Form 10-Q for ANTEON CORPORATION filed on November 15, 1999
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 September 30, 1999
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 333-84835
ANTEON 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
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(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 September 30, 1999, there were 3,557,672
outstanding shares of the registrant's common stock, par value $0.05 per share.
CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS AS OF
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998 1
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999
AND 1998 2
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND
1998 3
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 13
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 CORPORATION AND SUBSIDIARIES
(A majority-owned subsidiary of Azimuth
Technologies, Inc.)
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
September 30, 1999 December 31, 1998
(Unaudited) (Audited)
------------------ -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,306 $ 156
Accounts receivable, net 112,419 68,053
Prepaid expenses and other current assets 7,223 5,347
-------- --------
Total current assets 120,948 73,556
Due from parent 7,323 6,625
Property and equipment, net 19,105 4,537
Goodwill, net 132,837 50,036
Investments 909 5,973
Other assets, net 12,082 2,441
-------- --------
Total assets $293,204 $143,168
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 15,751 $ 12,582
Accrued expenses 44,996 23,338
Subordinated notes payable, current portion 9,099 967
Business purchase consideration payable 5,500 --
Other current liabilities, net 3,228 2,508
-------- --------
Total current liabilities $ 78,574 $ 39,395
Revolving credit facility 5,300 --
Bank notes payable, net of current portion -- 70,400
Term loan facility 60,000 --
Senior subordinated notes payable 100,000 --
Subordinated notes payable, net of current portion -- 8,335
Mortgage note payable, net of current portion 1,640 --
Deferred tax liabilities, net 44 311
Other long term liabilities 210 985
-------- --------
Total liabilities $245,768 $119,426
Minority interest in subsidiary 59 37
Shareholders' equity:
Common stock 178 149
Additional paid-in capital 40,758 18,243
Accumulated other comprehensive income 94 399
Retained earnings 6,347 4,914
-------- --------
Total shareholders' equity $ 47,377 $ 23,705
-------- --------
Total liabilities and shareholders' equity $293,204 $143,168
======== ========
See accompanying notes to unaudited condensed consolidated financial statements.
1
ANTEON CORPORATION AND SUBSIDIARIES
(A majority-owned subsidiary of Azimuth
Technologies, Inc.)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS)
Three months ended Nine months ended
September 30, September 30,
-------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
Revenues $125,708 $ 72,349 $271,317 $180,545
Costs of revenues 110,141 64,487 238,717 160,626
-------- -------- -------- --------
Gross profit 15,567 7,862 32,600 19,919
Operating expenses:
General and administrative expenses 8,409 3,879 17,316 10,082
Amortization of noncompete agreements 227 227 681 303
Goodwill amortization 1,208 551 2,232 1,302
Cost of acquisitions 168 72 168 90
-------- -------- -------- --------
Total operating expenses 10,012 4,729 20,397 11,777
-------- -------- -------- --------
Operating income 5,555 3,133 12,203 8,142
Income from sales of long-term investments 2,463 -- 2,463 --
Interest expense, net of interest income of
$34, $29, $716, $111, respectively 5,119 1,772 10,619 3,508
Minority interest in earnings of subsidiary 6 5 23 19
-------- -------- -------- --------
Income before provision for income taxes
and extraordinary item 2,893 1,356 4,024 4,615
Provision for income taxes 1,531 524 2,128 1,834
-------- -------- -------- --------
Net income before extraordinary item 1,362 832 1,896 2,781
Extraordinary item - loss on early extinguishment
of debt, net of income taxes of $309 -- -- 463 --
-------- -------- -------- --------
Net income $ 1,362 $ 832 $ 1,433 $ 2,781
======== ======== ======== ========
See accompanying notes to unaudited condensed consolidated financial statements.
