Back to GetFilings.com

Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-K

Commission File Number 001-31342

Veridian Corporation

Registrant’s telephone number, including area code:

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

      Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.      Yes þ          No o

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants’ knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).     Yes o          No þ

      The aggregate market value of the common stock on June 28, 2002 (based on the closing prices in the daily composite list for transactions on the New York Stock Exchange during the last business day of the registrant’s most recently completed second quarter) held by non-affiliates of the registrant was approximately $384,709,975.

      At March 10, 2003, the registrant had outstanding 34,171,158 shares of common stock, par value $0.0001 per share.

DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the registrant’s Proxy Statement for the 2003 Annual Meeting of Stockholders, which will be filed within 120 days of December 31, 2002, are incorporated by reference into Part II and Part III.

Table of Contents

TABLE OF CONTENTS

Table of Contents

PART I

Overview

      Veridian Corporation, a Delaware corporation, was incorporated in 1986 and serves as a holding company for its subsidiaries. The oldest business conducted by Veridian traces its heritage to 1948. We conduct our business through four primary operating subsidiaries: Veridian Engineering, Inc., Veridian Systems Division, Inc., Veridian Information Solutions, Inc. and Veridian IT Services, Inc. (formerly SIGNAL Corporation). Veridian Systems Incorporated is a fifth, smaller subsidiary. Each of our subsidiaries is wholly-owned and controlled by us. We are a leading provider of information-based systems, integrated solutions and services to the U.S. government. We specialize in mission-critical national security programs, primarily for the intelligence community, the Department of Defense, law enforcement and other U.S. government agencies. Our offerings include the design, development, deployment, operation and protection of vital networks, databases and other information and intelligence systems. We are at the forefront of U.S. government-funded research, development and application of advanced information and sophisticated sensor technologies for emerging defense and intelligence initiatives. During our 50 years of experience, we have developed long-standing customer relationships, proprietary technologies and intellectual property and have acquired extensive security clearances and domain expertise in understanding our governmental customers’ operations and missions.

      Our customer and contract base is highly diversified across a wide range of mission-critical applications. We currently have more than 2,000 contracts, two of which represented in excess of 5% of 2002 revenues each. One such contract is with an intelligence agency and had revenues of more than $50 million in 2002. The second contract is with the U.S. Army and had revenues of $59 million in 2002. The next largest contract represented less than 3% of our revenues in 2002. For the year ended December 31, 2002, approximately 47% of our revenues were represented by cost-plus contracts, 40% by time-and-materials contracts and 13% by fixed price contracts, resulting in substantial margin stability. Our contracts typically have terms of several years with renewal options. Our experience has been that most renewal options are exercised and the scope and term of our contracts are often expanded. Given our broad range of specialized capabilities and contracts, we are not dependent on any one funding decision, customer or technology for our business.

      Our comprehensive solutions leverage our core capabilities that include:

	•	network security and enterprise protection;
	•	intelligence, surveillance, and reconnaissance (ISR);
	•	knowledge discovery and decision support;
	•	information systems development and integration;
	•	chemical, biological and nuclear detection;
	•	network and enterprise management; and
	•	systems engineering services.

      Given the critical and classified nature of many of our services and our sophisticated technical capabilities, we are called upon to support our customers in the intelligence community and the Department of Defense as they respond to crisis situations around the world. Our solutions enable our customers to manage risk by identifying a wide variety of conventional and nonconventional threats, including nuclear, biological, chemical, cyber aggression and terrorism, quantifying exposure to these threats and implementing prudent physical and cyber countermeasures.

1

Table of Contents

      Our customers include:

	•	Department of Defense, including:

	•	U.S. military services (Army, Navy, Air Force, Marine Corps)
	•	Defense Advanced Research Projects Agency
	•	Defense Information Systems Agency

	•	U.S. intelligence agencies, including:

	•	National Reconnaissance Office
	•	National Imaging and Mapping Agency
	•	National Security Agency
	•	Other intelligence agencies

	•	U.S. government civilian agencies, including:

	•	Department of Justice
	•	Federal Bureau of Investigation
	•	Department of Homeland Security (including the Immigration and Naturalization Service, Transportation Security Administration, U.S. Coast Guard and U.S. Customs Service)
	•	Department of Transportation (including the Federal Aviation Administration)
	•	Federal Energy Regulatory Commission
	•	U.S. Senate
	•	Patent and Trademark Office
	•	Other commercial, state and local governments and international customers

Revenues, as a percentage of total revenues, by customer group were as follows for the year ended December 31, 2002:

(1)	Pro Forma to include the revenues of SIGNAL Corporation for the period prior to the date of acquisition (from January 1, 2002 to September 23, 2002).

Our Market Opportunity

      We derive our revenues predominantly from contracts with U.S. government agencies focused on national security. As a result, funding for our programs is generally linked to trends in U.S. government spending in the areas of defense and intelligence. With an increased focus on national security, we believe the following trends and developments will drive the growth in our industry.

