<Page>
Form 10-Q for ANTEON INTERNATIONAL CORPORATION filed on July 27, 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 June 30, 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
---------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Virginia 54-1023915
------------------------------- -----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3211 Jermantown Road, Fairfax, Virginia 22030-2801
------------------------------------------------------------------------------
(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 June 30, 2001, there were 14,266,128 outstanding
shares of the registrant's common stock, par value $0.05 per share.
<Page>
CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS AS OF
JUNE 30, 2001 AND DECEMBER 31, 2000 1
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS FOR THE THREE AND SIX MONTHS ENDED
JUNE 30, 2001 AND JUNE 30, 2000 2
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS FOR THE SIX MONTHS ENDED
JUNE 30, 2001 AND JUNE 30, 2000 3
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 15
PART II. OTHER INFORMATION REQUIRED IN REPORT
ITEM 1. LEGAL PROCEEDINGS 21
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 21
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS 21
ITEM 5. OTHER INFORMATION 21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 21
<Page>
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)
<Table>
<Caption>
June 30, 2001 December 31,
(Unaudited) 2000
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 1,502 $ 928
Accounts receivable, net 133,291 132,369
Prepaid expenses and other current assets 8,477 8,605
Deferred tax assets, net 1,564 3,621
--------- ---------
Total current assets 144,834 145,523
Property and equipment, net 14,343 17,974
Goodwill, net 137,611 140,482
Other assets, net 15,505 17,547
--------- ---------
Total assets $ 312,293 $ 321,526
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Term loan, current portion $ 9,863 $ 8,437
Subordinated notes payable, current portion 4,831 4,558
Business purchase consideration payable 1,120 1,075
Accounts payable 36,303 23,232
Accrued expenses 51,139 46,682
Income taxes payable 253 531
Deferred revenue 3,181 6,489
Other current liabilities, net 89 186
--------- ---------
Total current liabilities 106,779 91,190
Revolving credit facility 22,600 32,000
Term loan facility, less current portion 42,123 51,563
Senior subordinated notes payable 100,000 100,000
Subordinated notes payable, less current portion 2,165 2,044
Deferred tax liabilities, net 7,954 9,212
Other long term liabilities 861 859
--------- ---------
Total liabilities 282,482 286,868
Minority interest in subsidiaries 109 601
Stockholders' equity:
Common stock 713 713
Additional paid-in capital 40,313 40,294
Accumulated other comprehensive income (loss):
Foreign currency translation (39) 37
Interest rate swaps (1,115) --
Treasury stock (9) (9)
Due from parent (12,417) (8,810)
Retained earnings 2,256 1,832
--------- ---------
Total stockholders' equity 29,702 34,057
--------- ---------
Total liabilities and stockholders' equity $ 312,293 $ 321,526
========= =========
</Table>
See accompanying notes to unaudited condensed consolidated financial statements.
1
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ANTEON INTERNATIONAL CORPORATION AND SUBSIDIARIES
(A majority-owned subsidiary of Azimuth Technologies, Inc.)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS)
<Table>
<Caption>
Three months ended Six months ended
June 30, June 30,
----------------------- -----------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Revenues $ 188,786 $ 130,284 $ 351,152 $ 255,984
Costs of revenues 167,181 113,129 310,335 222,608
--------- --------- --------- ---------
Gross profit 21,605 17,155 40,817 33,376
Operating expenses:
General and administrative expenses 12,530 9,595 23,435 18,690
Amortization of noncompete agreements 140 221 349 448
Goodwill amortization 1,446 995 2,892 2,204
Other intangible amortization 560 1,717 1,106 1,717
Cost of acquisitions -- 2 -- 19
--------- --------- --------- ---------
Total operating expenses 14,676 12,530 27,782 23,078
--------- --------- --------- ---------
Operating income 6,929 4,625 13,035 10,298
Other income 587 -- 587 --
Interest expense, net of interest income of $96, $98, $187,
and $169, respectively 6,060 5,341 12,016 10,744
Minority interest in (earnings) losses of subsidiaries 6 (5) 5 (2)
--------- --------- --------- ---------
Income (loss) before provision (benefit) for income taxes 1,462 (721) 1,611 (448)
Provision (benefit) for income taxes 1,028 (403) 1,187 (261)
--------- --------- --------- ---------
Net income (loss) $ 434 $ (318) $ 424 $ (187)
========= ========= ========= =========
</Table>
See accompanying notes to unaudited condensed consolidated financial statements.
