Form 10-Q for ANTEON INTERNATIONAL CORPORATION filed on May 15, 2001
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
--------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 333-84835
ANTEON INTERNATIONAL CORPORATION
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(Exact name of registrant as specified in its charter)
Virginia 54-1023915
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3211 Jermantown Road, Fairfax, Virginia 22030-2801
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(Address of principal executive office)
(Zip Code)
(703) 246-0200
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(Registrant's telephone number, including area code)
Not Applicable
- -------------------------------------------------------------------------------
(Former name, former address, and former fiscal year, if
changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
As of the close of business on March 31, 2001, there were 14,266,128 outstanding
shares of the registrant's common stock, par value $.05 per share.
CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS AS OF
MARCH 31, 2001 AND DECEMBER 31, 2000 1
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000 2
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000 3
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 14
PART II. OTHER INFORMATION REQUIRED IN REPORT
ITEM 1. LEGAL PROCEEDINGS 18
ITEM 2. CHANGES IN SECURITIES 18
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS 18
ITEM 5. OTHER INFORMATION 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 18
i
PART I. FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ANTEON INTERNATIONAL CORPORATION AND SUBSIDIARIES
(A majority-owned subsidiary of Azimuth Technologies, Inc.)
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
March 31, 2001
(Unaudited) December 31, 2000
-------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 3,225 $ 928
Accounts receivable, net 137,458 132,369
Prepaid expenses and other current assets 10,775 8,605
Deferred taxes 3,955 3,621
--------- ---------
Total current assets 155,413 145,523
Property and equipment, net 16,440 17,974
Goodwill, net 139,057 140,482
Other assets, net 16,741 17,547
--------- ---------
Total assets $ 327,651 $ 321,526
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Term loan, current portion $ 11,250 $ 8,437
Subordinated notes payable, current portion 4,693 4,558
Business purchase consideration payable 1,087 1,075
Accounts payable 28,621 23,232
Accrued expenses 48,059 46,682
Income taxes payable 587 531
Deferred revenue 5,147 6,489
Other current liabilities, net 2,185 186
--------- ---------
Total current liabilities 101,629 91,190
Revolving credit facility 38,200 32,000
Term loan facility, less current portion 43,201 51,563
Senior subordinated notes payable 100,000 100,000
Subordinated notes payable, less current portion 2,104 2,044
Deferred tax liabilities, net 8,578 9,212
Other long term liabilities 868 859
--------- ---------
Total liabilities 294,580 286,868
Minority interest in subsidiaries 602 601
Stockholders' equity:
Common stock 713 713
Additional paid-in capital 40,313 40,294
Accumulated other comprehensive income (loss):
Foreign currency translations (19) 37
Interest rate swaps (1,228) --
Treasury stock (9) (9)
Due from parent (9,123) (8,810)
Retained earnings 1,822 1,832
--------- ---------
Total stockholders' equity 32,469 34,057
--------- ---------
Total liabilities and stockholders' equity $ 327,651 $ 321,526
========= =========
See accompanying notes to unaudited condensed consolidated financial statements.
1
ANTEON INTERNATIONAL CORPORATION AND SUBSIDIARIES
(A majority-owned subsidiary of Azimuth Technologies, Inc.)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS)
For the three months ended
March 31,
---------------------------
2001 2000
--------- ---------
Revenues $ 162,366 $ 125,700
Costs of revenues 143,154 109,479
--------- ---------
Gross profit 19,212 16,221
Operating expenses:
General and administrative expenses, excluding
acquisition related costs, below 10,905 9,095
Amortization of noncompete agreements 209 227
Goodwill amortization 1,446 1,209
Other intangibles amortization 546 --
Cost of acquisitions -- 17
--------- ---------
Total operating expenses 13,106 10,548
--------- ---------
Operating income 6,106 5,673
Interest expense, net of interest income of $91 and $71,
respectively 5,956 5,403
Minority interest in (earnings) losses of subsidiaries (1) 3
--------- ---------
Income before provision for income taxes 149 273
Provision for income taxes 159 142
--------- ---------
Net income (loss) $ (10) $ 131
========= =========
See accompanying notes to unaudited condensed consolidated financial statements.