	•	Increase in Overall Defense Spending. In response to President George W. Bush’s stated commitment to strengthen national defense, Congress appropriated $364.6 billion in fiscal year 2003 for defense funding. This reflects an increase of more than 10% over the fiscal year 2002, the largest one-year

2

Table of Contents

		increase since the 1980s. The President’s defense budget proposed for fiscal year 2004 is $379.9 billion, reflecting a further increase of 4% over fiscal year 2003. This fiscal year 2004 budget does not include additional funds that the Bush Administration intends to seek to fight terrorism and for any conflict with Iraq. The Department of Defense’s six-year spending plan, sent to Congress in February 2003, projects a 32% budget increase from fiscal years 2003 through 2009.
	•	Emphasis on Protecting and Enhancing Information Systems and ISR Capabilities. The Department of Defense is placing a greater emphasis on information superiority and information infrastructure protection, defined as the ability to collect, process, assimilate and protect information while denying an adversary’s capabilities to do the same.

In response to new strategic and tactical global threats, the Department of Defense has focused its resources on enhancing military efficiency, readiness and technological sophistication of existing and future platforms by implementing advanced information-based systems. This ongoing transformation of military capabilities centers on developing information and command and control capabilities needed to significantly enhance coordinated armed forces operations. With the support of secure command, control, communications, computers, intelligence, surveillance and reconnaissance, or C4ISR, systems, the Department of Defense expects to have the ability to respond rapidly to any conflict.

	•	Increase in Intelligence Spending. While the intelligence community budgets are classified, the increase in appropriations for the national foreign intelligence program for fiscal year 2003 represents the largest one-year increase in more than two decades. We believe that an emphasis on national security will continue to lead to significant additional funding for the intelligence community to enhance information assurance and protection, network security and ISR capabilities.
	•	Homeland Security Spending. The threats of terrorist activities have emphasized the importance of homeland security. The Bush Administration and Congress responded initially with $40 billion of emergency supplemental appropriation. Since that time, the Bush Administration and Congress have joined together to create the Department of Homeland Security. The President’s budget proposal for that department for fiscal year 2004 is $36.2 billion, representing a 7.4% increase over fiscal year 2003 and a 64% increase over fiscal year 2002. The consolidation of a large number of agencies into the Department of Homeland Security is the largest federal reorganization in more than 50 years. In addition, even outside that department, particularly within the federal law enforcement community, substantially expanded homeland security initiatives are getting underway.
	•	Increase in Overall U.S. Government Information Technology (IT) Spending. The U.S. government has consistently increased spending on IT since 1980 and is the largest purchaser of these services and products. This trend is expected to continue over the next five years. The total federal IT budget for fiscal year 2003 is expected to be $54.2 billion, 8.6% higher than it was in 2002. The President’s budget proposal for IT (both defense and civil) for fiscal year 2004 is $59.3 billion, representing a 9.4% increase over the current year. By 2008, according to the Government Electronics and Information Technology Association, the IT budget is expected to be $67 billion.

Our Business Strengths and Competitive Advantages

      We believe that we are well positioned to capitalize on these market opportunities and to address the mission-critical information requirements of our customers as a result of our:

	•	Strong Set of Core Capabilities. Our distinctive capabilities position us to capitalize on the increasing demand for vital defense information services. We integrate our technical areas of expertise into comprehensive solutions that support our customers’ growing needs in mission-critical initiatives, such as securing information networks, processing intelligence on adversaries, sharing knowledge among agencies, responding to disasters and defending against weapons of mass destruction.
	•	Highly Skilled Employee Base with High-Level Security Clearances. We work with customers in highly classified environments and at front-line deployments due in large part to the advanced degrees and security clearances of our employee base. Approximately 20% of our more than 7,100 employees

3

Table of Contents

		have advanced degrees, with 76% holding U.S. government security clearances, including more than 55% of those cleared employees holding higher-level security clearances. This large body of employees with higher-level security clearances provides us with a distinctive competitive advantage in pursuing new business in classified areas.

Our employees with security clearances have completed a difficult and lengthy approval process, which requires a candidate to be sponsored by the U.S. government for a particular purpose and entails extensive background investigations that typically take six months to a year. Higher-level clearances may take additional time for background investigations and may require successful completion of polygraph testing. We also maintain numerous facility clearances as required to support classified programs.

	•	Proprietary Technology and Intellectual Property. We possess significant trade secrets and know-how relating to technologies, processes and methods. Our innovations in sensor, image processing and information security technologies have resulted in a number of patents in these technology areas.

Because of our comprehensive technical expertise and experience, we are successful in winning additional contracts for U.S. government-funded research and development. Our continued success in research and development has helped us create a diversified portfolio of sophisticated sensor and advanced information technologies and obtain additional research and development funding. This accumulation of U.S. government-funded research and development has resulted in significant intellectual property and technology expertise that we are able to leverage into larger, more comprehensive systems contracts for our U.S. government customers. Our combination of technologies and domain expertise also positions us as a preferred provider with major aerospace and defense companies pursuing large-scale programs involving major platforms.

	•	Strong Customer Relationships and Heritage of Trust. We have more than 50 years of experience supporting priority national programs and protecting critical national security infrastructures. We have a reputation for integrity and responsibility and are committed to providing outstanding customer service.

Our executives and technical staff have developed long-standing, key customer relationships across the intelligence community, the Department of Defense and civil agencies supporting national security initiatives. As a result, we are often called upon as a trusted partner in critical, time-sensitive situations. For example, after the terrorist attacks on September 11, 2001, we were asked by some of our customers to operate key positions and support front-line systems on a 24x7 basis.

	•	Disciplined Growth-Oriented Management Team. Our team has a successful track record in identifying key growth opportunities, developing integrated solutions that address market demand and acquiring and integrating strategic assets and capabilities that build and sustain our competitive advantage.