2
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ANTEON INTERNATIONAL CORPORATION AND SUBSIDIARIES
(A majority-owned subsidiary of Azimuth Technologies, Inc.)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<Table>
<Caption>
For the six months ended June 30,
---------------------------------
2001 2000
------------- --------------
OPERATING ACTIVITIES:
Net income (loss) $ 424 $ (187)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities
(Gain) loss on sales of assets and closure of business (566) 117
Depreciation and amortization 4,931 2,865
Noncompete amortization 349 448
Amortization of goodwill 2,892 2,204
Amortization of other intangible assets 1,106 1,717
Amortization of deferred financing fees 590 590
Deferred income taxes 1,543 (44)
Minority interest in earnings (losses) of subsidiaries (5) 2
Changes in assets and liabilities 11,567 (7,662)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 22,831 50
--------- ---------
INVESTING ACTIVITIES:
Purchases of property and equipment (1,095) (3,007)
Payment of Techmatics earnout -- (5,500)
Acquisition of A&T, net of cash acquired -- (56)
Other, net (21) 40
--------- ---------
NET CASH USED FOR INVESTING ACTIVITIES (1,116) (8,523)
--------- ---------
FINANCING ACTIVITIES:
Principal payments on term loan facility (8,014) --
Principal payments on notes payable (119) (173)
Principal payments on subordinated notes and other consideration payable (20) (9,850)
Proceeds from revolving facility 345,500 234,300
Principal payments on revolving facility (354,900) (215,600)
Advances to parent for debt service (395) --
Acquisition of investment (3,212) --
Proceeds from issuance of common stock 19 44
--------- ---------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES (21,141) 8,721
--------- ---------
CASH AND CASH EQUIVALENTS:
Net increase in cash and cash equivalents 574 248
Balance at beginning of period 928 1,061
--------- ---------
Balance at end of period $ 1,502 $ 1,309
========= =========
Supplemental disclosure of cash flow information:
Interest paid $ 10,255 $ 9,349
Income taxes paid, net of refunds 210 (1,703)
========= =========
</Table>
See accompanying notes to unaudited condensed consolidated financial statements.
3
<Page>
ANTEON INTERNATIONAL CORPORATION AND SUBSIDIARIES
(A majority-owned subsidiary of Azimuth Technologies, Inc.)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 six months ended June 30, 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) SALE AND CLOSURE OF BUSINESSES
(a) SALE OF CITE
On June 29, 2001, the Company sold its Center for Information Technology
Education ("CITE") business to a subsidiary of Pinnacle Software Solutions, Inc.
for a total purchase price of $100,000, of which $50,000 was paid on the date of
closing, with the remainder due in six equal, monthly payments of approximately
$8,300 beginning on August 1, 2001. CITE provides evening and weekend training
for individuals to attain certification in Oracle developer and Java. Revenues
were approximately $470,000 and $1.1 million for the three and six months ended
June 30, 2001, respectively, as compared to $635,000 and $1.2 million ended
June 30, 2000, respectively. Operating income (losses) were approximately
$(913,000) and $(983,000) for the three and six months ended June 30, 2001,
respectively, as compared to $175,000 and $289,000 for the three and six
months ended June 30, 2000, respectively. These amounts have been included in
consolidated operating results of the Company for the three and six month
periods ended June 30, 2001 and 2000. As of the date of sale, the carrying
value of the net assets of CITE was approximately zero, resulting in a gain
on the sale of the business of approximately $100,000. The Company is
obligated to complete certain training courses initiated prior to June 29,
2001, and has accrued approximately $68,000 as of June 30, 2001, representing
the costs in excess of expected revenues associated with these remaining
courses.
(b) CLOSURE OF CITI-SIUSS LLC
On June 22, 2001, the Company decided to cease operations of CITI-SIUSS
LLC (formerly known as Anteon-CITI LLC) (the "Venture"), a joint venture between
the Company and Criminal Investigative Technology, Inc. to develop, sell and
support law enforcement software solutions. The decision to close the business
was a result of unsuccessful efforts by the Venture in establishing a
self-supporting business. Revenues were approximately $728,000 and $834,000 for
the three and six months ended June 30, 2001, respectively, as compared to
$390,000 and $613,000 for the three and six months ended June 30, 2000,
respectively. Operating losses were approximately $(1.2) million and $(2.6)
million for the three and six months ended June 30, 2001, respectively, and
$(323,000) and $(480,000) for the three and six months ended June 30, 2000,
respectively. These amounts have been included in the consolidated operating
results of the Company for the three and six months ended June 30, 2001 and
2000. As of June 30, 2001, the carrying value of the venture's net assets was
approximately zero. The Venture is obligated to provide maintenance and
support services on existing contracts through June 30, 2002. The expected
cost of fulfilling the Venture's existing maintenance and support contracts
exceeds the related expected revenue by approximately $202,000, which has
been accrued at June 30, 2001 as a cost of revenue. Upon liquidation of the
Venture, the Company anticipates that no excess proceeds will be available to
the Company or the minority interest party in the Venture. Accordingly, the
remaining minority interest of approximately $487,000 has been written off to
other income in the three and six months ended June 30, 2001.
(3) PRO FORMA RESULTS FOR ACQUISITION OF SHERIKON, INC.
On October 20, 2000, the Company purchased all of the issued and
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
4
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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 agreed to pay, or cause to be paid, certain bonuses totaling
approximately $1.75 million to former Sherikon employees' payable in two
installments on October 20, 2001 and October 20, 2002. The payment of such
bonuses is not contingent on the continued employment of such individuals by
Sherikon, and the present value of such amount, assuming an 11.75% discount
rate, $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 the workforce in place. These
assets were valued, based on an independent appraisal, at $1,310,000 and
$760,000, respectively. The acquired contracts and work force both have expected
useful lives of 4 years. Goodwill is being amortized on a straight-line basis
over twenty years.
The following unaudited pro forma summary presents consolidated
information as if the acquisition of Sherikon had occurred as of January 1,
1999, 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):
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 2000
------------------ ----------------
Total revenues $ 148,713 $ 289,134
Total expenses 149,160 289,587
--------- ---------
Net loss $ (447) $ (453)
========= =========
</Table>
(4) COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) for the three months ended June 30, 2001 and
2000 was approximately $527,000 and $(332,000), respectively, and $(138,000) and
$(204,000) for the six month periods ended June 30, 2001 and 2000, respectively.
