | $ | 499 | $ | 1,296 | $ | ||||||||
Net working capital |
10,499 | 10,305 | 6,085 | 5,502 | 18,141 | 19,374 | |||||||||||||||
Total assets |
88,311 | 105,945 | 101,842 | 94,057 | 151,124 | 155,953 | |||||||||||||||
Current portion of long-term debt |
2,750 | 3,750 | 4,235 | 4,235 | 6,767 | 12,400 | |||||||||||||||
Long-term debt, net of current portion |
33,183 | 27,904 | 20,313 | 16,844 | 54,205 | 53,944 | |||||||||||||||
Total stockholders equity |
30,815 | 43,079 | 45,276 | 47,861 | 52,903 | 54,160 |
(1) | Includes a one-time, non-cash compensation charge of $2.1 million in December 2005 resulting from the acceleration of the vesting of all then outstanding stock options. See Managements discussion and analysis of financial condition and results of operationsResults of OperationsYear ended December 31, 2005 compared to year ended December 31, 2004. |
(2) | EBITDA from continuing operations, a measure used by us to evaluate performance, is defined as net income plus (less) loss (income) from discontinued operations, less gain from sale of discontinued operations, less other income, plus other expenses, net interest expense, income tax expense and depreciation and amortization. We believe EBITDA from continuing operations is useful to investors because similar measures are frequently used by securities analysts, investors and other interested parties in the evaluation of companies in our industry. EBITDA from continuing operations is not a recognized term under generally accepted accounting principles and does not purport to be an alternative to net income as a measure of operating performance or to cash flows from operating activities as a measure of liquidity. Because not all companies use identical calculations, this presentation of EBITDA from continuing operations may not be comparable to other similarly titled measures used by other companies. EBITDA from continuing operations is not intended to be a measure of free cash flow for managements discretionary use, as it does not consider certain cash requirements such as interest payments, tax payments, capital expenditures and debt service. Our credit agreement includes covenants based on EBITDA from continuing operations, subject to certain adjustments. See Managements discussion and analysis of financial condition and results of operations Liquidity and Capital Resources. A reconciliation of net income to EBITDA from continuing operations follows: |
Year ended December 31, |
Quarter ended | |||||||||||||||||||||||||
2001 | 2002 | 2003 | 2004 | 2005 | April 1, 2005 |
March 31, 2006 | ||||||||||||||||||||
(unaudited) | ||||||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||
Net income (loss) |
$ | (848 | ) | $ | 789 | $ | 2,372 | $ | 3,017 | $ | 2,022 | $ | 1,087 | $ | 1,094 | |||||||||||
Loss (income) from discontinued operations |
(251 | ) | 503 | (308 | ) | 196 | | | | |||||||||||||||||
Gain from sale of discontinued operations |
| | | (380 | ) | | | | ||||||||||||||||||
Other expense (income) |
| | (33 | ) | 33 | (1,308 | ) | (1 | ) | | ||||||||||||||||
Interest expense, net |
3,688 | 2,940 | 3,095 | 1,266 | 2,981 | 473 | 1,026 | |||||||||||||||||||
Minority interest in net loss |
(94 | ) | | | | | | | ||||||||||||||||||
Income tax expense |
716 | 1,099 | 1,320 | 2,466 | 1,865 | 1,002 | 1,047 | |||||||||||||||||||
Depreciation and amortization |
5,196 | 3,664 | 3,000 | 3,155 | 5,541 | 777 | 772 | |||||||||||||||||||
EBITDA from continuing operations |
$ | 8,407 | $ | 8,995 | $ | 9,446 | $ | 9,753 | $ | 11,101 | $ | 3,338 | $ | 3,939 | ||||||||||||
39
Selected consolidated financial and other data
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
We acquired Caliber Associates, Inc. (Caliber) effective as of October 1, 2005 for $20.8 million in cash. The following unaudited pro forma condensed combined statement of operations data for the year ended December 31, 2005 gives effect to our acquisition of Caliber as if it had occurred on January 1, 2005. The acquisition has been accounted for using purchase price accounting in accordance with Statement of Financial Accounting Standards No. 141, Business Combinations.
This unaudited pro forma condensed combined statement of operations has been prepared in accordance with rules prescribed by Article 11 of Regulation S-X and based upon our historical financial statements and the historical financial statements of Caliber. This unaudited pro forma condensed combined statement of operations should be read in conjunction with our historical audited consolidated financial statements for the year ended December 31, 2005, and the historical audited consolidated financial statements of Caliber for the year ended December 31, 2004 and the historical unaudited consolidated financial statements of Caliber for the nine months ended September 30, 2005 included elsewhere in this prospectus. This unaudited pro forma condensed combined statement of operations has been prepared for illustrative purposes only, and is not necessarily indicative of the operating results that would have occurred if the acquisition transaction described above had been consummated on January 1, 2005, nor is it necessarily indicative of any future operating results.
Year ended December 31, 2005 |
|||||||||||||||
ICF (includes Caliber results from October 1, 2005) |
Caliber (through |
Pro forma adjustments |
Pro forma | ||||||||||||
(unaudited) | (unaudited) | (unaudited) | |||||||||||||
(In thousands, except per share amounts) | |||||||||||||||
Revenue |
$ | 177,218 | $ | 30,576 | $ | | $ | 207,794 | |||||||
Direct costs |
106,078 | 16,114 | | 122,192 | |||||||||||
Operating expenses |
|||||||||||||||
Indirect and selling expenses |
60,039 | (1) | 14,517 | (2,774) | (2) | 71,782 | (1) | ||||||||
Depreciation and amortization |
5,541 | 384 | 781 | (3) | 6,706 | ||||||||||
Earnings from operations |
5,560 | (439) | 1,993 | 7,114 | |||||||||||
Other (expense) income |
|||||||||||||||
Interest expense, net |
(2,981) | (763) | (310) | (4) | (4,054) | ||||||||||
Other |
1,308 | | | 1,308 | |||||||||||
Total other expense |
1,673 | (763) | (310) | (2,746) | |||||||||||
Income (loss) from continuing operations before income taxes |
3,887 | (1,202) | 1,683 | 4,368 | |||||||||||
Income tax expense |
1,865 | | 555 | (5) | 2,420 | ||||||||||
Income (loss) from continuing operations |
$ | 2,022 | $ | (1,202) | $ | 1,128 | $ | 1,948 | |||||||
Earnings from continuing operations per share |
|||||||||||||||
Basic |
|||||||||||||||
Diluted |
|||||||||||||||
Earnings per share |
|||||||||||||||
Basic |
|||||||||||||||
Diluted |
|||||||||||||||
Weighted-average shares |
|||||||||||||||
Basic |
|||||||||||||||
Diluted |
(footnotes on following page)
40
Selected consolidated financial and other data
(1) | Includes a one-time, non-cash compensation charge of $2.1 million in December 2005 resulting from the acceleration of the vesting of all then outstanding stock options. See Managements discussion and analysis of financial condition and results of operationsResults of OperationsYear ended December 31, 2005 compared to year ended December 31, 2004. |
(2) | Pro forma adjustment to remove Calibers employee stock ownership plan (ESOP) expense for January to September 2005. The ESOP terminated upon the acquisition and would not have existed in the period provided or been replaced with a similar expense. See Note 9 Employee Benefit Plans of the notes to the historical unaudited consolidated financial statements of Caliber Associates, Inc. for the nine months ended September 30, 2005 included in this prospectus. |
(3) | Pro forma adjustment to reflect increase in amortization expense of purchased intangibles assuming acquisition of Caliber on January 1, 2005, net of removal of amortization for Calibers own intangibles that ceased at purchase. |
(4) | Pro forma adjustment to reflect net increase in interest expense for additional interest expense on acquisition financing indebtedness and for elimination of interest expense on indebtedness of Caliber related to its ESOP. |
(5) | Pro forma adjustment to reflect a net increase in tax expense due to the following items (in thousands): |
Increase due to elimination of ESOP expense |
$ | 1,097 | ||
Increase due to amortization expense |
56 | |||
Tax benefit of net loss of Caliber for nine months | (476 | ) | ||
Decrease for additional interest expense | (122 | ) | ||
$ | 555 | |||
41
Managements discussion and analysis of financial condition and results of operations
The following discussion and analysis should be read in conjunction with the Selected consolidated financial and other data and the consolidated financial statements and related notes included elsewhere in this prospectus. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions, such as statements of our plans, objectives, expectations and intentions. The cautionary statements made in this prospectus should be read as applying to all related forward-looking statements wherever they appear in this prospectus. Our actual results could differ materially from those anticipated in the forward-looking statements. Factors that could cause or contribute to our actual results differing materially from those anticipated include those discussed in Risk Factors and elsewhere in this prospectus.
OVERVIEW
We provide management, technology and policy consulting and implementation services primarily to the U.S. federal government, as well as to other government, commercial and international clients. We help our clients conceive, develop, implement and improve solutions that address complex economic, social and national security issues. Our services primarily address four key markets: defense and homeland security; energy; environment and infrastructure; and health, human services and social programs. Increased government involvement in virtually all aspects of our lives has created opportunities for us to resolve issues at the intersection of the public and private sectors. We believe that demand for our services will continue to grow as government, industry and other stakeholders seek to understand and respond to geopolitical and demographic changes, budgetary constraints, heightened environmental and social concerns, rapid technological changes and increasing globalization.
Our federal government, state and local government, commercial and international clients utilize our services because we combine diverse institutional knowledge and experience in their activities with the deep subject matter expertise of our highly educated staff, which we deploy in multi-disciplinary teams. Our federal government clients include every cabinet-level department, including the Department of Defense, the Environmental Protection Agency, the Department of Homeland Security, the Department of Transportation, the Department of Health and Human Services, the Department of Housing and Urban Development, the Department of Justice and the Department of Energy. U.S. federal government clients generated 72% of our revenue in 2005. Our state and local government clients include the states of California, Massachusetts, New York and Pennsylvania. State and local government clients generated 9% of our revenue in 2005. We also serve commercial and international clients, primarily in the energy sector, including electric and gas utilities, oil companies and law firms. Our commercial and international clients generated 19% of our revenue in 2005. We have successfully worked with many of these clients for decades, providing us a unique and knowledgeable perspective on their needs.
We report operating results and financial data as a single segment based upon the information used by our chief operating decision makers in evaluating the performance of our business and allocating resources.
REVENUE
We earn revenue from services that we provide to government and commercial clients in four key markets:
Ø | defense and homeland security; |
Ø | energy; |
42
Managements discussion and analysis of financial condition and results of operations
Ø | environment and infrastructure; and |
Ø | health, human services and social programs. |
The following table shows our revenue from each of our four markets as a percentage of total revenue for the periods indicated. For each client, we have attributed all revenue from that client to the market we consider to be the clients primary market, even if a portion of that revenue relates to a different market.
Year ended December 31, |
Quarter ended |
||||||||||||||
2003 | 2004 |
2005 |
April 1, 2005 |
March 31, 2006 |
|||||||||||
Defense and homeland security |
16 | % | 19 | % | 28 | % | 29 | % | 28 | % | |||||
Energy |
24 | 21 | 20 | 20 | 19 | ||||||||||
Environment and infrastructure |
44 | 44 | 35 | 38 | 28 | ||||||||||
Health, human services and social programs |
16 | 16 | 17 | 13 | 25 | ||||||||||
Total revenue |
100 | % | 100 | % | 100 | % | 100 | % | 100 | % | |||||
The proportion of our revenue from each market identified in the above table changed significantly from 2004 to 2005, and may change from 2005 to 2006, due primarily to our recent acquisitions. See Acquisitions below for a discussion of these acquisitions.
Our primary clients are agencies and departments of the U.S. federal government. The following table shows our revenue by type of client as a percentage of total revenue for the periods indicated.
Year ended December 31, |
Quarter ended |
||||||||||||||
2003 | 2004 | 2005 | April 1, 2005 |
March 31, 2006 |
|||||||||||
U.S. federal government |
72 | % | 72 | % | 72 | % | 72 | % | 75 | % | |||||
Domestic commercial |
12 | 13 | 14 | 13 | 11 | ||||||||||
U.S. state and local government |
7 | 8 | 9 | 8 | 9 | ||||||||||
International |
9 | 7 | 5 | 7 | 5 | ||||||||||
Total revenue |
100 | % | 100 | % | 100 | % | 100 | % | 100 | % | |||||
Most of our revenue is from contracts on which we are the prime contractor, which we believe provides us strong client relationships. In 2003, 2004 and 2005, 91%, 87% and 86% of our revenue, respectively, was from prime contracts.
Contract mix
We had over 1,000 active contracts in 2005. Our contracts with clients include time-and-materials contracts, cost-based contracts (including cost-based fixed fee, cost-based award fee and cost-based incentive fee, as well as grants and cooperative agreements), and fixed-price contracts. Our contract mix varies from year to year due to numerous factors, including our business strategies and the procurement activities of our clients. Unless the content requires otherwise, we use the term contracts to refer to contracts and any task orders or delivery orders issued under a contract.
43
Managements discussion and analysis of financial condition and results of operations
The following table shows our revenue from each of these types of contracts as a percentage of total revenue for the periods indicated.
