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FORM 10-Q for ANTEON INTERNATIONAL CORPORATION filed on May 10, 2006
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2006
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 001-31258
ANTEON INTERNATIONAL CORPORATION
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 13-3880755
(State of Incorporation) (I.R.S. Employer Identification No.)
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3211 Jermantown Road, Fairfax, Virginia 22030-2801
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(Address of principal executive offices)(Zip Code)
(703) 246-0200
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to the
filing requirements for at least the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer |X| Accelerated filer |_| Non-accelerated filer |_|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). |_| Yes |X| No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d)of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. |_| Yes |_| No
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of the close of business on May 8, 2006, there were 37,529,350 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
MARCH 31, 2006 AND DECEMBER 31, 2005 1
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS FOR THE THREE MONTHS ENDED
MARCH 31, 2006 AND 2005 2
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005 3
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 23
ITEM 4. CONTROLS AND PROCEDURES 23
PART II. OTHER INFORMATION REQUIRED IN REPORT
ITEM 1. LEGAL PROCEEDINGS 24
ITEM 1. A RISK FACTORS 24
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 24
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS 25
ITEM 5. OTHER INFORMATION 26
ITEM 6. EXHIBITS 26
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)
March 31, 2006 December 31, 2005
-------------------- --------------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 49,364 $ 9,048
Short term investments -- 37,460
Accounts receivable, net 346,078 331,809
Prepaid expenses and other current assets 22,452 17,182
Deferred tax assets, net -- 71
-------------- --------------
Total current assets 417,894 395,570
Property and equipment, net 15,649 15,107
Goodwill 261,058 260,834
Intangible and other assets, net 25,497 26,434
-------------- --------------
Total assets $ 720,098 $ 697,945
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Term Loan B, current portion $ 1,650 $ 1,650
Obligations under capital leases, current portion 114 121
Accounts payable 22,424 28,319
Accrued expenses 111,378 110,638
Deferred tax liabilities, net 22 --
Income tax payable 15,392 9,973
Deferred compensation 3,090 2,009
Deferred revenue 22,329 25,080
-------------- --------------
Total current liabilities 176,399 177,790
Term Loan B, less current portion 160,875 161,288
Obligations under capital leases, less current portion 181 210
Noncurrent deferred tax liabilities, net 8,660 8,675
Other long term liabilities 6,639 6,529
-------------- --------------
Total liabilities 352,754 354,492
Minority interest in subsidiaries 363 357
Stockholders' equity:
Preferred stock, $0.01 par value; 15,000,000 shares authorized, none issued
and outstanding as of March 31, 2006
and December 31, 2005 -- --
Common stock, $0.01 par value; 175,000,000 shares
authorized, 37,486,550 and 37,238,974 shares issued and
outstanding as of March 31, 2006 and December 31, 2005,
respectively. 375 372
Additional paid-in capital 147,742 143,851
Accumulated other comprehensive income 27 13
Retained earnings 218,837 198,860
-------------- --------------
Total stockholders' equity 366,981 343,096
-------------- --------------
Total liabilities and stockholders' equity $ 720,098 $ 697,945
============== ==============
See accompanying notes to unaudited condensed consolidated financial statements.
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
March 31,
2006 2005
------------ -------------
Revenues $ 389,558 $ 349,982
Costs of revenues 332,573 298,226
------------ -------------
Gross profit 56,985 51,756
Operating expenses:
General and administrative expenses 21,470 20,270
Amortization of intangible assets 1,013 686
------------ -------------
Total operating expenses 22,483 20,956
------------ -------------
Operating income 34,502 30,800
Other income, net 121 873
Merger related expenses 303 --
Interest expense, net of interest income of
$579, and $85, respectively 2,385 2,214
Minority interest in earnings of subsidiaries (6) (29)
------------ -------------
Income before provision for income taxes 31,929 29,430
Provision for income taxes 11,952 11,406
------------ -------------
Net income $ 19,977 $ 18,024
============= =============
Basic earnings per common share: $ 0.54 $ 0.50
============= =============
Basic weighted average shares outstanding 37,317,939 36,286,772
Diluted earnings per common share: $ 0.52 $ 0.48
============= =============
Diluted weighted average shares outstanding 38,127,406 37,590,209
See accompanying notes to unaudited condensed consolidated financial statements.
