UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 2002
Commission File No. 000-49604
MANTECH INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 22-1852179
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
12015 Lee Jackson Highway, Fairfax, VA 22033
--------------------------------------------
(Address of principal executive offices)
(703) 218-6000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, Par Value $0.01 Per Share
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. [X] Yes [_] No
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of April 30, 2002, was approximately $196,000,000.00.
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of April 30, 2002: ManTech International Corp. Class A Common
Stock, $0.01 par value, 9,098,813 shares; ManTech International Corp. Class B
Common Stock, $0.01 par value, 17,131,004 shares.
ManTech International Corporation
INDEX
Page No.
PART I - FINANCIAL INFORMATION .............................. 3
Item 1. Financial Statements ............................... 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ............... 11
Item 3. Quantitative and Qualitative Disclosures About
Market Risk ....................................... 12
PART II - OTHER INFORMATION .................................. 13
Item 1. Legal Proceedings .................................. 13
Item 2. Changes in Securities and Use of Proceeds .......... 14
Item 3. Defaults Upon Senior Securities .................... 14
Item 4. Submission of Matters to a Vote of Security
Holders............................................ 14
Item 5. Other Information .................................. 14
Item 6. Exhibits and Reports on Form 8-K ................... 15
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MANTECH INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
As of March 31, As of December 31,
--------------- ------------------
2002 2001
---- ----
(unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 81,324 $ 26,902
Receivables - net 101,090 92,056
Prepaid expenses and other 6,280 11,937
Assets held for sale 18,904 16,988
----------- ----------
Total current assets 207,598 147,883
Property and equipment - net 7,734 6,615
Goodwill and other intangibles 10,935 10,956
Investments 7,735 7,782
Employee supplemental savings plan assets 7,624 7,637
Other assets 5,074 5,369
----------- ----------
TOTAL ASSETS $ 246,700 $ 186,242
=========== ==========
CURRENT LIABILITIES:
Current portion of debt $ - $ 1,969
Accounts payable and accrued expenses 23,151 26,212
Accrued salaries and related expenses 16,553 17,499
Deferred income taxes 10,888 19,161
Billings in excess of revenue earned 2,802 2,656
Liabilities held for sale 11,682 12,764
----------- ----------
Total current liabilities 65,076 80,261
Debt - net of current portion 26,104 70,343
Deferred rent 324 327
Accrued retirement 9,043 9,111
Deferred income taxes 7,086 2,140
Minority interest 43 41
----------- ----------
TOTAL LIABILITIES 107,676 162,223
----------- ----------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE COMMON STOCK - 1,462
STOCKHOLDERS' EQUITY:
Common stock, Class A 247 1,179
Common stock, Class B 15 -
Common stock, Class C - 21
Additional paid in capital 113,895 2,468
Retained earnings 26,266 34,304
Accumulated other comprehensive loss (1,399) (1,443)
Deferred compensation 640 640
Treasury stock - at cost (640) (14,612)
----------- ----------
Total stockholders' equity 139,024 22,557
----------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 246,700 $ 186,242
=========== ==========
See notes to consolidated financial statements.
3
MANTECH INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands Except Per Share Amounts)
Three Months Ended March 31,
------------------------------
2002 2001
---- ----
(unaudited) (unaudited)
REVENUES $ 108,134 $ 105,081
COST OF SERVICES 88,610 86,433
----------- -----------
GROSS PROFIT 19,524 18,648
----------- -----------
COSTS AND EXPENSES:
General and administrative 11,433 10,436
Depreciation and amortization 488 826
----------- -----------
Total costs and expenses 11,921 11,262
----------- -----------
INCOME FROM OPERATIONS 7,603 7,386
Interest expense 217 807
Other income (297) (443)
------------ -----------
INCOME BEFORE PROVISION FOR INCOME
TAXES AND MINORITY INTEREST 7,683 7,022
Provision for income taxes (3,108) (3,006)
Minority interest (2) (7)
------------ -----------
INCOME FROM CONTINUING OPERATIONS 4,573 4,009
Loss from discontinued operations - net - (2,361)
----------- -----------
NET INCOME $ 4,573 $ 1,648
=========== ===========
BASIC EARNINGS (LOSS) PER SHARE:
Income from continuing operations $ 0.20 $ 0.22
Loss from discontinued operations - (0.13)
----------- -----------
$ 0.20 $ 0.09
============ ===========
Weighted average common shares outstanding 22,700,345 18,558,589
=========== ===========
DILUTED EARNINGS (LOSS) PER SHARE:
Income from continuing operations $ 0.20 $ 0.22
Loss from discontinued operations - (0.13)
----------- -----------
$ 0.20 $ 0.09
=========== ===========
Weighted average common shares outstanding 22,933,015 18,718,210
=========== ===========
See notes to consolidated financial statements.
