Form 10-Q for ANTEON INTERNATIONAL CORPORATION filed on November 2, 2004
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, 2004
--------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 001-31258
ANTEON INTERNATIONAL CORPORATION
---------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3880755
----------------------------- -----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3211 Jermantown Road, Fairfax, Virginia 22030-2801
- --------------------------------------------------------------------------------
(Address of principal executive office)
(Zip Code)
(703) 246-0200
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
-----------------------------------------------
(Former name, former address, and former
fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ X ] No [ ]
As of the close of business on October 29, 2004, there were 35,888,353
outstanding shares of the registrant's common stock, par value $0.01 per share.
CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS AS OF
SEPTEMBER 30, 2004 AND DECEMBER 31, 2003 1
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2004 AND 2003 2
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND
2003 3
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 26
ITEM 4. CONTROLS AND PROCEDURES 26
PART II. OTHER INFORMATION REQUIRED IN REPORT
ITEM 1. LEGAL PROCEEDINGS 27
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS, AND ISSUER
PURCHASES OF EQUITY SECURITIES 27
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 27
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS 27
ITEM 5. OTHER INFORMATION 27
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 27
i
PART I. FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ANTEON INTERNATIONAL CORPORATION AND SUBSIDIARIES
(A Delaware Corporation)
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
September 30,
2004 December 31,
(Unaudited) 2003
------------------ -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 14,647 $ 2,088
Accounts receivable, net 257,384 222,937
Prepaid expenses and other current assets 16,244 17,925
Deferred tax assets, net 739 1,641
----------------- ----------------
Total current assets 289,014 244,591
Property and equipment, net 12,864 12,759
Goodwill 246,708 212,205
Intangible and other assets, net 15,625 9,725
----------------- ----------------
Total assets $ 564,211 $ 479,280
================= ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Term Loan B, current portion $ 1,650 $ 1,500
Subordinated notes payable, current portion -- 2,500
Obligations under capital leases, current portion 342 341
Accounts payable 32,473 36,793
Accrued expenses 104,210 85,468
Deferred compensation obligation 649 --
Due to related party -- 48
Income tax payable 7,326 641
Other current liabilities -- 230
Deferred revenue 16,236 11,783
----------------- ----------------
Total current liabilities 162,886 139,304
Term Loan B, less current portion 163,350 148,500
Revolving facility -- 4,400
Senior subordinated notes payable, less current portion -- 1,876
Obligations under capital leases, less current portion 247 465
Noncurrent deferred tax liabilities, net 8,631 10,017
Other long term liabilities 4,750 16
----------------- ----------------
Total liabilities 339,864 304,578
Minority interest in subsidiaries 236 210
Stockholders' equity:
Preferred stock, $0.01 par value; 15,000,000 shares authorized, none
issued and outstanding as of September 30, 2004 and December 31, 2003 -- --
Common stock, $0.01 par value; 175,000,000 shares authorized, 35,857,313
and 35,354,996 shares issued and outstanding as of September 30, 2004
and December 31, 2003, respectively. 359 354
Additional paid-in capital 120,448 115,863
Accumulated other comprehensive income (loss) 109 (72)
Retained earnings 103,195 58,347
----------------- ----------------
Total stockholders' equity 224,111 174,492
----------------- ----------------
Total liabilities and stockholders' equity $ 564,211 $ 479,280
================= ================
See accompanying notes to unaudited condensed consolidated financial statements.
1
ANTEON INTERNATIONAL CORPORATION AND SUBSIDIARIES
(A Delaware Corporation)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
For the three months ended For the nine months ended
September 30, September 30,
----------------------------------- ---------------------------------
2004 2003 2004 2003
-------------- --------------- -------------- ----------------
Revenues $ 325,581 $ 279,080 $ 917,892 $ 761,764
Costs of revenues 280,898 240,689 791,152 656,695
------------- ------------- ------------- --------------
Gross profit 44,683 38,391 126,740 105,069
------------- ------------- ------------- --------------
Operating expenses:
General and administrative expenses 16,473 14,969 48,720 42,388
Amortization of intangible assets 542 723 1,901 1,763
------------- ------------- ------------- --------------
Total operating expenses 17,015 15,692 50,621 44,151
------------- ------------- ------------- --------------
Operating income 27,668 22,699 76,119 60,918
Other income, net 939 -- 943 --
Secondary offering expenses -- 798 -- 798
Interest expense, net of interest income of $55,
$45, $204 and $187, respectively 1,831 3,831 5,575 10,384
Minority interest in (earnings) losses of
subsidiaries 9 (18) (26) (50)
------------- ------------- ------------- --------------
Income before provision for income taxes 26,785 18,052 71,461 49,686
Provision for income taxes 9,936 7,109 26,613 19,359
------------- ------------- ------------- --------------
Net income $ 16,849 $ 10,943 $ 44,848 $ 30,327
============= ============= ============= ==============
Basic earnings per common share: $ 0.47 $ 0.31 $ 1.26 $ 0.87
============= ============= ============= ==============
Basic weighted average shares outstanding 35,817,018 34,970,108 35,630,396 34,709,666
Diluted earnings per common share: $ 0.45 $ 0.30 $ 1.21 $ 0.82
============= ============= ============= ==============
Diluted weighted average shares outstanding 37,253,109 37,084,351 37,201,263 36,816,366
See accompanying notes to unaudited condensed consolidated financial statements.
2
ANTEON INTERNATIONAL CORPORATION AND SUBSIDIARIES
(A Delaware Corporation)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the nine months ended September 30,
2004 2003
------------------ ------------------
OPERATING ACTIVITIES:
Net income $ 44,848 $ 30,327
Adjustments to reconcile net income to net cash provided by
operating activities:
Gain on settlement of subordinated notes payable (1,327) --
Depreciation and amortization of property and equipment 2,945 2,986
Amortization of intangible assets 1,901 1,763
Amortization of deferred financing fees 522 1,078
Loss on disposals of property and equipment -- 135
Deferred income taxes 343 (3,307)
Minority interest in earnings of subsidiaries 26 50
Changes in assets and liabilities (1,012) 7,794
---------------- ----------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 48,246 40,826
---------------- ----------------
INVESTING ACTIVITIES:
Acquisition of Integrated Management Services, Inc., net of
cash acquired (29,103) --
Acquisition of Simulation Technologies, Inc., net of cash
acquired (14,460) --
Acquisition of Information Spectrum, Inc., net of cash -- (92,369)
Purchases of property, equipment and other assets (2,846) (2,241)
Other 268 --
---------------- ----------------
NET CASH USED FOR INVESTING ACTIVITIES (46,141) (94,610)
---------------- ----------------
FINANCING ACTIVITIES:
Principal payments on bank and subordinated notes payable (1,350) (38)
Payments on capital lease obligation (240) --
Deferred financing fees (294) (249)
Principal payments on Term Loan A -- (2,849)
Principal payments on Term Loan B (1,125) --
Proceeds from Term Loan B 16,125 --
Proceeds from revolving credit facility 893,200 737,100
Principal payments on revolving credit facility (897,600) (686,700)
Proceeds from certain stockholders related to secondary
offering -- 900
Redemption of senior subordinated notes payable (1,876) --
Proceeds from issuance of common stock, net of expenses 3,614 4,078
---------------- ----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 10,454 52,242
---------------- ----------------
CASH AND CASH EQUIVALENTS:
Net increase (decrease) in cash and cash equivalents 12,559 (1,542)
Cash and cash equivalents, beginning of period 2,088 4,266
---------------- ----------------
Cash and cash equivalents, end of period $ 14,647 $ 2,724
================ ================
Supplemental disclosure of cash flow information (in thousands):
Interest paid $ 5,360 $ 10,621
================ ================
Income taxes paid, net $ 19,796 $ 22,715
================ ================
See accompanying notes to unaudited condensed consolidated financial statements.
3
ANTEON INTERNATIONAL CORPORATION AND SUBSIDIARIES
(A Delaware Corporation)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 AND 2003
(1) Basis of Presentation
The information furnished in the accompanying Unaudited Condensed
Consolidated Balance Sheet, Unaudited Condensed Consolidated Statements of
Operations and Unaudited Condensed Consolidated Statements of Cash Flows have
been prepared in accordance with U.S. 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, 2004 may
not be indicative of the results of operations for the year ending December 31,
2004, or any future period. This financial information should be read in
conjunction with the Company's December 31, 2003 audited consolidated financial
statements and footnotes thereto, included in the Annual Report on Form 10-K
filed with the Securities and Exchange Commission by the Company on March 8,
2004 and Amendment No. 1 to the Annual Report on Form 10-K/A filed on March 11,
2004.