2
ANTEON CORPORATION AND SUBSIDIARIES
(A majority-owned subsidiary of Azimuth
Technologies, Inc.)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
For the nine months ended
--------------------------------------
September 30, 1999 September 30, 1998
------------------ ------------------
OPERATING ACTIVITIES:
Net income $ 1,433 $ 2,781
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Extraordinary loss 772 --
Gain on sale of long-term investments (2,721) --
Depreciation and amortization 2,062 999
Noncompete amortization 681 303
Amortization of goodwill 2,233 1,301
Amortization of deferred financing 388 494
Deferred income taxes 1,383 92
Minority interest in earnings (losses) of subsidiaries 23 --
Changes in assets and liabilities, net of acquired
assets and liabilities 1,828 (12,770)
--------- ---------
NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES $ 8,082 $ (6,800)
--------- ---------
INVESTING ACTIVITIES:
Purchases of property, buildings, and equipment (2,901) (1,631)
Acquisition of A&T, net of cash acquired (115,203) --
Acquisition of Techmatics, net of cash acquired -- (28,490)
Proceeds from sales of long-term investments 10,580 --
Purchases of long-term investments (3,040) --
Other, net (30) 122
--------- ---------
NET CASH USED FOR INVESTING ACTIVITIES $(110,594) $ (29,999)
--------- ---------
FINANCING ACTIVITIES:
Proceeds from bank notes payable 132,043 215,904
Principal payments on bank notes payable (202,525) (172,099)
Proceeds from senior subordinated notes payable 100,000 --
Proceeds from term loan facility 60,000 --
Proceeds from revolving facility 110,500 --
Principal payments on revolving facility (105,200) --
Deferred financing costs (8,775) (963)
Proceeds from issuance of common stock 22,544 19
Principal payments on Techmatics sub note payable (4,925) --
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES $ 103,662 $ 42,861
--------- ---------
CASH AND CASH EQUIVALENTS:
Net increase in cash and cash equivalents 1,150 6,062
Balance at beginning of period 156 652
--------- ---------
Balance at end of period $ 1,306 $ 6,714
========= =========
Supplemental disclosure of cash flow information:
Interest paid $ 6,667 $ 2,075
========= =========
Income taxes paid $ 204 $ 1,849
========= =========
See accompanying notes to unaudited condensed consolidated financial statements.
3
ANTEON CORPORATION AND SUBSIDIARIES
(A majority-owned subsidiary of Azimuth
Technologies, Inc.)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(1) BASIS OF PRESENTATION
The unaudited interim financial information as of September 30, 1999 and
for the three and nine months ended September 30, 1999 and 1998 have been
prepared in accordance with generally accepted accounting principles 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 and nine months ended September 30, 1999 may not be indicative of the
results of operations for the year ending 1999 or any future period. This
financial information should be read in conjunction with the Company's audited
consolidated financial statements and footnotes thereto.
(2) SENIOR SUBORDINATED NOTES OFFERING AND RELATED TRANSACTIONS
On May 11, 1999, the Company completed an offering of $100 million of its
12% Senior Subordinated Notes due 2009 (the "Notes"). The Notes are unsecured
and are guaranteed by all of the Company's current and future domestic
subsidiaries. The Notes require semi-annual interest payments beginning on
November 15, 1999 through maturity on May 15, 2009. The Notes may be redeemed at
the option of the Company after May 15, 2004 upon the payment of certain
redemption premiums, although up to 25% of the Notes can be redeemed prior to
May 15, 2002 with the proceeds of certain equity offerings and upon the payment
of certain redemption premiums. The Notes contain various restrictive covenants,
including limitations on the incurrence of additional indebtedness, restrictions
and limitations on dividends paid to the Company's parent, Azimuth Technologies,
Inc., and restrictions and limitations on the sales of certain assets, among
others.
Concurrent with the offering of the Notes, the Company's parent, Azimuth
Technologies, Inc., invested an additional $22.5 million in the Company's common
stock (the "Equity Contribution").
During June 1999, the Company obtained a new bank credit facility (the
"New Credit Facility") with a syndicate of banks, which includes a revolving
line of credit (the "Revolving Credit Facility") and a term loan facility (the
"Term Loan Facility"). The Revolving Credit Facility has maximum borrowings of
up to $120 million, as determined based on a portion of eligible accounts
receivable, and bears interest at varying rates based on LIBOR plus a margin
determined using Anteon's ratio of net debt to EBITDA (as defined in the New
Credit Facility) and matures on June 23, 2005. As of September 30, 1999, the
outstanding balance on the Revolving Credit Facility was $5.3 million. The Term
Loan Facility consists of a term loan of $60 million bearing interest at varying
rates based on LIBOR plus a margin determined using Anteon's ratio of net debt
to EBITDA (as defined in the New Credit Facility). Principal payments on the
Term Loan Facility commence on a quarterly basis after June 23, 2001 with $15
million due at maturity on June 23, 2005. The New Credit Facility is secured by
substantially all of the tangible and intangible assets of Anteon and the
Guarantor Subsidiaries (see note 6).