Comprehensive loss for the three months ended June 30, 2001 includes foreign
currency translation losses of $20,000 and increases in the fair value of
interest rate swaps of $113,000, net of tax. Comprehensive loss for the six
month period ended June 30, 2001 includes foreign currency translation losses of
$(76,000) and decreases in the fair value of interest rate swaps of $(486,000),
net of tax. Comprehensive income (loss) for the three and six month period ended
June 30, 2000 included $(14,000) and $(17,000), respectively, of foreign
currency translation losses.
(5) 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
<Page>
<Table>
<Caption>
AS OF JUNE 30, 2001
---------------------------------------------------------------------------------
CONSOLIDATED
UNAUDITED CONDENSED CONSOLIDATED ANTEON ANTEON
BALANCE SHEETS INTERNATIONAL GUARANTOR NON-GUARANTOR ELIMINATION INTERNATIONAL
CORPORATION SUBSIDIARIES SUBSIDIARIES ENTRIES CORPORATION
------------- ------------ ------------- ----------- -------------
(AMOUNTS IN THOUSANDS)
Cash and cash equivalents $ 1,027 $ 107 $ 368 $ -- $ 1,502
Accounts receivable, net 115,982 16,374 935 -- 133,291
Other current assets 8,539 627 875 -- 10,041
Property and equipment, net 13,960 247 136 -- 14,343
Due from parent 84 995 (1,079) -- --
Investment in and advances to subsidiaries 92,084 -- -- (92,084) --
Goodwill, net 137,611 -- -- -- 137,611
Other assets, net 15,080 269 156 -- 15,505
-------- -------- -------- -------- --------
Total assets $384,367 $ 18,619 $ 1,391 $(92,084) $312,293
======== ======== ======== ======== ========
Indebtedness $181,671 $ 1,120 $ -- $ -- $182,791
Accounts payable 34,121 1,773 409 -- 36,303
Accrued expenses and other current liabilities 46,512 4,625 255 -- 51,392
Deferred revenue 3,096 -- 85 -- 3,181
Other long-term liabilities 8,101 714 -- -- 8,815
-------- -------- -------- -------- --------
Total liabilities 273,501 8,232 749 -- 282,482
Minority interest in subsidiaries -- -- 109 -- 109
Total stockholders' equity 110,866 10,387 533 (92,084) 29,702
-------- -------- -------- -------- --------
Total liabilities and stockholders' equity $384,367 $ 18,619 $ 1,391 $(92,084) $312,293
======== ======== ======== ======== ========
</Table>
6
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<Table>
<Caption>
FOR THE SIX MONTHS ENDED JUNE 30, 2001
--------------------------------------------------------------------------------
CONSOLIDATED
UNAUDITED CONDENSED CONSOLIDATED ANTEON ANTEON
STATEMENTS OF OPERATIONS INTERNATIONAL GUARANTOR NON-GUARANTOR ELIMINATION INTERNATIONAL
CORPORATION SUBSIDIARIES SUBSIDIARIES ENTRIES CORPORATION
------------- ------------ ------------- ----------- -------------
(AMOUNTS IN THOUSANDS)
Revenues $311,209 $ 36,740 $ 4,385 $ (1,182) $351,152
Costs of revenues 272,418 35,351 3,748 (1,182) 310,335
-------- -------- -------- -------- --------
Gross profit 38,791 1,389 637 -- 40,817
Total operating expenses 25,252 2,065 465 -- 27,782
-------- -------- -------- -------- --------
Operating income (loss) 13,539 (676) 172 -- 13,035
Other income 100 487 -- -- 587
Interest expense (income), net 11,327 697 (8) -- 12,016
Minority interest in (earnings) losses of
subsidiaries -- 32 (27) -- 5
-------- -------- -------- -------- --------
Income (loss) before provision for income taxes 2,312 (854) 153 -- 1,611
Provision (benefit) for income taxes 1,399 (264) 52 -- 1,187
-------- -------- -------- -------- --------
Net income (loss) $ 913 $ (590) $ 101 $ -- $ 424
======== ======== ======== ======== ========
</Table>
7
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<Table>
<Caption>
FOR THE SIX MONTHS ENDED JUNE 30, 2001
-----------------------------------------------------------------
CONSOLIDATED
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF ANTEON ANTEON
CASH FLOWS INTERNATIONAL GUARANTOR NON-GUARANTOR INTERNATIONAL
CORPORATION SUBSIDIARIES SUBSIDIARIES CORPORATION
------------- ------------ ------------- -------------
(AMOUNTS IN THOUSANDS)
Net income (loss) $ 913 $ (590) $ 101 $ 424
Adjustments to reconcile change in net income (loss)
to net cash provided by operations:
Depreciation and amortization 2,349 2,565 17 4,931
Gain on sales of assets and closure of business (80) (486) -- (566)
Amortization of goodwill 2,892 -- -- 2,892
Amortization of other intangible assets 1,106 -- -- 1,106
Noncompete amortization 349 -- -- 349
Amortization of deferred financing fees 590 -- -- 590
Deferred income tax expense (benefit) 1,543 -- -- 1,543
Minority interest in earnings (losses) of subsidiaries -- (32) 27 (5)
Changes in assets and liabilities 12,750 (1,169) (14) 11,567
--------- --------- --------- ---------
Net cash provided by operating activities 22,412 288 131 22,831
--------- --------- --------- ---------
Cash flows from investing activities:
Purchases of property and equipment (530) (486) (79) (1,095)
Other, net (21) -- -- (21)
--------- --------- --------- ---------
Net cash used for investing activities (551) (486) (79) (1,116)
--------- --------- --------- ---------