(2) Organization and Business
Anteon International Corporation, a Delaware corporation, "Anteon" or the
"Company," and its subsidiaries provide professional information technology
solutions and systems engineering and integration services to government
clients. The Company designs, integrates, maintains and upgrades information
systems for national defense, intelligence, emergency response and other
government missions. The Company also provides many of its clients with the
systems analysis, integration and program management skills necessary to manage
their mission systems development and operations. The Company is subject to all
of the risks associated with conducting business with the U.S. federal
government, including the risk of contract termination for the convenience of
the government. In addition, government funding continues to be dependent on
congressional approval of program level funding and on contracting agency's
authorization of the Company's work. The extent to which the Company's existing
contracts will be funded in the future cannot be determined.
(3) Acquisition of Integrated Management Services, Inc.
On August 11, 2004, the Company purchased all of the outstanding stock of
Integrated Management Services, Inc. ("IMSI"), a provider of high end, mission
critical information and securities solutions, headquartered in Arlington,
Virginia, for a total purchase price of $29.1 million, including transaction
costs. The Company financed the acquisition through borrowings under its
existing Credit Facility. Under the terms of the stock purchase agreement,
consideration up to $3.5 million of additional purchase price may be paid if
certain milestones are met. The transaction was accounted for in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 141, Business
Combinations, whereby the net tangible and identifiable intangible assets
acquired and liabilities assumed were recognized at their estimated fair market
values at the date of acquisition, based on preliminary estimates made by
management. The identifiable intangible assets consisted of $1.3 million of
contracts and related customer relationships with an expected weighted average
useful life of 3.9 years. Goodwill recognized from this acquisition was
approximately $25.5 million and is expected to be fully deductible for tax
purposes. In accordance with SFAS No. 142, Goodwill and Other Intangible Assets,
goodwill arising from the transaction is not being amortized. Pursuant to the
requirements of SFAS No. 141, Business Combinations, the effect of the
acquisition did not meet the criteria of a material and significant acquisition,
and therefore, pro forma disclosures are not presented in the unaudited
condensed consolidated financial statements.
4
ANTEON INTERNATIONAL CORPORATION AND SUBSIDIARIES
(A Delaware Corporation)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 AND 2003
(4) Acquisition of Simulation Technologies, Inc.
On July 27, 2004, the Company purchased all of the outstanding stock of
Simulation Technologies, Inc. ("STI"), a provider of modeling and simulation
software solutions and services, headquartered in San Antonio, Texas, for a
total purchase price of $14.5 million (net of cash acquired), including
transaction costs. The Company financed the acquisition through borrowings under
its existing Credit Facility. The transaction was accounted for in accordance
with SFAS No. 141, Business Combinations, whereby the net tangible and
identifiable intangible assets acquired and liabilities assumed were recognized
at their estimated fair market values at the date of acquisition, based on
preliminary estimates made by management. The identifiable intangible assets
consisted of $1.9 million of contracts and related customer relationships with
an expected weighted average useful life of 2.3 years. Goodwill recognized from
this acquisition was approximately $9.3 million and is not expected to be
deductible for tax purposes. In accordance with SFAS No. 142, Goodwill and Other
Intangible Assets, goodwill arising from the transaction is not being amortized.
Pursuant to the requirements of SFAS No. 141, Business Combinations, the effect
of the acquisition did not meet the criteria of a material and significant
acquisition, and therefore, pro forma disclosures are not presented in the
unaudited condensed consolidated financial statements.
(5) Acquisition of Information Spectrum, Inc.
On May 23, 2003, the Company purchased all of the outstanding stock of
Information Spectrum, Inc. ("ISI"), a provider of credential card technologies,
military logistics and training systems, based in Annandale, Virginia, for a
total purchase price of approximately $92.4 million including transaction costs.
The transaction was accounted for in accordance with SFAS No. 141, Business
Combinations.
The following unaudited pro forma summary presents consolidated information
as if the acquisition of ISI had occurred as of January 1, 2003. This pro forma
summary is provided for information purposes only and is based on historical
information that does not necessarily reflect actual results that would have
occurred nor is it necessarily indicative of future results of operations of the
combined entities (in thousands except for share data):
For the nine
months ended
September 30,2003
-----------------
Total revenues $ 815,442
Total expenses 784,597
-----------------
Net income $ 30,845
=================
Basic earnings per common share $ 0.89
=================
Diluted earnings per common share $ 0.84
=================
(6) Accounting for Stock-Based Compensation
The Company accounts for employee stock-based compensation plans using the
intrinsic value based method of accounting prescribed by APB Opinion No. 25, or
"APB No. 25," Accounting for Stock Issued to Employees. The Company has an
employee stock option plan. Compensation expense for stock options granted to
employees is recognized based on the difference, if any, between the fair value
of the Company's common stock and the exercise price of the option at the date
of grant. The Company discloses the pro forma effect on net income as if the
fair value based method of accounting as defined in SFAS No. 123, Accounting for
Stock-based Compensation, had been applied.
The Company accounts for stock options granted to non-employees using the
fair value method of accounting as prescribed by SFAS No. 123. Compensation
expense related to stock options granted to non-employees is not significant.
The pro forma effect of the Employee Stock Purchase Plan (see note 13) on net
income is not significant.
5
ANTEON INTERNATIONAL CORPORATION AND SUBSIDIARIES
(A Delaware Corporation)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 AND 2003
The following table illustrates the effect on net income and earnings per
share for the three and nine months ended September 30, 2004 and 2003 as if the
Company had applied the fair value recognition provisions of SFAS No. 123 to
stock-based employee compensation:
Three Months Three Months
Ended September Ended September
30, 2004 30, 2003
------------------- -----------------
(in thousands, except per share data)
Net income, as reported $ 16,849 $ 10,943
Add: stock-based compensation recorded, net of tax 1 --
Deduct: total stock-based compensation expense determined
under the fair value method, net of tax 1,141 945
----------------- ----------------
Pro forma net income $ 15,709 $ 9,998
Earnings Per Share:
Basic-as reported $ 0.47 $ 0.31
============= ============
Basic-Pro forma $ 0.44 $ 0.29
============= ============
Diluted-as reported $ 0.45 $ 0.30
============= ============
Diluted-Pro forma $ 0.42 $ 0.27
============= ============
Nine Months Ended Nine Months
September 30, 2004 Ended September
30, 2003
------------------- -----------------
(in thousands, except per share data)
Net income, as reported $ 44,848 $ 30,327
Add: stock-based compensation recorded, net of tax 3 --
Deduct: total stock-based compensation expense determined
under the fair value method, net of tax 3,310 2,650
----------------- ----------------
Pro forma net income $ 41,541 $ 27,677
Earnings Per Share:
Basic-as reported $ 1.26 $ 0.87
============= ============
Basic-Pro forma $ 1.17 $ 0.80
============= ============
Diluted-as reported $ 1.21 $ 0.82
============= ============
Diluted-Pro forma $ 1.12 $ 0.75
============= ============
6
ANTEON INTERNATIONAL CORPORATION AND SUBSIDIARIES
(A Delaware Corporation)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 AND 2003
(7) Comprehensive Income
Comprehensive income for the three months ended September 30, 2004 and 2003
was approximately $16.8 million and $11.0 million, respectively. Comprehensive
income for the nine months ended September 30, 2004 and 2003 was approximately
$45.0 million and $30.6 million, respectively. Other comprehensive income for
the three months ended September 30, 2004 and 2003 includes foreign currency
translation income of approximately $1,000 and $17,000, respectively, and
increases in the fair value of interest rate swaps of approximately zero and
$104,000, net of tax. Other comprehensive income for the nine months ended
September 30, 2004 and 2003 includes foreign currency translation gains of
approximately $40,000 and $52,000, respectively, and increases in the fair value
of interest rate swaps of approximately $141,000 and $251,000 net of tax.