The proceeds from the Notes, the Equity Contribution, and the New Credit
Facility were used, along with other available cash to acquire all of the
outstanding stock of Analysis & Technology, Inc. ("A&T") and repay all
outstanding amounts on the Company's previous bank line of credit. Deferred
financing fees of $772,000 associated with the previous bank line of credit were
written off during the six months ended June 30, 1999 and have been recognized
as an extraordinary item, net of taxes.
4
(3) ACQUISITION OF ANALYSIS & TECHNOLOGY, INC.
On June 23, 1999, the Company acquired all of the outstanding stock of
A&T, a provider of system and engineering technologies, technology-based
training systems, and information technologies to the U.S. Government and
commercial customers. The acquisition has been 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 combination. These estimates were based on preliminary appraisals and
other studies that will be completed during the remainder of 1999. During the
third quarter of 1999, certain of these studies were completed and certain
reallocations were made, resulting in reductions to goodwill of approximately
$3.8 million. Goodwill resulting from the combination is being amortized on a
straight-line basis over thirty years.
The total purchase price paid, including transaction costs, of
approximately $115.5 million, has been preliminarily allocated to the assets and
liabilities acquired as follows (in thousands):
Accounts receivable............................ $ 29,910
Prepaid expenses and other current assets...... 951
Property and equipment ........................ 13,996
Other assets................................... 1,606
Goodwill....................................... 79,708
Deferred tax assets, net....................... 5,058
Accounts payable and accrued expenses.......... (13,619)
Mortgage note payable.......................... (2,077)
---------
Total consideration $ 115,533
=========
Transaction costs of approximately $4.5 million were incurred in
connection with the acquisition, including a fee of approximately $1.1 million
paid to Caxton-Iseman Capital, Inc., an affiliate of and advisor to the
Company's parent, Azimuth Technologies, Inc.
The following unaudited pro forma summary presents consolidated
information as if the acquisition of A&T had occurred as of January 1, 1998. 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 entity (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1999 1998
--------- --------- ---------
Total revenues........................ $ 113,481 $ 361,414 $ 306,574
Total expenses........................ 114,335 361,291 309,619
--------- --------- ---------
Net income (loss) before extraordinary
items............................... (854) 123 (3,045)
--------- --------- ---------
Net (loss).............................. $ (854) $ (340) $ (3,045)
========= ========= =========
(4) COMPREHENSIVE INCOME
Comprehensive income (loss) for the nine and three months ended September
30, 1999 and 1998 was approximately $1,128,000 and $2,781,000 and ($487,000) and
$832,000, respectively.
(5) ARRANGEMENT WITH CAXTON-ISEMAN CAPITAL, INC.
Effective June 1, 1999, the Company entered into an arrangement with
Caxton-Iseman Capital, Inc., an affiliate of and advisor to the
Company's parent, Azimuth Technologies, Inc., whereby the Company is required
to pay annual management fees to Caxton-Iseman Capital, Inc. Prior to the
completion of the acquisition of A&T, the annual management fee was $500,000
and covered the period beginning January 1, 1999. For periods subsequent to
the acquisition of A&T, the annual management fee is $1 million. For
5
the nine months ended September 30, 1999, the Company recognized $375,000 of
management fee expense under the arrangement. Also under the arrangement, the
Company paid Caxton-Iseman Capital, Inc. a transaction fee of approximately $1.1
million in connection with the acquisition of A&T.
(6) DOMESTIC SUBSIDIARIES SUMMARIZED FINANCIAL INFORMATION
Under the terms of the Notes, the Company's wholly-owned domestic
subsidiaries (the "Subsidiary Guarantors") are guarantors of the 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 the Company.