ANTEON INTERNATIONAL CORPORATION AND SUBSIDIARIES
(A Delaware Corporation)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the three months ended
March 31, 2006 March 31, 2005
------------------ -----------------
OPERATING ACTIVITIES:
Net income $ 19,977 $ 18,024
Adjustments to reconcile net income to net cash provided
by operating activities:
Gain on the reversal of an acquisition reserve -- (900)
Depreciation and amortization of property and equipment 1,108 1,091
Amortization of noncompete agreements 41 42
Other intangibles amortization 972 644
Stock compensation 1,361 --
Amortization of deferred financing fees 163 163
Excess tax benefits from stock-based compensation (124) --
Deferred income taxes (111) (966)
Minority interest in earnings of subsidiaries 6 29
Changes in assets and liabilities (21,038) 33,586
------------------ -----------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,355 51,713
------------------ -----------------
INVESTING ACTIVITIES:
Purchases of property, equipment and other assets (1,650) (1,538)
Proceeds from sales of short term investments 37,460 --
Other (34) 115
------------------ -----------------
NET CASH PROVIDED BY/(USED FOR) INVESTING ACTIVITIES 35,776 (1,423)
------------------ -----------------
FINANCING ACTIVITIES:
Principal payments on capital lease obligations (36) (80)
Principal payments on Term Loan B (413) (413)
Excess tax benefits from stock-based compensation 124 --
Proceeds from revolving credit facility 377,800 228,800
Principal payments on revolving credit facility (377,800) (248,600)
Proceeds from issuance of common stock, net of expenses 2,510 1,045
------------------ -----------------
NET CASH PROVIDED BY/(USED FOR) FINANCING ACTIVITIES 2,185 (19,248)
------------------ -----------------
CASH AND CASH EQUIVALENTS:
Net increase in cash and cash equivalents 40,316 31,042
Cash and cash equivalents, beginning of period 9,048 4,103
------------------ -----------------
Cash and cash equivalents, end of period $ 49,364 $ 35,145
================== =================
Supplemental disclosure of cash flow information (in thousands):
Interest paid $ 2,827 $ 2,136
================== =================
Income taxes paid, net $ 6,626 $ 1,622
================== =================
See accompanying notes to unaudited condensed consolidated financial statements.
ANTEON INTERNATIONAL CORPORATION AND SUBSIDIARIES
(A Delaware Corporation)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006 AND 2005
(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 months ended March 31, 2006 may not be
indicative of the results of operations for the year ending December 31, 2006,
or any future period. This financial information should be read in conjunction
with Anteon International Corporation's December 31, 2005 audited consolidated
financial statements and footnotes thereto, included in the Annual Report on
Form 10-K filed with the Securities and Exchange Commission on March 17, 2006.
(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. For the three months ended
March 31, 2006, approximately 87% of the Company's revenues were derived from
contracts with the Department of Defense, or "DOD," and intelligence agencies,
and approximately 12% from civilian agencies that includes the Department of
Homeland Security or "DHS" of the U.S. federal government. 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.
On December 13, 2005, the Company entered into an agreement and plan of
merger (the "Merger Agreement") with General Dynamics Corporation, or "General
Dynamics," and a wholly owned subsidiary of General Dynamics, pursuant to which
General Dynamics agreed to acquire Anteon International Corporation for
approximately $2.2 billion (the "Merger"), which includes the assumption of net
debt defined as debt less cash which totaled approximately $113 million as of
March 31, 2006. Upon completion of the Merger, Anteon International Corporation
will become a wholly owned subsidiary of General Dynamics.
On March 3, 2006, the Company held a special meeting of stockholders at
which the stockholders adopted the Merger Agreement and approved the Merger.
Completion of the Merger is subject to the satisfaction or waiver of a number of
conditions, including the expiration or termination of the waiting period under
the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act"). The
Company expects to divest certain contracts to enable the Department of Justice
to complete its review and approval of the proposed transaction with General
Dynamics pursuant to the HSR Act. Other than approval pursuant to the HSR Act,
no other material federal or state regulatory approvals are required to be
obtained by the Company, General Dynamics or its wholly owned subsidiary in
connection with the Merger.
On April 24, 2006, the Company announced that General Dynamics had extended
the April 30, 2006 deadline for completing its proposed merger with Anteon to
July 31, 2006 in accordance with the terms of the Merger Agreement between the
parties. The Company anticipates that the transaction will close no later than
the end of the second quarter of 2006. The Merger Agreement may be terminated
prior to the effective time of the Merger, under certain circumstances discussed
in the Merger Agreement.
ANTEON INTERNATIONAL CORPORATION AND SUBSIDIARIES
(A Delaware Corporation)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006 AND 2005
(3) Acquisition of Integrated Management Services, Inc.