Anticipating the increased focus of the intelligence community and the Department of Defense on the concept of information superiority as a key component of warfare, we initiated an investment and acquisition strategy in 1997 to develop, assemble and integrate sophisticated, information-based capabilities. Since 1997, we have acquired and successfully integrated several companies. We have substantial experience in market analysis, opportunity identification and qualification, and in identifying, acquiring and integrating companies and capabilities. Successful integration of acquired capabilities, along with bundling of offerings to address emerging requirements, has positioned us well to compete in growth markets supporting national security.

4

Table of Contents

Our Business Strategy

      We intend to increase our revenues, profitability and stockholder value by strengthening our position as a leading provider of information-based systems, integrated solutions and services for mission-critical national security programs. Our key strategies for achieving this objective are as follows:

	•	Expand our position in rapidly growing U.S. government segments and accelerate the application of our technology. We believe our core capabilities address many emerging needs in our industry. We intend to target rapidly growing segments in our industry, including:

	•	Defending critical information systems and infrastructures in the face of cyber attack and conducting effective information operations;
	•	Advancing ISR systems to deny enemies sanctuary and to support military commanders in the field;
	•	Developing next-generation technologies and capabilities to defend against terrorism and defeating chemical, biological and nuclear weapons of mass destruction; and
	•	Developing a “Global Information Grid” of sensors and networks designed to provide U.S. forces with a superior capability to collect, process and disseminate information in a secure environment.

	•	Leverage our strong set of complementary capabilities to win larger and more complex contracts. We have an extensive history of providing information-based solutions for mission-critical systems supporting intelligence and defense-related U.S. government agencies. We expect our experience, differentiating technologies, enhanced systems design and development skills and personnel resources to position us to compete effectively to win larger and more comprehensive U.S. government contracts. For example, we recently defeated a large incumbent contractor to win a $154 million contract to provide a broad range of services regarding information technology and network infrastructure related to the U.S. Navy’s development of weapons systems.
	•	Maintain technical leadership by retaining and attracting highly-skilled employees and enhancing our research and development efforts. We intend to continue to retain and recruit highly-skilled and security-cleared technical professionals, including engineers, scientists, analysts, technicians and support specialists who are attracted by the challenging nature and national significance of our work. These talented individuals ensure we have the knowledge base to continue to build our expertise in the design, development, deployment, operation and protection of mission-critical information solutions for our customers. We will also continue to focus our research and development efforts to maintain our proprietary leading-edge technical position in high-value areas such as network security, knowledge discovery and decision support and ISR, both through U.S. government-funded contracts and internal research and development.
	•	Pursue selected strategic acquisitions. We intend to enhance and to expand our core capabilities and to broaden our customer base by selectively pursuing strategic acquisitions. We have substantial experience in identifying, acquiring and integrating information-based systems companies that possess differentiating technologies, long-standing customer relationships and strong competitive positions in growth markets. We will continue to be highly selective in our acquisition program, pursuing only those companies that strengthen our core capabilities, expand our presence in new mission-critical segments and provide opportunities in high-growth information-based markets.

Our Core Capabilities

      The following are offerings for each of our core capabilities.

     Network Security and Enterprise Protection

      Intrusion Prevention, Detection and Response. We provide solutions that protect networks on a 24x7 basis through a system of firewalls and security applications that monitor systems, detect intrusions and

5

Table of Contents

      Threat and Risk Assessment. We provide services to test network and enterprise security status, specifically for vulnerability to potential threats, and provide consultation services regarding the required security upgrades and implementations.

      Information Operations. We develop and deploy a broad range of information tools to combat cyber aggression and other threats, including high-level planning, intelligence analysis, forensic analysis, attack signature identification and technical implementation.

      Computer Forensics and Emergency Response. We provide tools and techniques to determine the impact to digital systems of intrusions or unauthorized activity, as well as provide services for the rapid recovery of digital media to sustain business operations.

      Multi-Level Secure Communications. We provide technologies and systems that permit simultaneous access to data and applications involving different levels of security classification and authorization on a single protected system.

      Security Policy and Administration. We develop and implement policies to ensure the availability, safety and integrity of enterprise applications to include applications for both cyber and physical security.

     Intelligence, Surveillance and Reconnaissance (ISR)

      Remote Sensing Technology and Systems. We research, develop and deploy leading-edge sensors which collect information about a target or a geographic region from remote aircraft and spacecraft to provide valuable, timely information to intelligence analysts or battlefield planners.

      Sensor Processing and Exploitation. We develop tools to extract useful information from remotely-sensed images or other data products, including techniques to enhance images and computer methods to automate target detection and identification.

      Data Collection Management. We develop and deploy tools and systems for the optimal scheduling of complex constellations of satellite-based data collection sensors in space.

      Modeling and Simulation. We develop models to predict sensor and total ISR system performance and their effectiveness in realistic operational scenarios.

     Knowledge Discovery and Decision Support

      Data Mining and Event Correlation. We develop, deploy and operate systems that allow customers to gather and analyze large volumes of data and detect unseen patterns or abnormalities through the application of sophisticated techniques such as customized data algorithms, neural networks and multiple regression models.

      Data Warehousing. We develop and deploy systems that combine separate databases and files into a single logical entity, primarily for databases and files that may not have been designed to work together, improving the effectiveness of a customer’s mission-critical operations.