(8) Computation of Earnings Per Share
For the three months ended
September 30, 2004
Income Weighted average shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- --------
(in thousands, except share and per share data)
Basic earnings per share:
Net income $ 16,849 35,817,018 $ 0.47
============== ===========
Stock options -- 1,436,091 --
Diluted earnings per share:
Net income $ 16,849 37,253,109 $ 0.45
============== ===========
For the three months ended
September 30, 2003
Income Weighted average shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- --------
(in thousands, except share and per share data)
Basic earnings per share:
Net income $ 10,943 34,970,108 $ 0.31
============== ===========
Stock options -- 2,114,243 --
Diluted earnings per share:
Net income $ 10,943 37,084,351 $ 0.30
============== ===========
7
ANTEON INTERNATIONAL CORPORATION AND SUBSIDIARIES
(A Delaware Corporation)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 AND 2003
For the nine months ended
September 30, 2004
Income Weighted average shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- --------
(in thousands, except share and per share data)
Basic earnings per share:
Net income $ 44,848 35,630,396 $ 1.26
=============== ==============
Stock options -- 1,570,867 --
Diluted earnings per share:
Net income $ 44,848 37,201,263 $ 1.21
=============== ==============
For the nine months ended
September 30, 2003
Income Weighted average shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- --------
(in thousands, except share and per share data)
Basic earnings per share:
Net income $ 30,327 34,709,666 $ 0.87
=============== ==============
Stock options -- 2,106,700 --
Diluted earnings per share:
Net income $ 30,327 36,816,366 $ 0.82
=============== ==============
(9) Domestic Subsidiaries Summarized Financial Information
Under the terms of the Company's Credit Facility, the Company's wholly
owned domestic subsidiaries (the "Guarantor Subsidiaries") are guarantors of the
Company's Credit Facility. Such guarantees are full, unconditional and joint and
several. Separate unaudited condensed financial statements of the Guarantor
Subsidiaries are not presented because the Company's management has determined
that they would not be material to investors. The results of the non-guarantor
subsidiaries are from the Company's foreign subsidiaries. The following
supplemental financial information sets forth, on a combined basis, unaudited
condensed balance sheets, statements of operations and statements of cash flows
information for the Guarantor Subsidiaries, the Company's non-guarantor
subsidiaries and, on a consolidated and unconsolidated basis, for the Company.
8
ANTEON INTERNATIONAL CORPORATION AND SUBSIDIARIES
(A Delaware Corporation)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 AND 2003
As of September 30, 2004
----------------------------------------------------------------------------------
Unaudited Condensed Consolidated Consolidated
Anteon Anteon
International Guarantor Non-Guarantor Elimination International
Balance Sheets Corporation Subsidiaries Subsidiaries Entries Corporation
----------- ------------ ------------ ------- -----------
(in thousands)
Cash and cash equivalents $ (9) $ 13,138 $ 1,518 $ -- $ 14,647
Accounts receivable, net -- 257,074 310 -- 257,384
Other current assets 472 25,920 467 (9,876) 16,983
Property and equipment, net 1,644 11,097 123 -- 12,864
Due from parent (194,494) 194,758 (264) -- --
Investments in and advances to
subsidiaries 33,222 (32,297) -- (925) --
Goodwill 177,584 69,124 -- -- 246,708
Intangible and other assets, net 73,287 10,338 -- (68,000) 15,625
------------- ------------- ------------- ----------- -------------
Total assets $ 91,706 $ 549.152 $ 2,154 $ (78,801) $ 564,211
============= ============= ============= =========== =============
Indebtedness $ -- $ 233,000 $ -- $ (68,000) $ 165,000
Accounts payable 414 31,615 444 -- 32,473
Accrued expenses and other current
liabilities 3,609 108,655 263 -- 112,527
Deferred revenue 9,876 16,054 182 (9,876) 16,236
Other long-term liabilities -- 13,628 -- -- 13,628
------------- ------------- ------------- ----------- -------------
Total liabilities 13,899 402,952 889 (77,876) 339,864
Minority interest in subsidiaries -- -- 236 -- 236
Total stockholders' equity (deficit) 77,807 146,200 1,029 (925) 224,111
------------- ------------- ------------- ----------- -------------
Total liabilities and stockholders'
equity (deficit) $ 91,706 $ 549,152 $ 2,154 $ (78,801) $ $ 564,211
============= ============= ============= =========== =============
9
ANTEON INTERNATIONAL CORPORATION AND SUBSIDIARIES
(A Delaware Corporation)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 AND 2003
For the nine months ended September 30, 2004
----------------------------------------------------------------------------------
Consolidated
Anteon Anteon
Unaudited Condensed Consolidated International Guarantor Non-Guarantor Elimination International
Statements of Operations Corporation Subsidiaries Subsidiaries Entries Corporation
----------- ------------ ------------- --------- -----------
(in thousands)
Revenues $ (2) $ 914,671 $ 4,250 $ (1,027) $ 917,892
Costs of revenues 1 788,098 4,080 (1,027) 791,152
----------- ------------ -------------- ----------- -------------
Gross profit (loss) (3) 126,573 170 -- 126,740
Total operating expenses 3,263 76,885 60 (29,587) 50,621
----------- ------------ -------------- ----------- -------------
Operating income (loss) (3,266) 49,688 110 29,587 76,119
Other income (loss) 10,567 19,963 -- (29,587) 943
Interest expense (income), net (1,416) 7,013 (22) -- 5,575
Minority interest in earnings of
subsidiaries -- -- (26) -- (26)
----------- ------------ -------------- ----------- -------------
Income before provision for income
taxes 8,717 62,638 106 -- 71,461
Provision for (benefit from) income
taxes 3,283 23,343 (13) -- 26,613
----------- ------------ -------------- ----------- -------------
Net income $ 5,434 $ 39,295 $ 119 $ -- $ 44,848
========== =========== ============== ========== =========
10
ANTEON INTERNATIONAL CORPORATION AND SUBSIDIARIES
(A Delaware Corporation)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 AND 2003
For the nine months ended September 30, 2004
----------------------------------------------------------------------------------
Consolidated
Anteon Anteon
Unaudited Condensed Consolidated International Guarantor Non-Guarantor International
Statements of Cash Flows Corporation Subsidiaries Subsidiaries Corporation
----------- ------------ ------------ -----------
(in thousands)
Operating Activities:
Net income $ 5,434 $ 39,295 $ 119 $ 44,848
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Gain on settlement of subordinated notes
payable (1,327) -- -- (1,327)
Depreciation and amortization of property and
equipment 636 2,273 36 2,945
Amortization of intangible assets 1,718 183 -- 1,901
Amortization of deferred financing fees 62 460 -- 522
Deferred income taxes -- 343 -- 343
Minority interest in earnings of subsidiaries -- -- 26 26
Changes in assets and liabilities 7,655 (8,347) (320) (1,012)
------------ ------------ ------------- ------------
Net cash provided by (used for) operating
activities 14,178 34,207 (139) 48,246
------------ ------------ ------------- ------------
Investing activities:
Purchases of property, equipment and other assets (256) (2,520) (70) (2,846)
Other 268 -- -- 268
Acquisition of Integrated Management Services Inc
net of cash acquired -- (29,103) -- (29,103)
Acquisition of Simulation Technologies Inc., net of
cash acquired (14,598) 138 -- (14,460)
------------ ------------ ------------- ------------
Net cash used for investing activities (14,586) (31,485) (70) (46,141)
------------ ------------ ------------- ------------
Financing activities:
Deferred financing fee 87 (381) -- (294)
Proceeds from Term Loan B -- 16,125 -- 16,125
Principal payments on Term Loan B -- (1,125) -- (1,125)
Proceeds from revolving credit facility -- 893,200 -- 893,200
Principal payments on revolving credit facility -- (897,600) -- (897,600)
Redemption of senior subordinated notes payable (1,876) -- -- (1,876)
Principal payments under capital lease obligations -- (240) -- (240)
Payment on subordinated notes payable (1,350) -- -- (1,350)
Proceeds from issuance of common stock, net of
expenses 3,547 -- 67 3,614
------------ ------------ ------------- ------------
Net cash provided by financing activities 408 9,979 67 10,454
------------ ------------ ------------- ------------
Net increase (decrease) in cash and cash equivalents -- 12,701 (142) 12,559
Cash and cash equivalents, beginning of period (9) 437 1,660 2,088
------------ ------------ ------------- ------------
Cash and cash equivalents, end of period $ (9) $ 13,138 $ 1,518 $ 14,647
============ ============ ============= ============
11
ANTEON INTERNATIONAL CORPORATION AND SUBSIDIARIES
(A Delaware Corporation)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 AND 2003
For the nine months ended September 30, 2003
------------------------------------------------------------------------------