AS OF SEPTEMBER 30, 1999
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CONDENSED CONSOLIDATED BALANCE SHEET CONSOLIDATED
ANTEON GUARANTOR NON-GUARANTOR ELIMINATION ANTEON
CORPORATION SUBSIDIARIES SUBSIDIARIES ENTRIES CORPORATION
----------- ------------ ------------- ----------- ------------
(AMOUNTS IN THOUSANDS)
Cash............................................ $ 565 $ 355 $ 386 $ -- $ 1,306
Receivables..................................... 45,151 66,794 474 -- 112,419
Other current assets............................ 2,393 4,607 223 -- 7,223
Property and equipment, net..................... 3,205 15,843 57 19,105
Due from parent................................. 7,323 -- -- -- 7,323
Investment in and advances to subsidiaries...... 53,658 225 (225) (53,658) --
Goodwill, net................................... 132,837 -- -- -- 132,837
Investments..................................... 909 -- -- -- 909
Other long-term assets.......................... 7,908 4,151 23 12,082
--------- --------- --------- --------- ---------
Total assets.................................... $ 253,949 $ 91,975 $ 938 $ (53,658) $ 293,204
========= ========= ========= ========= =========
Indebtedness.................................... 174,046 1,993 -- -- 176,039
Accounts payable................................ 10,627 4,814 310 -- 15,751
Accrued expenses................................ 29,642 20,468 386 -- 50,496
Other current liabilities....................... (245) 3,469 4 -- 3,228
Other long-term liabilities..................... -- 197 58 -- 254
--------- --------- --------- --------- ---------
Total liabilities............................... 214,070 30,941 758 -- 245,768
Minority interest in subsidiary................. -- -- 59 -- 59
Total stockholders' equity...................... 39,879 61,035 121 (53,658) 47,377
--------- --------- --------- --------- ---------
Total liabilities and stockholders' equity...... $ 253,949 $ 91,975 $ 938 $ (53,658) $ 293,204
========= ========= ========= ========= =========
6
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
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CONDENSED CONSOLIDATED STATEMENTS OF CONSOLIDATED
OPERATIONS ANTEON GUARANTOR NON-GUARANTOR ELIMINATION ANTEON
CORPORATION SUBSIDIARIES SUBSIDIARIES ENTRIES CORPORATION
----------- ------------ ------------- ----------- ------------
(AMOUNTS IN THOUSANDS)
Revenues..................................... $ 148,041 $ 121,573 $ 2,282 $ (579) $ 271,317
Cost of revenues............................. 134,269 102,910 2,117 (579) 238,717
--------- --------- --------- --------- ---------
Gross profit................................. 13,772 18,663 165 -- 32,600
Total operating expenses..................... 9,940 10,451 6 -- 20,397
--------- --------- --------- --------- ---------
Operating income............................. 3,832 8,212 159 -- 12,203
Gain on sales of long-term investments....... 2,463 -- -- -- 2,463
Interest expense (income), net............... 10,627 (18) 10 -- 10,619
Minority interest............................ -- -- 23 -- 23
--------- --------- --------- --------- ---------
Income (loss) before provision for income
taxes and extraordinary item............... (4,332) 8,230 126 -- 4,024
Provision (benefit) for income taxes......... (1,196) 3,281 43 -- 2,128
--------- --------- --------- --------- ---------
Net income before extraordinary item......... (3,136) 4,949 83 -- 1,896
Extraordinary loss, net of tax............... 463 -- -- -- 463
--------- --------- --------- --------- ---------
Net income (loss)............................ $ (3,599) $ 4,949 $ 83 -- $ 1,433
========= ========= ========= ========= =========
7
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
--------------------------------------------------------------
CONSOLIDATED
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS ANTEON GUARANTOR NON-GUARANTOR ANTEON
CORPORATION SUBSIDIARIES SUBSIDIARIES CORPORATION
----------- ------------ ------------- ------------
(AMOUNTS IN THOUSANDS)
Net income (loss)............................................ $ (3,559) $ 4,949 $ 83 $ 1,433
Adjustments to reconcile change in net income (loss) to
net cash provided by operations:
Extraordinary loss......................................... 772 -- -- 772
Gain on sales of long-term investments..................... (2,721) -- -- (2,721)
Depreciation and amortization.............................. 585 1,454 23 2,062
Amortization of goodwill................................... 2,233 -- -- 2,233
Amortization of noncompetes................................ 681 -- -- 681
Amortization of deferred financing......................... 388 -- -- 388
Deferred income taxes...................................... 218 1,158 7 1,383
Minority interest in earnings of subsidiary................ -- 23 -- 23
Changes in assets and liabilities, net of acquired
assets and liabilities..................................... 7,782 (6,035) 81 1,828
--------- --------- --------- ---------
Net cash provided by operating activities.................. $ 6,339 $ 1,549 $ 194 $ 8,082
--------- --------- --------- ---------
Cash flows from investing activities:
Purchases of property and equipment........................ $ (1,981) $ (879) $ (41) $ (2,901)
Acquisitions, net of cash acquired......................... (115,203) -- -- (115,203)
Proceeds from sale of long-term securities................. 10,582 1 (2) 10,580
Purchases of long-term investments......................... (3,040) -- -- (3,040)
Other, net................................................. (30) -- -- (30)