      Multi-Source Data Fusion. We provide capabilities to combine data from distinctly different sources, such as radar and optical sensors, into a common model for intelligence analysis and decision making.

     Chemical, Biological and Nuclear Detection

      Detection Technology Research. We develop sensor technologies that detect chemical and biological agents and nuclear contaminants, materials and weapons.

      Monitoring Systems. We design, develop and deploy nuclear detection systems to support counterproliferation requirements and national security needs.

6

Table of Contents

      Incident Response Systems. We design and develop systems that merge collection, analysis, assessment, and decision aids into a comprehensive system to support authorities in responding to natural and man-made disasters.

     Network and Enterprise Management

      Network Design, Implementation and Operation. We provide end-to-end network services including network design services, Local Area Network design, Wide Area Network design, total network support, network and telecommunications engineering, network operations, technology upgrades, security and system maintenance support.

      Training and Simulation Systems. We design, create and integrate large, network-based computer models that simulate the complex environment of military operations, providing a realistic training environment for senior battlefield commanders and their staffs.

      Development and Management of Network and Enterprise Operations Centers. We develop operations centers to improve network and enterprise efficiency by instrumenting and measuring network performance and by providing quantitative data to enable decision-making in support of the enterprise mission and its infrastructure. We manage these centers on a 24x7 basis for our customers.

      Information Systems Integration. We integrate new hardware and software platforms with existing computer networks, upgrade communication protocols and interfaces, ensure systems compatibility and migrate applications to new operating systems and platforms all to improve network system reliability, availability and security.

      Software Engineering and Life Cycle Management. Our software engineers develop business, scientific and system applications over a wide spectrum of operating systems and hardware platforms, with an emphasis on distributed client/server database applications.

      Office Automation and Groupware Applications. We define and create custom applications for our customers to facilitate their unique business processes using modern software development and database tools. We use state-of-the-art tools and web-enabling technology to help our customers do business on the Internet.

      Help Desk Operations. We operate a number of help desks for our customers, using an “insourcing” partnership-based approach reinforced with service level agreements to ensure we maintain high levels of customer satisfaction at a low cost.

     Systems Engineering Services

      Spacecraft and Aircraft Research, Development, Testing and Evaluation. We provide expert systems engineering analysis, tools, techniques and models to support the research, development, test and evaluation of the U.S. government’s spacecraft, aircraft, and missile programs.

      Systems Life Cycle Support. We provide expert engineering support for all phases of design, development and operations of major national intelligence systems.

      Systems Support for U.S. Navy Surface Fleet. We provide engineering, design and installation services to upgrade U.S. Navy ships with modern command, control, communications and computer systems.

      Modeling and Simulation for Systems Acquisition Support. We develop models and simulations and perform engineering and operational analyses to support the Department of Defense’s weapons systems acquisition processes from early concept development to full system production.

      Intelligent Transportation Systems. We develop vehicle-based technologies to make vehicles safer and to add “smart” technologies to vehicles in order to provide more effective and efficient emergency responses.

7

Table of Contents

Backlog

      Many of our contracts, primarily with the U.S. government, extend over multiple years. In many cases our contracts include unexercised options. The amount included in “funded” backlog is for orders for which funding is appropriated and allocated to the contract by the purchasing agency. Because the U.S. government operates under annual appropriations, our customers typically fund contracts on an incremental basis, generally for periods of one year or less. Accordingly, a significant amount of our backlog is “unfunded.” We include in unfunded backlog an estimate of future funding that we expect to receive on signed contracts.

      Our backlog consists of the following approximate amounts at the dates specified:

      We believe that year-to-year comparisons of backlog are difficult and not necessarily indicative of future revenues from backlog. The actual timing of revenues on projects included in backlog could change because many factors affect the scheduling of projects. In addition, cancellation or adjustments to contracts may occur. Backlog is typically subject to large variations from quarter to quarter as existing contracts are renewed or new contracts are awarded. Also, a significant amount of our contract work is performed on contracts with a duration of one year or less. In many cases these contracts or task orders represent recurring short-term extensions of work that has been performed for many years with a customer. We estimate that approximately $1.7 billion of our backlog at December 31, 2002 will not be filled in 2003.

Sales and Marketing

      Much of our business development and sales and marketing activities are executed by line management. In addition, we have approximately 30 individuals skilled in those professional disciplines and possessing relevant technical expertise who are focused solely on business development and marketing. Our sales and marketing efforts focus on well-coordinated single sales objective pursuits and key account management led by seasoned business development professionals and staffed by teams of business development, senior management and program management personnel. We market and sell our services by leveraging long-term customer relationships, responding to competitive solicitations, capitalizing on our IDIQ contracts, attending marketing events and engaging in branding activities.

      To supplement or complement our domain expertise, we have teaming relationships to work together on contracts with various industry partners. While we are often the prime contractor on our contracts, we are a subcontractor when teaming furthers our goals of expanding our customer base or pursuing high-growth markets.

Research and Development

      We maintain a staff of engineers, other scientific professionals and support personnel engaged in the development of new applications of technology and improvement of existing products. These programs’ costs are expensed as incurred. Veridian-funded research and development expenditures were $5.8 million in 2000, $6.2 million in 2001 and $5.9 million in 2002. The majority of our research and development activities during 2002 were customer-funded, and as such were paid for through contract revenues with an associated expense in operating expenses.