Year ended December 31, |
Quarter ended |
||||||||||||||
2003 | 2004 | 2005 | April 1, 2005 |
March 31, 2006 |
|||||||||||
Time-and-materials |
40 | % | 37 | % | 42 | % | 44 | % | 44 | % | |||||
Cost-based |
44 | 41 | 34 | 32 | 30 | ||||||||||
Fixed-price |
16 | 22 | 24 | 24 | 26 | ||||||||||
Total |
100 | % | 100 | % | 100 | % | 100 | % | 100 | % | |||||
Time-and-materials contracts. Under time-and-materials contracts, we are paid for labor at fixed hourly rates and generally reimbursed separately for allowable materials, other direct costs and out-of-pocket expenses. Our actual labor costs may vary from the expected costs which formed the basis for our negotiated hourly rates if we need to hire additional employees at higher wages, increase the compensation paid to existing employees, or are able to hire employees at lower-than-expected rates. Our non-labor costs, such as fringe benefits, overhead and general and administrative costs, also may be higher or lower than we anticipated. To the extent that our actual labor and non-labor costs under a time-and-materials contract vary significantly from the negotiated hourly rates, we can generate more or less than the targeted amount of profit or, perhaps, a loss.
Cost-based contracts. Under cost-based contracts, we are paid based on the allowable costs we incur, and usually receive a fee. All of our cost-based contracts reimburse us for our direct labor and fringe-benefit costs that are allowable under the contract, but many limit the amount of overhead and general and administrative costs we can recover, which may be less than our actual overhead and general and administrative costs. In addition, our fees are constrained by fee ceilings and in certain cases, such as with grants and cooperative agreements, we may receive no fee. Because of these limitations, our cost-based contracts, on average, are our least profitable type of contract and we may generate less than the expected return. Cost-based fixed fee contracts specify the fee to be paid. Cost-based incentive fee and cost-based 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.
Fixed-price contracts. Under fixed-price contracts, we perform specific tasks for a pre-determined price. Compared to time-and-materials and cost-based contracts, fixed-price contracts involve greater financial risk because we bear the full impact of labor and non-labor costs that exceed our estimates, in terms of costs per hour, number of hours, and all other costs of performance, in return for the full benefit of any cost savings. We therefore may generate more or less than the targeted amount of profit or, perhaps, a loss.
DIRECT COSTS
Direct costs consist primarily of costs incurred to provide services to clients, the most significant of which are employee salaries and wages, plus associated fringe benefits, relating to specific client engagements. Direct costs also include the costs of subcontractors and outside consultants, third-party materials and any other related direct costs, such as travel expenses.
We generally expect the ratio of direct costs as a percentage of revenue to decline when our own labor increases relative to subcontracted labor or outside consultants. Conversely, as subcontracted labor or outside consultants for clients increase relative to our own labor, we expect the ratio to increase.
Changes in the mix of services and other direct costs provided under our contracts can result in variability in our direct costs as a percentage of revenue. For example, if we are successful in our strategy
44
Managements discussion and analysis of financial condition and results of operations
to increase the proportion of our work in the area of implementation, we expect that more of our services will be performed in client-provided facilities and/or with dedicated staff. Such work generally has a higher proportion of direct costs than much of our current advisory work, but we anticipate that higher utilization of such staff will decrease the amount of indirect expenses. In addition, to the extent we are successful in winning larger contracts, our own labor services component could decrease because larger contracts typically are broader in scope and require more diverse capabilities, potentially resulting in more subcontracted labor, more other direct costs and lower margins. Although these factors could lead to a higher ratio of direct costs as a percentage of revenue, the economics of these larger jobs are nonetheless generally favorable because they increase income, broaden our revenue base and have a favorable return on invested capital.
OPERATING EXPENSES
Our operating expenses consist of indirect and selling expenses, including non-cash compensation, and depreciation and amortization.
Indirect and selling expenses
Indirect and selling expenses include our management, facilities and infrastructure costs for all employees, as well as salaries and wages, plus associated fringe benefits, not directly related to client engagements. Among the functions covered by these expenses are marketing, business and corporate development, bids and proposals, facilities, information technology and systems, contracts administration, accounting, treasury, human resources, legal, corporate governance and executive and senior management. We include all of our cash incentive compensation in this item, as well as non-cash compensation such as stock-based compensation provided to employees whose compensation and other benefit costs are included in both direct costs and indirect and selling expenses. See Significant New Accounting Pronouncement below for a discussion of how we treat such compensation in our financial statements. In 2005, this stock-based compensation was comprised of a one-time non-cash compensation charge of $2.1 million resulting from the acceleration of the vesting of all then outstanding stock options in December.
We try to utilize our office space as efficiently as possible, and therefore attempt to sublease or otherwise dispose of space we do not anticipate needing in the near-term, but there can be no assurance that we will be able to do so in a timely manner, on commercially reasonable terms or at all. For example, on April 14, 2006, we decided to abandon, effective June 30, 2006, our San Francisco, California leased facility and relocate our staff there to other space. Our San Francisco lease obligation expires in July 2010 and covers approximately 12,000 square feet at an annual rate of $79 per square foot plus operating expenses. Management believes, based upon consultation with its leasing consultants, that the current market for similar space is substantially below this cost. In addition, we are also abandoning a smaller space in Lexington, Massachusetts that we have been unable to sublease. We anticipate a charge to earnings in the second quarter of 2006 of approximately $4.0 million as a result of these actions.
Depreciation and amortization
Depreciation and amortization includes the depreciation of computers, furniture and other equipment, the amortization of the costs of software we use internally, leasehold improvements and the amortization of goodwill and other intangible assets arising from acquisitions.
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Managements discussion and analysis of financial condition and results of operations
INCOME TAX EXPENSE
Our effective tax rate of 48.9% for the quarter ended March 31, 2006 was higher than the statutory tax rate for the quarter ended March 31, 2006 primarily due to permanent tax differences related to expenses not deductible for tax purposes, valuation allowances for tax losses from certain foreign subsidiaries and prior-year deferred tax adjustments. If we are successful in increasing our pre-tax income in the future, we expect our effective tax rate to decline.
ACQUISITIONS
A key element of our growth strategy is to pursue acquisitions. In 2005, we completed the acquisitions of Synergy, Inc. and Caliber Associates, Inc.
Synergy. Effective January 1, 2005, we acquired all of the outstanding common stock of Synergy, Inc. Synergy provides strategic consulting, planning, analysis and technology solutions in the areas of logistics, defense operations and command and control, primarily to the U.S. Air Force. We undertook the acquisition in order to enhance our presence in the areas of homeland security and national defense and also in government technology and program management. The aggregate purchase price was approximately $19.5 million, including $18.4 million of cash, common stock valued at $0.5 million, and $0.6 million of transaction expenses. The excess of the purchase price over the estimated fair value of the net assets acquired was approximately $14.9 million, of which we allocated approximately $14.1 million to goodwill and $0.8 million to customer-related intangible assets. Synergys results are included in our statements of operations beginning January 1, 2005.
Caliber Associates. Effective October 1, 2005, we acquired all of the outstanding common stock of Caliber Associates, Inc. from its employee stock ownership plan. Caliber provides professional services in the areas of human services programs and policies. We undertook the acquisition to enhance our presence in the areas of child and family studies and also in information technology and human services. The aggregate initial purchase price was approximately $20.8 million, including $19.5 million of cash and $1.3 million of transaction expenses. In addition to the initial consideration, the purchase agreement provides for additional contingent payments in cash up to an additional $3.5 million over the two years following the acquisition, subject to Caliber achieving certain performance goals. This additional amount has already been placed in escrow and is shown on our balance sheet as restricted cash. The excess of the purchase price over the estimated fair value of the net assets acquired was approximately $17.7 million, of which we allocated approximately $13.8 million to goodwill and $3.9 million to intangible assets. Calibers results are included in our statements of operations beginning October 1, 2005.
Our results of operations in 2005 were affected significantly by our acquisitions of Synergy and Caliber. Synergy operations accounted for approximately $21.7 million of our 2005 revenue, principally relating to our defense and homeland security market. Caliber operations had revenue of approximately $39.8 million in 2005, of which approximately $9.3 million is included in our 2005 revenue (in the fourth quarter), principally relating to our health, human services and social programs market.
Our prior acquisitions were accounted for as purchases and involved purchase prices well in excess of tangible asset values, resulting in the creation of a significant amount of goodwill and other intangible assets. Increased levels of intangible assets will increase our depreciation and amortization charges. At December 31, 2005, goodwill accounted for 53.7% of our total assets, and purchased intangibles accounted for 2.7% of our total assets. Under generally accepted accounting principles, we test our goodwill for impairment at least annually, and if we conclude that our goodwill is impaired we will be required to write down its carrying value on our balance sheet and book an impairment charge in our statement of operations.
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Managements discussion and analysis of financial condition and results of operations
We plan to continue to acquire businesses if and when opportunities arise. We expect future acquisitions to also be accounted for as purchases and therefore generate significant amounts of goodwill and other intangible assets. We expect to incur additional debt for future acquisitions and, in some cases, to use our stock as acquisition consideration in addition to, or in lieu of, cash. Any issuance of stock may have a dilutive effect on our stock outstanding.
IMPACT OF OUR INITIAL PUBLIC OFFERING
The completion of this offering will have near and long-term effects on our results of operations. For example, in the near term, under the terms of an incentive plan that has been in place since 1999, the completion of this offering will cause $2.7 million of one-time bonuses to become due to approximately 30 members of our management team. These bonuses are expected to be payable upon completion of this offering.
We have historically paid fees and certain expenses to CMLS Management, L.P., an affiliate of CM Equity Partners, L.P., under a consulting agreement. These amounts were approximately $333,000 for 2003, $361,000 for 2004 and $380,000 for 2005. The consulting agreement will terminate upon completion of this offering.
Over the long-term, our results of operations will be affected by the costs of being a public company, including changes in board and executive compensation, the costs of compliance with the Sarbanes- Oxley Act of 2002, the costs of complying with SEC and Nasdaq requirements, and increased insurance, accounting and legal costs. These costs are not reflected in our historical results.
FLUCTUATION OF QUARTERLY RESULTS AND CASH FLOW
Our results of operations and cash flow may vary significantly from quarter to quarter depending on a number of factors, including:
Ø | the progress of contract performance; |
Ø | the number of billable days in a quarter; |
Ø | vacation days; |
Ø | the timing of client orders; |
Ø | timing of award fee notices; |
Ø | changes in the scope of contracts; |
Ø | billing of other direct and subcontract costs; |
Ø | the commencement and completion of contracts; |
Ø | the timing of significant costs and investments (such as bid and proposal costs); |
Ø | our contract mix and use of subcontractors; |
Ø | changes in staff utilization; |
Ø | level and cost of our debt; |
Ø | changes in accounting principles and policies; and |
Ø | general market and economic conditions. |
Because a significant portion of our expenses, such as personnel, facilities and related costs, are fixed in the short term, contract performance and variation in the volume of activity, as well as in the number
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Managements discussion and analysis of financial condition and results of operations
-and volume of contracts commenced or completed during any quarter, may cause significant variations in operating results from quarter to quarter.
EFFECT OF APPROVAL OF FEDERAL BUDGET
The federal governments fiscal year ends on September 30 of each year. If a federal budget for the next fiscal year has not been approved by that date, our clients may have to suspend engagements on which we are working until a budget has been approved. Any such suspension may reduce our revenue in the quarter ending September 30 (our third quarter) or the subsequent quarter. The federal governments fiscal year end can also trigger increased contracting activity, which could increase our third or fourth quarter revenue.
EFFECTS OF INFLATION
We generally have been able to price our contracts in a manner to accommodate the rates of inflation experienced in recent years, although we cannot be sure that we will be able to do so in the future.
RESULTS OF OPERATIONS
The following table sets forth certain items from our consolidated statements of operations as a percentage of revenue for the periods indicated.
Year ended December 31, |
Quarter ended |
||||||||||||||
2003 | 2004 | 2005 |
April 1, 2005 |
March 31, 2006 |
|||||||||||
Revenue |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||||
Direct costs |
62.4 | 60.0 | 59.9 | 58.2 | 59.2 | ||||||||||
Operating expenses |
|||||||||||||||
Indirect and selling expenses |
31.1 | 33.0 | 33.9 | 33.7 | 33.5 | ||||||||||
Depreciation and amortization |
2.1 | 2.3 | 3.1 | 1.9 | 1.4 | ||||||||||
Earnings from operations |
4.4 | 4.7 | 3.1 | 6.2 | 5.9 | ||||||||||
Other (expense) income |
|||||||||||||||
Interest expense, net |
(2.1 | ) | (0.9 | ) | (1.7 | ) | (1.1 | ) | (1.9 | ) | |||||
Other |
| | 0.8 | | | ||||||||||
Total other expense |
(2.1 | ) | (0.9 | ) | (0.9 | ) | (1.1 | ) | (1.9 | ) | |||||
Income from continuing operations before income taxes |
2.3 | 3.8 | 2.2 | 5.1 | 4.0 | ||||||||||
Income tax expense |
0.9 | 1.8 | 1.1 | 2.5 | 2.0 | ||||||||||
Income from continuing operations |
1.4 | 2.0 | 1.1 | 2.6 | 2.0 | ||||||||||
Income from discontinued operations |
0.2 | 0.2 | | | | ||||||||||
Net income |
1.6 | % | 2.2 | % | 1.1 | % | 2.6 | % | 2.0 | % | |||||
Quarter ended March 31, 2006 compared to quarter ended April 1, 2005
Revenue. Revenue for the first quarter of 2006 was $53.4 million, compared to $41.2 million for the first quarter of 2005, representing an increase of $12.2 million or 29.7%. The increase in revenue was primarily due the acquisition of Caliber (approximately $10.4 million of revenue), as well as approximately $1.8 million in net contract growth, excluding Caliber, due primarily to an increase in subcontractor revenue.