Consolidated
Unaudited Condensed Consolidated Anteon Anteon
Statements of Operations International Guarantor Non-Guarantor Elimination International
Corporation Subsidiaries Subsidiaries Entries Corporation
----------- ------------ ------------ ------- -----------
(in thousands)
Revenues $ -- $ 753,527 $ 8,376 $ (139) $ 761,764
Costs of revenues -- 649,342 7,492 (139) 656,695
----------- ------------ ------------ ---------- ------------
Gross profit -- 104,185 884 -- 105,069
Total operating expenses 2,379 64,055 535 (22,818) 44,151
----------- ------------ ------------ ---------- ------------
Operating income (loss) (2,379) 40,130 349 22,818 60,918
Other income (loss) 7,229 15,589 -- (22,818) --
Secondary offering expenses 798 -- -- 798
Interest expense (income), net 3,646 6,749 (11) -- 10,384
Minority interest in earnings of
subsidiaries -- -- (50) -- (50)
----------- ------------ ------------ ---------- ------------
Income before provision for income
taxes 406 48,970 310 -- 49,686
Provision for income taxes 161 19,086 112 -- 19,359
----------- ------------ ------------ ---------- ------------
Net income $ 245 $ 29,884 $ 198 $ -- $ 30,327
=========== ============ ============ ========== ============
12
ANTEON INTERNATIONAL CORPORATION AND SUBSIDIARIES
(A Delaware Corporation)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 AND 2003
For the nine months ended September 30, 2003
-----------------------------------------------------------------------
Consolidated
Anteon Anteon
Unaudited Condensed Consolidated International Guarantor Non-Guarantor International
Statements of Cash Flows Corporation Subsidiaries Subsidiaries Corporation
----------- ------------ ------------ -----------
(in thousands)
Operating Activities:
Net income $ 245 $ 29,884 $ 198 $ 30,327
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation and amortization of property and
equipment 503 2,428 55 2,986
Amortization of intangible assets 1,582 181 -- 1,763
Amortization of deferred financing fees 995 83 -- 1,078
Loss on disposals of property and equipment -- 135 -- 135
Deferred income taxes -- (3,307) -- (3,307)
Minority interest in earnings of subsidiaries -- -- 50 50
Changes in assets and liabilities 87,063 (79,894) 625 7,794
------------ ------------ ------------- --------------
Net cash provided by (used for) operating activities 90,388 (50,490) 928 40,826
------------ ------------ ------------- --------------
Investing activities:
Purchases of property, equipment and other assets (352) (1,837) (52) (2,241)
Costs of acquisition, net of cash acquired (92,150) (219) -- (92,369)
------------ ------------ ------------- --------------
Net cash used for investing activities (92,502) (2,056) (52) (94,610)
------------ ------------ ------------- --------------
Financing activities:
Principal payments on bank and other notes payable -- (38) -- (38)
Deferred financing fee -- (249) -- (249)
Principal payments on Term Loan A (2,849) -- -- (2,849)
Proceeds from revolving credit facility -- 737,100 -- 737,100
Principal payments on revolving credit facility -- (686,700) -- (686,700)
Proceeds from issuance of common stock, net of
expenses 4,078 -- -- 4,078
Proceeds from certain stockholders related to
secondary offering
900 - -- -- 900
------------ ------------ ------------- --------------
Net cash provided by financing activities 2,129 50,113 -- 52,242
------------ ------------ ------------- --------------
Net increase (decrease) in cash and cash equivalents 15 (2,433) 876 (1,542)
Cash and cash equivalents, beginning of period (17) 3,659 624 4,266
------------ ------------ ------------- --------------
Cash and cash equivalents, end of period $ (2) $ 1,226 $ 1,500 $ 2,724
============ ============ ============= ==============
13
ANTEON INTERNATIONAL CORPORATION AND SUBSIDIARIES
(A Delaware Corporation)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 AND 2003
(10) Segment Information
Although the Company is organized by strategic business units, the Company
considers each of its government contracting units to have similar economic
characteristics, provide similar types of services and have a similar customer
base. Accordingly, the Company's government contracting segment aggregates the
operations of all of the Company's government contracting units.
(11) Interest Rate Swap Agreements
During the nine months ended September 30, 2004, the last of the Company's
interest rate swap agreements, with a notional value of $10.0 million, matured.
(12) Supplemental Retirement Savings Plan
Effective January 1, 2004, the Company implemented a Supplemental
Retirement Savings Plan (the "Plan") that permits eligible employees and
directors to defer all or a portion of their annual cash compensation. The
Company also filed a Registration Statement on Form S-8 with the Securities and
Exchange Commission ("SEC") to register the participation interests under the
Plan. The assets of the Plan are held in a trust to which contributions are made
by the Company based on amounts elected to be deferred by the Plan participants.
The Plan is treated as unfunded for tax purposes and its assets are subject to
the general claims of the Company's creditors. In order to provide for an
accumulation of assets comparable to the contractual liabilities accruing under
the Plan, the Company may direct the trustee of the Plan to invest the assets to
correspond to the hypothetical investment choices made by the Plan participants.
The Company records both the assets and obligations related to amounts
deferred under the Plan. Each reporting period, the assets, which have been
classified as trading securities, and obligations, are adjusted to fair market
value, with gains (losses) on the assets included in other income (expense) and
corresponding adjustments to the obligations recorded as compensation expense.
As of September 30, 2004, the deferred compensation obligation was approximately
$649,000. For the three and nine months ended September 30, 2004, the
adjustments to fair market value were not significant.
(13) Employee Stock Purchase Plan
Effective April 1, 2004, the Company implemented a non-compensatory
Employee Stock Purchase Plan ("ESPP") to offer eligible employees the
opportunity to purchase the Company's common stock at a discount from the market
price as reported on the New York Stock Exchange. Eligible employees may
authorize the Company to deduct a specified portion of their compensation each
payroll period for each quarterly offering period. The accumulated payroll
deductions are used by the Company to provide for the purchase by the ESPP
administrator of the Company's common stock on the open market for delivery to
ESPP participants. The ESPP provides that the per share purchase price discount
established by the Compensation Committee of the Board may be no greater than
15% of the fair market value per share of the Company's common stock on the last
day of each quarterly offering period. The Compensation Committee initially set
the purchase price discount at 5% of the Company stock's fair market value.
Under the ESPP, employees are limited to the purchase of shares of the Company's
common stock having a fair market value no greater than $25,000 during any
calendar year, as determined on the date of purchase. The Company has filed a
Registration Statement on Form S-8 with the SEC to register 1.2 million shares
of the Company's common stock under the ESPP. Under the plan, 14,668 shares were
purchased at $30.99 per share on July 1, 2004. The 5% difference between the
price paid for the common stock by the Company and the proceeds received from
the ESPP participants is charged to additional paid-in capital.
(14) Omnibus Stock Plan
On September 9, 2004, the Company filed a Registration Statement on Form
S-8 with the SEC to register an additional 1.5 million shares of the Company's
common stock available for issuance under its Amended and Restated Anteon
International Corporation Omnibus Stock Plan ("Omnibus Stock Plan"), as amended.
This increase in the number of shares available for issuance under the Omnibus
Stock Plan was approved by the Company's stockholders on May 27, 2004.
14
ANTEON INTERNATIONAL CORPORATION AND SUBSIDIARIES
(A Delaware Corporation)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 AND 2003
(15) Legal Proceedings
The Company is involved in various legal proceedings in the ordinary course
of business.
The Company cannot predict the ultimate outcome of these matters, but does
not believe that such matters will have a material impact on its financial
position or results of operations.
(16) Subsequent Events
On October 29, 2004 the Company announced the pricing of a secondary public
offering of 3.6 million shares of its common stock by affiliates of and
companies managed by Caxton-Iseman Capital, Inc. in an underwritten public
offering pursuant to its existing shelf registration statement on Form S-3
(Commission File No. 333-111249). Neither the Company nor any of its executive
officers are selling shares in this offering. The Company will not receive any
proceeds and will bear all costs related to the offering.