Recent Corporate History

      On September 24, 2002, we acquired SIGNAL Corporation (subsequently renamed Veridian IT Services, Inc.), a leading provider of information technology and engineering services, for $227 million in cash

8

Table of Contents

	•	Department of Defense (approximately 55% of SIGNAL’s 2002 revenues), including all of the U.S. military services; and
	•	Civil agencies (approximately 43% of SIGNAL’s 2002 revenues), including the Department of Transportation, the Department of Justice, the Coast Guard, the Federal Energy Regulatory Commission, the Federal Aviation Administration, the U.S. Customs Service, and the U.S. Senate.

      Financing for the acquisition consisted of available cash, $25 million of seven-year subordinated notes bearing interest initially at 9.50% and increasing thereafter and borrowings under our credit facility. We expanded our credit facility from $200 million to $360 million, including a six-year $270 million term loan and a five-year $90 million revolving line of credit.

      In June 2002, we sold substantially all of the net assets and operations of our wholly-owned subsidiary, Veritect, Inc. (subsequently renamed Veridian Commercial Operations, Inc.), to RedSiren Technologies, Inc. for $0.5 million in cash. We have recognized a cumulative loss of $8.7 million, net of income tax benefits.

Government Contracting and Regulatory Processes

      The government contracting process differs in many ways from commercial contracting, and involves a high degree of U.S. government regulation and oversight.

     Contracting Processes

      The Competition in Contracting Act of 1984 requires agencies to attain “full and open competition” in selecting companies to perform their contracts. If a U.S. government agency has a requirement for services valued above $25,000, it announces its requirements on an electronic bulletin board. Interested contractors submit information indicating their desire to perform the required services. The agency then solicits competitive proposals or bids from qualified contractors by providing them with a formal request for a proposal, or RFP, or similar solicitation. The RFP is an extensive document describing the desired services and terms and conditions that will form the final agency contract. The RFP includes the evaluation criteria the agency will use to select a contractor for the contract. Bidders then submit proposals in response to the RFP, and the agency evaluates all the proposals, asks for clarifications and engages in discussions with bidders if necessary. Agencies are encouraged to award contracts on a “best value” basis. This means that the contractor selected for the award should, in the agency’s judgment, provide the greatest overall benefit in response to the requirement, including technical merit, cost and relevant past performance considerations. This process can sometimes take a year or more.

      In some cases, full and open competition is not required. Depending upon the circumstances, contracts can be awarded to us or other contractors on a “sole-source” basis. This can occur when the agency’s need for the services is of such an unusual and compelling urgency that the U.S. government would be seriously injured unless the agency is permitted to limit the number of sources from which it solicits bids or proposals. A contract can also be awarded to a contractor on a sole-source basis when the services needed by the agency are available from only one responsible source or only from a limited number of responsible sources and no other type of services will satisfy the needs of the agency. From time to time, we are awarded contracts on a sole-source basis.

      Several statutory and regulatory changes have significantly altered U.S. government procurement practices in recent years, increasing the number of procurement “vehicles” available to U.S. government customers to satisfy their requirements. U.S. government agencies are now more likely to use flexible contract

9

Table of Contents

      In addition to the MAS Program, we also hold other multiple award contracts with individual agencies called indefinite delivery, indefinite quantity, or IDIQ, contracts. IDIQ contracts (also known as task order contracts) are essentially umbrella contracts that set forth the basic terms and conditions under which the agency may order goods and services from one, and in some cases, more than one, contractor. Typically, these contracts will also specify the labor or skill categories that the U.S. government agency believes are necessary to perform the necessary contract work and may also specify the labor rates applicable for each contract labor and/or skill category. Federal law establishes a preference for multiple award IDIQ contracts. IDIQ contracts do not obligate the U.S. government to purchase goods or services above the minimum levels set forth in the contract. When task orders over $100,000 are issued under multiple award IDIQ Department of Defense contracts, each awardee is entitled to fair notice of the U.S. government’s requirement, a fair opportunity to submit a bid for the task order and fair consideration of any bid it submits. The agency desiring contract services will conduct a limited best value competition among the interested awardees, resulting in the issuance of a task order to a single contractor.

      A task order calls for a specific set of services to be delivered by the contractor to a particular customer agency. Based on our experience, the key factors in bidding successfully for these task orders are technical merit, cost, relevant past performance considerations and customer trust. Our experience has also been that after winning a task order and providing the requested services, we will often receive successive task orders from the same agency for follow-on services as long as our customer is satisfied with our work. From time to time, we are also party to Government-Wide Agency Contracts, which are IDIQ contracts that permit the aggregation of multiple agencies’ requirements in a single contract in order to encourage contractors to offer the best possible prices and to reduce the costs associated with multiple acquisitions.

     Types of Contracts

      We hold essentially three different types of U.S. government contracts, each of which involves a different payment methodology and degree of risk of the cost of performance. These types of contracts are typically referred to as cost reimbursable, or “cost-plus,” contracts, time-and-materials contracts and fixed-price contracts. Each of these contract types is described below.