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Managements discussion and analysis of financial condition and results of operations
Direct costs. Direct costs for the first quarter of 2006 were $31.6 million, or 59.2% of revenue, compared to $24.0 million, 58.2% of revenue, for the first quarter of 2005. This 31.9% increase resulted primarily from the corresponding increase in revenue, and included approximately $5.1 million in additional labor and related fringe benefit costs, and $2.4 million in additional subcontractor and $0.2 million in additional other direct costs. The increase in direct costs as a percentage of revenue in the first quarter of 2006 is due to Calibers contract mix as well as an increase in subcontractor costs.
Indirect and selling expenses. Indirect and selling expenses for the first quarter of 2006 were $17.9 million, or 33.5% of revenue, compared to $13.9 million, or 33.7% for the first quarter of 2005. The 28.6% increase in indirect and selling expenses was due principally to the addition of staff and related non-labor expenses of our Caliber acquisition.
Earnings from Operations. For the first quarter of 2006, earnings from operations were $3.2 million, or 5.9% of revenue, compared to $2.6 million, or 6.2% for the first quarter of 2005. Earnings from operations increased primarily due to the increase in revenue from the Caliber acquisition. The decrease in earnings from operations as a percentage of revenue is due to an increase in direct costs resulting primarily from a change in contract mix.
Interest expense. For the first quarter of 2006, interest expense was $1.0 million, compared to $0.5 million for the first quarter of 2005. The 117.0% increase was due primarily to increased borrowings to fund the Caliber acquisition and higher interest rates.
Year ended December 31, 2005 compared to year ended December 31, 2004
Revenue. Revenue for 2005 was $177.2 million, compared to $139.5 million for 2004, representing an increase of 27.0%. The increase in revenue was primarily due to the acquisitions of Synergy, effective January 1, 2005 (approximately $21.7 million of revenue), and Caliber, effective October 1, 2005 (approximately $9.3 million of revenue), as well as approximately $6.7 million in net contract growth.
Direct costs. Direct costs for 2005 were $106.1 million, or 59.9% of revenue, compared to $83.6 million, 60.0% of revenue, for 2004. This 26.9% increase resulted from the corresponding increase in revenue, and included approximately $15.6 million in additional labor and related fringe benefit costs, approximately $4 million in additional subcontract costs, and approximately $2.9 million in additional other direct costs.
Indirect and selling expenses. Indirect and selling expenses for 2005 were $60.0 million, or 33.9% of revenue, compared to $46.1 million, or 33.0%, for 2004. The 30.2% increase in indirect and selling expenses was due principally to the addition of staff and related expenses of our two acquisitions. In December 2005, our board of directors accelerated the vesting of all of the outstanding unvested options previously awarded to our employees and officers, resulting in a non-cash stock compensation expense of approximately $2.1 million for the year. Absent this action, the majority of these options would have vested at the completion of this offering. This acceleration of vesting provided us greater certainty concerning the costs and timing of the expenses for these options.
Depreciation and amortization. Depreciation and amortization for 2005 was $5.5 million, compared to $3.2 million for 2004. The 71.9% increase in depreciation and amortization was primarily due to the increased amortization of purchased intangibles of $2.3 million. Of this amount, $1.8 million is attributable to the change in the estimated life of the intangible assets related to customers and contracts we obtained in our 2002 acquisition of two of the operating units of Arthur D. Little, Inc., and the remainder is attributable to the Synergy and Caliber acquisitions. See Note G Goodwill and other intangible assets of our Notes to Consolidated Financial Statements appearing in this prospectus.
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Managements discussion and analysis of financial condition and results of operations
Earnings from operations. For 2005, earnings from operations were $5.6 million, or 3.1% of revenue, compared to $6.6 million, or 4.7%, for 2004. Earnings from operations decreased primarily due to the $2.1 million of non-cash compensation resulting primarily from the accelerated vesting of options in 2005, as well as the increased amortization and depreciation discussed above.
Interest expense. For 2005, interest expense was $3.0 million, compared to $1.3 million for 2004. This 131.0% increase was due primarily to increased borrowings to fund the acquisitions of Synergy and Caliber.
Other income. Our $1.3 million of other income in 2005 resulted primarily from our reassessment of potential liabilities associated with the Arthur D. Little acquisitions. We had previously recorded a contingent liability of $1.4 million. The pre-acquisition contingency was resolved in our favor during 2005.
Income tax expense. Our income tax rate for 2005 was 48.0% compared to 46.1% for 2004. The 2005 effective rate was higher primarily because of higher permanent tax differences due to expenses not deductible for tax purposes and prior-year deferred tax adjustments.
Year ended December 31, 2004 compared to year ended December 31, 2003
Revenue. Revenue for 2004 was $139.5 million, compared to $145.8 million for 2003, representing a decrease of $6.3 million, or 4.3%. This decrease was due primarily to $8.4 million in 2003 revenue from two contracts acquired as part of the Arthur D. Little acquisitions that were completed or assigned to a third party in 2003 or early 2004.
Direct costs. Direct costs for 2004 were $83.6 million, or 60.0% of revenue, compared to of $91.0 million, or 62.4%, for 2003. This 8.1% decrease in direct costs was primarily due to a decrease of $6.0 million in subcontractor costs on the two Arthur D. Little contracts discussed above.
Indirect and selling expenses. Indirect and selling expenses for 2004 were $46.1 million, or 33.0% of revenue, compared to $45.3 million, or 31.1% of revenue, for 2003. This 1.8% increase in indirect and selling expenses resulted from a variety of factors, including additional staff and related expenses in business development.
Depreciation and amortization. Depreciation and amortization for 2004 and 2003 was stable, at $3.2 and $3.0 million, respectively.
Earnings from operations. For 2004, earnings from operations increased slightly to $6.6 million, or 4.7% of revenue, a 3.1% increase from $6.4 million, or 4.4% of revenue, for 2003.
Interest expense. For 2004, interest expense was $1.3 million, compared to $3.1 million for 2003. This 58.1% decrease was due primarily to a prepayment penalty and acceleration of amortization of approximately $1 million with respect to the refinancing of our debt in 2003, as well as to reduced borrowings.
Discontinued operations. In April 2004, we sold ICF Energy Solutions, Inc. (ESI) to Nexus Energy Software, Inc. on terms that resulted in a gain of approximately $0.4 million. The discontinued operations of ESI contributed net income of $0.3 million in 2003 and a net loss of $0.2 million in 2004. We sold this software company because it did not fit with our long-range strategic goals. See Note D Divestiture of our Notes to Consolidated Financial Statements included in this prospectus.
Income tax expense. Our income tax rate in 2004, 46.1%, was higher than in 2003, 39.0%, primarily because of our consumption of one-time research and development tax credits in 2003.
50
Managements discussion and analysis of financial condition and results of operations
Selected quarterly financial and other data
We maintain a December 31 fiscal year-end for financial reporting purposes. Prior to 2006, our quarterly financial information is presented consistent with our labor and billing cycles. Management does not believe that this practice has a material effect on historically reported quarterly results or on the comparison of such results.
The following table shows our results of operations and other data by quarter for the periods indicated. See Overview Fluctuation of Quarterly Results and Cash Flow and Overview Effect of Approval of Federal Budget for a description of the factors that may cause our quarterly results to fluctuate.
Quarter ended |
||||||||||||||||||||||||||||||||||||
Consolidated statement of operations data: |
Mar. 26, 2004 |
June 25, 2004 |
Sept. 30, 2004 |
Dec. 31, 2004 |
Apr. 1, 2005 |
July 1, 2005 |
Sept. 30, 2005 |
Dec. 31, 2005 |
March 31, 2006 |
|||||||||||||||||||||||||||
(unaudited) (In thousands) |
||||||||||||||||||||||||||||||||||||
Revenue |
$ | 34,111 | $ | 35,862 | $ | 36,055 | $ | 33,460 | $ | 41,212 | $ | 42,073 | $ | 42,151 | $ | 51,782 | $ | 53,448 | ||||||||||||||||||
Direct costs |
20,426 | 21,727 | 21,648 | 19,837 | 23,969 | 25,446 | 25,465 | 31,198 | 31,626 | |||||||||||||||||||||||||||
Operating expenses |
||||||||||||||||||||||||||||||||||||
Indirect and selling expenses |
11,141 | 11,720 | 11,680 | 11,556 | 13,905 | 13,611 | 14,258 | 18,265 | (1) | 17,883 | ||||||||||||||||||||||||||
Depreciation and amortization |
765 | 744 | 813 | 833 | 777 | 896 | 721 | 3,147 | 772 | |||||||||||||||||||||||||||
Total costs and expenses |
11,906 | 12,464 | 12,493 | 12,389 | 14,682 | 14,507 | 14,979 | 21,412 | 18,655 | |||||||||||||||||||||||||||
Earnings from operations |
1,779 | 1,671 | 1,914 | 1,234 | 2,561 | 2,120 | 1,707 | (828 | ) | 3,167 | ||||||||||||||||||||||||||
Other (expense) income |
||||||||||||||||||||||||||||||||||||
Interest expense, net |
(334 | ) | (309 | ) | (298 | ) | (325 | ) | (473 | ) | (737 | ) | (628 | ) | (1,143 | ) | (1,026 | ) | ||||||||||||||||||
Other |
| (2 | ) | (31 | ) | | 1 | (1 | ) | 1,320 | (12 | ) | | |||||||||||||||||||||||
Income (loss) from continuing operations before income taxes |
1,445 | 1,360 | 1,585 | 909 | 2,089 | 1,382 | 2,399 | (1,983 | ) | 2,141 | ||||||||||||||||||||||||||
Income tax expense (benefit) |
673 | 632 | 738 | 423 | 1,002 | 664 | 1,150 | (951 | ) | 1,047 | ||||||||||||||||||||||||||
Income (loss) from continuing operations |
772 | 728 | 847 | 486 | 1,087 | 718 | 1,249 | (1,032 | ) | 1,094 | ||||||||||||||||||||||||||
Discontinued operations |
||||||||||||||||||||||||||||||||||||
Income (loss) from discontinued operations, net |
(151 | ) | (40 | ) | | (5 | ) | | | | | | ||||||||||||||||||||||||
Gain from disposal of subsidiary, net |
| 271 | | 109 | | | | | | |||||||||||||||||||||||||||
Net income (loss) |
$ | 621 | $ | 959 | $ | 847 | $ | 590 | $ | 1,087 | $ | 718 | $ | 1,249 | $ | (1,032 | ) | $ | 1,094 | |||||||||||||||||
Other operating data: | ||||||||||||||||||||||||||||||||||||
EBITDA from continuing operations(2) |
$ | 2,544 | $ | 2,415 | $ | 2,727 | $ | 2,067 | $ | 3,338 | $ | 3,016 | $ | 2,428 | $ | 2,319 | $ | 3,939 | ||||||||||||||||||
Non-cash compensation charge included in EBITDA from continuing operations(1) |
2,138 |
(footnotes on following page)
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Managements discussion and analysis of financial condition and results of operations
(1) | Includes a one-time, non-cash compensation charge of $2.1 million in December 2005 resulting from the acceleration of the vesting of all then outstanding stock options. See Managements discussion and analysis of financial condition and results of operationsResults of OperationsYear ended December 31, 2005 compared to year ended December 31, 2004. |
(2) | EBITDA from continuing operations, a measure used by us to evaluate performance, is defined as net income plus (less) loss (income) from discontinued operations, less gain from sale of discontinued operations, less other income, plus other expenses, net interest expense, income tax expense and depreciation and amortization. We believe EBITDA from continuing operations is useful to investors because similar measures are frequently used by securities analysts, investors and other interested parties in the evaluation of companies in our industry. EBITDA from continuing operations is not a recognized term under generally accepted accounting principles and does not purport to be an alternative to net income as a measure of operating performance or to cash flows from operating activities as a measure of liquidity. Because not all companies use identical calculations, this presentation of EBITDA from continuing operations may not be comparable to other similarly titled measures used by other companies. EBITDA from continuing operations is not intended to be a measure of free cash flow for managements discretionary use, as it does not consider certain cash requirements such as interest payments, tax payments, capital expenditures and debt service. Our credit agreement includes covenants based on EBITDA from continuing operations, subject to certain adjustments. See Managements discussion and analysis of financial condition and results of operations Liquidity and Capital Resources. A reconciliation of net income to EBITDA from continuing operations follows: |
Quarter ended | ||||||||||||||||||||||||||||||||
Mar. 26, 2004 |
June 25, 2004 |
Sept. 30, 2004 |
Dec. 31, 2004 |
April 1, 2005 |
July 1, 2005 |
Sept. 30, 2005 |
Dec. 31, 2005 |
Mar. 31, 2006 | ||||||||||||||||||||||||
(unaudited) | ||||||||||||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||||||
Net income (loss) |
$ | 621 | $ | 959 | $ | 847 | $ | 590 | $ | 1,087 | $ | 718 | $ | 1,249 | $ | (1,032 | ) | $ | 1,094 | |||||||||||||
Loss (income) from discontinued operations |
151 | 40 | | 5 | | | | | | |||||||||||||||||||||||
Gain from sale of discontinued operations |
| (271 | ) | | (109 | ) | | | | | | |||||||||||||||||||||
Other expense (income) |
| 2 | 31 | | (1 | ) | 1 | (1,320 | ) | 12 | | |||||||||||||||||||||
Interest expense, net |
334 | 309 | 298 | 325 | 473 | 737 | 628 | 1,143 | 1,026 | |||||||||||||||||||||||
Income tax expense (benefit) |
673 | 632 | 738 | 423 | 1,002 | 664 | 1,150 | (951 | ) | 1,047 | ||||||||||||||||||||||
Depreciation and amortization |
765 | 744 | 813 | 833 | 777 | 896 | 721 | 3,147 | 772 | |||||||||||||||||||||||
EBITDA from continuing operations |
$ | 2,544 | $ | 2,415 | $ | 2,727 | $ | 2,067 | $ | 3,338 | $ | 3,016 | $ | 2,428 | $ | 2,319 | $ | 3,939 | ||||||||||||||
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Managements discussion and analysis of financial condition and results of operations
LIQUIDITY AND CAPITAL RESOURCES
Our primary liquidity needs are for working capital, repayment of debt, new acquisitions, capital expenditures and the payment of obligations on prior acquisitions. Historically, we have relied primarily on our cash flow from operations and borrowings under our credit facility to provide the capital for our liquidity needs.