On August 11, 2004, the Company purchased all of the outstanding stock
of Integrated Management Services, Inc., or "IMSI," a provider of high end,
mission critical information and securities solutions, based in Arlington,
Virginia, for a total purchase price of $29.0 million, including transaction
costs. Under the terms of the stock purchase agreement, the Company may be
obligated to pay up to $2.0 million of additional consideration if follow on
work related to a certain government contract was awarded in the time frame set
forth under the stock purchase agreement. The Company communicated to the seller
of IMSI the Company's determination of the additional consideration the Company
believes is due to the seller. The Company subsequently received the seller's
response setting forth the seller's calculation of the additional consideration
the Seller believes is due. The parties are currently engaged in discussions in
an effort to reach agreement on the additional consideration to be paid to the
seller. The net tangible and identifiable intangible assets acquired and
liabilities assumed were recognized at their estimated fair market values at the
date of acquisition. The identifiable intangible assets consisted of $5.9
million of contracts and related customer relationships with an expected
weighted average useful life of 5 years. The value of the contracts and customer
relationships is based, in part, on an independent appraisal and other studies
performed by the Company. Goodwill recognized from this acquisition was
approximately $20.6 million and is deductible for tax purposes due to the tax
code election made at the time of the acquisition. The acquisition did not meet
the criteria of a material and significant acquisition, and therefore, pro forma
disclosures have not been presented.
(4) Acquisition of Milestone Group, LLC.
On October 14, 2005, the Company purchased all of the outstanding
limited liability membership interests of Milestone Group, LLC, or "Milestone,"
a provider of IT professional services based in Arlington, Virginia, for a total
purchase price of $31.0 million, including transaction costs. The Company
financed the acquisition through cash-on-hand and proceeds from the sales of
short term investments. The transaction was accounted for in accordance with
Statement of Financial Accounting Standards or "SFAS," No. 141, Business
Combinations, whereby the net tangible and identifiable intangible assets
consisted of $10.5 million of contracts and related customer relationships is
based, in part, on an independent appraisal and other studies performed by the
Company. The Company has recognized approximately $328,000 of amortization
expense related to the intangible assets for the three months ended March 31,
2006. Goodwill recognized from this acquisition was approximately $18.9 million
and is deductible for tax purposes due to the tax code election made at the time
of the acquisition. The acquisition did not meet the criteria of a material and
significant acquisition, and therefore, pro forma disclosures have not been
presented.
(5) Accounting for Stock-Based Compensation
On January 1, 2006, the Company adopted the modified prospective transition
method of accounting for stock-based compensation in accordance with SFAS No.
123R, Share-Based Payment. Under the fair value recognition provisions of this
statement, compensation expense is measured at the grant date based on the fair
value of the award. The Company recognizes compensation expense on its
stock-based compensation on a straight-line basis over the vesting period. In
accordance with the Merger Agreement, the Company has suspended the issuance of
any additional equity-based awards.
ANTEON INTERNATIONAL CORPORATION AND SUBSIDIARIES
(A Delaware Corporation)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006 AND 2005
Prior to January 1, 2006, the Company used the intrinsic value based method
of accounting prescribed by APB No. 25. The Company had not recorded stock-based
compensation expense on options granted to employees in prior years as the fair
value of the Company's common stock equaled the exercise price of the option at
the date of the grant. The Company accounted 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
was not significant. Under the modified prospective transition method under SFAS
No. 123R, the Company has not revised prior periods for comparative purposes.
The following table illustrates the effect on net income and earnings per share
for the three months ended March 31, 2005 as if the Company had applied the fair
value recognition provisions of SFAS No. 123, to stock-based employee
compensation.
Three Months Ended
March 31, 2005
--------------------------
(in thousands, except per
share data)
-
Net income, as reported $ 18,024
Deduct: Total stock-based compensation expense
determined under fair value method, net of tax 989
---------------
Pro forma net income $ 17,035
Earnings per share:
Basic-as reported $ 0.50
===============
Basic-pro forma $ 0.47
===============
Diluted-as reported $ 0.48
===============
Diluted-pro forma $ 0.45
===============
(a) Stock Option Plan
In January 1997, the Company's Board of Directors approved the
adoption of the Anteon Virginia Corporation Omnibus Stock Plan
(the "Stock Option Plan"). At the discretion of the Board of
Directors, the stock option plan permits the granting of stock
options, stock appreciation rights, restricted or unrestricted
stock awards, and/or phantom stock to employees or directors
of the Company. As of March 31, 2006, an aggregate of
1,634,341 shares of the Company's common stock were reserved
for issuance under the stock option plan.
The exercise price of stock options granted is the market
value of the common stock at the grant date. Prior to the
Company's IPO, the exercise price of stock options granted was
determined by the Company's Board of Directors but was not to
be less than the fair value of the underlying shares of common
stock at the grant date.
For stock options granted to employees, 20% of the shares
subject to the options vest on the first anniversary of the
grant date and an additional 20% vest on each succeeding
anniversary of the grant date. All awards fully vest upon a
change in control (as defined in the Stock Option Plan). For
options granted from the date of the adoption of the Company's
stock option plan until September 21, 2000, employees have a
period of three years from the vesting date to exercise the
option to purchase shares of the Company's common stock. In
1997, the Company's Board of Directors approved that 20
percent of the options issued on the August 1, 1997 grant date
vested immediately. On September 21, 2000, the Company's Board
of Directors approved that, with respect to stock options
granted from that date forward, each grantee has a period of 8
years from the date of grant in which to exercise options
which vest. On March 11, 2002, the Company's Board of
Directors approved that, with respect to stock options granted
from that date forward, each grantee has a period of 10 years
from the date of grant in which to exercise options which
vest. All outstanding options granted under the Stock Option
Plan will become fully vested immediately prior to the
effective time of the Merger with General Dynamics.