      Cost-Plus Contracts. Cost-plus contracts provide for reimbursement of costs, to the extent that such costs are reasonable, allowable and allocable to the contract and for the payment of a “fee,” which essentially represents the profit margin negotiated between the contractor and the contracting agency. Cost-plus incentive fee and cost-plus award fee contracts provide for increases or decreases in the contract fee, within specified limits, based upon actual results as compared to contractual targets for factors such as cost, quality, schedule and performance. The fee is generally either fixed at the time of award (fixed fee) or is awarded based on performance at the sole discretion of the U.S. government (award fee). Contracts may require completion of defined tasks or performance of a specific number of hours of service. Our total cost incurred on our cost-plus contracts cannot exceed the funded cost ceiling set forth in the contract without the approval of the agency. If a contracted task has not been completed or the specific number of hours of service have not been performed at the time the authorized cost is expended, we may be required to complete the work and be reimbursed for the additional costs with no increase in fee or the fee may be reduced proportionately to the number of hours actually provided. Even though cost-plus contracts are generally thought to involve a relatively low degree of

10

Table of Contents

      Time-and-Materials Contracts. Under a time-and-materials contract, our compensation is based on a fixed hourly rate established for specified labor or skill categories. We are paid at the established hourly rates for the hours we expend performing the work specified in the contract. Labor costs, overhead, general and administrative costs and profit are included in the fixed hourly rate. Materials, subcontractors, travel and other direct costs are reimbursed at actual costs plus an amount for material handling. We make critical pricing assumptions and decisions when developing and proposing time-and-materials labor rates and risk loss of profitability if our actual costs exceed the costs incorporated into the fixed hourly labor rate. One variation of a standard time-and-materials contract is a time-and-materials, award fee contract. Under this type of contract, the profit or “fee” we earn is determined based on a combination of our internal cost control and the quality of our performance, which is determined at the sole discretion of the U.S. government.

      Fixed-Price Contracts. In a fixed-price contract, we must complete the work to receive the price, which is fixed and is not affected by the cost of performance. Thus, if the costs are greater than the price, we will suffer a loss; on the other hand, the lower our costs, the greater our profits. Since we agree to accept the cost risk for the contract, there is greater risk involved with performing the contract, but also the possibility of receiving higher profit margins than those recognized on cost-plus and time-and-materials contracts if work is performed or products are developed more efficiently than anticipated.

      The following table sets forth the percentage of our revenues derived from each type of contract for the three prior years.

(1)	Pro Forma to include revenues of SIGNAL Corporation for the period prior to the date of our acquisition (from January 1, 2002 to September 23, 2002).

     Payment Processes

      Almost all of our payments ultimately come from U.S. government agencies. An account receivable from an agency enjoys the overall creditworthiness of the U.S. government. We normally invoice our customers on a monthly basis, but can invoice our customers bi-weekly under certain cost-plus and time-and-materials contracts. Fixed-price contracts are often “financed” by the agency in the form of periodic progress or milestone payments made to us. Under the Prompt Payment Act, certain payments from U.S. government agencies must be made within 30 days of final invoice approval, or interest must be paid. We receive most of our payments from agencies via electronic funds transfer, further reducing unreasonably long accounts receivable aging periods. Final payments on U.S. government contracts are made after U.S. government audit agencies complete their reviews of the contract.

     Laws and Regulations Affecting Our Business

      U.S. government contracts are subject to a number of federal statutes, the Federal Acquisition Regulation, or FAR, and agency supplements to the FAR. The FAR contains several regulations that affect us significantly.

      The Anti-Deficiency Act prohibits U.S. government employees from committing U.S. government funds, by contract or otherwise, in excess or in advance of appropriations, unless authorized by some specific statute. Thus, work on our contracts may be limited by the availability of funds. Since Congress usually appropriates funds on a fiscal year basis, many of our contracts are incrementally funded by the agency as Congress makes appropriations for future fiscal years. Additionally, the U.S. government uses FAR clauses, such as the

11

Table of Contents

      Disappointed bidders and firms excluded from competition for U.S. government contracts and task orders can avail themselves of FAR and General Accounting Office bid protest remedies by submitting an objection to the contracting officer or General Accounting Office within specified time limits. The U.S. Court of Federal Claims also has bid protest jurisdiction. Contract performance can be suspended while a protest is pending and the contract can be terminated if found to have been improperly awarded.

      Larger contracts may also be subject to the Truth in Negotiations Act and Cost Accounting Standards. The Truth in Negotiations Act requires us to provide current, accurate and complete cost or pricing data in connection with the negotiation of a contract, modification or task order that is not subject to full and open competition. Cost Accounting Standards require consistency of accounting practices over time and compliance with specific cost accounting criteria. FAR Part 31, “Contract Cost Principles and Procedures,” sets forth the rules regarding the allowability and allocability of costs incurred in connection with U.S. government contracts.

      The FAR Changes Clause, prescribed by FAR Subpart 43.2, permits a contracting officer to make unilateral changes within the general scope of this contract at any time, by written order, in a number of contract areas. If any such change causes an increase or decrease in the estimated cost of, or the time required for, performance of any part of the work under a changed contract, or otherwise affects any other terms and conditions of the contract, the contracting officer must make an equitable adjustment in the estimated cost, delivery or completion schedule, or both, the amount of any fixed fee, and other affected terms, and modify the contract accordingly.

      The U.S. government makes efforts to avoid awarding contracts to companies that may have an organizational conflict of interest, or OCI. FAR Subpart 9.5 describes the situations that may result in an OCI and provides guidance to contracting officers in order to avoid and/or mitigate an actual or potential OCI. An OCI involves a situation that arises or might arise because the nature of the work to be performed by a contractor may, absent some restriction on future activities, result in an unfair competitive advantage to the contractor, impair the contractor’s objectivity in performing the contract work or make the contractor potentially unable to render impartial assistance or advice to the U.S. government. The contracting officer is responsible for resolving any significant potential OCIs before a contract award is made. We have a company-wide policy regarding acceptance of and compliance with contractual OCI provisions and a database in which OCI restrictions are logged.