2
ANTEON INTERNATIONAL CORPORATION AND SUBSIDIARIES
(A majority-owned subsidiary of Azimuth Technologies, Inc.)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
For the three months ended March 31,
------------------------------------
2001 2000
------------ ---------------
OPERATING ACTIVITIES:
Net income (loss) $ (10) $ 131
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization of property and equipment 2,276 1,105
Amortization of noncompete agreements 209 227
Goodwill amortization 1,446 1,209
Other intangibles amortization 546 --
Amortization of deferred financing fees 295 295
Loss (gain) on disposals of property and equipment 1 --
Deferred income tax expense (benefit) (149) 200
Minority interest in earnings (losses) of subsidiaries 1 (3)
Changes in assets and liabilities (1,966) 683
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,649 3,847
--------- ---------
INVESTING ACTIVITIES:
Purchases of property, equipment and other assets (629) (1,142)
Acquisitions, net of cash acquired (21) --
Other, net -- (17)
--------- ---------
NET CASH USED FOR INVESTING ACTIVITIES (650) (1,159)
--------- ---------
FINANCING ACTIVITIES:
Principal payments on notes payable (59) (88)
Principal payments on term loan facility (5,549) --
Proceeds from revolving credit facility 164,500 102,500
Principal payments on revolving credit facility (158,300) (104,400)
Proceeds from issuance of common stock 19 10
Advances to parent for debt service (313) --
--------- ---------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 298 (1,978)
--------- ---------
CASH AND CASH EQUIVALENTS:
Net increase in cash and cash equivalents 2,297 710
Cash and cash equivalents, beginning of period 928 1,061
--------- ---------
Cash and cash equivalents, at end of period $ 3,225 $ 1,771
========= =========
Supplemental disclosure of cash flow information:
Interest paid $ 2,597 2,092
Income taxes paid (refunded) (89) 63
========= =========
See accompanying notes to unaudited condensed consolidated financial statements.
3
ANTEON INTERNATIONAL CORPORATION AND SUBSIDIARIES
(A majority-owned subsidiary of Azimuth Technologies, Inc.)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001 AND 2000
(1) BASIS OF PRESENTATION
The information furnished in the accompanying unaudited Condensed
Consolidated Balance Sheets, Condensed Consolidated Statements of Operations,
and Condensed Consolidated Statements of Cash Flows have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information. In the opinion of management, such
information contains all adjustments, consisting only of normal recurring
adjustments, considered necessary for a fair presentation of such information.
The operating results for the three months ended March 31, 2001 may not be
indicative of the results of operations for the year ending December 31, 2001 or
any future period. This financial information should be read in conjunction with
the Company's December 31, 2000 audited consolidated financial statements and
footnotes thereto filed on Form 10-K.
2) PRO FORMA RESULTS FOR ACQUISITION OF SHERIKON, INC.
On October 20, 2000, the Company purchased all of the outstanding stock of
Sherikon Inc., a technology solutions and services firm based in Chantilly,
Virginia, for a total purchase price of approximately $34.8 million, including
transaction costs of approximately $861,000. Under the terms of the sale, the
total purchase price included, at closing, a cash payment of $20.8 million to
the shareholders of Sherikon, Inc., cash payments of approximately $5.2 million
to certain executives and employees of Sherikon, Inc. and subordinated notes
payable totaling $7.5 million, of which $5.0 million is due at the end of the
first year after closing and $2.5 million due at the end of the second year
after closing. The subordinated notes carry a 0% coupon rate. The present value
of the subordinated notes payable, using an assumed borrowing rate of 11.75%,
was approximately $6.5 million as of the date of purchase. In addition, the
Company guaranteed certain bonuses totaling approximately $1.75 million to
former Sherikon employees' payable in two installments on October 20, 2001 and
October 20, 2002. Such bonuses are not contingent on continued employment with
Sherikon, and the present value of such amount assuming an 11.75% discount rate,
of $1,503,000, has been recognized as additional purchase consideration. The
transaction was accounted for using the purchase method whereby the net tangible
and identifiable intangible assets acquired and liabilities assumed were
recognized at their estimated fair market values at the date of acquisition,
based on preliminary estimates by management. The identifiable intangible assets
were acquired contracts and workforce in place. These assets were valued, based
on an independent appraisal, at $1,310,000 and $760,000, respectively. Both have
expected useful lives of 4 years. Goodwill is being amortized on a straight-line
basis over twenty years.
4
The following unaudited pro forma summary presents consolidated
information as if the acquisition of Sherikon had occurred as of January 1,
2000, and the pro forma summary is provided for informational purposes only
and is based on historical information that does not necessarily reflect
actual results that would have occurred nor is it necessarily indicative of
future results of operations of the combined entities (in thousands):
Three Months Ended March 31,
2000
----------
Total revenues $ 140,421
Total expenses 140,427
----------
Net income (loss) $ (6)
==========
(3) COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) for the three months ended March 31, 2001 and
2000 was approximately $(665,000) million and $128,000, respectively.
Comprehensive loss for the three months ended March 31, 2001 is comprised of
foreign currency translation losses of $56,000 and decreases in the fair
value of interest rate swaps of $599,000, net of tax. Comprehensive income
for the three months ended March 31, 2000 included $3,000 of foreign currency
translation losses.