Cash flow from financing activities:
Principal payments on notes payable (119) -- -- (119)
Proceeds from revolving loan facility 345,500 -- -- 345,500
Principal payments on revolving credit facility (354,900) -- -- (354,900)
Principal payments on term loan facility (8,014) -- -- (8,014)
Proceeds from issuance of common stock 19 -- -- 19
Payments on other consideration payable -- (20) -- (20)
Advances to parent for debt service (395) -- -- (395)
Acquisition of investment (3,212) -- -- (3,212)
--------- --------- --------- ---------
Net cash provided by financing activities (21,121) (20) -- (21,141)
--------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents 740 (218) 52 574
Cash and cash equivalents, beginning of year 287 325 316 928
--------- --------- --------- ---------
Cash and cash equivalents, at end of year $ 1,027 $ 107 $ 368 $ 1,502
========= ========= ========= =========
</Table>
8
<Page>
<Table>
<Caption>
FOR THE SIX MONTHS ENDED JUNE 30, 2000
---------------------------------------------------------------------------------
CONSOLIDATED
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS ANTEON ANTEON
OF OPERATIONS INTERNATIONAL GUARANTOR NON-GUARANTOR ELIMINATION INTERNATIONAL
CORPORATION SUBSIDIARIES SUBSIDIARIES ENTRIES CORPORATION
------------- ------------ ------------- ----------- -------------
(AMOUNTS IN THOUSANDS)
Revenues $ 98,059 $ 157,538 $ 1,293 $ (906) $ 255,984
Cost of revenues 87,749 134,531 1,234 (906) 222,608
--------- --------- --------- --------- ---------
Gross profit 10,310 23,007 59 -- 33,376
Total operating expenses 9,543 13,519 16 -- 23,078
--------- --------- --------- --------- ---------
Operating income 767 9,488 43 -- 10,298
Interest expense (income), net 10,714 30 -- -- 10,744
Minority interest in earnings of subsidiaries -- -- (2) -- (2)
--------- --------- --------- --------- ---------
Income (loss) before provision for income
taxes (9,947) 9,458 41 -- (448)
Provision (benefit) for income taxes (4,055) 3,769 25 -- (261)
--------- --------- --------- --------- ---------
Net income (loss) $ (5,892) $ 5,689 $ 16 $ -- $ (187)
========= ========= ========= ========= =========
</Table>
9
<Page>
<Table>
<Caption>
FOR THE SIX MONTHS ENDED JUNE 30, 2000
--------------------------------------------------------------------
CONSOLIDATED
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF ANTEON ANTEON
CASH FLOWS INTERNATIONAL GUARANTOR NON-GUARANTOR INTERNATIONAL
CORPORATION SUBSIDIARIES SUBSIDIARIES CORPORATION
------------- ------------ ------------- --------------
(AMOUNTS IN THOUSANDS)
Net income (loss) $ (5,892) $ 5,689 $ 16 $ (187)
Adjustments to reconcile change in net income (loss) to
net cash provided by operations:
Loss on sales of assets -- 117 -- 117
Depreciation and amortization 462 2,400 3 2,865
Amortization of goodwill 2,204 -- -- 2,204
Amortization of other intangible assets 1,717 -- -- 1,717
Noncompete amortization 448 -- -- 448
Amortization of deferred financing fees 590 -- -- 590
Deferred income taxes (39) 68 (73) (44)
Minority interest in earnings of subsidiaries 2 -- -- 2
Changes in assets and liabilities (1,787) (5,975) 100 (7,662)
--------- --------- --------- ---------
Net cash provided by (used for) operating activities (2,295) 2,299 46 50
--------- --------- --------- ---------
Cash flows from investing activities:
Purchases of property and equipment (879) (2,139) 11 (3,007)
Payment of Techmatics earnout (5,500) -- -- (5,500)
Other, net (16) -- -- (16)
--------- --------- --------- ---------
Net cash used for investing activities (6,395) (2,139) 11 (8,523)
--------- --------- --------- ---------
Cash flow from financing activities:
Principal payments notes payable -- (173) -- (173)
Principal payment on subordinated notes payable and
other consideration (9,850) -- -- (9,850)
Principal payments on revolving facility (215,600) -- -- (215,600)
Proceeds from revolving facility 234,300 -- -- 234,300
Initial capitalization of joint venture 246 (246) -- --
Proceeds from issuance of common stock 44 -- -- 44
--------- --------- --------- ---------
Net cash provided by (used for) financing activities 9,140 (419) -- 8,721
--------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents 450 (259) 57 248
Cash and cash equivalents beginning of year (11) 499 573 1,061
--------- --------- --------- ---------
Cash and cash equivalents end of year $ 439 $ 240 $ 630 $ 1,309
========= ========= ========= =========
</Table>
10
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(6) SEGMENT INFORMATION
The Company has adopted Statement of Financial Accounting Standards No.
131 ("SFAS No. 131"), DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION. SFAS No. 131 establishes annual and interim reporting standards
for an enterprise's operating segments.
Based on its organization, the Company reports two business segments: the
Company's government contracting business and the Company's commercial custom
training and performance solutions group (Interactive Media) (see note 11(b)).