Our short-term liquidity requirements have been met, in part, by amounts borrowed under our revolving credit facility in excess of the otherwise applicable maximum borrowing base, as allowed by a March 14, 2006 amendment to our credit facilities. Such overadvances are permitted only through August 31, 2006, and no such overadvances were outstanding as of May 26, 2006. We also have due in January 2007 an $8 million short-term term loan facility with an outstanding principal amount of $8 million as of May 26, 2006.
Over the longer term, our liquidity needs include continuing financing of our operations and the reduction of our existing revolving credit and term debt, which are at heightened levels due to the incurrence of debt during 2005 in connection with the Synergy and Caliber acquisitions and the repayment of debt to our former parent, which, in the aggregate, required us to increase the availability under our credit facilities by approximately $35 million. We also require funding to pursue our acquisition strategy, which is severely constrained by our current liquidity.
Following this offering and the repayment of outstanding debt under our credit facilities, we expect the combination of cash flow from operations and our borrowing capacity under a new credit agreement to continue to meet our anticipated cash requirements for at least the next twelve months, excluding liquidity needed to pursue our acquisition strategy. Any acquisitions we undertake may be funded through other forms of debt, such as publicly issued or privately placed senior or subordinated debt, or the use of common or preferred equity as acquisition consideration.
Cash and net working capital
The following table sets forth our cash and net working capital (current assets less current liabilities) balances at the dates indicated.
As of December 31, |
April 1, 2005
|
March 31, 2006
| |||||||||||||
2003 | 2004 | 2005 | |||||||||||||
(In thousands) | |||||||||||||||
Cash and cash equivalents |
$ | 1,643 | $ | 797 | $ | 499 | $ | 1,074 | $ | 1,296 | |||||
Net working capital |
6,085 | 5,502 | 18,141 | 10,858 | 19,374 |
We consider cash on deposit and all highly liquid investments with original maturities of three months or less to be cash and cash equivalents. We maintain minimal cash balances and have substantially all available cash credited against our borrowings under our line of credit. Our net working capital increased by $12.6 million at December 31, 2005 as compared to December 31, 2004. The increase in net working capital for 2005 was primarily due to an increase in net contract receivables from $29.5 million at December 31, 2004 to $52.9 million at December 31, 2005, which more than offset an approximate $11.8 million increase in current liabilities.
This increase in net working capital was primarily due to the effects of the Synergy and Caliber acquisitions, both of which had higher receivables in terms of days sales outstanding than the company as a whole as of December 31, 2005, an increase in days sales outstanding for receivables for the rest of our company from December 31, 2004 to December 31, 2005 and a decrease in days payable outstanding from December 31, 2004 to December 31, 2005.
Our net working capital increased by $8.5 million at March 31, 2006 as compared to April 1, 2005. The increase in net working capital for the first quarter 2006 was primarily due to an increase of net contract
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Managements discussion and analysis of financial condition and results of operations
receivables of $14.7 million from $42.5 million at April 1, 2005 to $57.2 million at March 31, 2006, which more than offset an approximate $7.2 million increase in current liabilities. The increase in net contract receivables was in large part due to the growth in revenue of $12.2 million as well as delays in billings resulting from the Caliber integration. The increase in current liabilities was primarily due to an increase of $7.4 million in the current portion of debt.
Cash flow
Our operating cash flow is primarily affected by the overall profitability of our contracts, our ability to invoice and collect from our clients in a timely manner, and our ability to manage our vendor payments. We bill most of our clients and prime contractors monthly after services are rendered.
Operating activities provided cash of $11.8 million, $3.3 million and $2.2 million in 2003, 2004 and 2005, respectively. Operating activities in 2005 provided approximately $1.0 million less cash than operating activities provided in 2004. This decrease was primarily attributable to an increase in contract receivables due to the integration of the two acquisitions made in 2005. Operating activities in 2004 provided approximately $8.5 million less of net cash than in 2003. In 2003, we received large cash advances from a commercial client. As of December 31, 2003, the balance of the cash advances was approximately $1.6 million. The criteria for payment to the third-parties were satisfied, and the payments were disbursed in 2004. The decrease in accrued expenses in 2004 was primarily attributable to a reduction of accrued subcontractor costs and liabilities related to the Arthur D. Little acquisitions.
Operating activities used cash of $4.2 million in first quarter of 2006 as compared to providing $0.3 million in the first quarter of 2005. Operating activities in the first quarter of 2006 were negatively impacted by an increase in accounts receivable of $4.3 million, due in large part to growth in revenue and delays in billings resulting from the Caliber integration, and a decrease in accounts payable of $2.6 million due to the timing of vendor payments.
Our cash flow used in investing activities in recent years relates primarily to acquisitions. Investing activities used cash of $2.1 million, $0.2 million and $38.8 million in 2003, 2004 and 2005, respectively. The $38.8 million in cash used in investing activities for 2005, compared to $0.2 million of cash used in investing activities in 2004, was primarily due to the $38.6 million used for the Synergy and Caliber acquisitions.
Investing activities used cash of $18.9 million and $0.1 million in the first quarters of 2005 and 2006, respectively. The cash used in investing activities for the first quarter of 2006 was primarily for capital expenditures. The cash used in investing activities for the first quarter of 2005 was primarily for the acquisition of Synergy ($18.6 million).
Our cash flow from financing activities consists primarily of proceeds from and payments on our credit facilities. Financing activities used cash of $9.0 million and $3.8 million in 2003 and 2004, respectively, and provided cash of $36.3 million in 2005. For 2005, $36.3 million of cash flow from financing activities reflected payments of $21.8 million on our credit facilities and borrowings of $61.7 million. The $3.8 million used in financing activities for 2004 was primarily due to payments made under our credit facilities.
Financing activities provided cash of $18.7 million and $5.2 million in the first quarters of 2005 and 2006, respectively. For the first quarter of 2006, $6.8 million of cash flow from financing activities reflected net borrowings to finance operating activities, partially offset by $1.5 million of debt payments. For the first quarter of 2005, the $18.7 million provided in financing activities primarily reflected the increased borrowings to finance the Synergy acquisition.
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Managements discussion and analysis of financial condition and results of operations
Credit agreement
In October 2005, in connection with the Caliber acquisition, we entered into an amended and restated credit agreement with a syndicate of banks. This agreement currently provides for three credit facilities:
Ø | a revolving line of credit for up to the lesser of $45 million or a borrowing base comprised of eligible billed receivables, maturing in October 2010, that bears interest at either the U.S. prime rate plus a margin or LIBOR plus a spread, with both the margin and the spread depending on our total leverage and with interest payable monthly; |
Ø | a term loan facility for $22 million, maturing in October 2010, that also bears interest at the U.S. prime rate plus a margin or LIBOR plus a spread, with both the margin and the spread depending on our total leverage and with principal and interest payable in monthly installments; and |
Ø | a short-term loan facility, or time loan, for $8 million, maturing in January 2007, that bears interest at a rate 0.50% above that of the term loan, with interest payable monthly, with six monthly principal payments of $333,334 commencing July 1, 2006, and with the balance due in January 2007. |
On March 14, 2006 our lenders agreed to an amendment to the credit agreement to provide us with a temporary increase in our borrowing base so that it equals $6 million plus eligible receivables through June 30, 2006 and $4 million plus eligible receivables through August 31, 2006, in each case not to exceed the total revolving credit facility of $45 million.
The outstanding borrowings are collateralized by a security interest in substantially all of our assets. Our credit agreement requires that we meet certain financial covenants. At the present time, these include a fixed charge coverage ratio (in general, EBITDA as defined in the credit agreement plus real property rent and operating lease expense divided by real property rent and operating lease expense, plus interest expense, plus cash taxes paid plus required principal payments on debt and capital lease payments) of not less than 1.10 to 1.00 and a maximum leverage ratio (in general, total debt divided by EBITDA as defined in the credit agreement) of 3.5 to 1.0 (4.0 to 1.0 as of the quarters ended March 31 and June 30, 2006). EBITDA as defined in the credit agreement varies significantly from the calculation of EBITDA from continuing operations as set forth herein. Our credit agreement also limits capital expenditures to 1.5% of gross revenue during the past 12 months; prohibits net operating losses; and prohibits our total senior debt from exceeding our aggregate billed and unbilled receivables. We were in compliance with these financial covenants as of March 31, 2006.
In November 2005, we entered into an interest rate swap agreement as a partial hedge against interest rate fluctuations on approximately $15 million. The effect of the agreement was to establish a fixed LIBOR rate of 5.11% on that amount.
For 2003, 2004 and 2005, our net interest expense was approximately $3.1 million, $1.3 million and $3.0 million, respectively. For the first quarters of 2005 and 2006, our net interest expense was approximately $0.5 million and $1.0 million, respectively.
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Managements discussion and analysis of financial condition and results of operations
The following table summarizes the amounts available and outstanding (excluding interest) under our credit facilities as of December 31, 2004 and 2005 and May 26, 2006. The amounts listed as available and outstanding prior to October 2005 below with respect to the term loan represent the amounts available and outstanding under a predecessor loan facility replaced by the term loan in October 2005. This table does not include a note payable to our former owner of approximately $6.4 million that was outstanding as of December 31, 2004 and that was repaid in full during 2005.
December 31, |
May 26,
|
|||||||||||
2004 | 2005 | |||||||||||
(In thousands) | ||||||||||||
Capacity (Facility A/line of credit) |
$ | 28,000 | $ | 45,000 | $ | 45,000 | ||||||
Capacity (term loan) |
6,353 | 21,634 | 19,801 | |||||||||
Capacity (time loan) |
| 8,000 | 8,000 | |||||||||
Availability (Facility A/line of credit) |
20,102 | 37,518 | 45,000 | |||||||||
Availability (term loan) |
6,353 | 21,634 | 19,801 | |||||||||
Availability (time loan) |
| 8,000 | 8,000 | |||||||||
Amount outstanding (Facility A/line of credit)(1) |
8,965 | 32,019 | 38,135 | |||||||||
Amount outstanding (term loan) |
6,353 | 21,634 | 19,801 | |||||||||
Amount outstanding (time loan) |
| 8,000 | 8,000 | |||||||||
Unused availability (Facility A/line of credit) |
11,137 | 5,499 | 6,865 | |||||||||
Unused availability (term loan) |
| | | |||||||||
Unused availability (time loan) |
| | | |||||||||
Interest rate on Facility A/line of credit |
5.25 | % | 7.25 | % | 8.25 | % |
(1) | Includes letters of credit. |
Use of proceeds
We plan to use up to $ million of the net proceeds of this offering to repay in full our term loan facilities (see Use of Proceeds for a more complete description of these plans) with the balance of the net proceeds being applied to make $2.7 million of one-time bonus payments to employees (see ManagementEmployment, Severance and Restricted Stock Agreements for a description of these incentive payments) and reduce our borrowings under our revolving line of credit.
Replacement credit facilities
We expect to enter into new credit facilities after the completion of this offering that will finance working capital needs and provide capacity for future acquisitions. These facilities will replace our existing credit facilities. We expect the completion of this offering to enable us to put in place a more cost-effective capital structure that will provide the financing needed for our existing operations and working capital needs, as well as possible acquisitions.
In the event it is not possible to enter into the new facilities we contemplate, we would have to resort to other more expensive and less attractive forms of financing, including publicly or privately placed senior and subordinated debt and the issuance of common stock, preferred stock or other forms of equity. Such forms of financing would likely carry higher interest and other costs, thereby reducing our profitability; include covenants that would be more restrictive than those under the capital structure that we contemplate after the completion of this offering; restrict our ability to grow through acquisitions or require the use of common or preferred equity as acquisition consideration; and could dilute the holders of our common stock.
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Managements discussion and analysis of financial condition and results of operations
Off-balance sheet arrangements
We do not have any off-balance sheet arrangements.
Contractual obligations
The following table summarizes our contractual obligations (excluding interest in the case of debt) as of March 31, 2006 that require us to make future cash payments.