--------- --------- --------- ---------
Net cash used by investing activities...................... $(109,673) $ (878) $ (43) $(110,594)
--------- --------- --------- ---------
Cash flow from financing activities
Proceeds from bank notes payable........................... $ 132,043 $ -- $ -- $ 132,043
Principal payments on bank notes payable................... (202,442) (83) -- (202,525)
Proceeds of senior subordinated notes payable.............. 100,000 -- -- 100,000
Proceeds from term loan facility........................... 60,000 -- -- 60,000
Proceeds from revolving facility........................... 110,500 -- -- 110,500
Principal payments on revolving facility................... (105,200) -- -- (105,200)
Principal payments on Techmatics subnote paybale........... (4,925) -- -- (4,925)
Proceeds from issuance of common stock..................... 22,544 -- -- 22,544
Deferred financing costs................................... (8,775) -- (8,775)
--------- --------- --------- ---------
Net cash provided by financing activities.................. $ 103,745 $ (83) $ -- $ 103,662
--------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents......... 411 588 151 1,150
Cash and cash equivalents beginning of year.................. 154 (233) 235 156
--------- --------- --------- ---------
Cash and cash equivalents end of year........................ $ 565 $ 355 $ 386 $ 1,306
========= ========= ========= =========
8
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(AMOUNTS IN THOUSANDS) ----------------------------------------------------------
CONSOLIDATED
ANTEON GUARANTOR NON-GUARNATOR ANTEON
CORPORATION SUBSIDIARIES SUBSIDIARIES CORPORATION
----------- ------------ ------------- ------------
Revenues...................................... $140,985 $ 37,857 $ 1,703 $180,545
Cost of revenues.............................. 126,968 32,061 1,597 160,626
-------- -------- -------- --------
Gross profit.................................. $ 14,017 $ 5,796 $ 106 $ 19,919
Total operating expenses...................... 8,041 3,708 28 11,777
-------- -------- -------- --------
Operating income (loss)....................... $ 5,976 $ 2,088 $ 78 $ 8,142
Interest expense (income) net................. 3,559 (37) (14) 3,508
Minority interest............................. -- -- 19 19
-------- -------- -------- --------
Income before provision for income taxes...... $ 2,417 $ 2,125 $ 73 $ 4,615
Provision for income taxes.................... 958 848 28 1,834
-------- -------- -------- --------
Net income.................................... $ 1,459 $ 1,277 $ 45 $ 2,781
======== ======== ======== ========
9
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
--------------------------------------------------------------
CONSOLIDATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ANTEON GUARANTOR NON-GUARANTOR ANTEON
CORPORATION SUBSIDIARIES SUBSIDIARIES CORPORATION
----------- ------------ ------------- ------------
(AMOUNTS IN THOUSANDS)
Net income................................................... $ 1,459 $ 1,277 $ 45 $ 2,781
Adjustments to reconcile change in net income to net
cash provided by (used in) operations:
Depreciation and amortization.............................. 575 372 52 999
Goodwill amortization...................................... 1,301 -- -- 1,301
Amortization of noncompete agreements...................... 303 -- -- 303
Amortization of deferred financing and contract costs...... 494 -- -- 494
Deferred income taxes...................................... -- 71 21 92
Changes in assets and liabilities, net of acquired
assets and liabilities..................................... (11,668) (1,449) 347 (12,770)
--------- --------- --------- ---------
Net cash provided by (used in) operating activities.......... $ (7,536) $ 271 $ 465 $ (6,800)
--------- --------- --------- ---------
Cash flows from investing activities:
Purchases of property and equipment........................ (1,311) (229) (91) (1,631)
Acquisition of Techmatics, net of cash..................... (28,490) -- -- (28,490)
Other...................................................... 114 -- 8 122
--------- --------- --------- ---------
Net cash used in investing activities........................ $ (29,687) $ ( 229) $ (83) $ (29,999)
--------- --------- --------- ---------
Cash flow from financing activities:
Proceeds from bank notes payable........................... $ 215,904 $ -- $ -- $ 215,904
Principal payments on bank notes payable................... (172,099) -- -- (172,099)
Proceeds from issuance of common stock..................... 19 -- -- 19
Deferred financing fees.................................... (963) -- -- (963)
--------- --------- --------- ---------
Net cash provided by financing activities.................... $ 42,861 $ -- $ -- $ 42,861
--------- --------- --------- ---------
Net increase in cash and cash equivalents.................... 5,638 42 382 6,062
Cash and cash equivalents beginning of year.................. 830 (195) 17 652
--------- --------- --------- ---------
Cash and cash equivalents end of year........................ $ 6,468 $ (153) $ 399 $ 6,714
========= ========= ========= =========
10
(7) DEFERRED COMPENSATION
In connection with the acquisition of A&T, the Company entered into
employment agreements with certain officers of Interactive Media Corporation
("IMC"), a subsidiary of A&T. The agreements require the Company to pay the
officers $800,000 of aggregate compensation in the event they continue their
employment with IMC for at least eighteen months.