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 Anteon, Vector Data Systems, Techmatics, A&T and Sherikon, prior
acquisitions which have been integrated into the Company's government
contracting business.
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. Allocations of overhead costs to segments are 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.
<Table>
<Caption>
SIX MONTHS ENDED JUNE 30, 2001
(AMOUNTS IN THOUSANDS)
GOVERNMENT INTERACTIVE
CONTRACTING MEDIA ELIMINATIONS CONSOLIDATED
----------- ----------- ------------ ------------
Total assets $ 306,613 $ 5,680 $ -- $ 312,293
========= ========= ========= =========
Sales to unaffiliated customers 334,736 16,416 -- 351,152
Intersegment sales 36 15 (51) --
--------- --------- --------- ---------
Total revenues $ 334,772 $ 16,431 $ (51) $ 351,152
Operating income 12,276 759 13,035
Other income 587
Minority interest in losses of subsidiaries 5
Interest expense, net 12,016
Provision for income taxes 1,187
---------
Net income $ 424
=========
<Caption>
SIX MONTHS ENDED JUNE 30, 2000
(AMOUNTS IN THOUSANDS)
GOVERNMENT INTERACTIVE
CONTRACTING MEDIA ELIMINATIONS CONSOLIDATED
----------- ----------- ------------ ------------
Total assets $ 280,222 $ 7,456 $ -- $ 287,678
========= ========= ========= =========
Sales to unaffiliated customers 242,242 13,742 -- 255,984
Intersegment sales 2 84 (86) --
--------- --------- --------- ---------
Total revenues $ 242,244 $ 13,826 $ (86) $ 255,984
Operating income 9,723 575 -- 10,298
Minority interest in earnings of subsidiaries (2)
Interest expense, net 10,744
Provision (benefit) for income taxes (261)
---------
Net loss $ (187)
=========
</Table>
11
<Page>
<Table>
<Caption>
THREE MONTHS ENDED JUNE 30, 2001
(AMOUNTS IN THOUSANDS)
GOVERNMENT INTERACTIVE
CONTRACTING MEDIA ELIMINATIONS CONSOLIDATED
----------- ----------- ------------ ------------
Total assets $306,613 $ 5,680 $ -- $ 312,293
======== ======== ======== =========
Sales to unaffiliated customers 180,663 8,123 -- 188,786
Intersegment sales 9 -- (9) --
-------- -------- -------- ---------
Total revenues $180,672 $ 8,123 $ (9) $ 188,786
Operating income 6,809 120 6,929
Other income 587
Minority interest in losses of subsidiaries 6
Interest expense, net 6,060
Provision for income taxes 1,028
---------
Net income $ 434
=========
<Caption>
THREE MONTHS ENDED JUNE 30, 2000
(AMOUNTS IN THOUSANDS)
GOVERNMENT INTERACTIVE
CONTRACTING MEDIA ELIMINATIONS CONSOLIDATED
----------- ----------- ------------ ------------
Total assets $ 280,222 $ 7,456 $ -- $ 287,678
========= ========= ========= =========
Sales to unaffiliated customers 123,691 6,593 -- 130,284
Intersegment sales -- -- -- --
--------- --------- --------- ---------
Total revenues $ 123,691 $ 6,593 $ -- $ 130,284
Operating income 4,555 70 4,625
Minority interest in earnings of subsidiaries (5)
Interest expense, net 5,341
Provision for income taxes (403)
---------
Net loss $ (318)
=========
</Table>
12
<Page>
(7) INTEREST RATE SWAP AGREEMENTS
Effective January 1,2001, the Company adopted Statement of Financial
Accounting Standards No. 133 ("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 100% its
longer-term variable interest payments for the Term Note.
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 POLICIES
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 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 designed 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
earnings.
Over the next twelve months, approximately $1.1 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 June 30, 2001, the fair value of the Company's
interest swap agreements resulted in a net liability of $1.9 million and has
been recorded as other current liabilities.
(8) 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 all 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,
13
<Page>
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. The settlement was recognized as
general and administrative expense during the three months ended March 31, 2001.
(9) RECENT ACCOUNTING PRONOUNCEMENTS
On July 20, 2001, the Financial Accounting Standards Board issued
Statement No. 141 ("SFAS No. 141"), BUSINESS COMBINATIONS, and Statement No.
142 ("SFAS No. 142"), GOODWILL AND OTHER INTANGIBLE ASSETS. SFAS No. 141
addresses the accounting for acquisitions of businesses and is effective for
acquisitions occurring on or after July 1, 2001. SFAS No. 142 addresses the
method of identifying and measuring goodwill and other intangible assets
acquired in a business combination, eliminates further amortization of
goodwill, and requires periodic evaluations of impairment of goodwill
balances. SFAS No. 142 is effective January 1, 2002. The Company is
currently assessing the impacts of adoption of SFAS No. 141 and SFAS No. 142.
(10) PAYMENT OF PARENT COMPANY OBLIGATION
On June 29, 2001, the Company acquired a $3.2 million, nine percent
senior subordinated note payable (the "note") from Ogden Technology Services
Corporation ("Ogden"). The principal amount of the note is due from Azimuth
Technologies, Inc. (the "Parent Company") in April 2004. The Company has
recorded the purchase of the note due from the Parent Company as a reduction
to additional paid-in capital in the accompanying unaudited condensed
consolidated financial statements.