15
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. Forward-looking statements
relate to future events or our future performance. These statements involve
known and unknown risks, uncertainties and other factors that may cause our and
our industry's actual results, levels of activity, performance or achievements
to be materially different from any results, levels of activity, performance or
achievements expressed or implied by these forward-looking statements. In some
cases, you can identify forward-looking statements by terminology like "may",
"will", "should", "expects", "plans", "projects", anticipates", "believes",
"estimates", "predicts", "potential" or "continue" or the negative of these
terms or other comparable terminology. Such forward-looking statements include,
but are not limited to:
o total estimated remaining contract value;
o our expectations regarding the U.S. federal government's procurement
budgets and reliance on outsourcing of services, and
o our financial condition and liquidity, as well as future cash flows
and earnings.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of these statements. We
are under no duty to update any of the forward-looking statements after the date
of this quarterly report to conform these statements to actual results and do
not intend to do so. These statements are only predictions. Actual events or
results may differ materially. In evaluating these statements, you should
specifically consider various factors, including the following:
o changes in the U.S. federal government procurement laws, regulations,
policies, and budgets;
o the number and type of contracts and task orders awarded to us;
o the integration of acquisitions without disruption to our other
business activities;
o changes in general economic and business conditions;
o technological changes;
o the ability to attract and retain qualified personnel;
o competition;
o and our ability to retain our contracts during any rebidding process.
GENERAL
We are a leading provider of information technology solutions and systems
engineering and integration services to U.S. federal government clients as
measured by revenue. We design, integrate, maintain and upgrade state-of-the-art
information systems for national defense, intelligence, emergency response and
other high priority government missions. We also provide many of our government
clients with the systems analysis, integration and program management skills
necessary to manage their mission systems development and operations.
We have a broad client and contract base and a diverse contract mix. We
currently serve over 1,000 U.S federal government clients in more than 50
government agencies, as well as state and foreign governments. For the nine
months ended September 30, 2004, approximately 89% of our revenue was derived
from contracts with the Department of Defense, or "DOD," Department of Homeland
Security, or "DHS," and intelligence agencies, and approximately 10% from
civilian agencies of the U.S. federal government. For the nine months ended
September 30, 2004, approximately 89% of our revenue was from contracts where we
were the lead, or "prime" contractor. Our diverse contract base has
approximately 800 active contracts and more than 4,000 active task orders. For
the nine months ended September 30, 2004, our largest contract or task order
accounted for approximately 8% of our revenue.
16
DESCRIPTION OF CRITICAL ACCOUNTING POLICIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses our unaudited condensed consolidated financial statements,
which have been prepared in accordance with U.S. generally accepted accounting
principles. The preparation of these unaudited condensed consolidated financial
statements requires management to make estimates and judgments that affect the
reported amount of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the unaudited condensed consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. On an ongoing basis, management evaluates its estimates,
including those related to uncollected accounts receivable, other contingent
liabilities, revenue recognition, goodwill and other intangible assets.
Management bases its estimates on historical experience and on various other
factors that are believed to be reasonable at the time the estimates are made.
Actual results may differ from these estimates under different assumptions or
conditions. Management believes that our critical accounting policies which
require more significant judgments and estimates in the preparation of our
unaudited condensed consolidated financial statements are revenue recognition,
costs of revenues, goodwill impairment, long-lived assets and identifiable
intangible asset impairment and business combinations.
Revenue Recognition
For the nine months ended September 30, 2004, we estimate that
approximately 99% of our revenues were derived from services and approximately
1% from product sales. Services are performed under contracts that may be
categorized into three primary types: time and materials, cost-plus
reimbursement and firm fixed price. Revenues for time and materials contracts
are recognized as time is spent at hourly rates, which are negotiated with the
customer. Time and materials contracts are typically more profitable than
cost-plus contracts because of our ability to negotiate rates and manage costs
on those contracts. Revenues are recognized under cost-plus contracts on the
basis of direct and indirect costs incurred plus a negotiated profit calculated
as a percentage of costs or as a performance-based award fee. Cost-plus type
contracts provide relatively less risk than other contract types because we are
reimbursed for all direct costs and certain indirect costs, such as overhead and
general and administrative expenses, and are paid a fee for work performed. For
cost-plus award fee type contracts, we recognize the expected fee to be awarded
by the customer at the time such fee can be reasonably estimated, based on
factors such as our prior award experience and communications with the customer
regarding our performance, including any interim performance evaluations
rendered by the customer. Revenues are recognized under substantially all fixed
price contracts based on the percentage-of-completion basis, using the
cost-to-cost method for all services provided. For non-service-related fixed
price contracts, revenues are recognized as units are delivered (the
units-of-delivery method). In addition, we evaluate our contracts for multiple
deliverables which may require the segmentation of each deliverable into
separate accounting units for proper revenue recognition.
We recognize revenues under our U.S. federal government contracts when a
contract is executed, the contract price is fixed and determinable, delivery of
the services or products has occurred, the contract is funded and collectibility
of the contract price is considered probable. Our contracts with agencies of the
U.S. federal government are subject to periodic funding by the respective
contracting agency. Funding for a contract may be provided in full at inception
of the contract or ratably throughout the term of the contract as the services
are provided. From time to time, we may proceed with work based on customer
direction pending finalization and signing of contractual funding documents. We
have an internal process for approving any such work. All revenue recognition is
deferred during periods in which funding is not received. Costs incurred during
such periods are deferred if the receipt of funding is assessed as probable. In
evaluating the probability of funding being received, we consider our previous
experiences with the customer, communications with the customer regarding
funding status, and our knowledge of available funding for the contract or
program. If funding is not assessed as probable, costs are expensed as they are
incurred. Historically, we have not recorded any significant write-offs because
funding was not ultimately received.
For cost based contracts, we recognize revenues under our U.S. federal
government contracts based on allowable contract costs, as mandated by the U.S.
federal government's cost accounting standards. The costs we incur under U.S.
federal government contracts are subject to regulation and audit by certain
agencies of the federal government. Historically, contract cost disallowances
resulting from government audits have not been significant. We may be exposed to
variations in profitability, including potential losses, if we encounter
variances from estimated fees earned under award fee contracts and estimated
costs under fixed price contracts.
Contract revenue recognition inherently involves estimation. Examples of
such estimates include the level of effort needed to accomplish the tasks under
the contract, the cost of those efforts, and the continual assessment of our
progress toward the completion of the contract. From time to time, circumstances
may arise which require us to revise our estimated total revenues or costs.
Typically, these revisions relate to contractual changes involving our services.
To the extent that a revised estimate affects contract revenue or profit
previously recognized, we record the cumulative effect of the revision in the
period in which it becomes known. In addition, the full amount of an anticipated
loss on any type of contract is recognized in the period in which it becomes
known.
17
We generally do not pursue fixed price software development work that may
create material financial risk. We do, however, provide services under fixed
price labor hour and fixed price level of effort contracts, which represent
similar levels of risk as time and materials contracts. Our contract mix was
approximately 39% time and materials, 35% cost-plus and 26% fixed price (a
substantial majority of which were firm fixed price level of effort, which have
lower risk than other types of fixed price contracts) during the nine months
ended September 30, 2004. The contract mix can change over time depending on
contract awards and acquisitions. Under cost-plus contracts with the U.S.
federal government, operating profits are statutorily limited to 15% but
typically range from 5% to 7%. Under fixed price and time and materials
contracts, margins are not subject to statutory limits. However, the U.S.
federal government's objective in negotiating such contracts is to seldom allow
for operating profits in excess of 15% and, due to competitive pressures,
operating profits on such contracts are often less than 10%.
We maintain reserves for uncollectible accounts receivable which may arise
in the normal course of business. Historically, we have not had significant
write-offs of uncollectible accounts receivable. However, we do perform work on
many contracts and task orders, where on occasion, issues may arise, which could
lead to accounts receivable not being fully collected.