Compensation expense is being accrued over the eighteen month employment period.
(8) BUSINESS PURCHASE CONSIDERATION PAYABLE
As part of the agreement for the Techmatics acquisition, the Company is
required to pay an earnout to the former shareholders of Techmatics based on the
attainment by Techmatics of certain financial performance measures from date of
the acquisition (May 29, 1998) through June 30, 1999. As a result of the earnout
provisions, the amount earned by Techmatics was $5,500,000 and is payable in
April 2000. The earnout was recognized as additional purchase consideration for
the Techmatics acquisition, and accordingly, increased goodwill from the
combination.
(9) SEGMENT INFORMATION
The Company adopted Statement of Financial Accounting Standards No. 131
("SFAS No. 131"), DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION as of June 30, 1999. SFAS No. 131 establishes annual and interim
reporting standards for an enterprise's operating segments.
Based on its organization, the Company operates in two business segments:
the company's government contracting business and IMC's commercial custom
training and performance solutions group.
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 are based on measures such as
revenue and 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.
THREE MONTH PERIOD ENDED SEPTEMBER 30, 1999
(AMOUNTS IN THOUSANDS)
------------------------------------------------------------------------------------
ANTEON INTERACTIVE MEDIA ELIMINATIONS CONSOLIDATED
---------- ----------------- ------------ ------------
Sales to unaffiliated customers $ 119,690 $ 6,018 $ - $ 125,708
Intersegment sales - 359 (359) -
-------------------- ---------------------- ------------------- --------------------
Total revenues $ 119,690 $ 6,377 $ (359) $ 125,708
Operating income $ 4,966 $ 589 $ - $ 5,555
Interest expense, net (5,084) (35) - (5,119)
Other income, net 2,457 - - 2,457
-------------------- ---------------------- ------------------ --------------------
Income before provision for
income taxes $ 2,339 $ 554 $ - $ 2,893
==================== ====================== =================== ====================
11
NINE MONTH PERIOD ENDED SEPTEMBER 30, 1999
(AMOUNTS IN THOUSANDS)
------------------------------------------------------------------------------------
ANTEON INTERACTIVE MEDIA ELIMINATIONS CONSOLIDATED
---------- ----------------- ------------ ------------
Sales to unaffiliated customers $ 252,297 $ 19,020 $ - $ 271,317
Intersegment sales - 127 (127) -
-------------------- ---------------------- ------------------- --------------------
Total revenues $ 252,297 $ 19,147 $ (127) $ 271,317
-------------------- ---------------------- ------------------- --------------------
Operating income $ 10,555 $ 1,648 - $ 12,203
Interest expense, net (10,582) (37) - (10,619)
Other income, net 2,440 - - 2,440
-------------------- ---------------------- ------------------- --------------------
Income before provision for
income taxes $ 2,413 $ 1,611 - $ 4,024
==================== ====================== =================== ====================
12
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 are set forth in the paragraphs above that discuss
the Company's backlog, liquidity, capital resources, and "Year 2000" conversion.
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 A&T 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, our ability to attract and retain qualified
personnel, and third party failures to complete the "Year 2000" conversions in a
timely manner.
GENERAL
Anteon is a leading provider of advanced information technology and
engineering services principally to a wide range of customers within the U.S.
Federal government. The Company serves hundreds of governmental clients through
over 40 offices worldwide. The Company has performed work for all 14
Cabinet-level agencies, designing, maintaining and upgrading critical elements
of the government's information technology infrastructure, such as emergency
response, defense, intelligence, logistics and financial management systems. The
Federal government is among the world's largest purchasers of information
technology with expected total expenditures in fiscal 1999 in excess of $30
billion. In April 1996 an investor group led by affiliates of Caxton-Iseman
Capital, Inc. acquired Ogden Professional Services Corporation (the Predecessor
Company), which was renamed Anteon Corporation. Since that acquisition, the
Company has implemented a strategy designed to increase revenues through
internal growth and acquisitions, improve earnings before interest, taxes,
depreciation and amortization, profit margins and improve asset turnover.