(11) SUBSEQUENT EVENTS
(a) ACQUISITION OF SIGCOM TRAINING DIVISION
On July 20, 2001, the Company acquired the assets, contracts and
personnel of the training division of Sigcom, Inc. The principal business of
Sigcom's training division is in the design, construction, instrumentation,
training and maintenance of simulated live-fire training facilities to help
acclimate members of the armed forces to combat conditions in urban areas. Total
purchase price was $10.4 million, of which $9.4 million was paid in cash to the
seller at closing, and $1.0 million of which was placed in an escrow account to
cover potential liabilities which may arise from matters existing as of the
acquisition date. Additionally, the Company acquired, as part of the
transaction, $2.5 million of accounts receivable. The Company also assumed
payment for accounts payable and accrued liabilities estimated at $1.1 million.
(b) INTERACTIVE MEDIA CORPORATION (IMC) COMMERCIAL SALE
On July 20, 2001, the Company sold all of its stock in Interactive Media
Corporation for $13.5 million in cash. In addition, the Company has an
additional $.5 million earnout potential based on IMC's performance from the
date of closing through the end of calendar year 2001. IMC specializes in
providing training services to customers primarily in the commercial
marketplace. Prior to the sale, IMC transferred to Anteon the assets of the
government division of Interactive Media, which specializes in training services
primarily to the government marketplace. For the commercial division,
revenues were approximately $5.2 million and $10.8 million for the three and
six months ended June 30, 2001, respectively, as compared to $3.8 million and
$8.2 million for the three and six months ended June 30, 2000, respectively.
Operating income (losses) were approximately $(100,000) and $261,000 for the
three and six months ended June 30, 2001, respectively, as compared to
$(133,000) and $269,000 for the three and six months ended June 30, 2000,
respectively.
14
<Page>
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, 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 an
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 5,400 full-time employees in the
United States, England, Germany, Italy, Canada and Australia.
Anteon offers customers information technology, e-business, and
engineering solutions. Anteon's teams of software engineers bring 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 systems integration experience to
identification of the e-government business case, re-engineering processes,
supplier management, database development, data mining, data security, and often
applies its expertise in an enterprise-wide system solution.
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 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.
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 time and materials and cost-plus
contracts, the Company charges direct costs and an agreed-upon portion of
indirect costs to customers. A key element in the successful bidding and
execution of contracts is the control of indirect costs. The Company has
developed industry standard management 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.
Each year a significant portion of the Company's revenue 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
15
<Page>
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 four years, while
increasing total backlog from $428 million in 1996 to $3.2 billion at June 30,
2001, of which $285.3 million was funded as of June 30, 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 only 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
In June 2001, the Company made a strategic decision to focus its resources
on its core services business. As a result, the Company either sold or closed
several small businesses.
Center for Information Technology Education ("CITE") - The Company
established CITE in 1999 to conduct training for adults in the metropolitan
Washington D.C. area who were interested in information technology as a second
career. CITE offers ORACLE database and JAVA training. While initially
profitable, the business has been impacted by the slowdown of the general
economy. On June 29, 2001 the business was sold to B&G LLC, an affiliate of
PINNACLE Software Solutions, Inc. for $100,000, of which, $50,000 was paid in
cash and the remainder is to be paid in equal monthly installments of $8,300
beginning August 1, 2001. In addition, the Company will retain the tuition from
courses that were already underway prior to the sale on June 29, 2001. CITE's
loss from operations, after closeout, totaled $70,000 and $913,000 in the first
and second quarters of 2001 on revenue of $595,000 and $470,000, respectively.
During fiscal 2000, CITE produced an operating profit of $414,000 on revenue of
$2.5 million.
CITI-SIUSS LLC - The Company established a joint venture, CITI-SIUSS LLC,
(formerly known as Anteon-CITI LLC) with Criminal Investigative Technology, Inc.
in 1999 to participate in the law enforcement software development and services
market. After two years of investment in software and business development
expenses, the joint venture has not generated a sufficient customer base to
create a self-supporting business. In June 2001, a decision was made to close
operations but to continue to support customers who purchased software prior to
June 30, 2001. In the first and second quarters of 2001, the joint venture
generated operating losses of $1.4 million and $1.2 million on revenue of
$106,000 and $728,000, respectively, after closeout. The joint venture produced
an operating loss of $2.5 million on revenue of $880,000 in 2000.
DisplayCheck - Anteon, through its acquisition of Analysis and Technology,
Inc. acquired expertise in electronic testing of Liquid Crystal Displays
("LCD") and other microdisplay products that utilize Liquid Crystal on
Silicon ("LCOS") technologies. This newly emergent market was pursued to
determine business feasibility. While the Company has been successful in
generating a limited amount of revenue from its test equipment products, a
decision was made to not make any further investments in this market and to
cease operations after a current order is completed in August 2001. Operating
losses of $161,000 and $212,000 on revenues of $215,000 and $449,000 were
incurred in the first and second quarters of 2001, respectively. DisplayCheck
generated an operating loss of $15,000 on revenue of $703,000 in 2000.
PocketMultimedia - Anteon, through its acquisition of Analysis and
Technology, Inc. acquired video compression technology that has potential
applications in the handheld Personal Data Assistant ("PDA") market via
attachments that can playback or receive video on a wireless PDA. Anteon
funded this technology through June 30, 2001. Anteon's Board of Directors
determined that to continue the development of the technology, outside
funding would be required beyond June 30, 2001. During the first and second
quarters of 2001, Anteon incurred $175,000 and $178,000, respectively, in
operating losses developing the technology. There will be no further
investments made in this technology by Anteon beyond June 2001. In 2000,
PocketMultimedia produced an operating loss of $270,000 on revenue of
$159,000.