4
MANTECH INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited: Dollars in Thousands)
Accumulated
Other
Additional Comprehensive Comprehensive Total
Common Paid In Income Retained (Loss) Deferred Treasury Stockholders
Stock Capital (Loss) Earnings Income Compensation Stock Equity
----- ------- ---- -------- ------------- ------------ ----- ------
Balance, January 1, 2002 $ 1,200 $ 2,468 $ 34,304 $(1,443) $640 $(14,612) $ 22,557
Change in redemption feature
of Class B stock 1,462 1,462
Retire treasury stock (1,342) (19) (12,611) 13,972 -
Recapitalize common stock (1,134) 1,134 -
Issuance of Class A common stock 76 110,312 110,388
Net Income $4,573 4,573 4,573
Other comprehensive income (loss):
Cash flow hedge 229
Translation adjustments (185)
-----
Other comprehensive income 44 44 44
-----
Comprehensive income $4,617
=====
------- -------- -------- ------- ---- -------- --------
Balance, March 31, 2002 $ 262 $113,895 $ 26,266 $(1,399) $640 $ (640) $139,024
======= ======== ======== ======= ==== ======== ========
See notes to consolidated financial statements.
5
MANTECH INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
Three Months Ended March 31,
------------------------------
2002 2001
---- ----
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,573 $ 1,648
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Equity in earnings of affiliates (297) (443)
Loss from discontinued operations - 2,361
Deferred income taxes (2,586) 620
Minority interest in income of consolidated subsidiaries 2 15
Loss on disposals of property and equipment 6 8
Depreciation and amortization 864 1,315
Change in assets and liabilities - net of effects from discontinued businesses:
Increase in receivables (10,106) (2,252)
Decrease in prepaid expenses and other 4,752 4,345
Decrease in accounts payable and accrued expenses (2,871) (2,813)
(Decrease) increase in accrued salaries and related expenses (945) 1,921
Decrease in billings in excess of revenue earned (196) (3,183)
(Decrease) increase in deferred rent (3) 95
(Decrease) increase in accrued retirement (68) 209
---------- ----------
Net cash (used in) provided by operating activities of continuing operations (6,875) 3,846
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in property and equipment (748) (303)
Proceeds from sales of property and equipment 1 -
Proceeds from notes receivable 250 -
Loans receivable from GSE - (550)
Investment in capitalized software products (216) (282)
Dividends from investments 303 285
---------- ----------
Net cash used in investing activities of continuing operations (410) (850)
---------- ----------
6
MANTECH INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
Three Months Ended March 31,
----------------------------
2002 2001
---- ----
(unaudited) (unaudited)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in borrowings under lines of credit (32,300) (7,557)
Repayment of term loan (5,908) (800)
Repayment of notes payable - (1,000)
Repayment of subordinated debt (8,000) -
Proceeds from Common Stock issuance 110,388 -
--------- ---------
Net cash provided by (used in) financing activities of continuing operations 64,180 (9,357)
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS (22) 10
--------- ---------
NET CASH USED IN DISCONTINUED OPERATIONS (2,451) (1,488)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 54,422 (7,839)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 26,902 29,578
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 81,324 $ 21,739
========= =========
See notes to consolidated financial statements.
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended March 31, 2002 and 2001
1. Description of the Business
ManTech International Corporation delivers a broad array of information
technology and technical services solutions to U.S. federal government
customers, focusing primarily on critical national defense programs for the
intelligence community and Department of Defense. We design, develop, procure,
implement, operate, test and maintain mission-critical, enterprise information
technology and communication systems and infrastructures for our federal
government customers in the United States and 28 countries worldwide.
2. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of
ManTech International Corporation have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
note disclosures normally included in the annual financial statements, prepared
in accordance with accounting principles generally accepted in the United States
of America, have been condensed or omitted pursuant to those rules and
regulations, although the Company believes that the disclosures made are
adequate to insure that the information is not misleading.
New Accounting Pronouncements - In June 2001, the Financial Accounting Standards
Board (FASB) issued Statements of Financial Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets. SFAS No. 142 requires that, upon its
adoption, amortization of goodwill will cease and instead, the carrying value of
goodwill will be evaluated for impairment on an annual basis. Identifiable
intangible assets will continue to be amortized over their useful lives and
reviewed for impairment in accordance with SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.
SFAS No. 142 will be effective for fiscal years beginning after December 15,
2001. The Company has not yet completed its analysis of this new pronouncement
and the impact it will have on the consolidated financial statements.
In July 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 requires that the fair value of a liability for an
asset retirement obligation be recognized in the period in which it is incurred,
if a reasonable estimate of fair value can be made. The associated asset
retirement cost would be capitalized as part of the carrying amount of the
long-lived asset. SFAS No. 143 will be effective for fiscal years beginning
after June 15, 2002. The Company has not yet completed its analysis of this new
pronouncement and the impact it will have on the consolidated financial
statements.