      To the extent that we fail to comply with procurement requirements, the U.S. government may demand an adjustment in contract prices. Additionally, changes in cost accounting practices are subject to a required procedure for determining the cost impact of the change. The U.S. government is protected from paying increased costs resulting from a contractor’s accounting changes.

      Our books and records are subject to audit by the Defense Contract Audit Agency, or DCAA, and other audit agencies, to ensure that the costs and hourly rates for which we invoice the U.S. government under cost-plus and time-and-materials contracts are in compliance with the Cost Principles, Cost Accounting Standards and FAR invoicing regulations. These audits can result in adjustments to contract costs and fees as well as penalties and interest costs. The U.S. government retains a portion of the fee earned by us under cost-plus contracts until contract completion and audit by the DCAA. Audits of our business units by the DCAA have been completed for all fiscal years through 1998 without material adjustments. In the opinion of management, the audits for fiscal years 1999 and beyond will not result in adjustments that would have a material adverse effect on our financial position or results of operations; however, future material adjustments are possible. Additionally, our GSA MAS work is subject to audit by the GSA Inspector General to ensure that we are in compliance with the most favored customer, price reductions and other provisions in our GSA MAS contracts.

12

Table of Contents

Competition

      Our key competitors include divisions of large defense contractors such as The Boeing Company, Computer Sciences Corporation, Jacobs Engineering Group, Inc., Lockheed Martin Corporation, Northrop Grumman Corporation, Raytheon Company and Science Applications International Corporation, as well as a number of smaller U.S. government contractors with specialized capabilities. Because of the diverse requirements of our U.S. government customers and the highly competitive nature of large procurements, corporations frequently form teams to pursue contract opportunities. The same companies listed as competitors will, at times, team with us or subcontract to us in the pursuit of new business.

      We believe that the major competitive factors that affect our ability to compete are technical competencies, knowledge of the customer and their specific needs, the results of past performance on similar engagements, our reputation, key management and technical personnel, number and level of security clearances and price. Although we believe that we compare favorably with our competitors based on these factors, we may not maintain our competitive position against current or potential competitors. Some of our competitors have longer operating histories, significantly greater research and development capabilities and financial, technological, marketing and human resources, greater name recognition and a larger customer base than we have.

Proprietary Rights

      Although we have patents, our operations are not substantially dependent on these patents. We also rely extensively on a combination of copyright law, trade secret law, confidentiality procedures and contractual provisions to protect our proprietary rights. Because the U.S. government cannot be enjoined from using patented inventions, our patents would not bar competitors from our government markets. In addition, when the U.S. government directly funds research and development by its contractors, it generally obtains licenses to use resulting patents, copyrights and data for government purposes, and sometimes for all purposes, including through other contractors. We believe that the technological and creative skills of our personnel, new software tool developments, frequent software tool and service enhancements, name recognition and professional services capabilities are essential to establishing and maintaining a technology leadership position. Our competitors may independently develop technologies that are similar to ours or may duplicate any technology developed by us, or our technology could infringe upon the patent rights of others.

      Despite our efforts to protect our proprietary rights, unauthorized parties may copy or use aspects of our technology or obtain and use inventions, works or information that we regard as proprietary. Policing unauthorized use of our technology is difficult. We have not sought patents in foreign countries to the same extent as in the United States. Litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement or invalidity. This type of litigation could result in substantial costs and diversion of resources and could have an adverse effect on our business. To date we have not been notified that technologies we have developed infringe the proprietary rights of any third parties, but third parties may, in the future, claim that our current or future technologies infringe upon their proprietary rights.

Employees

      We currently employ more than 7,100 employees, including computer scientists, software development engineers, systems analysts, scientists, engineers, technicians and mission specialists. Fifty-six of our employees are represented by a collective bargaining agreement, which expires on May 8, 2004. We have not experienced any work stoppages and believe that we have a good relationship with our employees.

Subcontractors

      The competitive and complex nature of our business often leads us to subcontract a portion of the scope of work under a contract. At times we must rely on our subcontractors to fill critical roles in the completion of our contract services. While approximately 18% of our sales for 2002 were attributable to work performed by subcontractors, we are not dependent upon any one subcontractor or group of subcontractors for providing any

13

Table of Contents

Environmental, Health and Safety Matters

      Some of our operations, particularly those in connection with our test and evaluation facilities in Ashford and Buffalo, New York, are subject to environmental, health and safety regulations and similar standards contained in our contracts with the U.S. government. At these facilities, activities include aircraft testing and simulations, supersonic wind tunnel and hyper-sonic shock tunnel testing and chemical agent and military ordnance testing for the U.S. government. The nature of these activities is inherently dangerous. As a result, we risk incurring liability for personal injuries, death and contamination of the environment in the event of an accidental explosion or chemical release. All or some of these costs could be disallowed as charges (i) under U.S. government contracts, (ii) in excess of any applicable insurance limits or (iii) not covered by insurance. For example, we do not maintain insurance for environmental liabilities.