16
<Page>
A summary of comparative results for the quarters and six month periods ended
June 30, 2001 and June 30, 2000 is as follows:
<Table>
<Caption>
THREE MONTHS ENDED JUNE 30,
(amounts in thousands)
---------------------------------------------------------------------------
PERCENTAGE
2001 2000 CHANGE
------------- ------------ -------------
Revenue $ 188,786 $ 130,284 44.9
Operating income $ 6,929 $ 4,625 49.8
Income (loss) before
provision (benefit) for
income taxes $ 1,462 $ (721) 302.8
Net income (loss) $ 434 $ (318) 236.5
<Caption>
SIX MONTHS ENDED JUNE 30,
(amounts in thousands)
---------------------------------------------------------------------------
PERCENTAGE
2001 2000 CHANGE
------------- ------------ -------------
Revenue $ 351,152 $ 255,984 37.2
Operating income $ 13,035 $ 10,298 26.6
Income (loss) before
provision (benefit) for
income taxes $ 1,611 $ (448) 459.6
Net income (loss) $ 424 $ (187) 326.7
</Table>
Revenue increased 44.9% to $188.8 million for the quarter ended June 30,
2001 from $130.3 million for the quarter ended June 30, 2000. For the six month
period ended June 30, 2001, revenue increased 37.2% to $351.2 million from
$256.0 million for the six month period ended June 30, 2000. The increases in
revenue for the quarter and six month period ended June 30, 2001 were
attributable to internal growth in several business units and the acquisition of
Sherikon, Inc. For the three and six month period ended June 30, 2001, internal
growth was 26.5% and 21.1%, respectively, 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 $18.2
million and $35.9 million in revenue, during the second quarter and first six
months of fiscal 2001, respectively.
Gross margin increased 25.6% for the quarter ended June 30, 2001 to $21.6
million from $17.2 million for the quarter ended June 20, 2000. For the six
months ended June 30, 2001 gross margin increased 22.2% to $40.8 million from
$33.4 million for the six months ended June 30, 2000. The gross margin
percentage decreased to 11.4% for the quarter ended June 30, 2001 from 13.2%
for the quarter ended June 30, 2000. Gross margin percentage decreased to
11.6% for the six months ended June 30, 2001 from 13.0% for the six months
ended June 30, 2000. The decreases for both the quarter and six months ended
were due to the increase in amortization of software for CITI-SIUSS and an
increase in other direct costs, primarily subcontractors, which generally
carry lower margins than direct labor, and consultants.
Operating income increased 49.8% for the quarter ended June 30, 2001 to
$6.9 million from $4.6 million for the quarter ended June 30, 2001. Operating
income for the first six months of fiscal 2001 increased 26.6% to $13.0
million from $10.3 million for the first six months of fiscal 2000. Operating
income as a percentage of revenue (operating margin) increased to 3.7%
compared with 3.5% in the prior year comparable quarter. Operating margin for
the first six months of fiscal 2001 decreased to 3.7% from 4.0% in fiscal
2000. Sherikon contributed $1.0 million and $2.4 million in operating income
during the second quarter and first six months of 2001, respectively.
Operating income for the second quarter and first six months of 2000 includes
approximately $1.5 million of a retroactive adjustment of amortization
expense for other intangible assets related to the acquisition of A&T. The
decreased operating margin for the first six months of fiscal 2001 resulted
in part from an $813,000 increase in goodwill and intangible amortization
attributed to the purchase of Sherikon in October 2000. In addition, the
Company amortized $2.5 million in software developed for CITI-SIUSS LLC
(formerly known as Anteon-CITI LLC) during the first six months compared to
$371,000 for the first six months of 2000. The decreased operating margin
also reflects legal settlement and defense costs of $1.1 million related to a
dispute with a former subcontractor (see note 8 to the unaudited condensed
consolidated financial statements). After adjusting for the CITI-SIUSS LLC
amortization and legal matter, operating income would have been $16.6 million
versus $13.0 million and the operating margin would have been 4.7%.
Cost of revenue increased $54.1 million from the second quarter of 2000 to
the second quarter of 2001. For the first six months of fiscal 2001, costs of
revenue increased $87.7 million over 2000. The acquisition of Sherikon in
October 2000 resulted in increased cost of $16.0 million and $31.5 million for
the quarter and six month period ended, respectively. In addition, cost of
revenues increased due to the corresponding growth in revenue. The majority of
this growth for the quarter and six month period ended was due to a $17.2
million and $31.1 million increase in direct labor and fringe and a $33.2
million and $50.1 million increase in other direct contract costs.
17
<Page>
General and administrative ("G&A") expense increased $2.9 million and $4.7
million from the second quarter and first six months of 2000 respectively,
compared to the second quarter and first six months of 2001 primarily due to the
purchase of Sherikon. G&A expenses 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 and $497,000 in
legal fees during the first quarter 2001 for matters relating to a dispute with
a former contractor.
Interest expense, net of interest income, increased 13.5% and 11.8% for
the three and six month periods June 30, 2001, respectively, compared with the
comparable periods of 2000 due primarily to increased borrowings on the
Company's revolving line of credit relating primarily to the purchase of
Sherikon.