Costs of Revenues
Our costs are categorized as either direct or indirect costs. Direct costs
are those that can be identified with and allocated to specific contracts and
tasks. They include labor, fringe (vacation time, medical/dental, 401K plan
matching contribution, tuition assistance, employee welfare, worker's
compensation and other benefits), subcontractor costs, consultant fees, travel
expenses and materials. Indirect costs are either overhead or general and
administrative expenses. Indirect costs cannot be identified with specific
contracts or tasks, and to the extent that they are allowable, they are
allocated to contracts and tasks using appropriate government-approved
methodologies. Costs determined to be unallowable under the Federal Acquisition
Regulations cannot be allocated to projects. Our principal unallowable costs are
interest expense, amortization expense for separately identified intangibles
from acquisitions and certain general and administrative expenses. A key element
to our success has been our ability to control indirect and unallowable costs,
enabling us to profitably execute our existing contracts and successfully bid
for new contracts. In addition, with the acquisition of new companies, we have
been able to control our indirect costs and improve operating margins by
integrating the indirect cost structures and realizing opportunities for cost
synergies. Costs of revenues are considered to be a critical accounting policy
because of the direct relationship to revenue recognized.
Goodwill Impairment
Goodwill relating to our acquisitions represents the excess of cost over
the fair value of net tangible and separately identifiable intangible assets
acquired, and has a carrying amount of approximately $246.7 million and $212.2
million as of September 30, 2004 and December 31, 2003, respectively. In
accordance with SFAS No. 142, we test our goodwill for impairment at least
annually using a fair value approach. We have completed our annual impairment
analysis as of September 30, 2004, noting no indications of impairment for any
of our reporting units.
Long-Lived Assets and Identifiable Intangible Asset Impairment
The net carrying amount of long-lived assets and identifiable intangible
assets was approximately $19.4 million and $17.9 million at September 30, 2004
and December 31, 2003, respectively. Long-lived assets and identifiable
intangible assets, excluding goodwill, are evaluated for impairment when events
occur that suggest that such assets may be impaired. Such events could include,
but are not limited to, the loss of a significant customer or contract,
decreases in federal government appropriations or funding of certain programs,
or other similar events. None of these events occurred during the nine months
ended September 30, 2004. We determine if an impairment has occurred based on a
comparison of the carrying amount of such assets to the future undiscounted net
cash flows, excluding charges for interest. If considered impaired, the
impairment is measured by the amount by which the carrying amount of the assets
exceeds their estimated fair value, as determined by an analysis of discounted
cash flows using a discounted interest rate based on our cost of capital and the
related risks of recoverability.
In evaluating impairment, we consider, among other things, our ability to
sustain our current financial performance on contracts and tasks, our access to
and penetration of new markets and customers and the duration of, and estimated
amounts from, our contracts. Any uncertainty of future financial performance is
dependent on the ability to maintain our customers and the continued funding of
our contracts and tasks by the government. Over the past four years, we have
been able to win more than 90% of our contracts that have been recompeted. In
addition, we have been able to sustain financial performance through indirect
cost savings from our acquisitions, which have generally resulted in either
maintaining or improving margins on our contracts and tasks. If we are required
to record an impairment charge in the future, it could have an adverse impact on
our results of operations.
18
Business Combinations
We apply the provisions of SFAS No. 141, Business Combinations, whereby the
net tangible and separately identifiable intangible assets acquired and
liabilities assumed are recognized at their estimated fair market values at the
acquisition date. The purchase price in excess of the estimated fair market
value of the net tangible and separately identifiable intangible assets acquired
represents goodwill. The allocation of the purchase price related to our
business combinations involves significant estimates and management judgment
that may be adjusted during the allocation period, but in no case beyond one
year from the acquisition date. Costs incurred related to successful business
combinations are capitalized as costs of business combinations, while costs
incurred by us for unsuccessful or terminated acquisition opportunities are
expensed when we determine that such opportunities will no longer be pursued.
Costs incurred related to anticipated business combinations are deferred.
On August 11, 2004, we purchased all of the outstanding stock of IMSI, a
provider of high end, mission critical information and securities solutions,
based in Arlington, Virginia, for a total purchase price of $29.1 million,
including transaction costs. Under the terms of the stock purchase agreement,
additional consideration up to $3.5 million of additional purchase price may be
paid if certain milestones are met. The transaction was accounted for in
accordance with SFAS No. 141, Business Combinations.
On July 27, 2004, we purchased all of the outstanding stock of STI, a
provider of modeling and simulation software solutions and services, based in
San Antonio, Texas, for a total purchase price of $14.5 million, including
transaction costs. The transaction was accounted for in accordance with SFAS No.
141, Business Combinations.
On May 23, 2003, we purchased all of the outstanding stock of ISI, a
provider of credential card technologies, military logistics and training
systems, based in Annandale, Virginia, for a total purchase price of
approximately $92.4 million, including transaction costs. The transaction was
accounted for in accordance with SFAS No. 141, Business Combinations.
Statements of Operations
The following is a description of certain line items from our unaudited
condensed consolidated statements of operations, which include the operations of
IMSI, STI and ISI since the dates of the acquisitions.
Costs of revenues include direct labor and fringe costs for program
personnel and direct expenses incurred to complete contracts and task orders.
Costs of revenues also include depreciation, overhead, and other direct contract
costs, which include subcontract work, consultant fees, and materials. Overhead
consists of indirect costs relating to operational managers, rent/facilities,
administration, travel and other expenses.
General and administrative expenses are primarily for corporate functions
such as management, legal, finance and accounting, contracts and administration,
human resources, company management information systems and depreciation, and
also include other unallowable costs such as marketing, certain legal fees and
reserves.
Amortization expenses relate to intangible assets from our acquisitions.
These intangible assets consist of a noncompete agreement, contract backlog and
contracts and related customer relationships acquired as part of our
acquisitions.
Interest expense is primarily related to our term loans and revolving
facility, our Senior Subordinated Notes due 2009, or the "12% Notes", and other
miscellaneous interest costs.
Other income is from non-core business items such as the settlement
agreement of the subordinated notes payable.
Funded Backlog and Total Estimated Remaining Contract Value
Each year a significant portion of our revenue is derived from existing
contracts with our government clients, and a portion of the revenue represents
work related to maintenance, upgrade or replacement of systems under contracts
or projects for which we are the incumbent provider. Proper management of
contracts is critical to our overall financial success and we believe that
effective management of costs makes us competitive on price. Historically, we
believe that our demonstrated performance record and service excellence have
enabled us to maintain our position as an incumbent service provider on more
than 90% of our contracts that have been recompeted. We have increased our total
remaining estimated contract value by approximately $600.0 million including
acquisitions, from $5.6 billion at December 31, 2003, to $6.2 billion at
September 30, 2004. Funded backlog increased $131.7 million to $792.8 million at
September 30, 2004, from $661.1 million as of December 31, 2003.
19
Our total estimated remaining contract value, excluding indefinite
delivery, indefinite quantity, or "IDIQ," and multiple award contracts,
represents the aggregate contract revenue we estimate will be earned over the
remaining life of our contracts including all option years. For IDIQ and
multiple award contracts, we compute the total estimated remaining contract
value by calculating the three month rolling average run rate on each of these
contracts and extrapolating it over the life of the contract. Funded backlog is
based upon amounts actually appropriated by a customer for payment for goods and
services. Because the U.S federal government operates under annual
appropriations, agencies of the U.S. federal government typically fund contracts
on an incremental basis. Accordingly, the majority of the total estimated
remaining contract value is not funded backlog. Our total estimated remaining
contract value is based on our experience under contracts and we believe our
estimates are reasonable. However, there can be no assurance that our existing
contracts will result in actual revenues in any particular period or at all.
These amounts could vary depending upon government budgets and appropriations.