ANTEON INTERNATIONAL CORPORATION AND SUBSIDIARIES
(A Delaware Corporation)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006 AND 2005
The following tables summarize information regarding options
under the Company's stock option plan:
Weighted
Average
Weighted Remaining Aggregate
Number Average Contractual Intrinsic Value
of Shares Exercise Price Life (in years) (thousands)
----------- ---------------- ---------------- ------------------
Outstanding at December 31, 2005 1,951,383 $ 23.13
Granted -- --
Exercised (247,576) 10.28
Cancelled or expired (14,800) 30.81
----------- --------------
Outstanding as of March 31, 2006 1,689,007 $ 24.95 6.4 $ 50,014
=========== ==============
Vested and Expected to Vest
as of March 31, 2006 1,533,037 $ 24.10 6.3 $ 46,697
=========== ==============
Exercisable as of March 31, 2006 810,907 $ 18.96 5.3 $ 28,865
=========== ==============
In the table above, intrinsic value is calculated as the
difference between the market price of the Company's stock on the
last trading day of the quarter and the exercise price of the
options. The adoption of SFAS No. 123R resulted in a reduction to
operating income and net income of $1.3 million and $1.0 million,
respectively, for the three months ended March 31, 2006. The
impact on basic and diluted earnings per share for the three
months ended March 31, 2006 was $0.02 and $0.03, respectively.
For the three months ended March 31, 2006, cash flow from
operating activities decreased by $124,000 and cash flow from
financing activities increased by $124,000 as a result of the
adoption of SFAS No. 123R. Total unrecognized compensation cost
related to unvested stock options at March 31, 2006 prior to the
consideration of expected forfeitures is approximately $9.0
million and is expected to be recognized over a weighted average
period of 3 years. For options exercised, intrinsic value is
calculated as the difference between the market price on the date
of the exercise and the exercise price. The total intrinsic value
of options exercised during the three months ended March 31, 2006
and 2005 was $1.0 million and $426,000, respectively. Cash
received from the exercise of stock options was $2.5 million and
$1.1 million, respectively, for the three months ended March 31,
2006 and 2005. The total fair value of shares vested during the
three months ended March 31, 2006 and March 31, 2005 was $1.7
million and $2.3 million, respectively. The tax benefits realized
from stock options exercised was $124,000 and $411,000,
respectively, for the three months ended March 31, 2006 and 2005
ANTEON INTERNATIONAL CORPORATION AND SUBSIDIARIES
(A Delaware Corporation)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006 AND 2005
The Company uses the Black-Scholes-Merton option pricing model to
determine the fair value of stock options. Variables used in the
option pricing model included stock price volatility, risk-free
interest rates, expected dividends and actual and projected
employee stock option exercise behaviors. For the three months
ended March 31, 2006, there were no stock options granted under
the Stock Option Plan. For the three months ended March 31, 2005,
the weighted average fair value of options granted was $13.44.
The Company used the following assumptions to value the stock
options granted during the three months ended March 31, 2005:
March 31, 2005
------------------
Expected term (in years) 5
Volatility 32.54%
Risk free interest rate 3.91%
(b) Employee Stock Purchase Plan
Effective April 1, 2004, the Company implemented an 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 Company common stock for delivery to
ESPP participants. These shares may be newly issued shares,
treasury shares or shares purchased on the open market or
otherwise. 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 of a share of
Company common stock on the last day of each quarterly offering
period. The Compensation Committee has 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. Effective with the offering period
beginning January 1, 2006, the Company has suspended the ESPP as
required in the Merger Agreement. The table below details the
total shares purchased by the Company to fulfill its obligations
under the ESPP for the period covered by this report.
Total Total Number of Maximum Number of
Number of Average Shares Purchased as Shares that May Yet
Shares Prices Paid Part of Publicly Be Purchased
Period Purchased per Share Announced Plan Under the Plan
- ----------------------- ------------ ------------- ---------------------- ----------------------
January 1 - 31, 2006 13,495 $51.63 13,495 1,097,393
February 1 - 28, 2006 -- -- -- 1,097,393
March 1 - 31, 2006 -- -- -- 1,097,393
------------ ---------------------
Total 13,495 13,495
============ =====================
ANTEON INTERNATIONAL CORPORATION AND SUBSIDIARIES
(A Delaware Corporation)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006 AND 2005
(c) Supplemental Retirement Savings Plan
The Company implemented a Supplemental Retirement Savings Plan
(the "Plan") on January 1, 2004, that permits eligible
employees and directors to defer all or a portion of their
annual cash compensation. The Company amended the Plan on
January 1, 2005 to comply with the requirements of the
American Jobs Creation Act signed into law on October 22,
2004. 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 March 31, 2006, the deferred
compensation obligation was approximately $3.1 million. For
the three months ended March 31, 2006 and March 31, 2005, the
adjustments to fair market value were not significant.