Less than 1 year | 1-3 years |
3-5 years |
More than 5 years |
Total | |||||||||||
(In thousands) | |||||||||||||||
Facility A/line of credit |
$ | | $ | | $ | 38,177 | $ | | $ | 38,177 | |||||
Term loan(1) |
4,400 | 13,200 | 2,567 | | 20,167 | ||||||||||
Time loan(2) |
8,000 | | | | 8,000 | ||||||||||
Rent of facilities |
8,988 | 16,254 | 14,910 | 14,192 | 54,344 | ||||||||||
Operating lease obligations |
1,177 | 1,432 | 360 | | 2,969 | ||||||||||
Purchase obligations |
688 | | | | 688 | ||||||||||
Other long-term liabilities |
| 440 | | | 440 | ||||||||||
Total |
$ | 23,253 | $ | 31,326 | $ | 56,014 | $ | 14,192 | $ | 124,785 | |||||
(1) | The term loan requires monthly principal payments of $366,667 plus interest and matures in October 2010. |
(2) | The time loan requires monthly principal payments of $333,334 plus interest commencing July 1, 2006 and matures in January 2007. |
The components of our credit facilities referred to above (Facility A/line of credit, Term loan and Time loan) provide that each component defaults upon a default of any of the other components and, therefore, may be accelerated together. The other contractual obligations referred to in the above table do not include provisions that create, increase or accelerate other obligations.
DESCRIPTION OF CRITICAL ACCOUNTING POLICIES
The preparation of our financial statements in accordance with accounting principles generally accepted in the United States of America requires that we make estimates and judgments that affect the reported amount of assets, liabilities, revenue and expenses, as well as the disclosure of contingent assets and liabilities. If any of these estimates or judgments proves to be incorrect, our reported results could be materially affected. Actual results may differ significantly from our estimates under different assumptions or conditions. We believe that the estimates, assumptions and judgments involved in the accounting practices described below have the greatest potential impact on our financial statements and therefore consider them to be critical accounting policies.
Revenue recognition
We recognize revenue when persuasive evidence of an arrangement exists, services have been rendered, the contract price is fixed or determinable, and collectibility is reasonably assured. We enter into contracts that are either time-and-materials contracts, cost-based contracts or fixed-price contracts.
Time-and-Materials Contracts. Revenue under time-and-materials contracts is recognized as costs are incurred. Revenue for time-and-materials contracts is recorded on the basis of allowable labor hours worked multiplied by the contract-defined billing rates, plus the costs of other items used in the performance of the contract. Profit and losses on time-and-materials contracts result from the difference between the cost of services performed and the contract-defined billing rates for these services.
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Managements discussion and analysis of financial condition and results of operations
Cost-Based Contracts. Revenue under cost-based contracts is recognized as costs are incurred. Applicable estimated profit, if any, is included in earnings in the proportion that incurred costs bear to total estimated costs. Incentives, award fees, or penalties related to performance are also considered in estimating revenue and profit rates based on actual and anticipated awards.
Fixed-Price Contracts. Revenue for fixed-price contracts is recognized when earned, generally as work is performed in accordance with the provisions of the Commissions Staff Accounting Bulletin No. 104, Revenue Recognition. Services performed vary from contract to contract and are not uniformly performed over the term of the arrangement. Revenue on most fixed-price contracts is recorded each period based on contract costs incurred to date compared with total estimated costs at completion (cost-to-cost method). Performance is based on the ratio of costs incurred to total estimated costs where the costs incurred represent a reasonable surrogate for output measures of contract performance, including the presentation of deliverables to the client. Progress on a contract is matched against project costs and costs to complete on a periodic basis. Clients are obligated to pay as services are performed, and in the event that a client cancels the contract, payment for services performed through the date of cancellation is negotiated with the client. Revenue under certain fixed-price contracts is recognized ratably over the period benefited.
Revenue recognition requires us to use judgment relative to assessing risks, estimating contract revenue and costs, and making assumptions for schedule and technical issues. Due to the size and nature of many of our contracts, the estimation of revenue and cost at completion can be complicated and is subject to many variables. Contract costs include labor, subcontracting costs and other direct costs, as well as allocation of allowable indirect costs. We must also make assumptions regarding the length of time to complete the contract because costs also include expected increases in wages, prices for subcontractors and other direct costs. From time to time, facts develop that require us to revise our estimated total costs and revenue on a contract. To the extent that a revised estimate affects contract profit or revenue previously recognized, we record the cumulative effect of the revision in the period in which the facts requiring the revision become known. Provision for the full amount of an anticipated loss on any type of contract is recognized in the period in which it becomes probable and can be reasonably estimated. As a result, operating results could be affected by revisions to prior accounting estimates.
We generate invoices to clients in accordance with the terms of the applicable contract, which may not be directly related to the performance of services. Unbilled receivables are invoiced based upon the achievement of specific events as defined by each contract including deliverables, timetables and incurrence of certain costs. Unbilled receivables are classified as a current asset. Advanced billings to clients in excess of revenue earned are recorded as deferred revenue until the revenue recognition criteria are met. Reimbursements of out-of-pocket expenses are included in revenue with corresponding costs incurred by us included in cost of revenue. We grant credit primarily to large companies and government agencies and occasionally perform credit evaluations of our clients financial condition. We do not generally require collateral. Credit losses relating to clients generally have been within managements expectations.
From time to time, we may proceed with work based on client direction prior to the completion and signing of formal contract documents. We have a formal review process for approving any such work. Revenue associated with such work is recognized only when it can reliably be estimated and realization is probable. We base our estimates on a variety of factors, including previous experiences with the client, communications with the client regarding funding status, and our knowledge of available funding for the contract.
Goodwill and the amortization of intangible assets
Costs in excess of the fair value of tangible and identifiable intangible assets acquired and liabilities assumed in a business combination are recorded as goodwill, in accordance with Statement of Financial
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Managements discussion and analysis of financial condition and results of operations
Accounting Standards (SFAS) 141, Business Combinations. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead reviewed annually (or more frequently if impairment indicators arise) for impairment in accordance with the provisions of SFAS 142 Goodwill and Other Intangible Assets. SFAS 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS 144, Accounting for Impairment or Disposal of Long-lived Assets.
We have elected to perform the annual goodwill impairment review on September 30 of each year. Based upon managements review, including a valuation report issued by an investment bank, we determined that no goodwill impairment charge was required for 2003, 2004 or 2005.
We follow the provisions of SFAS 144 in accounting for impairment or disposal of long-lived assets. SFAS 144 requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset might not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flow expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less cost to sell.
SIGNIFICANT NEW ACCOUNTING PRONOUNCEMENT
In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS 123 (revised 2004), Shared-Based Payment (SFAS 123(R)), which is a revision of SFAS 123, Accounting for Stock-Based Compensation. SFAS 123(R) supersedes APB 25, and amends SFAS 95, Statement of Cash Flows.
SFAS 123(R) was effective for non-public companies in the first fiscal year beginning after December 15, 2005. We adopted SFAS 123(R) effective January 1, 2006. SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values (i.e., pro forma disclosure is no longer an alternative to financial statement recognition). Non-public entities that did not use the fair-value-based method of accounting are required to apply the prospective transition method of accounting under SFAS 123(R) as of the required effective date. Under the prospective method, a non-public entity accounting for its equity-based awards using the intrinsic-value method under APB 25 would continue to apply APB 25 in future periods to awards outstanding at the date they adopt SFAS 123(R). All awards granted, modified, or settled after the date of adoption would be accounted for using the measurement, recognition and attribution provisions of SFAS 123(R). Should we make share-based awards consistent with historical levels, the adoption of SFAS 123(R) will have a material impact on our financial statements.
Implementation of FASB 123(R)
In adopting SFAS 123(R), companies must choose among alternative valuation models and amortization assumptions. We elected to use the Black-Scholes-Merton option pricing model and straight-line amortization of compensation expense over the requisite service period of the grant. We will reconsider use of the Black-Scholes-Merton model if additional information becomes available in the future that indicates another model would be more appropriate or if grants issued in future periods have characteristics that cannot be reasonably estimated using this model.
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Managements discussion and analysis of financial condition and results of operations
The following assumptions were used for option grants made during the quarter ended March 31, 2006:
Expected volatility. Because we are not publicly traded, we have no history of share prices determined on the open market. Therefore, the expected volatility of our shares was estimated based upon analyzing volatilities of similar public companies. The expected volatility factor used in valuing options granted during the quarter ended March 31, 2006 was 36%.
Expected term. We do not have any history of employee exercise behavior. The expected term of five years was estimated by consideration of the contractual terms of the grants, vesting schedules, employee forfeitures and expected terms of option grants by similar public companies.
Risk-free interest rate. We base the risk-free interest rates used in the Black-Scholes-Merton valuation method on implied interest rates for U.S. Treasury securities with a term consistent with the expected life of the stock options. The risk-free interest rate used in valuing options granted during the quarter ended March 31, 2006 was 4.51%.
Dividend yield. The Black-Scholes-Merton valuation model calls for a single expected dividend yield as an input. We have not paid dividends in the past nor do we expect to pay dividends in the future. We therefore used a dividend yield percentage of zero.
During the quarter ended March 31, 2006, we granted incentive stock options to purchase shares of our common stock at an exercise price of $ per share, the fair value of the stock on the date of grant. The Black-Scholes-Merton weighted average valuation of the options granted during the quarter ended March 31, 2006 was $ per share. These options expire in ten years and vest upon the attainment of certain levels of operating income or upon certain events, including this offering. We are expensing the value of these option grants over the period of time from the date of award to the expected date of this offering.
In addition, in September 2005 we made a restricted common stock award to a key employee, 25% of which vests each January 1 thereafter, with vesting accelerating effective upon the completion of this offering. This stock award is also being expensed based on the grant date value of the stock of $ per share.
The total intrinsic value of the options outstanding and the options exercisable at March 31, 2006 was approximately $4.8 million.
We recognized stock-based compensation expense of $76,359 in the quarter ended March 31, 2006, which is included in indirect and selling expenses. All of this expense related to the options and stock awards granted in the quarter ended March 31, 2006. Net income for the quarter ended March 31, 2006 also reflects income tax benefits relating to this expense of $29,490. There was no stock-based compensation expense in the quarter ended April 1, 2005.
As of March 31, 2006, there was approximately $0.1 million of total unrecognized compensation cost related to unvested stock-based compensation agreements. This amount relates entirely to stock option grants and restricted stock grants during the quarter ended March 31, 2006. This cost is expected to be fully amortized over the next year because such grants will vest upon completion of this offering.
Based on the initial public offering price of $ per share, the intrinsic value of options outstanding at , 2006 was $ million, of which $ million related to vested options and $ million related to unvested options.
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Managements discussion and analysis of financial condition and results of operations
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
In addition to the risks involved in our operations, we are exposed to interest rate and foreign exchange rate risks.
Our exposure to interest rate risk relates primarily to changes in interest rates for borrowings under our revolving credit agreement and our term loans. These borrowings accrue interest at variable rates. Based upon our borrowings under these facilities at the end of 2005 and without giving effect to the swap agreement we entered into in 2005, a hypothetical one hundred basis point increase in interest rates we pay on those borrowings would increase our annual interest expense by approximately $0.6 million.
Because of the size and nature of our international operations, we are not currently exposed to substantial risks relating to exchange rate fluctuations. As our mix of business changes in the future, however, this exposure could become material.
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COMPANY OVERVIEW
We provide management, technology and policy consulting and implementation services primarily to the U.S. federal government, as well as to other government, commercial and international clients. We help our clients conceive, develop, implement and improve solutions that address complex economic, social and national security issues. Our services primarily address four key markets: defense and homeland security; energy; environment and infrastructure; and health, human services and social programs. Increased government involvement in virtually all aspects of our lives has created opportunities for us to resolve issues at the intersection of the public and private sectors. We believe that demand for our services will continue to grow as government, industry and other stakeholders seek to understand and respond to geopolitical and demographic changes, budgetary constraints, heightened environmental and social concerns, rapid technological changes and increasing globalization.
Our federal government, state and local government, commercial and international clients utilize our services because we combine diverse institutional knowledge and experience in their activities with the deep subject matter expertise of our highly educated staff, which we deploy in multi-disciplinary teams. Our federal government clients include every cabinet-level department, including the Department of Defense, the Environmental Protection Agency, the Department of Homeland Security, the Department of Transportation, the Department of Health and Human Services, the Department of Housing and Urban Development, the Department of Justice and the Department of Energy. U.S. federal government clients generated 72% of our revenue in 2005. Our state and local government clients include the states of California, Massachusetts, New York and Pennsylvania. State and local government clients generated 9% of our revenue in 2005. We also serve commercial and international clients, primarily in the energy sector, including electric and gas utilities, oil companies and law firms. Our commercial and international clients generated 19% of our revenue in 2005. We have successfully worked with many of these clients for decades, providing us a unique and knowledgeable perspective on their needs.