In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which replaces SFAS No. 121. SFAS No. 144
requires that long-lived assets be measured at the lower of carrying amount or
fair value less cost to sell, whether reported in continuing operations or in
discontinued operations. SFAS No. 144 also broadens the reporting of
discontinued operations to include all components of an entity with operations
that can be distinguished from the rest of the entity and that will be
eliminated from the ongoing operations of the entity in a disposal transaction.
The provisions of SFAS No. 144 are effective for financial statements issued for
fiscal years beginning after December 15, 2001. The Company has not yet
completed its analysis of this new pronouncement and the impact it will have on
the consolidated financial statements.
In November 2001, the EITF issued Topic No. D-103, Income Statement
Characterization of Reimbursements Received for "Out-of-Pocket" Expenses
Incurred. EITF No. D-103 requires that companies report reimbursements received
for out-of-pocket expenses incurred as revenue, rather than as a reduction of
expenses. The provisions of EITF No. D-103 are effective for financial
statements issued for fiscal years beginning after December 15, 2001. As the
Company has historically accounted for reimbursements for out-of-pocket expenses
in the manner provided for under EITF No. D-103, the adoption of the provisions
of EITF No. D-103 did not have an impact on the Company's consolidated financial
position or results of operation.
Reclassifications - Certain reclassifications have been made to previously
reported balances to conform with the current-period presentation.
3. Earnings Per Share
Basic earnings per share has been computed by dividing net income by the
weighted average number of shares of Common Stock outstanding during each
period. Shares issued during the period, including shares issued during the
period ended March 31, 2002, pursuant to our initial public offering, and shares
acquired during the period, if any, are weighted for the portion of the period
that they were outstanding. Diluted earnings per share have been computed in a
manner consistent with that of basic earnings per share while giving effect to
all potentially dilutive common shares that were outstanding during each period.
All share data for all periods has been updated to reflect the 16.3062-for-one
stock split effected in January 2002. The weighted average number of common
shares outstanding is computed as follows:
8
Three Months Ended March 31,
----------------------------
2002 2001
---- ----
Basic weighted average common shares outstanding 22,700,345 18,558,589
Effect of potential exercise of stock options 232,670 159,621
---------- ----------
Diluted weighted average common shares outstanding 22,933,015 18,718,210
========== ==========
4. Goodwill
The FASB recently issued SFAS No. 141 "Business Combinations", and SFAS No. 142,
"Goodwill and Other Intangible Assets". SFAS No. 142 requires that goodwill no
longer be amortized against earnings, but instead reviewed periodically for
impairment. The Company has adopted SFAS No. 142 effective January 1, 2002, and
as a result, amortization of goodwill was discontinued. Goodwill amortization
for the three months ended March 31, 2001, was $288,000. Net income and fully
diluted earnings per share for the three months ended March 31, 2001, assuming
goodwill was not amortized during this period would have been $1,918,000 and
$0.10, respectively.
5. Business Segment and Geographic Area Information
The Company operates as one segment, delivering a broad array of information
technology and technical services solutions under contracts with the U.S.
Government, state and local governments, and commercial customers. The company's
federal government customers typically exercise independent contracting
authority, and even offices or divisions within an agency or department may
directly, or through a prime contractor, use the company's services as a
separate customer so long as that customer has independent decision-making and
contracting authority within its organization. No single customer accounted for
10% or more of the Company's accounts receivable or revenues as of or for the
periods ended March 31, 2002 and 2001. In addition, there were no sales to any
customers within a single country except for the United States where the sales
accounted for 10% or more of total revenue. The company treats sales to U.S.
Government customers as sales within the United States regardless of where the
services are performed. Substantially all assets of continuing operations were
held in the United States for the periods ended March 31, 2002 and 2001.
Revenues by geographic customer and the related percentages of total revenues
for the periods ended March 31, 2002 and 2001, were as follows (in thousands):
Three Months Ended March 31,
----------------------------
2002 2001
---- ----
United States $ 106,864 $ 103,246
International 1,270 1,835
---------- ---------
$ 108,134 $ 105,081
========== =========
United States 98.8% 98.3%
International 1.2 1.7
---------- ----------
100.0% 100.0%
========== ==========
6. Revenues and Receivables
The Company delivers a broad array of information technology and technical
services solutions under contracts with the U.S. Government, state and local
governments, and commercial customers. Revenues from the U.S. Government under
prime contracts and subcontracts, as compared to total contract revenues, were
approximately 96.6% and 95.1% for the periods ended March 31, 2002 and 2001,
respectively. The components of contract receivables are as follows (in
thousands):
As of March 31, December 31,
--------------- ------------
2002 2001
---- ----
Billed receivables $ 74,209 $ 70,291
Unbilled receivables:
Amounts currently billable 21,040 14,706
Revenues recorded in excess of estimated contract value or funding 2,190 2,548
Retainage 1,805 1,988
Indirect costs incurred in excess of provisional billing rates 3,656 4,133
Allowance for doubtful accounts (1,810) (1,610)
----------- ---------
$ 101,090 $ 92,056
=========== =========
9
7. Recent Events
Reincorporation, Recapitalization and Stock Split
The Company is incorporated in Delaware and is the successor by merger to
ManTech International Corporation, a New Jersey corporation. As a result of the
merger, in January 2002 the Company reincorporated from New Jersey to Delaware
and recapitalized its common stock. The predecessor corporation had three
classes of common stock outstanding prior to the effective date of the merger.