(4) DOMESTIC SUBSIDIARIES SUMMARIZED FINANCIAL INFORMATION
Under the terms of the Senior Subordinated Notes, the Company's
wholly-owned domestic subsidiaries (the "Subsidiary Guarantors") are guarantors
of the Senior Subordinated Notes. Such guarantees are full, unconditional and
joint and several. Separate unaudited condensed financial statements of the
Subsidiary Guarantors are not presented because the Company's management has
determined that they would not be material to investors. The following
supplemental financial information sets forth, on a combined basis, condensed
balance sheets, statements of operations and statements of cash flows
information for the Subsidiary Guarantors, the Company's non-guarantor
subsidiaries and for Anteon International Corporation.
5
AS OF MARCH 31, 2001
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CONSOLIDATED
ANTEON ANTEON
UNAUDITED CONDENSED CONSOLIDATED INTERNATIONAL GUARANTOR NON-GUARANTOR ELIMINATION INTERNATIONAL
BALANCE SHEETS CORPORATION SUBSIDIARIES SUBSIDIARIES ENTRIES CORPORATION
------------- ------------ ------------- ----------- -------------
(AMOUNTS IN THOUSANDS)
Cash and cash equivalents $ 1,442 $ 349 $ 1,434 $ -- $ 3,225
Accounts receivable, net 120,894 15,958 606 -- 137,458
Other current assets 13,065 839 826 -- 14,730
Property and equipment, net 14,800 1,566 74 -- 16,440
Due from parent (1,780) 2,390 (610) -- --
Investment in and advances to subsidiaries 92,633 -- -- (92,633) --
Goodwill, net 139,057 -- -- -- 139,057
Other assets, net 16,333 272 136 -- 16,741
--------- --------- --------- --------- ---------
Total assets $ 396,444 $ 21,374 $ 2,466 $ (92,633) $ 327,651
========= ========= ========= ========= =========
Indebtedness $ 199,448 $ 1,087 $ -- $ -- $ 200,535
Accounts payable 25,529 2,847 245 -- 28,621
Accrued expenses and other current
liabilities 44,795 5,306 730 -- 50,831
Deferred revenue 4,260 -- 887 -- 5,147
Other long-term liabilities 8,753 693 -- -- 9,446
--------- --------- --------- --------- ---------
Total liabilities 282,785 9,933 1,862 294,580
Minority interest in subsidiaries 549 (48) 101 602
Total stockholders' equity 113,110 11,489 503 (92,633) 32,469
--------- --------- --------- --------- ---------
Total liabilities and stockholders' equity $ 396,444 $ 21,374 $ 2,466 $ (92,633) $ 327,651
========= ========= ========= ========= =========
6
FOR THE THREE MONTHS ENDED MARCH 31, 2001
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CONSOLIDATED
ANTEON ANTEON
UNAUDITED CONDENSED CONSOLIDATED INTERNATIONAL GUARANTOR NON-GUARANTOR ELIMINATION INTERNATIONAL
STATEMENTS OF OPERATIONS CORPORATION SUBSIDIARIES SUBSIDIARIES ENTRIES CORPORATION
------------- ------------ ------------- ----------- -------------
(AMOUNTS IN THOUSANDS)
Revenues $ 142,213 $ 17,832 $ 2,752 $ (431) $162,366
Costs of revenues 124,015 17,046 2,524 (431) 143,154
--------- --------- --------- --------- ---------
Gross profit 18,198 786 228 -- 19,212
Total operating expenses 12,145 837 124 -- 13,106
--------- --------- --------- --------- ---------
Operating income (loss) 6,053 (51) 104 -- 6,106
Interest expense (income), net 5,923 40 (7) -- 5,956
Minority interest in earnings (losses) of
subsidiaries -- 18 (19) -- (1)
--------- --------- --------- --------- ---------
Income (loss) before provision for income
taxes 130 (73) 92 -- 149
Provision (benefit) for income taxes 152 (35) 42 -- 159
--------- --------- --------- --------- ---------
Net income (loss) $ (22) $ (38) $ 50 $ -- $ (10)
========= ========= ========= ========= =========
7
FOR THE THREE MONTHS ENDED MARCH 31, 2001
------------------------------------------------------------
CONSOLIDATED
ANTEON ANTEON
INTERNATIONAL GUARANTOR NON-GUARANTOR INTERNATIONAL
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS CORPORATION SUBSIDIARIES SUBSIDIARIES CORPORATION
------------- ------------ ------------- -------------
(AMOUNTS IN THOUSANDS)
Net income (loss) $ (22) $ (38) $ 50 $ (10)
Adjustments to reconcile change in net income (loss) to
net cash provided by operations:
Depreciation and amortization of property and equipment 1,204 1,067 5 2,276
Loss on disposals of property and equipment 1 -- -- 1
Goodwill amortization 1,446 -- -- 1,446
Other intangibles amortization 546 -- -- 546
Amortization of noncompete agreements 209 -- -- 209
Amortization of deferred financing fees 295 -- -- 295
Deferred income tax expense (benefit) (149) -- -- (149)
Minority interest in earnings (losses) of subsidiaries -- (18) 19 1
Changes in assets and liabilities (2,334) (681) 1,049 (1,966)
--------- --------- --------- ---------
Net cash provided by (used for) operating activities 1,196 330 1,123 2,649
--------- --------- --------- ---------
Cash flows from investing activities:
Purchases of property and equipment (319) (305) (5) (629)
Acquisitions, net of cash acquired (21) -- -- (21)
--------- --------- --------- ---------
Net cash used for investing activities (340) (305) (5) (650)
--------- --------- --------- ---------
Cash flow from financing activities:
Principal payments on notes payable (59) -- -- (59)
Proceeds from revolving loan facility 164,500 -- -- 164,500
Principal payments on revolving credit facility (158,300) -- -- (158,300)
Principal payments on term credit facility (5,549) -- -- (5,549)
Proceeds from issuance of common stock 19 -- -- 19
Advances to parent for debt service (313) -- -- (313)
--------- --------- --------- ---------
Net cash provided by financing activities 298 -- -- 298
--------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents 1,154 25 1,118 2,297
Cash and cash equivalents, beginning of year 288 324 316 928
--------- --------- --------- ---------
Cash and cash equivalents, at end of year $ 1,442 $ 349 $ 1,434 $ 3,225
========= ========= ========= =========
8
FOR THE THREE MONTHS ENDED MARCH 31, 2000
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CONSOLIDATED
ANTEON ANTEON
UNAUDITED CONDENSED CONSOLIDATED INTERNATIONAL GUARANTOR NON-GUARANTOR ELIMINATION INTERNATIONAL
STATEMENTS OF OPERATIONS CORPORATION SUBSIDIARIES SUBSIDIARIES ENTRIES CORPORATION
------------- ------------ ------------- ----------- -------------
(AMOUNTS IN THOUSANDS)
Revenues $ 48,277 $ 77,039 $ 754 $ (370) $ 125,700
Costs of revenues 43,699 65,458 692 (370) 109,479
--------- --------- --------- --------- ---------
Gross profit 4,578 11,581 62 -- 16,221
Total operating expenses 3,699 6,840 9 -- 10,548
--------- --------- --------- --------- ---------
Operating income 879 4,741 53 -- 5,673
Interest expense (income), net 5,364 36 3 -- 5,403
Minority interest in losses of subsidiaries -- -- 3 -- 3
--------- --------- --------- --------- ---------
Income (loss) before provision for income
taxes (4,485) 4,705 53 -- 273
Provision (benefit) for income taxes (1,780) 1,908 14 -- 142
--------- --------- --------- --------- ---------
Net income (loss) $ (2,705) $ 2,797 $ 39 $ -- $ 131
========= ========= ========= ========= =========
9
FOR THE THREE MONTHS ENDED MARCH 31, 2000
------------------------------------------------------------
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS CONSOLIDATED
ANTEON ANTEON
INTERNATIONAL GUARANTOR NON-GUARANTOR INTERNATIONAL
CORPORATION SUBSIDIARIES SUBSIDIARIES CORPORATION
------------- ------------ ------------- -------------
(AMOUNTS IN THOUSANDS)
Net income (loss) $ (2,705) $ 2,795 $ 39 $ 131
Adjustments to reconcile change in net income (loss) to
net cash provided by operations:
Depreciation and amortization of property and equipment 225 875 5 1,105
Goodwill amortization 1,209 -- -- 1,209
Amortization of noncompete agreements 227 -- -- 227
Amortization of deferred financing fees 295 -- -- 295
Deferred income taxes 200 -- -- 200
Minority interest in losses of subsidiaries -- (3) -- (3)
Changes in assets and liabilities 3,464 (2,673) (108) 683
--------- --------- --------- ---------
Net cash provided by (used for) operating activities 2,915 996 (64) 3,847
--------- --------- --------- ---------
Cash flows from investing activities:
Purchases of property and equipment (373) (768) (1) (1,142)
Acquisitions, net of cash acquired (17) -- -- (17)
--------- --------- --------- ---------
Net cash used for investing activities (390) (768) (1) (1,159)
--------- --------- --------- ---------
Cash flow from financing activities:
Principal payments on notes payable -- (88) -- (88)
Proceeds from revolving credit facility 102,500 -- -- 102,500
Principal payments on revolving credit facility (104,400) -- -- (104,400)
Initial capitalization of common stock 246 (246) --
Proceeds from issuance of common stock 10 -- -- 10
--------- --------- --------- ---------
Net cash used for financing activities (1,644) (334) -- (1,978)
--------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents 881 (106) (65) 710
Cash and cash equivalents, beginning of year (11) 499 573 1,061
--------- --------- --------- ---------
Cash and cash equivalents, at end of year $ 870 $ 393 $ 508 $ 1,771
========= ========= ========= =========
10
(5) SEGMENT INFORMATION
Based on its organization, the Company operates in two business segments: the
Company's government contracting business and the Company's commercial custom
training and performance solutions group (Interactive Media). Although the
Company is organized by strategic business unit, the Company considers each of
its government contracting units to have similar economic characteristics,
provide similar types of services, and have a similar customer base.