(d) Restricted Shares
The Company had 7,000 restricted shares outstanding as of
December 31, 2005 and March 31, 2006 with a weighted average
exercise price of $44.95. Compensation expense and effect on
earnings per share related to these restricted shares were not
significant.
(6) Comprehensive Income
Comprehensive income for the three months ended March 31, 2006 and 2005 was
approximately $20.0 million and $17.9 million, respectively. Other comprehensive
income (loss) for the three months ended March 31, 2006 and 2005 includes
foreign currency translation gain (loss) of approximately $14,000 and ($109,000)
respectively.
(7) Computation of Earnings Per Share
For the three months ended
March 31, 2006
Income Weighted average shares Per Share
(Numerator) (Denominator) Amount
----------- ----------------------- ---------
(in thousands, except share and per share data)
Basic earnings per share:
Net income $ 19,977 37,317,939 $ 0.54
=========== =========
Stock options and restricted shares -- 809,467 --
Diluted earnings per share:
Net income $ 19,977 38,127,406 $ 0.52
=========== =========
For the three months ended
March 31, 2005
Income Weighted average shares Per Share
(Numerator) (Denominator) Amount
----------- ----------------------- ---------
(in thousands, except share and per share data)
Basic earnings per share:
Net income $ 18,024 36,286,772 $ 0.50
=========== =========
Stock options -- 1,303,437 --
Diluted earnings per share:
Net income $ 18,024 37,590,209 $ 0.48
=========== =========
For the three months ended March 31, 2006 and 2005, weighted average
shares issuable upon the exercise of stock options, which were not
included in computing dilutive earnings per share because they were
anti-dilutive, were 101,940 and 296,600, respectively.
(8) 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.
ANTEON INTERNATIONAL CORPORATION AND SUBSIDIARIES
(A Delaware Corporation)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006 AND 2005
(9) Investments Available-for-Sale
During the three months ended March 31, 2006, the Company sold its
remaining investments in state and municipal variable rate deposit notes with
maturities greater than 10 years. The Company had carried the investments as
current assets on the balance sheet at fair value. With variable rate notes, the
Company did not record unrealized gains or losses on the investments as the fair
value and the cost basis were always the same. Similarly, there was no gain or
loss realized when these instruments were sold during the quarter. Interest
income on the investments was recognized when earned.
(10) Legal Proceedings
On November 4, 2005, the Company received a Customs Export Enforcement
Subpoena for documents from the United States Customs Service. The subpoena
requested the production of records and information in connection with two of
the Company's programs, and a description of the Company's export compliance
program. The Company produced documents responsive to the subpoena in November
and December 2005 and the matter is on-going. Although the Company cannot
predict the outcome of the matter, the Company does not believe that it will
have a material impact on the Company's financial position or results of
operations.
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.
(11) Recent Accounting Pronouncements
In March 2006, the Financial Accounting Standards Board (FASB) issued SFAS
No. 156, Accounting for Servicing of Financial Assets, which amends SFAS No.
140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. SFAS No. 156 requires recognition of a servicing
asset or liability at fair value each time an obligation is undertaken to
service a financial asset by entering into a servicing contract. SFAS No. 156
also provides guidance on subsequent measurement methods for each class of
servicing assets and liabilities and specifies financial statement presentation
and disclosure requirements. SFAS No. 156 is effective for fiscal years
beginning after September 15, 2006. The Company believes the adoption of this
statement will have no impact on the Company's financial condition or results of
operations.
In February 2006, FASB issued SFAS No. 155, Accounting for Certain Hybrid
Financial Instruments, which amends SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, and SFAS No. 140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No.
155 simplifies the accounting for certain derivatives embedded in other
financial instruments by allowing them to be accounted for as a whole if the
holder elects to account for the whole instrument on a fair value basis. SFAS
No. 155 also clarifies and amends certain other provisions of SFAS No. 133 and
SFAS No. 140. SFAS No. 155 is effective for all financial instruments acquired,
issued or subject to a remeasurement event occurring in fiscal years beginning
after September 15, 2006. Earlier adoption is permitted, provided the Company
has not yet issued financial statements, including for interim periods, for that
fiscal year. The Company believes the adoption of this statement will have no
impact on the Company's financial condition or results of operations.
(12) Subsequent Event
On April 10, 2006, the Company acquired the remaining 20% minority
interest in its Anteon (UK) Limited subsidiary for approximately $1.4 million.