Class A common stock, Class B common stock and Class C common stock, of which
the Class B common stock was redeemable and, therefore, not counted as equity
for accounting purposes. On the effective date of the merger, each outstanding
share of the New Jersey corporation's common stock was exchanged for one share
of our Class A common stock or for one share of our Class B common stock.
Immediately after the merger, we effected a 16.3062-for-one stock split of our
Class A common stock and Class B common stock. The holders of each share of our
Class A common stock are entitled to one vote per share, and the holders of each
share of Class B common stock are entitled to ten votes per share.
Initial Public Offering
The Company successfully closed its Initial Public Offering on February 12,
2002. Net proceeds to the Company were approximately $110.4 million, after
deducting the estimated expenses related to the offering and the portion of the
underwriting discount payable by the Company. Proceeds from the offering were
used to repay subordinated debt of $8.0 million, the balance of the term loan of
$5.9 million and $17.7 million of the revolving credit facility, plus accrued
interest. The balance of the net proceeds of the offering (together with cash on
hand, additional borrowings and capital stock) will be used to fund all or a
portion of the costs of any acquisitions of complementary businesses we
determine to pursue in the future, although there are no assurances that the
Company will be able to successfully consummate any such acquisitions. To the
extent that the Company cannot pursue or consummate any acquisitions, any
remaining net proceeds will be used for working capital and general corporate
purposes.
8. Discontinued Operations
ManTech's discontinued operations include three foreign and two domestic
commercial businesses. As of April 30, 2002, the negotiations for the sale of
the U.S.-based environmental consulting business, the China-based consulting
business and the U.S.-based application hosting business have concluded, with no
significant surplus or detriment, compared to projected losses, expected for the
disposition of those three business lines. The remaining two dispositions are
the United Kingdom-based bank remittance processing business and the
Australia-based software solutions consulting business. For the UK-based
operation, a potential buyer is carrying out due diligence, and the company
expects to complete a transaction before June 30, 2002. For the Australian
operation, ManTech expects to complete a transaction during the third quarter of
2002, a delay from the original guidance due to a deteriorating market for the
sale of commercial technology businesses in Australia. Although the company has
adjusted the estimated closing date, no additional charges are anticipated to
discontinued operations at this time.
10
* * * * * *
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of our financial condition and results of operations
should be read together with the consolidated financial statements and the notes
to those statements. This discussion contains forward-looking statements that
involve risks and uncertainties. The factors that could cause actual results to
differ materially from those anticipated include, but are not limited to the
following: failure of government customers to exercise options under contracts,
funding decisions of U.S. Government projects; government contract procurement
(such as bid protest) and termination risks; competitive factors such as pricing
pressures and/or competition to hire and retain employees; material changes in
laws or regulations applicable to the company's businesses and other risk
factors discussed in the company's Registration Statement on Form S-1, filed
with the SEC on February 7, 2002 and the company's annual report on Form 10-K,
filed with the SEC on April 1, 2002. Our statements in this report are made as
of May 15, 2002, and the Company undertakes no obligation to update any of the
forward looking statements made herein, whether as a result of new information,
future events, changes in expectations or otherwise. This discussion addresses
only our continuing operations. For more information on our discontinued
operations, please see note 8 to our condensed consolidated financial
statements.
Overview
We deliver a broad array of information technology and technical services
solutions to U.S. federal government customers, focusing primarily on critical
national defense programs for the intelligence community and Department of
Defense. We design, develop, procure, implement, operate, test and maintain
mission-critical, enterprise information technology and communication systems
and intelligence processing infrastructures for our federal government
customers. We also provide solutions to federal government civilian agencies, as
well as to state and local governments and commercial customers.
A substantial portion of our revenues are derived from contracts with the
federal government. For the periods ended March 31, 2002 and 2001, 96.6% and
95.1%, respectively, of our revenues were derived, either as a prime or a
subcontractor, from contracts with the federal government. For the periods
ended March 31, 2002 and 2001, we derived 85.8% and 83.4%, respectively, of our
revenues from contracts with our customers in the intelligence community and
Department of Defense.