Other income increased to $587,000 in the three and six months ended June
30, 2001, and is comprised of $100,000 of gain on the sale of CITE's assets and
$487,000 representing the remaining minority interest as of the date of closure
for the Anteon-CITI LLC joint venture. The Company anticipates that, upon
liquidation of the joint venture, there will be no excess proceeds available to
the Company or the minority interest. Accordingly, the remaining minority
interest has been written off to other income.
Earnings before income taxes increased to $1.5 million for the second
quarter of fiscal 2001 from a loss of $721,000 in the second quarter of 2000.
Earnings before income taxes for the first six months of fiscal 2001 increased
to $1.6 million from a loss of $448,000 for the first six months of 2000. The
Company's effective tax rate for the second quarter and first six months of
fiscal 2001 was 70.3% and 73.7% compared with 55.9% and 58.3% for the second
quarter and first six months of fiscal 2000, primarily due to the additional
non-deductible amortization of goodwill and intangible assets from the Sherikon
acquisition.
Earnings before interest, taxes, depreciation and amortization ("EBITDA")
increased 37.8% and 30.7%, respectively from the three and six month periods
ending June 30, 2000. EBITDA for the second quarter increased from $8.9 million
in 2000 to $12.3 million in 2001. EBITDA increased from $17.5 million for the
six months ending on June 30, 2000 to $22.9 million for the comparable period in
2001. The increase in EBITDA was due to several new major contract wins in late
2000 and early 2001, which have started. In addition, Sherikon contributed $1.0
million and $2.5 million respectively for the three and six month periods ending
on June 30, 2001.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated $22.8 million in cash from operations for the six
month period ended June 30, 2001. By comparison, the Company generated $50,000
in cash for the six month period ended June 30, 2000. This increase in cash flow
was attributable to an increase in accounts payable and accrued expenses of
$16.1 million, and an increase of $7.8 million in depreciation and amortization.
The Company increased revenue on an annualized basis by approximately $162
million from the fourth quarter of 2000 to the second quarter of 2001 without a
significant increase in accounts receivable. This was accomplished through a
significant reduction in days sales outstanding. Days sales outstanding
decreased from 73 days at the end of 2000 to 64 days for the period ended June
30, 2001. Contract receivables totaled $133.3 million at June 30, 2001 and
represented 42.7% of total assets at that date. For the first six months of
2001, net cash used by investing activities was $1.1 million, primarily for
purchases of property, plant and equipment. Cash used by financing activities
was $21.1 million. The primary use of cash in the first six months of 2001 was
payments, net of proceeds, under our Revolving Credit Facility, Term Loan, and
acquisition of a $3.2 million, nine percent senior subordinated note payable
from Ogden Technology Services Corporation (see note (10) to the unaudited
condensed consolidated financial statements).
The total funds available to the Company under its Revolving Credit
Facility as of June 30, 2001 were $58.2 million and, in the opinion of
management, are sufficient to meet ongoing working capital requirements for at
least the next twelve months. Borrowings under the Revolving Credit Facility
were $22.6 million as of June 30, 2001.
On July 20, 2001, the Company sold its ownership of the commercial
division of Interactive Media Corporation for $13.5 million cash at closing,
with an additional $.5 million earnout potential based on the commercial
division's performance during the last half of calendar year 2001. The proceeds
from the sale were used to pay down the revolving line of credit. Also, on July
20, 2001, the Company acquired the assets, contracts and personnel of the
training division of Sigcom, Incorporated for a total purchase price of $10.4
million, of which $9.4 million was paid in cash to the seller at closing, and
$1.0 million was placed in escrow to cover any potential liabilities which may
arise from matters existing as of the acquisition date. The Company funded the
acquisition by drawing on the revolving line of credit.
The Credit Agreement was amended during the first quarter 2001 to modify
certain financial covenants for the first, second and third quarters of 2001.
As of June 30, 2001 the Company does not have any major capital
commitments greater than $1.0 million.
18
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The Company believes that inflation has not had a material effect on its
business.
RECENT ACCOUNTING PRONOUNCEMENTS
On July 20, 2001, the Financial Accounting Standards Board issued
Statement No. 141 ("SFAS No. 141"), BUSINESS COMBINATIONS, and Statement No. 142
("SFAS No. 142"), GOODWILL AND OTHER INTANGIBLE ASSETS. SFAS No. 141 addresses
the accounting for acquisitions of businesses and is effective for acquisitions
occurring on or after July 1, 2001. SFAS No. 142 addresses the method of
identifying and measuring goodwill and other intangible assets acquired in a
business combination, eliminates further amortization of goodwill, and requires
periodic evaluations of impairment of goodwill balances. SFAS No. 142 is
effective January 1, 2002. The Company is currently assessing the impacts of
adoption of SFAS No. 141 and SFAS No. 142.
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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 INTERNATIONAL CORPORATION
Date: July 27, 2001
/s/ Joseph Kampf
--------------------------------------
Joseph Kampf - President and Chief
Executive Officer
Date: July 27, 2001
/s/ Carlton B. Crenshaw
--------------------------------------
Carlton B. Crenshaw - Senior Vice President of
Finance and
Administrative and Chief
Financial Officer
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PART II. OTHER INFORMATION REQUIRED IN REPORT
ITEM 1. 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 all 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
NONE.
B. REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during
the quarter ended June 30, 2001.
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