20
RESULTS OF OPERATIONS
The following table sets forth our results of operations based on the
amounts and percentage relationship of the items listed to contract revenues
during the period shown:
For the Three Months Ended September 30,
2004 2003
---- ----
($ in thousands)
Revenues $ 325,581 100.0% $ 279,080 100.0%
Costs of revenues 280,898 86.3 240,689 86.2
----------------- ------------- ---------------- -------------
Gross profit 44,683 13.7 38,391 13.8
----------------- ------------- ---------------- -------------
Operating expenses:
General and administrative expenses 16,473 5.1 14,969 5.4
Amortization of intangible assets 542 0.1 723 0.3
----------------- ------------- ---------------- -------------
Total operating expenses 17,015 5.2 15,692 5.7
----------------- ------------- ---------------- -------------
Operating income 27,668 8.5 22,699 8.1
Other income, net 939 0.3 -- --
Secondary offering expenses -- -- 798 0.3
Interest expense, net 1,831 0.6 3,831 1.4
Minority interest in (earnings) losses of subsidiaries 9 -- (18) --
----------------- ------------- ---------------- -------------
Income before income taxes 26,785 8.2 18,052 6.4
Provision for income taxes 9,936 3.0 7,109 2.5
----------------- ------------- ---------------- -------------
Net income $ 16,849 5.2% $ 10,943 3.9%
================= ============= ================ =============
For the Nine Months Ended September 30,
2004 2003
---- ----
($ in thousands)
Revenues $ 917,892 100.0% $ 761,764 100.0%
Costs of revenues 791,152 86.2 656,695 86.2
----------------- ------------- ---------------- -------------
Gross profit 126,740 13.8 105,069 13.8
----------------- ------------- ---------------- -------------
Operating expenses:
General and administrative expenses 48,720 5.3 42,388 5.6
Amortization of intangible assets 1,901 0.2 1,763 0.2
----------------- ------------- ---------------- -------------
Total operating expenses 50,621 5.5 44,151 5.8
----------------- ------------- ---------------- -------------
Operating income 76,119 8.3 60,918 8.0
Other income, net 943 0.1 -- --
Secondary offering expenses -- -- 798 0.1
Interest expense, net 5,575 0.6 10,384 1.4
Minority interest in earnings of subsidiaries (26) -- (50) --
----------------- ------------- ---------------- -------------
Income before income taxes 71,461 7.8 49,686 6.5
Provision for income taxes 26,613 2.9 19,359 2.5
----------------- ------------- ---------------- -------------
Net income $ 44,848 4.9% $ 30,327 4.0%
================= ============= ================ =============
21
REVENUES
For the three months ended September 30, 2004, revenues increased by $46.5
million, or 16.7%, to $325.6 million from $279.1 million for the three months
ended September 30, 2003. For the nine months ended September 30, 2004, revenues
increased by $156.1 million, or 20.5%, to $917.9 million from $761.8 million for
the nine months ended September 30, 2004. The increase in revenues was
attributable to organic growth and the acquisitions of IMSI, STI and ISI. We
define organic growth as the increase in revenues excluding the revenues
associated with acquisitions, divestitures and closures of businesses in
comparable periods. We believe that organic growth is a useful supplemental
measure to revenue. Management uses organic growth as part of its evaluation of
core operating results and underlying trends. For the three and nine months
ended September 30, 2004, our organic growth was 13.9% and 11.9%, respectively.
The acquisitions of IMSI and STI combined accounted for approximately, $7.7
million of the revenue growth for the three and nine months ended September 30,
2004, respectively. The increase in revenue was primarily driven by an increase
in employee headcount and growth in the following business areas: task orders in
support of a wide range of federal government agencies under our GSA
Applications and Support for Widely-diverse End User Requirements (ANSWER) and
Management and Business Services (MOBIS) contracts; Engineering and Technical
Services for Deploying Enabling Technologies with the U.S. Navy; engineering and
technical support to the U.S. Army's Program Executive Office for Simulation,
Training and Instrumentation; Foreign Military Sales Logistics support; and task
orders under our Naval Sea Systems Command (NAVSEA) Multiple Award Contract.
COSTS OF REVENUES
For the three months ended September 30, 2004, costs of revenues increased
by $40.2 million, or 16.7%, to $280.9 million from $240.7 million for the three
months ended September 30, 2003. For the nine months ended September 30, 2004,
costs of revenues increased by $134.5 million, or 20.5%, to $791.2 million from
$656.7 million for the nine months ended September 30, 2003. The increase in
costs of revenues was due to the corresponding growth in revenues resulting from
organic growth, the acquisitions of IMSI, STI and ISI and the increase in
employee headcount.
GENERAL and ADMINISTRATIVE EXPENSES
For the three months ended September 30, 2004, general and administrative
expenses increased $1.5 million, or 10.1%, to $16.5 million from $15.0 million
for the three months ended September 30, 2003. General and administrative
expenses for the three months ended September 30, 2004, as a percentage of
revenues, decreased to 5.1% from 5.4%. For the nine month period ended September
30, 2004, general and administrative expenses increased $6.3 million, or 14.9%,
to $48.7 million from $42.4 million for the nine months ended September 30,
2003. General and administrative expenses for the nine months ended September
30, 2004, as a percentage of revenues, decreased to 5.3% from 5.6%. This
decrease as a percentage of revenues was driven primarily by continued
operational cost efficiencies achieved in connection with acquired operations
and their successful integration. The dollar increase was primarily attributable
to the corresponding overall growth in the business.
AMORTIZATION
For the three months ended September 30, 2004, amortization expense
decreased $181,000, or 25.0%, to $542,000 from $723,000 for the comparable
period in 2003. The decrease in amortization expense during the period was the
result of one intangible asset, from a prior acquisition, being fully amortized.
For the nine months ended September 30, 2004, amortization expenses increased
$100,000, or 5.6%, to $1.9 million from $1.8 million for the nine months ended
September 30, 2003. The increase in amortization expense during the period is a
result of the additional amortization related to intangible assets from the
recent acquisitions of IMSI and STI.
OPERATING INCOME
For the three months ended September 30, 2004, operating income increased
$5.0 million, or 21.9%, to $27.7 million from $22.7 million for the three months
ended September 30, 2003. Operating income as a percentage of revenues increased
to 8.5% for the three months ended September 30, 2004 from 8.1% for the same
period in 2003. For the nine months ended September 30, 2004, operating income
increased $15.2 million, or 25.0%, to $76.1 million from $60.9 million for the
nine months ended September 30, 2003. Operating income as a percentage of
revenues increased to 8.3% for the nine months ended September 30, 2004 from
8.0% for the same period in 2003, primarily as a result of an increase in
revenues and controlling our indirect costs by integrating our acquisitions into
our cost structure and realizing opportunities for cost synergies.
22
OTHER INCOME
For the three months ended September 30, 2004, other income increased to
$939,000 from zero for the three months ended September 30, 2003. For the nine
months ended September 30, 2004, other income increased $939,000 to $943,000
from $4,000 for the nine months ended September 20, 2003. The increase in other
income, for the three and nine months period, was primarily related to a
settlement agreement we entered into with the former shareholders of Sherikon,
Inc. Under the provisions of the settlement agreement, the principal amount of
the subordinated note payable was reduced from $2.5 million to $1.35 million,
and the Company paid the reduced note amount, without interest. The $933,000 in
other income, related to the settlement agreement, consists of the $1.15 million
reduction in the promissory note amount plus previously accrued interest net of
legal expenses.
INTEREST EXPENSE, NET
For the three month period ended September 30, 2004, interest expense, net
of interest income, decreased $2.0 million, or 52.6%, to $1.8 million from $3.8
million for the three months ended September 30, 2003. For the nine months ended
September 30, 2004, interest expense, net of interest income, decreased $4.8
million, or 46.2%, to $5.6 million from $10.4 million for the nine months ended
September 30, 2003. The decrease in interest expense was due primarily to the
repurchase of our 12% Notes and the refinancing of our Credit Facility. In
December 2003, we reduced the balance of our 12% Notes to approximately $1.9
million from $75.0 million by utilizing the proceeds from the $150.0 million in
the Term Loan B borrowings made under the Amended and Restated Credit Agreement
of December 19, 2003, or the "2003 Amended and Restated Credit Agreement". In
June 2004, we repurchased the remaining balance of $1.9 million of our 12%
Notes. In conjunction with the repurchase in 2004, we paid a tender premium of
approximately $113,000 which is included in interest expense for the nine months
ended September 30, 2004. During the nine months ended September 30, 2004, the
interest rate on the Term Loan B borrowings ranged from 3.73% to 3.11% compared
to a range of 3.66% to 3.35% on the previous term loan for the same period in
the prior year.
PROVISION FOR INCOME TAXES
Our effective tax rate for the three months ended September 30, 2004 was
37.1% compared to an effective tax rate of 39.4% for the three months ending
September 30, 2003. Our effective tax rate for the nine months ended September
30, 2004 was 37.2% compared to an effective tax rate of 39.0% for the nine
months ended September 30, 2003. The 2004 effective tax rate reflects a benefit
for federal credits from prior years, state legislative changes and a
non-recurring benefit in the three months ended September 30, 2004 from
nontaxable other income resulting from the settlement with the former owners of
Sherikon, Inc. for which a deferred tax liability has not been recorded.