Our revenues consist primarily of payments for the work of our employees and, to
a lesser extent, the pass-through of costs for material and subcontract efforts
under contracts with our customers. We enter into three types of federal
government contracts: cost-plus, time-and-materials and fixed-price. Under
cost-plus contracts, we are reimbursed for allowable costs and paid a fee, which
may be fixed or performance-based. Under time-and-materials contracts, we are
reimbursed for labor at negotiated hourly billing rates and for certain
expenses. We assume financial risk on time-and-material contracts because we
assume the risk of performing those contracts at negotiated hourly rates. Under
fixed-price contracts, we perform specific tasks for a fixed price. Compared to
cost-plus contracts, fixed-price contracts generally offer higher margin
opportunities but involve greater financial risk because we bear the impact of
cost overruns and receive the benefit of cost savings. For the period ended
March 31, 2002, we derived approximately 36.0%, 40.4% and 23.6% of our revenues
from cost-plus, time-and-materials and fixed-price contracts, respectively.
Our most significant expense is our cost of services, which consists primarily
of direct labor costs for program personnel and direct expenses incurred to
complete contracts, including cost of materials and subcontract efforts. Our
ability to accurately predict personnel requirements, salaries and other costs,
as well as to manage personnel levels and successfully redeploy personnel, can
have a significant impact on our cost of services. General and administrative
expenses consist primarily of costs associated with our management, finance and
administrative groups; personnel training; sales and marketing expenses which
include bid and proposal efforts; and certain occupancy, travel and other
corporate costs.
The following table sets forth, for each period indicated, the percentage of our
revenues derived from each of our major types of customers.
Three Months Ended March 31,
----------------------------
2002 2001
---- ----
Intelligence / Department of Defense 85.8% 83.4%
Federal Civilian Agencies 10.8 11.7
Commercial / State / Local 3.4 4.9
----- -----
Total 100.0% 100.0%
------ ------
Three Months Ended March 31, 2002 Compared to the Period Ended March 31, 2001
Revenues. Revenues increased 2.9% to $108.1 million for the period ended March
31, 2002, compared to $105.1 million for 2001. This increase is attributable
primarily to additional work under contracts that were in existence during the
prior year, and the new CECOM contract. Additional work from the Department of
State and the Army for secure systems and infrastructure solutions, contributed
significantly to the increased revenues. We derived approximately 39.9% of our
revenues for the period ended March 31, 2002 from work under GSA schedule
contracts, compared with approximately 28.9% for 2001.
Cost of services. Cost of services increased 2.5% to $88.6 million for the
period ended March 31, 2002, compared to $86.4 million for 2001. As a percentage
of revenues, cost of services decreased from 82.3% to 81.9%. Direct labor costs
increased by 13.0%, while other direct costs decreased by 9.1% over 2001.
Material and subcontract costs decreased to $34.0 million for the period ended
March 31, 2002, compared to $37.5 million for 2001. The decrease in material
costs is primarily in our ATE information technology work.
Gross profit. Gross profit increased 4.7% to $19.5 million for the period ended
March 31, 2002, compared to $18.6 million for 2001. Gross profit margin
increased to 18.1% for the period ended March 31, 2002, compared to 17.7% for
2001. The increase resulted from higher margins on new secure systems and
infrastructure and information technology tasks, in conjunction with our
improved realization of cost efficiencies, as a greater percentage of our work
is performed under GSA schedule contracts.
11
General and administrative. General and administrative expenses increased 9.6%
to $11.4 million for the period ended March 31, 2002, compared to $10.4 million
for 2001 for additional management personnel and infrastructure to support the
growth of our business. As a percentage of revenues, general and administrative
expenses increased 0.7% over the comparable period during the prior year as a
result of infrastructure growth and non-recurring costs related to the initial
public offering.
Depreciation and amortization. Depreciation and amortization expense has
decreased 40.9% for the period ended March 31, 2002 compared to the prior year.
Depreciation expense has remained relatively constant but amortization is
significantly reduced as a result of our adoption of SFAS No. 142, which
discontinues the amortization of acquired goodwill.
Income from operations. Income from operations increased 2.9% to $7.6 million
for the period ended March 31, 2002, compared with $7.4 million for 2001. The
increase was primarily a result of the increase in revenues relative to the cost
of services discussed above.
Income from continuing operations. Income from continuing operations increased
14.1% to $4.6 million for the period ended March 31, 2002, compared to $4.0
million for 2001. The increase resulted from higher operating income, reduced
interest expense and a lower effective tax rate. Net interest expense for 2002
decreased by 73.1% from the period ended March 31, 2001 as a result of debt
reduction and investment of our IPO proceeds. Our effective tax rate for the
period ended March 31, 2002 was 40.5%, compared to 42.8% for 2001, due primarily
to the elimination of non-deductible goodwill amortization in current earnings.