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 trends in and revenues derived from funded backlog;
o total estimated remaining contract value;
o our expectations regarding the U.S. federal government's procurement
budgets and reliance on outsourcing of services;
o our financial condition and liquidity, as well as future cash flows
and earnings; and
o our ability to close the proposed merger with a subsidiary of General
Dynamics.
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. Actual events or results may differ materially. In
evaluating these statements, you should specifically consider various factors,
including the following:
o inability to obtain government approval of the Merger;
o changes in U.S. federal government procurement laws, regulations,
policies and budgets;
o changes in U.S. federal government military and security-related
outsourcing policies;
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 our ability to attract and retain qualified personnel;
o competition;
o our ability to retain our contracts during any rebidding process; and
o the other factors outlined under the heading "Risk Factors" in our
Annual Report on Form 10-K filed with the Securities and Exchange
Commission on March 17, 2006.
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 three
months ended March 31, 2006, approximately 87% of our revenues were derived from
contracts with the DOD and intelligence agencies, and approximately 12% from
civilian agencies that includes DHS of the U.S. federal government. For the
three months ended March 31, 2006, approximately 86% of our revenues were from
contracts where we were the lead, or "prime" contractor. For the three months
ended March 31, 2006, our diverse contract base had approximately 800 active
contracts and approximately 3,800 active task orders, and our STRICOM task order
under the ANSWER contract accounted for approximately 13% of our revenues. No
other individual task order accounted for more than 10% of our revenues.
On December 13, 2005, the Company entered into an agreement and plan of
merger (the "Merger Agreement") with General Dynamics Corporation, or "General
Dynamics," and a wholly owned subsidiary of General Dynamics, pursuant to which
General Dynamics agreed to acquire Anteon International Corporation for
approximately $2.2 billion (the "Merger"), which includes the assumption of net
debt defined as debt less cash which totaled approximately $113 million as of
March 31, 2006. Upon completion of the Merger, Anteon International Corporation
will become a wholly owned subsidiary of General Dynamics.
On March 3, 2006, the Company held a special meeting of stockholders at
which the stockholders adopted the Merger Agreement and approved the Merger.
Completion of the Merger is subject to the satisfaction or waiver of a number of
conditions, including the expiration or termination of the waiting period under
the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act"). The
Company expects to divest certain contracts to enable the Department of Justice
to complete its review and approval of the proposed transaction with General
Dynamics pursuant to the HSR Act. Other than approval pursuant to the HSR Act,
no other material federal or state regulatory approvals are required to be
obtained by the Company, General Dynamics or its wholly owned subsidiary in
connection with the Merger.
On April 24, 2006, the Company announced that General Dynamics had extended
the April 30, 2006 deadline for completing its proposed merger with Anteon to
July 31, 2006 in accordance with the terms of the Merger Agreement between the
parties. The Company anticipates that the transaction will close no later than
the end of the second quarter of 2006. The Merger Agreement may be terminated
prior to the effective time of the Merger, under certain circumstances discussed
in the Merger Agreement.
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 three months ended March 31, 2006, 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 plus the cost of any allowable material costs and out-of-pocket
expenses. 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, a fixed amount 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 certain cost-plus type contracts, which are referred to as
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, communications with the customer
regarding our performance, including any interim performance evaluations
rendered by the customer or our average historical award fee rate on similar
type contracts. Under substantially all fixed price contracts, which are
predominantly level of effort contracts, revenues are recognized using the
cost-to-cost method for all services provided. Fixed price contracts that
involve a defined number of hours or a defined category of personnel are
referred to as "level of effort" contracts. We believe the cost-to-cost method
is the best estimate for determining performance on these contracts. For
product-related fixed price contracts, revenues are recognized as units are
delivered (the units-of-delivery method). In addition, we evaluate the contracts
for multiple deliverables which may require the segmentation of each deliverable
into a separate accounting unit for proper revenue recognition as defined by
EITF 00-21. The appropriate revenue recognition method based on applicable
accounting guidance is then applied for each separate unit.
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 incrementally throughout the term of the contract as the
services are provided. During the course of normal routine business, 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. Our incurred costs have been audited through
2003 by the Defense Contract Audit Agency.
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.
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 42% time and materials, 39% cost-plus and 19% 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 three months
ended March 31, 2006. 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 typically range from 5% to 7% but are
statutorily limited to 10% on cost-plus-fixed-fee contracts. 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 our overall
operating profits on such contracts have historically been less than 15%.
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 and, on occasion, issues may arise that 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 assigned 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, material handling 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
Regulation, or ("FAR"), cannot be assigned or allocated to projects. Our
principal unallowable costs are interest expense, amortization expense for
separately identified intangibles from acquisitions, bad debt expense and
certain general and administrative expenses and upon the adoption of SFAS No.
123R, compensation expense related to stock options.