23
LIQUIDITY AND CAPITAL RESOURCES
Cash flows for the Nine Months Ended September 30, 2004 and 2003
We generated $48.2 million and $40.8 million in cash from operations for
the nine months ended September 30, 2004 and 2003, respectively. This increase
in cash flows was primarily attributable to an improvement in net income. Total
days sales outstanding, or "DSO," at September 30, 2004 increased to 70 days,
from 67 days as of September 30, 2003. The increase in DSO during the period was
due to the timing of receipt of payments from various government payment
offices. Accounts receivable totaled $257.4 million at September 30, 2004 and
represented 45.6% of total assets at that date. For the nine months ended
September 30, 2004, net cash used for investing activities was $46.1 million,
which was primarily attributable to approximately $29.1 million and $14.5
million used for the acquisitions of IMSI, and STI, respectively. For the nine
months ended September 30, 2003, net cash used for investing activities was
$94.6 million, of which approximately $92.4 million was used for the acquisition
of ISI. Cash provided in financing activities was $10.5 million for the nine
months ended September 30, 2004, primarily related to an increase in the Term
Loan B borrowing. Cash provided by financing activities was $52.2 million for
the nine months ended September 30, 2003, primarily due to the additional
borrowings under the revolving loan portion of our Credit Facility for the
acquisition of ISI.
On September 30, 2004, the Company entered into a second amendment related
to our Credit Agreement. This amendment provided an additional $16.1 million of
borrowing by increasing our Term Loan B to $165 million, and lowered the
interest rates on Term Loan B borrowings by 0.25%. At September 30, 2004, total
debt outstanding under our Credit Facility was $165.0 million, all of which was
related to our Term Loan B and zero outstanding under the revolving loan portion
of our Credit Facility. The total funds available to us under the revolving loan
portion of our Credit Facility as of September 30, 2004 was $175.0 million.
Under certain conditions related to excess annual cash flow, as defined in our
Credit Facility, and the receipt of proceeds from certain asset sales and debt
or equity issuances, we are required to prepay, in amounts specified in our
Credit Facility, borrowings under the Term Loan B. In addition, we are scheduled
to pay quarterly installments of approximately $412,500 under the Term Loan B
until the Credit Facility matures on December 31, 2010. As of September 30,
2004, we did not have any capital commitments greater than $1.0 million.
Prior to September 30, 2004, our 2003 Amended and Restated Credit Agreement
dated as of December 19, 2003, provided among other things, a Term Loan B in the
amount of $150.0 million with a maturity date of December 31, 2010 and for the
extension of the maturity date of the revolving loan portion of our Credit
Facility to December 31, 2008. In addition, the 2003 Amended and Restated Credit
Agreement permits the Company to raise up to $200.0 million of additional debt
in the form of additional term loans, subordinated debt or revolving loans, with
certain restrictions on the amount of revolving loans. All borrowings under the
2003 Amended and Restated Credit Agreement are subject to financial covenants
customary for such financings, including, but not limited to: maximum ratio of
net debt to EBITDA (as defined in the 2003 Amended and Restated Credit
Agreement) and maximum ratio of senior debt to EBITDA. Historically, our primary
liquidity requirements have been for debt service under our Credit Facility and
12% Notes and for acquisitions and working capital requirements. We have funded
these requirements primarily through internally generated operating cash flow
and funds borrowed under our existing Credit Facility.
Our principal working capital need is for funding accounts receivable,
which has increased with the growth in our business, and timing of receipt of
government payments. Our principal sources of cash to fund our working capital
needs are cash generated from operating activities and borrowings under the
revolving portion of our Credit Facility.
We have relatively low capital investment requirements. Capital
expenditures were $2.8 million and $2.2 million for the nine months ended
September 30, 2004 and 2003, respectively, primarily for leasehold improvements
and office equipment.
We intend to, and expect over the next twelve months to be able to, fund
our operating cash, capital expenditure and debt service requirements through
cash flow from operations and borrowings under our Credit Facility. Over the
longer term, our ability to generate sufficient cash flow from operations to
make scheduled payments on our debt obligations will depend on our future
financial performance, which will be affected by a range of economic,
competitive and business factors, many of which are outside our control.
24
OFF-BALANCE SHEET ARRANGEMENTS AND AGGREGATE CONTRACTUAL OBLIGATIONS
We use operating leases to finance computers, servers, phone systems, and
to a lesser extent, other fixed assets, such as furnishings. As of September 30,
2004, we financed equipment with an original cost of approximately $18.2 million
through operating leases. Had we not used operating leases, we would have used
our existing Credit Facility to purchase these assets. Other than the operating
leases described above, and facilities leases, we do not have any other
off-balance sheet financing.
INFLATION
We do not believe that inflation has had a material effect on our business
in the three months ended September 30, 2004.
25
ITEM 3. QUANTITATIVE and QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have interest rate exposure relating to certain of our long-term
obligations. In June 2004, we redeemed the remaining $1.9 million balance of
our 12% Notes, which had a fixed interest rate of 12%. The interest rates on
both the Term Loan B and the revolving loan portion of our Credit Facility are
affected by changes in market interest rates. We manage these fluctuations by
reducing the amount of outstanding debt through cash flow by focusing on billing
and collecting our accounts receivable.
During the nine months ended September 30, 2004, the last of our interest
rate swap agreements, with a notional value of $10.0 million, matured. We are
not currently contemplating any further interest rate swap agreements. However,
as market conditions change, we will reevaluate our position.
A 1% change in interest rates on variable rate debt would have resulted in
our interest expense fluctuating by approximately $1.1 million and $316,000 for
the nine months ended September 30, 2004 and 2003 respectively.
ITEM 4. CONTROLS AND PROCEDURES.
Our management, with the participation of our chief executive officer and
chief financial officer (our principal executive officer and principal financial
officer), evaluated the effectiveness of our disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15-d-15(e) under the Exchange Act) as of
September 30, 2004. Based on this evaluation, our chief executive officer and
chief financial officer concluded that, as of September 30, 2004, our disclosure
controls and procedures were (1) designed to ensure that material information
relating to us, including our consolidated subsidiaries, is made known to our
chief executive officer and chief financial officer by others within those
entities, particularly during the period in which this report was being prepared
and (2) effective, in that they provide reasonable assurance that information
required to be disclosed by us in the reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms.
No change in our internal controls over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the three
months ended September 30, 2004 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
26
PART II. OTHER INFORMATION REQUIRED IN REPORT
ITEM 1. LEGAL PROCEEDINGS
We are involved in various legal proceedings in the ordinary course of
business.
We cannot predict the ultimate outcome of these matters, but do not believe
that such matters will have a material impact on our financial position or
results of operations.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS, AND ISSUER PURCHASES OF EQUITY
SECURITIES
The Anteon International Corporation Employee Stock Purchase Plan ("ESPP")
became effective on April 1, 2004
The Company has filed a Registration Statement on Form S-8 with the SEC to
register 1.2 million shares of the Company's common stock under the ESPP. The
table below details the total shares purchased to date under the plan:
(d) Maximum Number (or
(c) Total Number of Approximate Dollar
Shares Purchased as Value) of Shares that
(b) Average Part of Publicly May Yet Be Purchased
(a) Total Number of Price Paid per Announced Plans or Under the Plans or
Period Shares Purchased Share Programs Programs
- ------ ---------------- ----- -------- --------
July 1, 2004 14,668 $30.99 14,668 1,185,332
Total 14,668 14,668 1,185,332
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
ITEM 5. OTHER INFORMATION
NONE
ITEM 6. EXHIBITS
10.1 Second Amendment, dated as of September 30, 2004, to
the Amended and Restated Credit Agreement, dated as of
December 19, 2003 among Anteon Corporation, Bank of
America, N.A., and Citizens Bank of Pennsylvania.
31.1 Certification of the Chief Executive Officer pursuant
to Rule 13a-14(a) of the Securities Exchange Act of
1934, as amended.
31.2 Certification of the Chief Financial Officer pursuant
to Rule 13a-14(a) of the Securities Exchange Act of
1934, as amended.
32.1 Certification of the Chief Executive Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of the Chief Financial Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ANTEON INTERNATIONAL CORPORATION
Date: November 2, 2004 /s/ Joseph M. Kampf
---------------- ------------------------------------------------
Joseph M. Kampf - President and
Chief Executive Officer
Date: November 2, 2004 /s/ Charles S. Ream
---------------- ------------------------------------------------
Charles S. Ream - Executive Vice President and
Chief Financial Officer
28