We partner with our clients to solve complex problems and produce mission-critical results. Across our markets, we provide end-to-end services that deliver value throughout the entire life of a policy, program, project or initiative:
Ø | Advisory Services. We help our clients analyze the policy, regulatory, technology and other challenges facing them and develop strategies and plans for responding. Our advisory and management consulting services include needs and markets assessment, policy analysis, strategy and concept development, change management strategy, enterprise architecture and program design. |
Ø | Implementation Services. We implement and manage technological, organizational and management solutions for our clients, often based on the results of our advisory services. Our implementation services include information technology solutions, project and program management, project delivery, strategic communications and training. |
Ø | Evaluation and Improvement Services. In support of advisory and implementation services, we provide evaluation and improvement services to help our clients increase the future efficiency and effectiveness of their programs. These services include program evaluation, continuous improvement initiatives, performance management, benchmarking and return-on-investment analyses. |
We provide our services using multi-disciplinary teams with deep subject matter expertise, highly analytical methodologies and technology-enabled tools. We have more than 1,600 employees, including many who are recognized thought leaders in their respective fields. As of December 31, 2005, almost 50% of our professional staff held post-graduate degrees in diverse fields such as economics, engineering, business administration, information technology, law, life sciences and public policy. Over 300 of our
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Business
employees hold a U.S. federal government security clearance. Our senior managers have extensive industry and project management experience and an average tenure of 14 years with our company. This diverse pool of intellectual capital enables us to assemble multi-disciplinary teams that can provide creative solutions to our clients most pressing problems.
We serve clients globally from our headquarters in the metropolitan Washington, D.C. area, our 15 domestic regional offices throughout the United States and our five international offices in London, Moscow, New Delhi, Rio de Janeiro and Toronto.
We generated revenue of $177.2 million and $53.4 million in 2005 and the quarter ended March 31, 2006, respectively. Our total backlog was $226.8 million and $216.8 million as of December 31, 2005 and March 31, 2006, respectively. See Contract Backlog for a discussion of how we calculate backlog.
MARKET OPPORTUNITY
An increasing number of complex, long-term factors are changing the way we live and the way in which government and industry must operate and interact. These factors include terrorism and changing national security priorities, increasing federal budget deficits, the need for emergency preparedness in response to natural disasters and threats to national security, rising energy demand, global climate change, aging infrastructure, environmental degradation and an aging population and federal civilian workforce. The federal government and other governments react to these factors by evaluating, adopting and implementing new policies, which drive governmental spending and the regulatory environment affecting industry. Industry, in turn, must adapt to this government involvement by realigning strategic direction, formulating plans for responding and modifying business processes. Both the reaction by governments to these factors and the resulting impact on industry create opportunities for professional service firms that are expert in addressing issues at the intersection of the public and private sectors.
Within the U.S. federal government, continuing budget deficits are forcing government departments and agencies to transform in order to provide more services with fewer resources. In addition, an aging workforce is retiring in large numbers from the federal government, resulting in diminished institutional knowledge and ability to perform services. This combination of forces provides opportunities for professional services firms with deep experience and expertise in the issues facing government and the ability to deliver innovative and transformational approaches to those issues. Further, these capabilities need to be combined seamlessly with strong information technology and other implementation skills. Government at every level recognizes the importance of information technology in fulfilling policy mandates, and there is increasing awareness among key government decision makers that, to be effective, technology solutions need to be properly integrated with the affected people and processes.
Defense and homeland security
The U.S. Department of Defense (DoD) is undergoing major transformations in its approach to strategies, processes, organizational structures and business practices due to several complex, long-term factors. These factors include the changing nature of global security threats and enemies, the implications of the information age, the community and family issues associated with globally deployed armed forces, and the continued loss of professional capabilities in the military and senior civilian workforce through retirement. Other factors include the increasing complexity of war-fighting strategies, the need for real-time information sharing and logistics modernization, network-centric warfare requirements and the global nature of combat arenas. DoD is also grappling with domestic and international disaster relief requirements while it fights a global war on terrorism.
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Professional services firms that understand the strategic context of defense transformation and DoDs mission objectives while providing a wide range of services, such as policy analysis, information technology-enabled solutions and outsourced implementations, should see increased demand for their services. The need for rapid deployment and management of armed forces anywhere around the globe requires concept, policy and technology innovation in the fields of logistics management, operational support, and command and control. Demand is increasing to support military organizations and program offices as senior civilians retire and military personnel remain focused on war-fighting efforts. With families and communities experiencing longer troop deployments, we believe the global war on terror will increase demand for professional services firms in the area of social services to military personnel and their families
Similarly, homeland security programs continue to drive budgetary growth at the federal level and are also increasing funding for state and local budgets. Over the last few years, homeland security concerns have broadened to include areas such as health, food, energy, water and transportation safety and involve all levels of government and the private sector. For example, in the aftermath of Hurricane Katrina, government policy makers are reassessing the emergency management function of homeland security in order to refocus spending and support to respond to natural disasters. The increased dependence upon private sector personnel and organizations as first responders also requires a keen understanding of the diversity and relationships among various stakeholders involved in homeland security.
This complex environment of urgent needs and public scrutiny necessitates consulting support from firms that understand the interaction among government policies, implementation requirements and public sentiment. Developing and implementing systems to improve communications, logistics planning, information sharing and organizational effectiveness provide further opportunities for additional advisory and implementation services.
Finally, significant opportunities lie at the intersection of defense and homeland security. We believe the strengthened ties among traditional defense requirements, homeland security support, and disaster preparedness, response and recovery create significant demands for professional services. We believe that a major emphasis will be in the areas of strategy, policy, planning, execution and logistics and that companies possessing deep domain expertise across these disciplines will be well positioned to partner with DoD, the U.S. Department of Homeland Security (DHS), and state and local governments.
Energy
Significant factors affecting suppliers, users and regulators of energy are driving private sector demand for professional services firms with expertise in this market. According to the International Energy Agency, world energy demand is expected to grow by 50% from 2004 to 2030. As a result, the global energy industry has estimated that approximately $17 trillion in capital will be required from 2004 to 2030 to build sufficient energy infrastructure to meet the increased demand. At the same time, oil and gas supplies have become increasingly constrained, partly due to the need to source from politically sensitive or physically challenging regions. Moreover, most industrialized countries are undergoing deregulation of electric and gas utilities in order to stimulate competition at the generation, transmission and retail levels. These factors, together with the continual search for alternative fuels, are driving profound and long-term restructuring in the energy industry.
In addition, with evidence mounting that sea levels are rising and climate volatility is increasing at a rapid pace, reducing or offsetting greenhouse gas emissions is becoming a critical element of energy
industry strategy, resulting in the development of additional regulations for curbing emissions that
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significantly affect energy industry operations. Entirely new markets are being created in response to problems associated with emissions, such as emissions trading. Although the regulatory landscape in this area is still evolving, the need to address carbon and other harmful emissions has significantly changed the way in which the worlds governments and industries interact.
Consumers of energy are also reacting to deregulating energy markets, increasing environmental constraints and rising costs. Pressure is increasing to manage demand through energy efficiency programs, demand response and peak load management. Government programs and public-private partnerships are becoming more prevalent, pursuing sometimes overlapping and conflicting goals, such as reducing national dependence on foreign energy sources, limiting the growth of domestic power generation and the resultant pollutants, and reducing electricity and gas costs for businesses and consumers.
We believe there will be significant opportunities for professional services firms that combine industry expertise in complex, interdependent energy systems with deep knowledge of the economic, scientific and regulatory factors that influence those systems. In particular, for energy producers and other energy suppliers, these changes have increased the need for advisory and implementation services to support regulatory developments, power and transmission market assessments, capacity expansions and corporate restructurings, acquisitions and divestitures.
Environment and infrastructure
A growing awareness of, and concern about, the effects of global warming, continued environmental degradation and depletion of key natural resources has increased demand for professional services that address these environmental issues. Furthermore, natural disasters, such as Hurricane Katrina, have underscored the importance of long-term stewardship, while environmental reviews of new facilities for energy refining, delivery and transportation have become increasingly complex. Solutions to these environmental issues need to integrate an understanding of evolving regulations, demands for improved infrastructure and economic incentives while providing equitable treatment of the various constituents involved in the political discourse related to these solutions. As a result, we anticipate continued demand for professional services firms that understand the complex relationships between these issues and can help reconcile the often competing concerns of different government and industry stakeholders. We believe that firms with these strengths are best positioned to help governments with developing and implementing effective public policies and programs and to assist commercial entities with responding to these policies and programs.
Environmental and public health services are also needed to help decision makers keep pace with advances in science while developing public policies that are protective but not unduly restrictive. The private sector is anxious to bring new products to the market, including new pesticides and food additives, while product developers and regulators must perform human health and ecological risk assessments to ensure product safety. Product developers and regulators therefore must evaluate the environmental and public health tradeoffs of alternative materials used in manufacturing and new approaches for controlling air and water pollution. In addition, public policy priorities often create tremendous development pressures that present significant environmental challenges. For example, new energy demands foster the development of additional liquefied natural gas facilities and associated pipelines, as well as uranium enrichment and nuclear power facilities. Moreover, additional transportation infrastructure is required to meet needs for defense logistics, freight movements and nuclear waste disposal. All of these pressures contribute to growing demand for firms with capabilities in environment and infrastructure.
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Important parts of the transportation infrastructure of the United States have suffered from under-investment for decades. The resurgence of city centers and the rapid growth of international trade have put tremendous pressure on access points and exits around our major urban and port areas. The U.S. Department of Transportation (DOT) has estimated that our highway, bridge and transit infrastructure will require approximately $90 billion of annual investment through 2020 to maintain current operating conditions and that an additional $36 billion in annual investment will be required during the same period to make planned improvements and capacity expansions. Both the public and private sectors will need assistance from experienced professional services firms that understand the economic, social and environmental implications of the options available to upgrade the transportation infrastructure.
Health, human services and social programs
A confluence of long-term factors is expected to drive an increased need for public spending on health, human services and social programs, despite budgetary pressures. U.S. Social Security and Medicare trustees project a major rise in the percentage of the population age 65 and older from 12% today to 18% in 2025, placing significant burdens on a variety of public programs. Other major factors adding to pressure for more program support include continued immigration, increased military personnel returning home with health and social service needs, increased population growth at the lowest income levels, and the rising cost of healthcare. In addition, demand is growing for professional services that plan for and respond to the health and social consequences of threats from terrorism, natural disasters and epidemics.
We believe the resulting growth in demand for program services in this era of budget deficits will require agencies at all levels of government to utilize professional services firms with diverse expertise across social program areas. These areas include designing and enhancing programs to meet new threats, determining the effectiveness of programs, re-engineering current programs to increase efficiency, providing the required management and technical resources to support underlying knowledge management, training and technical assistance, and managing widely dispersed people and information. In addition, we expect that government will consolidate services with professional services firms with expertise across multiple social program areas in order to take advantage of best practices and extract additional efficiencies.
COMPETITIVE STRENGTHS
We possess the following key business strengths:
We have a highly educated professional staff with deep subject matter knowledge.
We possess strong intellectual capital that provides us deep understanding of policies, processes and programs at the intersection of the public and private sectors. Our thought leadership is based on years of training, experience and education. Our clients are able to draw on the in-depth knowledge of our subject matter experts and our corporate experience developed over decades of providing advisory services. As of December 31, 2005, almost 50% of our professional staff held post-graduate degrees in diverse fields such as economics, engineering, business administration, information technology, law, life sciences and public policy. These qualifications, and the complementary nature of our markets, enable us to deploy multi-disciplinary teams able to identify, develop and implement solutions that are creative, pragmatic and tailored to our clients specific needs.
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We believe our diverse range of markets, services and projects provides a stimulating work environment for our employees and enhances their professional development. The use of multi-disciplinary teams provides our staff the opportunity to develop and refine common skills required in many types of engagements. Our approach to managing human resources fosters collaboration and significant cross-utilization of the skills and experience of both industry experts and personnel who can bring creative solutions drawing upon their experiences in different markets. The types of services we provide, and the manner in which we do so, enable us to attract and retain talented professionals from a variety of backgrounds while maintaining a culture that fosters teamwork and excellence.
We have long-standing relationships with our clients.
We have a successful record of fulfilling our clients needs, as demonstrated by our continued long-term client relationships. We have numerous contacts at various levels within our clients organizations, ranging from key decision makers to functional managers. We have advised the U.S. Environmental Protection Agency (EPA) and DoD for more than 30 years, the U.S. Department of Energy for over 25 years and have multi-year relationships with many of our other clients. Such extensive experience, together with increasing on-site presence and prime contractor position on a substantial majority of our contracts, gives us clearer visibility into future opportunities and emerging requirements. In addition, over 300 of our employees hold a U.S. federal government security clearance, which affords us client access at appropriate levels and further strengthens our relationships. Our balance between defense and civilian agencies, our commercial presence and the diversity of the markets we serve mitigate the impact of annual shifts in our clients budgets and priorities.
Our advisory services position us to capture a full range of engagements.
We believe our advisory approach, which is based on deep subject matter expertise and understanding of our clients requirements and objectives, is a significant competitive differentiator that helps us gain access to key client decision makers during the initial phases of a policy, program, project or initiative. We use this expertise and understanding to formulate customized recommendations for our government and commercial clients. Because of our role in formulating initial recommendations, we are often well positioned to capture the implementation services that often result from our recommendations. Implementation services, in turn, allow us to hone our understanding of the clients requirements and objectives as they evolve over time. We use this understanding to provide evaluation and improvement services that maintain the relevance of our recommendations. In this manner, we believe we are able to offer end-to-end services across the entire life cycle of a particular policy, program, project or initiative.
Our technology solutions are driven by our deep subject matter expertise.
We possess strong knowledge in information technology and a deep understanding of human and organizational processes. This combination of skills allows us to deliver technology-enabled solutions tailored to our clients business and organizational needs. There is increasing awareness among government and commercial decision makers that, to be effective, technology solutions need to be seamlessly integrated with people and processes. An example of such a technology-enabled solution that we have developed is CommentWorks, a web-based tool that enables federal government agencies to collect and process public comments in connection with rulemaking or other activities.