Liquidity and Capital Resources
Our primary source of liquidity has been cash provided by operations and our
revolving credit and term-loan facility. Proceeds from our initial public
offering also provide a source of liquidity. We fund our operations primarily
through cash provided by operating activities. Cash used in operating activities
of continuing operations was $6.9 million for the period ended March 31, 2002, a
decrease of $10.7 million from the prior year. The primary reason for this
decrease was increased contract receivables and decreased salary related
accruals and tax accruals offset by an increase in income from continuing
operations, less of a decrease in billings in excess of revenue earned than the
comparative period, and decreases in prepaid and other assets.
Cash used in investing activities of continuing operations was $0.4 million for
the period ended March 31, 2002, compared to $0.9 million for the prior year.
Investment activities in 2002 included purchase of property and equipment and
investments in intellectual property.
Cash provided by financing activities of continuing operations was $64.2 million
for the period ended March 31, 2002, compared to cash used of $9.4 million for
the period ended March 31, 2001. The net cash provided during 2002 is primarily
the result of the net proceeds of our initial public offering, less amounts used
to repay debt.
On December 17, 2001, we executed a new Business Loan and Security Agreement
with Citizens Bank of Pennsylvania, PNC Bank N.A., Branch Banking and Trust
Company of Virginia, and Chevy Chase Bank, F.S.B. to refinance and replace our
prior agreement. The new agreement provides for a $65.0 million revolving credit
facility and a $6.4 million term loan. Under the term loan portion of the new
agreement, the principal balance was payable in consecutive quarterly
installments of $0.5 million on the last business day of each quarter commencing
with the last business day of December 2001. The maturity date of the new
agreement is December 31, 2004. Borrowings under the new agreement are
collateralized by our eligible contract receivables, inventory, all of our stock
in our subsidiaries and certain property and equipment and bear interest at the
London Interbank Offering Rate (LIBOR), or the lender's prime rate, plus
market-rate spreads that are determined based on a company leverage ratio
calculation. The LIBOR spreads may range from 1.75% to 2.75% and the prime rate
spreads may range from 0.50% to 1.50%. The term loan balance and accrued
interest and all but $25 million of the revolving credit facility were repaid
during the period. At March 31, 2002, we had $25.0 million in borrowings
outstanding under the agreement.
In January 1998, we executed a seven-year Subordinated Credit Agreement with
First Source Financial LLP for $8.0 million to finance the redemption of
preferred stock. The principal balance was payable in eight consecutive
quarterly installments of $0.9 million on the first business day of each quarter
commencing with the first business day of January 2003. A ninth and final
payment was due on the last day of December 2004. The balance and accrued
interest of this credit facility was repaid during the period.
We believe the capital resources available to us under our credit agreements and
cash from our operations are adequate to fund our ongoing operations and to
support the internal growth we expect to achieve for at least the next 12
months. We anticipate financing our external growth from acquisitions as well as
our longer-term internal growth through one or a combination of the following:
cash from operations; additional borrowing; proceeds from our initial public
offering and additional issuances of equity; use of the existing revolving debt
facility; or a refinancing of our credit facilities.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk for changes in interest rates relates primarily to
the Company's existing credit facility. During the three months ended March 31,
2002, the Company had paid all but $25.0 million in borrowings outstanding under
the agreement. A hypothetical 10% increase in interest rates would have
increased our three month interest expense by less than $0.1 million.
In November 2000, we entered into an interest swap agreement in order to reduce
our exposure associated with the market volatility of interest rates. This
agreement has a notional amount of $25.0 million and, as of March 31, 2002, had
a rate of 6.83%. The value of the swap at March 31, 2002 was a negative
$1.7 million.
The Company does not use derivative financial instruments for speculative or
trading purposes. The Company invests its excess cash in short-term, investment
grade, interest-bearing securities.
Our investments are made in accordance with an investment policy approved by the
Board of Directors. Under this policy, no investment securities can have
maturities exceeding one year and the average maturity of the portfolio can not
exceed 90 days.
12
PART II
ITEM 1. LEGAL PROCEEDINGS
The company is subject to certain litigation and administrative proceedings
discussed in the company's annual report on Form 10-K, filed with the SEC on
April 1, 2002, and other legal proceedings, claims and disputes which arise in
the ordinary course of our business. Like most large government defense
contractors, our contract costs are audited and reviewed on a continual basis by
an in-house staff of auditors from the Defense Contract Auditing Agency. In
addition to these routine audits, we are subject from time to time to audits and
investigations by other agencies of the federal government. These audits and
investigations are conducted to determine if our performance and administration
of our government contracts is compliant with contractual requirements and
applicable federal statutes and regulations. An audit or investigation may
result in a finding that our performance and administration is compliant or,
alternatively, may result in the government initiating proceedings against us
or our employees, including administrative proceedings seeking repayment of
monies, suspension and/or debarment from doing business with the federal
government or a particular agency, or civil or criminal proceedings seeking
penalties and/or fines. Audits and investigations conducted by the federal
government frequently span several years. Other than routine audits of the
company's contracts, the company is not aware of any other government audits or
investigations except as set forth in the company's annual report on Form 10-K,
filed with the SEC on April 1, 2002, and as set forth below.