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 $261.1 million and $260.8
million as of March 31, 2006 and December 31, 2005, respectively. In accordance
with SFAS No. 142, we test our goodwill for impairment at least annually using a
fair value approach. We completed our annual impairment analysis as of September
30, 2005, noting no indications of impairment for any of our reporting units. As
of March 31, 2006, there have been no events or circumstances that would
indicate an impairment test should be performed sooner than our planned annual
test as of September 30, 2006.
Long-Lived Assets and Identifiable Intangible Asset Impairment
The net carrying amount of long-lived assets and identifiable intangible
assets was approximately $33.5 million and $33.9 million at March 31, 2006 and
December 31, 2005, 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 three months ended March 31,
2006. 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. Based upon contract value, we have
historically been able to win approximately 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.
Amortization expense on identifiable intangible assets was approximately
$1.0 million and $686,000 for the three months ended March 31, 2006 and March
31, 2005, respectively.
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.
Statements of Operations
The following is a description of the elements of certain line items from
our unaudited condensed consolidated statements of operations, which include the
operations of Milestone since the date of the acquisition.
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,
stock based compensation 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.
Other income is from non-core business items such as a gain on the reversal
of a reserve created from a prior acquisition and the fair market adjustments
related to marketable equity securities that are classified as trading
securities.
Merger related expenses are costs incurred in connection with the planned
merger with General Dynamics and a wholly owned subsidiary of General Dynamics.
Interest expense is primarily related to our Term Loan B and revolving
facility and amortization of deferred financing costs. Interest expense is
reported net of interest income. Interest income primarily relates to the
interest earned on short term investments and cash-on-hand.
Funded Backlog and Total Estimated Remaining Contract Value
Each year a significant portion of our revenues are derived from existing
contracts with our government clients, and a portion of the revenues 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. We believe that our
demonstrated performance record and service excellence have enabled us
historically to maintain our position as an incumbent service provider on
approximately 90% of our contracts that have been recompeted.
Our total estimated remaining contract value, excluding new indefinite
delivery, indefinite quantity "IDIQ" and multiple award contracts, represents
the aggregate contract revenues 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. 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.
Funded backlog is based upon amounts actually authorized by a customer for
payment for goods and services. We estimate that the majority of our funded
backlog will be recognized as revenues during the next twelve months. 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.
At March 31, 2006, our total remaining estimated contract value decreased
by approximately $172.4 million, from $6.53 billion at December 31, 2005, to
$6.36 billion. Funded backlog increased $134.5 million to $1.05 billion at March
31, 2006, from $910.6 million as of December 31, 2005.
RESULTS OF OPERATIONS
For the quarter ended March 31, 2006:
o We generated revenues of $389.6 million, up 11.3% from the quarter
ended March 31, 2005;
o Operating margin was 8.9% up 0.1% from the quarter ended March 31,
2005;
o Our net income was $20.0 million, up 10.8% from the quarter ended
March 31, 2005.
We attribute these results primarily to:
o Continued expansion of some of the key programs and continued focus on
controlling our indirect costs.
The following table sets forth our results of operations based on the amounts
and percentage relationship of the items listed to contract revenues during the
period shown:
For the Three Months Ended March 31,
2006 2005
------------------------ ------------------------
($ in thousands)
Revenues $ 389,558 100.0% $ 349,982 100.0%
Costs of revenues 332,573 85.4 298,226 85.2
----------- -------- ------------ --------
Gross profit 56,985 14.6 51,756 14.8
----------- -------- ------------ --------
Operating expenses:
General and administrative expenses 21,470 5.5 20,270 5.8
Amortization of intangible assets 1,013 0.2 686 0.2
----------- -------- ------------ --------
Total operating expenses 22,483 5.7 20,956 6.0
----------- -------- ------------ --------
Operating income 34,502 8.9 30,800 8.8
Other income, net 121 -- 873 0.2
Merger related expenses 303 0.1 -- --
Interest expense, net 2,385 0.6 2,214 0.6
Minority interest in earnings of subsidiaries (6) -- (29) --
----------- -------- ------------ --------
Income before income taxes 31,929 8.2 29,430 8.4
Provision for income taxes 11,952 3.1 11,406 3.3
----------- -------- ------------ --------
Net income $ 19,977 5.1% $ 18,024 5.1%
=========== ======== ============ ========
REVENUES
For the three months ended March 31, 2006, revenues increased by $39.6
million, or 11.3%, to $389.6 million from $350.0 million for the three months
ended March 31, 2005. The increase in revenues was attributable to organic
growth and the acquisition of Milestone. 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 months ended March 31, 2006, our organic growth
was 9.7%. The acquisition of Milestone accounted for approximately $5.7 million
of the revenue growth for the three months ended March 31, 2006. The increase in
revenues was driven primarily by the increased tasking and related increases in
employee headcount 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 IT Schedules acquired from
Milestone; U.S. Navy SeaPort Enhanced Multiple Award Contract; Naval Air Depot
(NADEP) contract; and task orders under our Naval Sea Systems Command (NAVSEA)
Multiple Award Contract.