Our proprietary analytics and methods allow us to deliver superior solutions to clients.
We believe our innovative, and often proprietary, analytics and methods are key competitive differentiators because they improve our credibility with prospective clients, enhance our ability to deliver customized solutions and enable us to deliver services in a more cost-effective manner than our
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competitors. We have developed industry standard energy and environmental models such as IPM (Integrated Planning Model) and UAM (Urban Airshed Model), which are used by governments and commercial entities around the world for energy planning and air quality analyses, respectively. The scientific validity of UAM has been recognized in decisions by U.S. federal courts, including the Supreme Court, which supports use of these models by our government clients in their official administrative processes. In addition, we have developed a suite of proprietary climate change tools to help the private sector develop strategies for complying with greenhouse gas emission reduction requirements, including the K-PRISM project risk evaluation system and the International Carbon Pricing Tool. We also maintain proprietary databases that we continually refine and that are available to be incorporated quickly into our analyses on client engagements. In addition, we use proprietary project management methodologies that we believe help reduce process related risk, improve delivery, contain costs and help meet our clients tight timetables. We have won numerous awards for the quality of our technical work.
We are led by an experienced management team.
Our senior management team possesses extensive industry experience and has an average tenure of 14 years with our company. Our managers are experienced not only in generating business, but also in successfully managing and executing advisory and implementation assignments. For example, one of our senior managers served for 20 years on the New York City Fire Department and later as Federal Emergency Management Agency (FEMA) Operations Chief at Ground Zero. Our management team also has experience in acquiring other businesses and integrating their operations with our own. A number of our managers are industry-recognized thought leaders. For example, one of our senior managers was named last year to Project Management Institutes Power 50, which recognized forward-thinking strategic leaders. Our managements successful past performance and deep understanding of our clients needs have been key differentiating factors in competitive situations.
STRATEGY
Our strategy to increase our revenue, grow our company and increase stockholder value involves the following key elements:
Strengthen our end-to-end service offerings
We plan to leverage our advisory services and strong client relationships to increase our revenue from implementation services, which include information technology solutions, project and program management, project delivery, strategic communications and training. Currently, we generate most of our revenue from advisory services, with the remainder coming from implementation and evaluation and improvement services. We believe our advisory services provide us with insight and understanding of our clients missions and goals and, as a result, position us to capture a greater portion of the implementation engagements that directly result from our advisory services. Expanding our client engagements into implementation and evaluation and improvement services will increase the scale, scope and duration of our contracts and thus accelerate our growth.
Grow our client base and increase scope of services provided to existing clients
We intend to grow our client base, while maintaining strong relationships with our current clients, by expanding our geographic presence domestically in the United States and internationally. Within the United States, we plan to increase our presence at key government client sites. Our strong record of past performance with government clients, highly skilled multi-disciplinary teams and growing information technology implementation capabilities should facilitate this expansion. We also intend to take advantage of the growing need for our advisory services in Europe, Asia and Latin America through our existing offices in these regions. Expansion of our advisory services in these markets will help increase our client
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relationships and set the stage for us to expand into implementation and improvement services. In addition, we intend to invest in development and marketing initiatives in order to strengthen our brand recognition among potential clients. We intend to focus on additional opportunities in our existing client base by increasing the scope of our services, such as by identifying and offering clients new skill sets and implementation and improvement services that complement ongoing advisory services.
Expand into additional markets at the intersection of the public and private sectors
We have a strong record of providing services that address complex issues at the intersection of the public and private sectors. We believe there are additional opportunities for us to expand into other markets that are impacted by government involvement. In the next three to five years, we expect key markets for these opportunities to include education, social and criminal justice and veterans affairs. Although we believe we are well qualified to serve these additional markets, we have not yet fully capitalized on these additional opportunities and have only limited presence in these markets.
Focus on high margin projects
We plan to pursue higher margin commercial energy projects and continue to shift our government contract base to increase margins. In light of recent oil price increases, the impact of those increases on the prices of other forms of energy, and the need for both governments and industry to react to these conditions, we view the energy industry as a particularly attractive market for us over the next decade, and we have strong global client relationships in this market. Historically, our margins on engagements in this market have been higher than those in our government business. We believe the size and scope of these assignments will grow in the future due to the major changes facing the energy industry. In addition, we will continue our efforts in government markets to shift our contract mix from cost-based contracts toward fixed-price contracts and time-and-materials contracts, both of which, in our experience, typically offer higher margins.
Capitalize on operating leverage
We have built a corporate infrastructure and internal systems that we believe are readily scalable and can accommodate significant growth without a proportionate increase in expense. We have invested significant time and resources in developing our accounting and financial systems and our information technology infrastructure. As our revenue base grows, we expect to realize operating leverage by spreading the costs associated with these investments over a larger revenue base, which would increase our operating margins. In addition, we intend to pursue larger prime contract opportunities, which should provide a greater return on our business development efforts and allow for enhanced employee utilization. Also, in an effort to reduce costs and access global talent, we are utilizing resources in India for our commercial work, including energy modeling, and intend to further utilize offshore resources where appropriate.
Pursue strategic acquisitions
We plan to augment our organic growth with selected acquisitions. During the past five years, we have acquired and integrated several businesses, including two of Arthur D. Littles consulting units in May 2002, Synergy, Inc. in January 2005 and Caliber Associates, Inc. in October 2005. We plan to continue a disciplined acquisition strategy to obtain new customers, increase our size and market presence and obtain capabilities that complement our existing portfolio of services, while focusing on cultural compatibility and financial impact.
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SERVICES AND SOLUTIONS
We offer a broad and diverse set of services and solutions within our four key markets: defense and homeland security; energy; environment and infrastructure; and health, human services and social programs. We seek to provide end-to-end services that deliver value throughout the entire life of a policy, program, project or initiative. The following chart provides an overview of our end-to-end services and solutions in our four key markets.
Defense and homeland security
We support DoD by providing high-end strategic planning, analysis and technology solutions in the areas of logistics management, operational support and command and control. We also provide strong capabilities to the defense sector in environmental management, human capital assessment, military community research and technology-enabled solutions. In the area of homeland security, we provide services to federal, state and local government clients to prevent, prepare for, respond to and recover from natural disasters, technological failures and terrorist attacks. We are a national leader in critical infrastructure protection and are currently leading two efforts for DHSs Preparedness Directorate in its Infrastructure Protection Division. We also manage the national program to test emergency preparedness at the federal, state, local and private sector levels in communities adjacent to nuclear power facilities.
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The following is a representative list of our clients in this market for 2005.
Ø U.S. Department of Defense |
Ø U.S. Department of Homeland Security | |
Ø Air Force |
Ø Federal Emergency Management Agency | |
Ø Army |
Ø Secret Service | |
Ø Navy |
Ø Transportation Security Administration | |
Ø Directorate for Science & Technology | ||
Ø Commonwealth of Puerto Rico |
Ø Citizenship & Immigration Services | |
Ø State of Nebraska |
Ø Directorate for Preparedness | |
Ø Coast Guard |
Some of our representative client engagements in the defense and homeland security market are described below.
Network Centric Logistics Office of the Secretary of Defense, Office of Force Transformation (OSD/OFT)
In support of OSD/OFTs efforts to leverage information technology to transform the U.S. military from disparate, isolated units into a well-coordinated, highly responsive and networked organization, we were retained to design, develop and implement a network-centric defense logistics solution. We utilized our expertise in strategy and concept development, research and analysis, and our in-depth understanding of logistics and the emerging complexities of modern warfare, to assist OSD/OFT with this web-based prototype solution. This system is designed to be linked to various information technology networks and provides real-time integration of information from the militarys logistics, operations and intelligence groups. This integrated capability is a source of operational advantage and a force multiplier.
E-Procurement System U.S. Department of Defense
By Congressional mandate, DoDs Joint Electronic Commerce Program Office was required to develop an electronic procurement system allowing military and other authorized government users to order from DoD catalogs. From this mandate emerged EMALL, one of DoDs most widely adopted web-based government procurement applications. Initially, EMALL targeted finished goods and off-the-shelf products, which comprised only a fraction of DoD procurements. In order to allow EMALL to handle more complicated transactions, DoD engaged us to develop more sophisticated functionality by integrating commercial off-the-shelf technology components with customized software. We have enhanced EMALL by enabling secure messaging, competitive pricing and collaborative checkout procedures to help users obtain the best price. We have also developed programs to allow various agencies (such as DHS) and other buyers (such as military bases) to develop their own business rules. Our efforts are responsible, in part, for EMALLs recent exponential growth in sales, from $13 million in 2003, to over $500 million in 2005 and projected sales of $1 billion in 2006. In 2004, EMALL received the David Packard award for Acquisition Excellence, and in 2005, EMALL received the Defense Certificate of Recognition for Acquisition Innovation.
Radiological Emergency Preparedness Program and Offsite Exercises U.S. Department of Homeland Security
DHS has engaged us to evaluate the ability of state and local governments in regions with nuclear power plants to implement their radiological emergency preparedness and response plans. The Radiological Emergency Preparedness (REP) Program is designed to enhance the ability of all levels of government and
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their private sector partners to plan for, prepare for, and respond to, peacetime radiological emergencies, and to ensure that adequate off-site emergency plans are in place and can be implemented successfully. Under this contract, we conduct more than 75 annual exercises and drills, provide access to more than 130 subject matter experts and other evaluators and deliver training. To facilitate managing this complex engagement, we have developed two web-based systems to analyze and track issues and personnel involved in these REP exercises.
National Infrastructure Protection Plan Development U.S. Department of Homeland Security
In December 2003, the White House directed the Secretary of DHS to lead the federal government in protecting 17 critical infrastructure sectors of the United States, such as transportation, telecommunications and pipeline systems. We were selected by DHS as the lead contractor to coordinate the development of the National Infrastructure Protection Plan. Based on extensive research and interviews with DHS personnel, participating federal agencies and other stakeholders, we developed a framework for collecting information on critical infrastructure and key resources. In addition, this framework can be used in assessing potential asset risks, determining cross-sector impacts and interdependencies and for prioritizing assets based on vulnerabilities, threats and consequences in the development and performance assessment of protective programs.
Energy
We assist energy enterprises and energy consumers worldwide in their efforts to develop, analyze and implement strategies related to their business operations and the interrelationships of those operations with the environment and applicable government regulations. Our clients include integrated energy enterprises, power developers, regulated electricity transmission and distribution companies, unregulated enterprises, municipal power authorities, energy traders and marketers, oil and gas exploration and production companies, gas transmission companies, pipeline developers, local distribution companies, industry associations, investors, financial institutions, law firms and regulators in the United States and throughout the Americas, Europe and Asia. We also support government and commercial clients in designing, implementing and improving effective and innovative demand-side management strategies in a wide range of areas, including energy efficiency and peak load management.
For more than 25 years, we have helped commercial and regulatory clients in the energy sector deal with complex and challenging regulatory and litigation issues. We provide advisory services in asset and contract valuation, rate structure and price analysis, resource planning, market structures and environmental compliance. Our expert testimony and support for scores of litigated cases reinforce our reputation for deep industry knowledge backed by our proprietary analytical models. We are currently providing support and representation in a number of regulatory proceedings, including those at the U.S. Federal Energy Regulatory Commission, the U.S. Department of Justice (DoJ) and the New Jersey Board of Public Utilities (NJBPU).
The following is a representative list of our clients in this market for 2005.
Ø U.S. Department of Energy |
Ø We Energies | |
Ø U.S. Environmental Protection Agency |
Ø GridFlorida | |
Ø TXU Energy |
Ø Con Edison Company of New York | |
Ø Pacific Gas & Electric |
Ø BP Global Power | |
Ø Cinergy |
Ø Excelsior Energy | |
Ø CenterPoint Energy |
Ø State of New York | |
Ø Northeast Utilities |
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Some of our representative client engagements in the energy market are described below.
Support for the ENERGY STAR® Program U.S. Environmental Protection Agency, Utilities, State Agencies
Since the programs inception in 1992, we have assisted EPA in the design and implementation of ENERGY STAR, one of the best known energy efficiency programs in the world to help government, business, and families save energy. Our roles in the ENERGY STAR program have included analyzing the market potential for energy efficiency in buildings and commercial products, designing incentives to encourage energy efficiency, developing energy use specifications for more than 25 ENERGY STAR products, and developing proprietary tools to map ENERGY STAR home specifications across various national climate zones. On behalf of EPA, we have also conducted extensive outreach to influence the manufacturing and building industries and have promoted energy efficient products and processes to over 2,000 of the top businesses in the U.S.
ENERGY STAR has become the national benchmark for best practices in energy efficiency. As a result of our role in the national ENERGY STAR program, we are now assisting regional and state entities in designing and implementing similar programs. For example, we have worked nationally and locally with a major utility to initiate the ENERGY STAR New Homes Transformation, contributing to the construction of over 500,000 ENERGY STAR homes. In addition, the ENERGY STAR label and tenets are used in other countries and jurisdictions, including the European Union, Australia, Canada, Japan, New Zealand and Taiwan. We have also provided consulting services to Brazil, China, India and Taiwan related to the use of ENERGY STAR concepts in their own energy efficiency labeling programs.