Substantially all of the Company's services and products are provided under
long-term government contracts. Anteon's contract base is well diversified and
in 1998, the Company performed work on approximately 3,000 task orders under
more than 500 contracts for approximately 400 customers. Management estimates
that no task order accounted for more than 5% of 1998 revenues. The contracts
the Company perform under can 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"). Time and materials contracts
represented approximately 47% of 1998 revenues. 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. Cost-plus
contracts represented approximately 34% of 1998 revenues. 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. From
1995 - 1998 fixed price contracts have represented only 15% to 20% of revenues,
including 19% of 1998 revenues.
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 comprehensive management information and resource management systems
in order to increase the productivity of the
13
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 demonstrated performance record and service excellence
have enabled the Company 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 $2.3 billion at
September 30, 1999. These backlog amounts consist of "funded" backlog, which is
based upon amounts actually appropriated by a customer for payment of goods and
services and "unfunded" backlog which is based upon management's estimates of
the future potential of our existing contracts to generate revenues for us.
RESULTS OF OPERATIONS
A summary of comparative results for the nine months ended and the quarters
ended September 30, 1999 and September 30, 1998 is as follows:
QUARTER ENDED SEPTEMBER 30
(amounts in thousands)
- -------------------------------------------------------------------------------
PERCENTAGE
1999 1998 CHANGE
---- ---- ------
Revenue $ 125,708 $ 72,349 73.8%
Operating income $ 5,555 $ 3,133 77.3%
Income before provision for income
taxes $ 2,893 $ 1,356 113.3%
Net income $ 1,362 $ 832 63.7%
NINE MONTHS ENDED SEPTEMBER 30
(amounts in thousands)
- -------------------------------------------------------------------------------
PERCENTAGE
1999 1998 CHANGE
---- ---- ------
Revenue $ 271,317 $ 180,545 50.3%
Operating income $ 12,203 $ 8,142 49.8%
Income before provision for income
taxes and extraordinary item $ 4,024 $ 4,615 (12.8%)
Net income $ 1,433 $ 2,781 (48.5%)
Revenue increased 73.8% to $125.8 million for the quarter ended September
30, 1999 from $72.3 million for the quarter ended September 30, 1998. For the
nine month period ended September 30, 1999, revenue increased 50.3% to $271.3
million from $180.5 million for the nine month period ended September 30, 1998.
The increases in revenue were attributable to internal growth in several
business units as well as the addition from June 23, 1999 of results of the
Company's latest acquisition, A&T. For the quarter ending September 30, 1999,
internal growth was 10%. It was driven by increases in both the Company's
information technology and
14
engineering services businesses. In addition, A&T provided $46.5 million in
revenue during the third quarter of 1999 which was a 13% increase from its third
quarter revenues in 1998. July 1999 was the first month in which Anteon included
A&T's results. Revenue growth for the nine months ended September 30, 1999 was
primarily attributable to nine months of Techmatics revenue versus only four
months in 1998 and growth in our engineering services and software products
sales. These gains offset a slight decline in our West Coast business resulting
from a transition of tasks on our sole source PacZone contracts to the Answer
contract which was awarded in December 1998.
Operating earnings increased 77.3% for the three months ended September 30,
1999 to $5.6 million from $3.1 million for the quarter ended September 30, 1998.
Operating earnings as a percentage of revenue (operating margin) increased to
4.4% compared with 4.3% in the prior year comparable quarter. For the nine
months ended September 30, 1999, operating earnings increased 49.8% to $12.2
million from $8.1 million the first nine months of 1998. The increased operating
earnings for the quarter resulted from growth in the Company's information
technology, engineering services and software products sales businesses. In
particular, the Company successfully completed a large sale to a government
agency during the period. In addition, A&T contributed $2.9 million to
earnings with an above average margin during the third quarter. Operating
earnings growth for the nine months ended September 30, 1999 versus September
30, 1998 was also attributable to increases in earnings of the engineering
services and PAS businesses and the inclusion of Techmatics for a full nine
months. In addition, A&T is included from July 1, 1999.
Interest expense increased for both the nine month and three month periods
in 1999 from the comparable periods of 1998 due primarily to the $100 million in
12% senior subordinated notes which we issued in May 1999. In addition, interest
expense was amortized for deferred loan and financing fees.