Risk Factors

      Certain statements in this annual report contain or are based on “forward-looking” information (that Veridian believes to be within the definition in the Private Securities Litigation Reform Act of 1995) and involve risks and uncertainties, many of which are outside of our control. Words such as “may,” “will,” “intends,” “should,” “expects,” “plan,” “projects,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue,” or “opportunity,” or the negative of these terms or words of similar import, are intended to identify forward-looking statements.

      These forward-looking statements are subject to known and unknown risks and uncertainties, which could cause actual results to differ materially from those anticipated, including, without limitation: adverse changes in U.S. government spending priorities; failure to retain existing U.S. government contracts or win new contracts; failure to obtain task orders under U.S. government contracts; failure to obtain funding under U.S. government contracts; risks of contract performance; risks of contract termination, either for default or for the convenience of the U.S. government; adverse results of U.S. government audits of our U.S. government contracts; and risks associated with complex U.S. government procurement laws and regulations. These and other risk factors are more fully discussed below, and from time to time in Veridian’s other filings with the Securities and Exchange Commission, including among others, its reports on Form 8-K and Form 10-Q.

      The forward-looking statements included in this annual report are only made as of the date of this annual report and we undertake no obligation to publicly update any of the forward-looking statements made herein, whether as a result of new information, subsequent events or circumstances, changes in expectations or otherwise.

Risks Related to Our Industry

We depend on contracts with the U.S. government for substantially all of our revenues and the loss or impairment of this relationship could adversely affect our business.

      Our revenues would decline substantially if the U.S. government, or a significant U.S. government department or agency, ceases to use, or uses less of, our services. For the year ended December 31, 2002, we derived approximately 95% of our revenues from contracts with U.S. government agencies. We expect that U.S. government contracts will continue to be the primary source of our revenues for the foreseeable future. Many of our U.S. government customers are under stringent budgetary constraints. The factors that could

14

Table of Contents

	•	budget constraints affecting U.S. government spending generally, or specific departments or agencies (such as the intelligence agencies and the Department of Defense), and changes in fiscal policies or available funding;
	•	changes in U.S. government programs or requirements;
	•	curtailment of the U.S. government’s use of technology services providers;
	•	the adoption of new laws or regulations pertaining to U.S. government procurement;
	•	U.S. government appropriations delays or shutdowns;
	•	suspension or prohibition from contracting with the U.S. government or any significant agency in the intelligence or defense community; and
	•	impairment of our reputation or relationships with the U.S. government or any significant agency in the intelligence or defense community.

      These or other factors described separately below could cause U.S. government agencies to decrease the amount of business they do with us, to exercise their rights to terminate contracts or not to exercise options to renew contracts, any of which could have a material adverse effect on our business, prospects, financial condition and results of operations. In particular, the factors affecting our reputation or relationship with our customers could have a material adverse effect on our business, prospects, financial conditions and results of operations.

U.S. government spending priorities may change in a manner adverse to our business.

      Our business depends upon continued U.S. government expenditures on intelligence and defense programs. A significant decline in overall spending or the loss of or substantial decline in spending on a large program in which we participate could materially adversely affect our business. The U.S. intelligence and defense budgets generally, and spending in specific agencies with which we work, such as intelligence agencies and the Department of Defense, have declined from time to time for extended periods since the mid-1980s, resulting in program delays, program cancellations and a slowing of new program starts. Although spending on intelligence and defense-related programs by the U.S. government has recently increased, particularly since the terrorist attacks on September 11, 2001, future levels of expenditures and authorizations for those programs may decrease, remain constant or shift to programs in areas where we do not currently provide services. Moreover, even though our contract periods of performance for a program may exceed one year, Congress must usually approve funds for a given program each fiscal year and may significantly reduce funding of a program in a particular year. Significant reductions in these appropriations by Congress or the award level of new defense contracts may affect our ability to complete contracts, obtain new work and grow our business. A significant decline in intelligence or defense expenditures, or a shift of expenditures to programs in areas where we do not currently provide services, could have a material adverse effect on our business, prospects, financial condition and results of operations.

      Congress does not always enact spending bills by the beginning of the new fiscal year. In the current fiscal year 2003, Congress did not pass eleven of the thirteen annual appropriations bills until the fifth month of the year. These delays tend to leave the affected agencies under-funded as long as the delays persist. Future delays and uncertainties in funding would impose additional business risks on us.

      The Department of Homeland Security, bringing together twenty-two U.S. government agencies, remains in its organizational and integration stages. The department’s spending priorities, and the pace of homeland security spending, remain particularly uncertain at this time. A significant delay or decline in homeland security expenditures, or a shift of expenditures to programs in areas where we do not currently provide services, could have a material adverse effect on our business, prospects, financial condition and results of operations.

15

Table of Contents

Our contracts with the U.S. government may be terminated or adversely modified prior to completion, which could adversely affect our business.

      U.S. government contracts generally contain provisions and are subject to laws and regulations that give the U.S. government rights and remedies not typically found in commercial contracts, including providing the U.S. government with the ability to unilaterally:

	•	terminate our existing contracts;
	•	reduce the value of our existing contracts;
	•	modify some of the terms and conditions in our existing contracts;
	•	suspend or permanently prohibit us from doing business with the U.S. government or with any specific U.S. government agency;
	•	control and potentially prohibit the export of our products;
	•	cancel existing multi-year contracts and related orders if the necessary funds for contract performance for any subsequent year are not appropriated by Congress;
	•	decline to exercise an option to extend an existing multi-year contract; and