Accordingly, the Company's government contracting segment aggregates the
operations of all its business units excluding Interactive Media.
The Company's chief operating decision maker utilizes both revenue and
earnings before interest and taxes in assessing performance and making overall
operating decisions and resource allocations. Certain indirect costs such as
corporate overhead and general and administrative expenses are allocated to the
segments. Allocation of overhead costs to segments is based on measures such as
revenue and employee headcount. General and administrative costs are allocated
to segments based on the government-required three-factor formula which uses
measures of revenue, labor and net book value of fixed assets. Interest expense,
investment income and income taxes are not allocated to the Company's segments.
THREE MONTHS ENDED MARCH 31, 2001
(AMOUNTS IN THOUSANDS)
GOVERNMENT INTERACTIVE
CONTRACTING MEDIA ELIMINATIONS CONSOLIDATED
----------- ----------- ------------ ------------
Total assets $ 318,689 $ 8,962 $ -- $ 327,651
========= ========= ========= =========
Sales to unaffiliated customers 153,966 8,400 -- 162,366
Intersegment sales $ 27 $ 15 $ (42) $ --
--------- --------- --------- ---------
Total revenues 153,993 8,415 (42) 162,366
Operating income 5,467 639 6,106
Minority interest in earning of subsidiaries (1)
Interest expense, net 5,956
---------
Provision for income taxes 159
---------
Net loss $ (10)
=========
11
THREE MONTHS ENDED MARCH 31, 2000
(AMOUNTS IN THOUSANDS)
GOVERNMENT INTERACTIVE
CONTRACTING MEDIA ELIMINATIONS CONSOLIDATED
----------- ----------- ------------ ------------
Total assets $278,006 $ 6,996 $ -- $285,002
======== ======== ======== ========
Sales to unaffiliated customers 118,551 7,149 -- 125,700
Intersegment sales $ 1 $ 84 $ (85) $ --
-------- -------- -------- --------
Total revenues 118,552 7,233 (85) 125,700
Operating income 5,133 540 -- 5,673
Minority interest in losses of subsidiaries 3
Interest expense, net 5,403
--------
Provision for income taxes 142
--------
Net income $ 131
========
(6) INTEREST RATE SWAP AGREEMENTS
Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS
AND HEDGING ACTIVITIES, as amended by SFAS No. 137, and as further amended
by SFAS No. 138. The adoption of SFAS No. 133, as amended, had no significant
impact on the Company's consolidated financial statements.
OBJECTIVES AND CONTEXT
The Company uses variable-rate debt to finance its operations through
its revolving credit and term loan facilities. These debt obligations
expose the Company to variability in interest payments due to changes
in interest rates. If interest rates increase, interest expense
increases. Conversely, if interest rates decrease, interest expense
also decreases.
Management believes it is prudent to limit the variability of a portion
of its interest payments. It is the Company's objective to hedge
between - to - percent of its variable-rate short-term interest
payments and - to - percent of its longer-term variable interest payments.
STRATEGIES
To meet this objective, management enters into various interest rate
swap derivative contracts to manage fluctuations in cash flow
resulting from fluctuations in interest rate.
The interest rate swaps change the variable-rate cash flow exposure on
the Company's long-term debt obligations to fixed-rate cash flows by
entering into receive-variable, pay-fixed interest rate swaps. Under
the interest rate swaps, the Company receives variable interest rate
payments and makes fixed interest rate payments, thereby creating
fixed-rate long-term debt.
The Company does not enter into derivative instruments for any purpose
other than cash flow hedging purposes. That is, the Company does not
speculate using derivative instruments.
RISK MANAGEMENT POLICES
The Company assesses interest rate cash flow by continually identifying
and monitoring changes in interest rate exposures that may adversely
impact expected future cash flows and by evaluating hedging opportunities.
The Company monitors interest rate cash flow risk attributable to both the
Company's outstanding or forecasted debt obligations as well as the Company's
offsetting hedge positions and estimates the
12
expected impact of changes in interest rates on the Company's future
cash flows.
Upon adoption of SFAS No. 133, the fair value of interest rate swaps
was recorded as a transition adjustment to accumulated other
comprehensive income. This resulted in a decrease of $629,000, net of
tax, to accumulated other comprehensive income. Changes in the fair
value subsequent to January 1, 2001 of interest rate swaps
designated as hedging instruments of the variability of cash flows
associated with floating-rate, long-term debt obligations are
reported in accumulated other comprehensive income (loss). These
amounts subsequently are reclassified into interest expense as a
yield adjustment in the same period in which the related interest on
the floating-rate debt obligations affects earning.