Greenhouse Gas Strategy and Implementation Support Major Oil & Gas Company
The energy industry accounts for about one-third of the greenhouse gas (GHG) emissions generated by human activities. One of the worlds largest oil and gas companies has employed our services as it strives to redefine its future in a carbon-constrained world. In addition to helping this client establish protocols for measuring and managing its GHG emissions, we helped develop an internal GHG trading system designed to increase corporate-wide awareness about the need for, and internal costs of, reducing our clients emissions. We have been engaged to support the clients interests in assessing the value and commercial viability of proposed new power market projects in Europe and Asia based on cleaner fuels such as gas and renewable fuels. More recently, as our client explores new business models that are less reliant on traditional petroleum-based fuels, we have been engaged to identify and evaluate various policy options that could be introduced to reduce GHG emissions throughout the fuel cycle in the transportation sector. As the global energy industry continues to address GHG emissions in various regions, we believe our combined expertise in carbon strategy, emission trading, global energy market analysis, energy efficiency, alternative fuels, and transportation will play an important role.
Power Market Strategy, Regulatory and Litigation Support Commercial and Regulatory Clients
We work with companies in the power markets in the Americas, Europe and Asia to help them develop strategies that will optimize the value of their existing and proposed assets within continuously evolving regulatory and market frameworks. Our energy market models are used as the basis for decision-making by both commercial and regulatory clients. For example, we have recently been retained by the New Jersey Board of Public Utilities to provide analyses and legal filings and to serve as an expert witness with respect to a large proposed acquisition. Our work involves detailed node-by-node analyses of the power grid affecting the state, assessments of the impact of divesting specific generating units, and recommendations for additional power generation that the combined entity may have to sell to alleviate competition concerns.
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Environment and infrastructure
For more than three decades, we have been providing services for the design, evaluation and implementation of environmental policies and projects across all environmental media land, air and water. We work with federal, regional and international governments and commercial clients to assess, establish and improve environmental policies using interdisciplinary skills ranging from finance and economics, to the earth and life sciences, to information technology and program management. Because of the wide range of potential environmental impacts of changes in transportation, energy and other types of infrastructure, our in-depth environmental knowledge is often critical to providing comprehensive solutions. In addressing infrastructure issues, however, we go beyond environmental questions to address problems at the nexus of transportation, energy, economic development and the environment. For example, we help shape national freight policy and assess alternatives for reducing urban congestion and pollution. Our solutions are based on skills in transportation planning, urban and land use planning, environmental science, economics, information technology, financial analysis, policy analysis and communications.
The following is a representative list of our clients in this market for 2005.
Ø U.S. Department of Transportation |
Ø U.S. Postal Service | |
Ø Federal Aviation Administration |
Ø U.S. Department of Commerce | |
Ø Federal Highway Administration |
Ø U.S. Department of Interior | |
Ø U.S. Environmental Protection Agency |
Ø U.S. Federal Trade Commission | |
Ø U.S. Federal Motor Carrier Safety Administration |
Ø U.S. National Aeronautics and Space Administration | |
Ø U.S. Nuclear Regulatory Commission |
Ø European Commission | |
Ø Commonwealth of Pennsylvania |
Some of our representative client engagements in the environment and infrastructure market are described below.
National Airspace Implementation Support U.S. Federal Aviation Administration
We have provided over 20 years of support to the U.S. Federal Aviation Administration (FAA) to improve its management, maximize return on its capital investments, and mitigate the risks in investment outcomes. We provide a wide variety of on-site management services, including:
Ø | design and implementation of an agency-wide portfolio management framework that has improved capital investment planning and management processes; |
Ø | support to FAA Integrated Project Teams in their tailored implementation of program management processes, tools and techniques; |
Ø | curriculum development and training on acquisition management and program management; |
Ø | analyses of identified deficiencies and technology enhancement opportunities in air traffic control information technology systems; |
Ø | business process re-engineering for human resource, civil rights reporting and investment management processes; and |
Ø | assistance in developing the FAAs Acquisition Management System, one of the first such systems in government exempt from the Federal Acquisition Regulation. |
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Market-Based Air Emission Control Programs U.S. Environmental Protection Agency
EPAs Clean Air Markets Division (CAMD) was established to use the successful market-based approach to utility regulation pioneered in the Title IV Acid Rain Program on new pollutants and sources. We have supported EPAs Clean Air programs since the 1970s through our deep knowledge of the regulated industries, their market relationships and the technologies they use for generating power and reducing emissions. This knowledge is vital in supporting CAMDs innovative market-based programs, which leave many compliance decisions to the affected industries. A critical dimension of our support is collecting industry knowledge in a detailed and sophisticated industry database that drives our proprietary Integrated Planning Model (IPM), which simulates the activities of the entire North American power industry. This approach allows us to provide detailed cost and air quality analyses of responses to emission cap and trade proposals and other air emissions requirements. These model runs form the core of the Regulatory Impact Analyses that EPA and the U.S. Office of Management and Budget require for program implementation.
Environmental Assessment of Permitting Mexican Carriers to Operate in the United States U.S. Department of Transportation
The North American Free Trade Agreement requires that Mexican trucks and buses be permitted to operate in the United States beyond established commercial border zones. The U.S. Federal Motor Carrier Safety Administration (FMCSA) of the U.S. Department of Transportation (DOT) retained us to analyze air pollution, noise, safety, and other impacts of Mexican vehicles on U.S. highways. We applied firm-wide expertise in transportation, environmental assessment, commodity flow, traffic and air quality modeling, and stakeholder outreach to perform the required analyses, provide advisory services to FMCSA, conduct public hearings to reach out to stakeholders and carry out the required filings during an expedited environmental impact review schedule. We developed a system to estimate the likely movement of trucks throughout the United States, determine appropriate emissions factors and estimate emissions effects in every air quality non-attainment and maintenance area in the country under a variety of scenarios.
Environmental Safety and Occupational Health Support U.S. Missile Defense Agency
For the last five years, we have been supporting the efforts of the Civil Engineering and Environmental Management Division within the U.S. Missile Defense Agency (MDA) to facilitate environmental stewardship and compliance of all Ballistic Missile Defense System (BMDS) testing and deployment activities. We provide a range of environmental planning, safety and occupational health support to MDA. For example, we prepared MDAs first Programmatic Environmental Impact Statement (EIS) for the BMDS, which covered a wide variety of missile technologies and systems. We have also developed and are maintaining MDAs environmental knowledge management system, which allows MDA environmental professionals to analyze proposed future actions using data from hundreds of documents we have reviewed and, thus, streamline their environmental compliance activities. In addition, we have developed and implemented a geographic information system for MDA that analyzes the potential effects of BMDS activities on environmental resources. We have received numerous letters of commendation from MDA for our work and we were awarded the DoD Group Achievement Award for Environmental Management in 2005.
Health, human services and social programs
We provide research, consulting, implementation and improvement services that help government, industry and other stakeholders develop and manage effective programs in the areas of health and human services at the national, regional and local levels. Clients utilize our services in this market because we
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have deep subject matter expertise in complex social areas, including education, children and families, public health, economic development and disaster recovery, housing and communities, military personnel recruitment and retention, and substance abuse. We partner with our clients in the public, private and non-profit sectors to increase their knowledge base, support program development, enhance program operations, evaluate program results and improve program effectiveness.
The following is a representative list of our clients in this market for 2005.
Ø U.S. Department of Health & Human |
Ø U.S. Department of Housing & Urban Development | |
Ø Centers for Disease Control |
Ø U.S. Department of Agriculture | |
Ø Food & Drug Administration |
Ø U.S. Department of Justice | |
Ø National Institutes of Health |
Ø U.S. Department of State | |
Ø Administration for Children & Families |
Ø U.S. Department of Education |
Some of our representative client engagements in the health, human services and social programs market are described below.
Childrens Bureau Clearinghouse Services U.S. Department of Health and Human Services
We help U.S. federal agencies such as the U.S. Department of Health and Human Services (HHS) implement human and social programs by managing technical assistance centers, providing instructional systems, supporting stakeholder outreach, developing information technology applications and managing clearinghouse operations. Clearinghouses disseminate information about a program or subject area to professionals in the field and the general public. We have been chosen to manage several clearinghouses because of our deep and broad understanding of legislation, regulations, emerging issues, research findings and promising practice models, combined with our ability to collect, synthesize and disseminate information to diverse audiences in multiple formats.
Since the 1990s, we have operated and provided leadership, in collaboration with the Childrens Bureau, for two large, federally funded clearinghouses: the National Clearinghouse on Child Abuse and Neglect Information and the National Adoption Information Clearinghouse. Today, as a result of continuous process improvement, both of these clearinghouses have a strong Internet presence with total on-line libraries of more than 48,000 documents, on-line ordering capabilities, product lines of more than 130 documents (developed by our staff experts) and on-line databases that make information continuously available. We exhibited at more than 70 national, regional and state conferences in 2005 and distributed more than 170,000 publications.
Addressing Domestic Violence and Child Maltreatment U.S. Departments of Justice, and Health and Human Services
In addition to providing advisory and research services at the front end of government programs, we also conduct evaluations and implement program enhancements. We received funding from DOJ and HHS to evaluate and implement recommendations of The Greenbook, a ground-breaking work developed by the National Council of Juvenile and Family Court Judges to change approaches to family violence in order to help battered women and their children lead safer lives. We led a team of subject matter and evaluation experts to develop and implement data collection protocols, perform multi-level qualitative and quantitative analyses, and describe evaluation findings. The original three-year evaluation funding period (through August 2003) has been extended to seven years to allow a more comprehensive evaluation plan and development of products for targeted policymaker, practitioner and evaluator
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audiences. Our work has been referenced by government and industry stakeholders citing the Greenbook project as a model for collaborative systems change that can support safety and well-being among families experiencing violence.
CONTRACTS
Government, commercial and international clients accounted for 81%, 14% and 5%, respectively, of our 2005 revenue. Our clients span a broad range of defense and civilian agencies and commercial enterprises. We had more than 1,000 active contracts as of December 31, 2005, including task orders and delivery orders under GSA Schedules. Our contract periods typically extend from one month to as much as seven years, including option periods. Option periods may be exercised at the election of the government. Our largest contract accounted for approximately 5% and 3% of our revenue for 2004 and 2005, respectively. Our top ten contracts collectively accounted for approximately 32% and 22% of our revenue for 2004 and 2005, respectively. We received approximately 18% and 16% of our revenue for 2005 from DoD and EPA, respectively. Most of our revenue is derived from prime contracts, which accounted for 87% and 86% of our revenue for 2004 and 2005, respectively. We consider each task order and delivery order under GSA Schedules as a separate contract. Unless the context otherwise requires, we use the term contracts to refer to contracts and any task orders or delivery orders issued under a contract.
CONTRACT BACKLOG
We define total backlog as the future revenue we expect to receive from our contracts and other engagements. We generally include in backlog the estimated revenue represented by contract options that have been priced, though not exercised. We do not include any estimate of revenue relating to potential future delivery orders that might be awarded under our GSA Schedule contracts, other Indefinite Delivery/Indefinite Quantity (IDIQ) contracts, or other contract vehicles that are also held by a large number of firms, and under which potential future delivery orders or task orders might be issued by any of a large number of different agencies and are likely to be subject to a competitive bidding process. We do, however, include potential future work expected to be awarded under IDIQ contracts that are available to be utilized by a limited number of potential clients and are held either by us alone or by a limited number of firms.
We include expected revenue in funded backlog when we have been authorized by the client to proceed under a contract up to the dollar amount specified by our client, and this amount will be owed to us under the contract after we provide the services pursuant to the authorization. If we do not provide services authorized by a client prior to the expiration of the authorization, we remove amounts corresponding to the expired authorization from backlog. We do include expected revenue under an engagement in funded backlog when we do not have a signed contract if we have received client authorization to begin or continue working and we expect to sign a contract for the engagement. In this case, the amount of funded backlog is limited to the amount authorized. Our funded backlog does not represent the full revenue potential of our contracts because government clients, and sometimes other clients, generally authorize work under a particular contract on a yearly or more frequent basis, even though the contract may extend over a number of years. Most of the services we provide to commercial clients are provided under contracts with relatively short durations that authorize us to provide services and, as a consequence, our backlog attributable to these clients is typically reflected in funded backlog and not in unfunded backlog.
We define unfunded backlog as the difference between total backlog and funded backlog. Our revenue estimates for purposes of determining unfunded backlog for a particular contract are based, to a large extent, on the amount of revenue we have recently recognized on that contract, our experience in
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utilizing contract capacity on similar types of contracts, and our professional judgment. Our revenue estimate for a contract included in backlog is sometimes lower than the revenue that would result from our client utilizing all remaining contract capacity.
Although we expect our contract backlog to result in revenue, the timing of revenue associated with both funded and unfunded backlog will vary based upon a number of factors, and we may not recognize revenue associated with a particular component of backlog when anticipated, or at all. The federal government has the right to cancel any contract, or ongoing or planned work under any contract, at any time. In addition, there can be no assurance that revenue from funded or unfunded backlog will have similar profitability to previous work or will be profitable at all. Generally speaking, we believe the risk that a particular component of backlog will not result in future revenue is higher for unfunded backlog than for funded backlog.
Our estimates of funded, unfunded and total backlog at the dates indicated were as follows:
December 31, |
March 31, 2006 | ||||||||
2004 |
2005 |
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(In millions) | |||||||||
Funded |
$ | 70.6 | $ | 133.0 | $ | 112.3 | |||
Unfunded |
63.8 | 93.8 | 104.5 | ||||||