Although the company cannot predict the outcomes of any litigation or
administrative proceedings, based on the information now available to it, and
except as discussed in the company's annual report on Form 10-K, filed with the
SEC on April 1, 2002, it does not believe that the ultimate resolution of these
matters, either individually or in the aggregate, will have a material adverse
effect on the business, prospects, financial condition or operating results of
the company.
On July 29, 1999, Thomas Harris Corporation filed suit in state court in
Rockwall County, Texas, against the company's environmental remediation
subsidiary (which is among the businesses included in discontinued operations)
and subcontractors to that subsidiary, alleging that the company's subsidiary or
its subcontractors caused soil and groundwater contamination by improperly
disposing of dry cleaning solvents, and seeking an unspecified amount of actual,
consequential and punitive damages. The company vigorously disputes and denies
these allegations. Trial in this case was set for April 22, 2002 and postponed
pending settlement negotiations between the parties. While the ultimate outcome
of litigation cannot be assured, if and to the extent that the damages alleged
by the plaintiffs are ultimately determined to be the company's responsibility,
or the parties reach a settlement, the Company believes that it will be able to
recover a portion of the amount from its professional liability insurance,
including attorneys' fees, and that any amounts that it bears will not have a
material adverse effect the business, prospects, financial condition, cash flow
or operating results of the company.
The Company was subject to an investigation by the Inspector General of the
Department of State regarding its allocation of costs to a contract with the
Department of State. The investigation was closed during the first quarter of
2002 without any adverse action against the company.
13
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On February 6, 2002, our first registration statement, filed on Form S-1 (File
No. 333-73946) under the Securities Act of 1933, relating to our initial public
offering of Class A Common Stock, was declared effective, and on February 7,
2002, our registration statement filed under Rule 462(b) (File No. 333-82310)
was declared effective. Under these registration statements, we registered a
total of 7,200,000 shares of our Class A common stock, of which 6,866,667 shares
were sold by us, and 333,333 shares were sold by the selling stockholder, who is
our Chairman of the Board of Directors, Chief Executive Officer and President,
and a 10% or greater stockholder. All such shares were sold at $16.00 per share
on February 7, 2002. The managing underwriters for the offering were Jefferies &
Company, Inc., Legg Mason Wood Walker, Incorporated and BB&T Capital Markets.
Pursuant to the terms of the underwriting agreement described in the
registration statements, the underwriters were entitled to elect, not later than
March 9, 2002, to sell up to 1,080,000 additional shares of our Class A common
stock, of which 696,487 shares were to be sold by us, and 383,513 shares were to
be sold by the selling stockholder if the underwriters elected to sell all the
additional shares. On February 12, 2002, the underwriters elected to sell an
additional 1,080,000 shares, resulting in an aggregate offering price of
$132,480,000, of which $121,010,464 pertained to shares sold by us and the
remaining $11,469,536 pertained to shares sold by the selling stockholder. The
total underwriting discount was approximately $9.3 million, of which the company
paid $8.5 million, and we incurred other expenses (including filing, legal and
accounting fees) of approximately $2.5 million, none of which were paid to our
directors or officers or their affiliates or to persons owning 10% or more of
any class of our common stock or that of our affiliates. Our net proceeds from
the offering were approximately $110.4 million. Proceeds from the offering were
used to repay the principal and accrued interest outstanding under our term loan
and under our subordinated debt and to pay off all but $25.0 million of
principal owing under our revolving credit facility. The principal and accrued
interest under our term loan was $6.0 million, principal and accrued interest
under our subordinated debt was $8.1 million, and the principal repayment under
our revolving credit facility was $17.7 million.
We intend to use the remainder of the net proceeds of the offering (together
with cash on hand, additional borrowings and capital stock) to fund all or a
portion of the costs of any acquisitions of complementary businesses we
determine to pursue in the future, although there are no assurances that we will
be able to successfully identify or consummate any such acquisitions. To the
extent that we do not pursue or consummate any acquisitions, any remaining net
proceeds to us will be used for working capital and general corporate purposes.