Over the next twelve months, approximately $1.2 million of losses in
accumulated other comprehensive loss related to the interest rate
swap are expected to be reclassified into interest expense as a yield
adjustment of the hedged debt obligation. As of March 31, 2001, the
fair value of the Company's interest swap agreements resulted in a
net liability of $2.0 million and has been recorded as other current
liabilities.
(7) LEGAL PROCEEDINGS
The Company entered into a settlement agreement on April 24, 2001
with Cambridge Technology Partners, Inc. ("Cambridge") to resolve a
legal action brought by Cambridge against the Company for work
performed solely by Cambridge for the United States Customs Service
("Customs Service"). In 1998, the Customs Service requested that the
Company enter into a contract for the sole purpose of allowing the
Customs Service to direct work to Cambridge to develop software as
part of a Customs Service information system modernization program.
The Company awarded Cambridge a subcontract to perform all of the
software development effort required by the contract without any work
being performed by the Company. In 1999, the Customs Service rejected
the Cambridge developed software. As a result, the Company terminated
the Cambridge subcontract. The Customs Service and the Company
negotiated a no-cost termination to resolve the matter. In 2000,
Cambridge filed a lawsuit seeking payment of the subcontract amount,
approximately $3 million, plus pre-judgment interest. Anteon filed a
counter-claim for damages. While the Company believed that it had a
strong defense and would likely have prevailed at trial, settlement
discussions with Cambridge just prior to the trial date in early
April 2001, resulted in the Company deciding to settle the matter.
The Company concluded this decision was in the best interests of the
Company in light of the diversion of management time a trial would
cause, the additional legal fees that would be incurred and ultimate
uncertainties of trial. Under the terms of the settlement agreement,
the Company agreed to pay Cambridge $600,000. In exchange, Cambridge
agreed to dismiss all claims against the Company. The Company also
agreed to dismiss its counter-claims against Cambridge. The
settlement was recognized as general and administrative expense
during the three months ended March 31, 2001.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of The
Private Securities Litigation Reform Act of 1995. These statements are based on
current expectations and are subject to a number of risks and uncertainties.
Statements relating to the Company's or management's intentions, hopes, beliefs,
expectations, or predictions of the future are forward-looking statements.
Forward-looking statements discuss the Company's backlog, liquidity, and capital
resources. The Company cautions readers that actual results could differ
materially from those in the forward-looking statements. The factors that could
cause actual results to differ materially include the following: the integration
of Sherikon and other acquisitions into our business, general economic and
business conditions, program funding priorities, changes in federal government
procurement laws, regulations and policies, budget reductions in defense
programs, technological changes, delays in the development and acceptance of new
commercial products, pricing pressures from competitors and/or customers, and
our ability to attract and retain qualified personnel and general economic
conditions which may affect the level of federal government procurement.
GENERAL
Anteon International Corporation ("Anteon" or the "Company") is a leading
information technology and e-business solutions company providing support to the
federal government, commercial, and international sectors. Founded in 1976 and
incorporated in the Commonwealth of Virginia, Anteon is headquartered in
Fairfax, Virginia and employs approximately 5,000 full-time employees in the
United States, Puerto Rico, England, Germany, Italy, Canada and Australia.
Anteon Corporation was renamed Anteon International Corporation effective
January 1, 2001.
Anteon offers customers information technology, e-business, and
engineering solutions. Anteon's teams of software engineers bring the latest
database tools, application products and technologies, and web-based
solutions to address customer needs. Anteon's communication services include
the design, custom configuration and implementation of data, voice, and video
communication networks. The Company has obtained ISO 9001 registration for
its quality systems as well as achieving Software Engineering Institute (SEI)
Level 3 certification for its software development processes.
Anteon specializes in helping client agencies web-enable legacy systems,
achieving the promise of extended services and more efficient internal
processes. The Company brings its depth of systems integration experience to
identification of the e-government business case, re-engineering processes,
supplier management, database development, data mining, data security, and
performance requirements, among other critical e-government system challenges.
The contracts the Company performs may be categorized into three primary
types: time and materials ("time and materials"), cost-plus fixed fee
reimbursement ("cost-plus") and firm fixed price ("fixed price"). Revenue
recognition for time and materials contracts is recorded at hourly rates, which
are negotiated with the customer. Time and materials contracts are typically
more profitable because of our ability to negotiate rates and manage costs on
those contracts. Revenue is recognized under cost-plus contracts on the basis of
direct and indirect costs incurred plus a negotiated profit calculated as a
percentage of our costs. Cost-plus contracts provide less risk than other
contract types because the Company is reimbursed for all direct costs and
certain indirect costs, such as overhead and general and administrative charges,
and is paid a fixed fee for work performed. Revenues are recognized under fixed
price contracts based on the percentage-of-completion method. The Company may be
exposed to cost overruns if the Company encounters variances from estimated
costs under fixed price contracts. Accordingly, the Company attempts to minimize
the number of fixed price contracts, particularly for advanced software
development projects.