Other expense net increased in the third quarter of fiscal 1999 primarily
due to an increase in amortization of goodwill associated with the acquisition
of A&T in June 1999.
Earnings before income taxes increased 113.3% to $2.9 million in the third
quarter of fiscal 1999 from $1.4 million in the third quarter of 1998. In
addition to the ongoing operating earnings during the period, the Company also
realized a gain on the sale of long term investments. The Company's effective
tax rate was 52.9% for the three-month period ended September 30, 1999 compared
with 38.6% for the three-month period ended September 30, 1998. 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. Earnings before income taxes for the nine months ended September
30, 1999 decreased 12.8% to $4.0 million from $4.6 million for the nine months
ended September 30, 1998. This was due primarily to the increased interest
expense for the new senior subordinated notes. Anteon's effective tax rate for
the nine months ended September 30, 1999 increased to 52.9% from 38.6% for the
first three quarters of 1998.
Net earnings for the third quarter of 1999 increased 63.7% to $1.4 million
from $832,000 in the third quarter of fiscal 1998. The revenue increase,
operating margin increase and gains from the sale of long term investments all
contributed to the net earnings increase for the third quarter of 1999. For the
nine months ended September 30, 1999 net earnings fell 48.5% to $1.4 million
from $2.8 million during the nine months ended September 30, 1998. This was
primarily attributable to a $7.1 million increase in interest expense for the
senior subordinated notes during the second and third quarters of 1999.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended September 30, 1999, net cash provided by
operating activities was $8.1 million. Contract receivables totaled $112.4
million at September 30, 1999, $68.1 million at September 30, 1998, and
represented 38% and 48%, respectively, of total assets at each of those dates.
For the first three quarters of 1999 net cash used by investing activities
was $112.4 million. The primary use of cash during the nine months was for the
purchase of A&T in June.
For the first nine months of 1999 the net cash provided by financing
activities was $103.7 million. The primary source of cash from financing
activities for the nine months ending September 30, 1999 was approximately
$65.3 million from the new bank line credit facility and $100 million in senior
subordinated notes. The primary use of cash in the third quarter was for pay
down on the company's line of credit.
15
The total funds available to the Company under its New Credit Facility as
of September 30, 1999 were $63.2 million and are sufficient to meet ongoing
working capital requirements for the foreseeable future. Borrowings under the
Revolving Credit Facility were $5.3 million as of September 30, 1999.
As of September 30, 1999 the Company does not have any major capital
commitments.
The Company believes that inflation has not had a material effect on its
business.
RECENT ACCOUNTING PRONOUNCEMENTS
In 1998, the Financial Accounting Standards Board issued SFAS No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES ("SFAS 133"). SFAS
No. 133 becomes effective June 15, 2000 and will require the Company to disclose
additional information on any hedging activities. The Company is reviewing this
standard; however, it is not expected that implementing this Standard will
significantly impact the Company.
YEAR 2000
The Company has completed an assessment of its computer systems and has
identified the systems that will be affected by the "Year 2000" issue. The
Company has substantially completed a plan for corrective action, including
modification or replacement of certain systems such as security and telephones.
This includes the Company's personal computers, servers, security systems and
facilities. The Company presently believes that, with modifications to existing
software and conversions to new software, the "Year 2000" issue will not pose
significant operational problems for the Company's computer systems or
operations. The total cost of modification and replacement of affected systems
has not had a material effect on the Company's financial position or results of
operations. Not withstanding the foregoing, there is a risk that the "Year 2000"
issue could adversely affect the Company.
The "Year 2000" issue also creates risk for the Company from unforeseen
problems from third parties with whom the Company deals. The Company is in the
process of contacting its key suppliers, customers, and other third parties to
determine the possible impact on its business. There can be no assurance that
their "Year 2000" solutions will be successful. If third parties do not convert
their systems in a timely manner, or if other unforeseen problems arise relative
to the "Year 2000" issue, there is a risk that this could have a material
adverse impact on the Company's ability to conduct its business.
16
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: November 12, 1999 /s/Joseph Kampf
---------------------------
Joseph Kampf - President and
Chief Executive Officer
Date: November 12, 1999 /s/Carlton B. Crenshaw
---------------------------
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
NONE.
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
27.1 FINANCIAL DATA SCHEDULE
B. REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the
quarter ended September 30, 1999.
18
EXHIBIT INDEX
Exhibit Number Description of Documents
27 Financial Data Schedules
- For quarter ended September 30, 1999
19