We have no present commitments, agreements or understandings to acquire any
business. We have invested the net proceeds of this offering in short-term,
investment grade, interest-bearing securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
Forward Looking Statements
This quarterly report contains forward-looking statements that involve
substantial risks and uncertainties. You can identify these statements by
forward-looking words such as "may," "will," "expect," "intend," "anticipate,"
"believe," "estimate," "continue" and other similar words. You should read
statements that contain these words carefully because they discuss our future
expectations, make projections of our future results of operations or financial
condition or state other "forward-looking" information. We believe that it is
important to communicate our future expectations to our investors. However,
there may be events in the future that we are not able to accurately predict or
control. The factors that could cause actual results to differ materially from
those anticipated include, but are not limited to the following: failure of
government customers to exercise options under contracts, funding decisions of
U.S. Government projects; government contract procurement (such as bid protest)
and termination risks; competitive factors such as pricing pressures and/or
competition to hire and retain employees; material changes in laws or
regulations applicable to the company's businesses and other risk factors
discussed in the company's Registration Statement on Form S-1, filed with the
SEC on February 7, 2002, the company's annual report on Form 10-K, filed with
the SEC on April 1, 2002, the risks discussed in the section captioned
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" of this report, as well as any other cautionary language found
elsewhere in this quarterly report. Our statements in this report are made as of
May 15, 2002, and the Company undertakes no obligation to update any of the
forward looking statements made herein, whether as a result of new information,
future events, changes in expectations or otherwise.
14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
EXHIBIT
NO. DESCRIPTION
-- -----------
2.1 Form of Plan of Merger by and between ManTech International
Corporation, a New Jersey corporation, and ManTech International
Corporation, a Delaware corporation, incorporated herein by reference
from Registrant's Registration Statement on Form S-1 (File No.
333-73946), as filed with the Commission on November 23, 2001, as
amended.
3.1 Second Amended and Restated Certificate of Incorporation of the
Registrant as filed with the Secretary of State of the State of
Delaware on January 30, 2002, incorporated herein by reference from
Registrant's Registration Statement on Form S-1 (File No. 333-73946),
as filed with the Commission on November 23, 2001, as amended.
3.2 Amended and Restated Bylaws of the Registrant, incorporated herein by
reference from Registrant's Registration Statement on Form S-1 (File
No. 333-73946), as filed with the Commission on November 23, 2001, as
amended.
10.1 Retention Agreement, effective as of January 1, 2002, between John A.
Moore, Jr. and ManTech International Corporation, incorporated herein
by reference from Registrant's Registration Statement on Form S-1
(File No. 333-73946), as filed with the Commission on November 23,
2001, as amended.
10.2 Form of Confidentiality, Non-competition and Non-solicitation
Agreement, effective as of the closing of this offering, between
specified executive officers and ManTech International Corporation,
incorporated herein by reference from Registrant's Registration
Statement on Form S-1 (File No. 333-73946), as filed with the
Commission on November 23, 2001, as amended.
10.3 Management Incentive Plan of ManTech International Corporation,
incorporated herein by reference from Registrant's Registration
Statement on Form S-1 (File No. 333-73946), as filed with the
Commission on November 23, 2001, as amended.
15
10.4 Retention Agreement, effective as of January 1, 2002, between George
J. Pedersen and ManTech International Corporation, incorporated herein
by reference from Registrant's Registration Statement on Form S-1
(File No. 333-73946), as filed with the Commission on November 23,
2001, as amended.
10.5 Form of Term Sheet for ManTech International Corporation
Management Incentive Plan Non-Qualified Stock Option, and Standard
Terms and Conditions for Non-Qualified Stock Options, incorporated
herein by reference from Registrant's Registration Statement on Form
S-1 (File No. 333-73946), as filed with the Commission on November 23,
2001, as amended.
10.6 Form of Term Sheet for ManTech International Corporation Management
Incentive Plan Incentive Stock Option, and Standard Terms and
Conditions for Incentive Stock Options, incorporated herein by
reference from Registrant's Registration Statement on Form S-1 (File
No. 333-73946), as filed with the Commission on November 23, 2001, as
amended.
(B) REPORTS ON FORM 8-K
None.
16
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form 10-Q and has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Fairfax in the Commonwealth of Virginia, on this 15 day of May, 2002.
MANTECH INTERNATIONAL CORPORATION
By: /s/ George J. Pedersen
--------------------------
Name: George J. Pedersen
Title: Chairman of the Board of Directors,
Chief Executive Officer and President
Name and Signature Title Date
------------------ ----- ----
/s/ George J. Pedersen
Chairman of the Board of Directors, May 15, 2002
George J. Pedersen Chief Executive Officer and President
(Principal Executive Officer)
/s/ John A. Moore, Jr.
Executive Vice President, Chief May 15, 2002
John A. Moore, Jr. Financial Officer, Treasurer and
Director
(Principal Financial Officer and
Principal Accounting Officer)
/s/ Walter W. Vaughan
Director May 15, 2002
Walter W. Vaughan
/s/ Michael D. Golden
Director May 15, 2002
Michael D. Golden
/s/ Stephen W. Porter
Director May 15, 2002
Stephen W. Porter
/s/ Walter R. Fatzinger, Jr.
Director May 15, 2002
Walter R. Fatzinger, Jr.
/s/ Richard J. Kerr
Director May 15, 2002
Richard J. Kerr
17