Prices on federal government contracts are generally set using estimated
costs plus a negotiated profit percentage. Under time and materials and fixed
price contracts, margins are not limited by law or regulation; however, the
Federal government's profit objectives in negotiating time and materials and
fixed price contracts seldom provide for operating profits in excess of 15%. Due
to competitive pressures, operating profits on time and materials and fixed
price contracts are often less than 10%. Under cost-plus contracts, operating
profits are statutorily limited to 15% of costs.
Anteon's costs may be categorized as direct costs such as labor and
related fringe costs, which are directly attributable to contract performance,
and indirect costs such as corporate overhead, which are not directly
attributable to contract performance. Under our time and materials and cost-plus
contracts, the Company charges direct costs and an agreed-upon portion of
indirect costs to the customer. A key element in the successful bidding and
execution of contracts is the control of indirect costs. The Company has
developed management
14
information and resource management systems in order to increase the
productivity of the finance and administrative support areas. As a result of
these efforts, the Company's indirect costs have grown at rates much lower than
overall revenues.
In each year a significant portion of the Company's revenues is derived
from contract backlog and a significant portion of that backlog represents work
related to maintenance, upgrade or replacement of systems under contracts or
projects for which the Company is the incumbent provider. Proper management of
contracts is critical to the overall financial success of Anteon and the Company
believes that it manages costs effectively. This allows the Company to be highly
competitive on price. The Company believes that its demonstrated performance
record and service excellence have enabled it to maintain its position as an
incumbent service provider on all major contracts that have been recompeted over
the past three years, while increasing backlog from $428 million in 1996 to $2.8
billion at March 31, 2001, of which $325.6 million was funded as of March 31,
2001. The Company's total backlog represents the aggregate contract revenue
remaining to be earned by the Company at a given time over the life of its
contracts. When more than one company is awarded a contract for a given work
requirement, the Company includes in total backlog its estimate of the contract
revenue it expects to earn over the remaining life of the contract. Funded
backlog is based upon amounts actually appropriated by a customer for payment of
goods and services. Because the federal government operates under annual
appropriations, agencies of the federal government typically fund contracts on
an incremental basis. Accordingly, the majority of the total contract backlog is
not funded.
RESULTS OF OPERATIONS
A summary of comparative results for the quarters ended March 31, 2001 and March
31, 2000 is as follows:
QUARTER ENDED MARCH 31
(amounts in thousands)
- ------------------------------------------------------------------------
PERCENTAGE
2001 2000 CHANGE
--------- --------- -----------
Revenue $ 162,366 $ 125,700 29.2%
Operating income $ 6,106 $ 5,673 7.6%
Income before provision for
income taxes $ 149 $ 273 (45.4%)
Net income (loss) $ (10) $ 131 (107.6%)
Revenue increased 29.2 % to $162.4 million for the quarter ended March 31,
2001 from $125.7 million for the quarter ended March 31, 2000. The increases in
revenue were attributable to internal growth in several business units as well
as the addition on October 20, 2000 of the Company's latest acquisition,
Sherikon, Inc. ("Sherikon"). For the quarter ended March 31, 2001, internal
growth was 15.4%, driven by revenue increases in the Company's Applied
Technology Group ("ATG"), Information Systems Group ("ISG"), and Systems
Engineering Group ("SEG"). In addition, Sherikon provided $17.1 million in
revenue during the first quarter of 2001.
Operating income increased 7.6% for the quarter ended March 31, 2001 to
$6.1 million from $5.7 million for the quarter ended March 31, 2000. Sherikon
contributed $1.4 million in operating income during the first quarter of
2001. Operating income as a percentage of revenue (operating margin)
decreased to 3.8% compared with 4.5% in the prior year comparable quarter.
The decreased operating income margin for the quarter resulted from a $.7
million increase in goodwill amortization attributed to the purchase of
Sherikon in October 2000 and the acceleration of amortization for other
intangibles associated with the purchase of Sherikon and the purchase of
Analysis & Technology, Inc. ("A&T") in June 1999. In addition, the Company
amortized $1.0 million in software developed for Anteon-CITI, LLC during the
first quarter of 2001 compared to $124,000 in the first quarter of 2000. In
addition, the decreased operating margin reflects legal settlement cost of
$836,000 relating to a dispute with a former subcontractor. (See Note 7 to
the unaudited condensed consolidated financial statements). Adjusting for
these items, operating income would have been $8.6 million and the operating
margin would have been 5.3%.
Cost of revenues increased $33.7 million from first quarter 2000 to first
quarter 2001. Over 44% of this increase, or $14.9 million, was due to the
addition of Sherikon in October of 2000. In addition, cost of revenues increased
due to the corresponding growth in revenue. The majority of this growth was due
to a $4.8 million increase in direct labor and an $11.6 million increase in
other direct contract costs.
General and Administrative ("G&A") expense increased $1.8 million from
first quarter 2000 to first quarter 2001 due primarily to the addition of the
Sherikon strategic business unit. G&A expenses also increased due to additional
costs incurred in support of the Anteon-CITI, LLC and Displaycheck businesses.
In addition and as mentioned above, the Company agreed to a $600,000 settlement
of a legal matter, relating to a dispute with a former subcontractor.
15
Interest expense increased 10% for the three-month period ended March 31,
2001 from the comparable period of 2000 due primarily to increased borrowings on
the Company's revolving line of credit due primarily to the purchase of
Sherikon.
Earnings before income taxes decreased 45.4% to $149,000 in the first
quarter of fiscal 2001 from $273,000 in the first quarter of 2000. The Company's
effective tax rate was 105.7% for the three-month period ended March 31, 2001
compared with 52.0% for the three-month period ended March 31, 2000. The higher
effective tax rate in the current quarter was due primarily to an increase in
nondeductible amortization of goodwill associated with the Company's
acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated $2.6 million in cash from operations for the quarter
ended March 31, 2001. By comparison, the Company generated $3.8 million in cash
for the quarter ended March 31, 2000. This decrease in cash flow was
attributable to an increase in contract receivables and an increase in prepaid
and other assets. Contract receivables totaled $137.5 million at March 31, 2001
and represented 42% of total assets at that date. For the first quarter of 2001,
net cash used by investing activities was $650,000 primarily for purchases of
property, plant and equipment. Cash provided by financing activities was
$298,000. The primary provider of cash in the first quarter 2001 was proceeds,
net of payments under our Revolving Credit Facility.
The total additional funds available to the Company under its Revolving
Credit Facility as of March 31, 2001 were $35.3 million and, in the opinion of
management, are sufficient to meet ongoing working capital and debt service
requirements for the next 12 months. Borrowings under the Revolving Credit
Facility were $38.2 million as of March 31, 2001.
The Credit Agreement was amended to modify certain financial covenants
for the first, second and third quarter of 2001. A copy of the Amendment has
been filed.
As of March 31, 2001 the Company does not have any major capital
commitments greater than $1.0 million.
The Company believes that inflation has not had a material effect on its
business.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ANTEON CORPORATION
Date: _______________
-----------------------------------------------
Joseph Kampf - President and
Chief Executive Officer
Date: _______________
-----------------------------------------------
Carlton B. Crenshaw - Senior Vice President
of Finance and
Administrative and Chief
Financial Officer
17
PART II. OTHER INFORMATION REQUIRED IN REPORT
ITEM 1. LEGAL PROCEEDINGS
(7) LEGAL PROCEEDINGS-BEING EDITED AND REVIEWED
The Company entered into a settlement agreement on April 24, 2001
with Cambridge Technology Partners, Inc. ("Cambridge") to resolve a
legal action brought by Cambridge against the Company for work
performed solely by Cambridge for the United States Customs Service
("Customs Service"). In 1998, the Customs Service requested that the
Company enter into a contract for the sole purpose of allowing the
Customs Service to direct work to Cambridge to develop software as
part of a Customs Service information system modernization program.
The Company awarded Cambridge a subcontract to perform all of the
software development effort required by the contract without any work
being performed by the Company. In 1999, the Customs Service rejected
the Cambridge developed software. As a result, the Company terminated
the Cambridge subcontract. The Customs Service and the Company
negotiated a no-cost termination to resolve the matter. In 2000,
Cambridge filed a lawsuit seeking payment of the subcontract amount,
approximately $3 million, plus pre-judgment interest. Anteon filed a
counter-claim for damages. While the Company believed that it had a
strong defense and would likely have prevailed at trial, settlement
discussions with Cambridge just prior to the trial date in April 2001,
resulted in the Company deciding to settle the matter. The Company
concluded this decision was in the best interests of the Company in
light of the diversion of management time a trial would cause, the
additional legal fees that would be incurred and ultimate
uncertainties of trial. Under the terms of the settlement agreement,
the Company agreed to pay Cambridge $600,000. In exchange, Cambridge
agreed to dismiss all claims against the Company. The Company also
agreed to dismiss its counter-claims against Cambridge.
ITEM 2. CHANGES IN SECURITIES
NONE.
ITEM 3. DEFAULTS UPON SENIOR SUBORDINATED SECURITIES
NONE.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE.
ITEM 5. OTHER INFORMATION
NONE.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
SCHEDULE
B. REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K
during the quarter ended March 31, 2001.
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EXHIBIT INDEX
Exhibit Number Description of Documents
19