COSTS OF REVENUES
For the three months ended March 31, 2006, costs of revenues increased by
$34.3 million, or 11.5%, to $332.6 million from $298.2 million for the three
months ended March 31, 2005. The increase in costs of revenues was due to the
corresponding growth in revenues resulting from organic growth, the acquisition
of Milestone and the increase in employee headcount. The majority of the
increase in costs of revenues for the three months ended March 31, 2006 was due
to increases of $13.1 million and $14.9 million in direct labor and other direct
contract costs, respectively.
GENERAL AND ADMINISTRATIVE EXPENSES
For the three months ended March 31, 2006, general and administrative
expenses increased by $1.2 million, or 5.9%, to $21.5 million from $20.3 million
for the three months ended March 31, 2005. General and administrative expenses
for the three months ended March 31, 2006, as a percentage of revenues,
decreased from 5.8% to 5.5%. This decrease as a percentage of revenues for the
three months ended March 31, 2006 was driven primarily by continued operational
cost efficiencies achieved in connection with acquired operations and their
successful integration. The dollar increase for the three months ended March 31,
2006 was primarily attributable to the overall growth in the business and $1.3
million of stock-based compensation expense on stock options as a result of
adopting SFAS No.123R.
AMORTIZATION
For the three months ended March 31, 2006, amortization expenses increased
$327,000, or 47.7%, to $1.0 million from $686,000 for the comparable period in
2005. The increase in amortization expense is related to intangible assets
acquired in connection with the purchase of Milestone. Amortization as a
percentage of revenues for the three months ended March 31, 2006 remained
constant at 0.2%.
OPERATING INCOME
For the three months ended March 31, 2006, operating income increased $3.7
million, or 12.0%, to $34.5 million from $30.8 million for the three months
ended March 31, 2005. Operating income as a percentage of revenues increased to
8.9% for the three months ended March 31, 2006 from 8.8% for the same period in
2005. The increase in operating income as a percentage of revenues was primarily
a result of improvements in controlling our indirect costs and an improvement in
profit rates on certain contracts.
OTHER INCOME, NET
For the three months ended March 31, 2006, other income decreased to
$121,000 from $873,000 for the three months ended March 31, 2005. For the three
month period ended March 31, 2006, other income is primarily related to the fair
market value adjustments related to marketable equity securities. For the three
month period ended March 31, 2005, other income was primarily related to a
$900,000 gain on a reversal of an acquisition reserve.
INTEREST EXPENSE, NET
For the three months ended March 31, 2006, interest expense, net of
interest income, increased $171,000 or 7.7%, to $2.4 million from $2.2 million
for the three months ended March 31, 2005. The net increase in interest expense
was primarily due to the higher interest rates on the Term Loan B during the
three months period ended March 31, 2006. During the three months ended March
31, 2006, the interest rate on the Term Loan B borrowings ranged from 6.14% to
6.58% compared to a range of 4.31% to 4.60% on the term loan outstanding for the
same period in the prior year. For the three months ended March 31, 2006,
interest income earned on short term investments and cash-on-hand was $484,000.
For the three months ended March 31, 2005, interest income earned on
cash-on-hand was $19,000.
PROVISION FOR INCOME TAXES
Our effective tax rate for the three months ended March 31, 2006 was 37.4%
compared to an effective tax rate of 38.8% for the three months ended March 31,
2005. The 2006 effective tax rate reflects a benefit for federal and state
credits for prior years now considered realizable.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows for the three months ended March 31, 2006 and 2005
We generated $2.4 million in cash from operations for the three months
ended March 31, 2006. By comparison, we generated $51.7 million in cash from
operations for the three months ended March 31, 2005. The decrease in cash flow
from operations between the comparable periods was primarily attributable to
accounts receivable. During the three months ended March 31, 2006, accounts
receivable increased by $14.3 million compared to an $18.2 million decrease for
the three months ended March 31, 2005. The increase in accounts receivable for
the three months ended March 31, 2006 was due to payment delays on our billed
accounts receivable. Our cash flows from operations are dependent on the timing
of receipts from various government payment offices and, as a result, may differ
from period to period and such differences could be significant. Total days
sales outstanding, or "DSO," at March 31, 2006 increased to 80 days, from 77
days as of March 31, 2005. Accounts receivable totaled $346.1 million at March
31, 2006 and represented 48.1% of total assets at that date. For the three
months ended March 31, 2006, net cash provided from investing activities was
$35.8 million, which was primarily attributable to the proceeds from the sale of
the short term investments in anticipation of the Merger. Cash provided from
financing activities was $2.2 million for the three months ended March 31, 2006,
primarily related to the exercise of stock options and the issuance of common
stock.
Liquidity
Our principal working capital need is for funding accounts receivable,
which has typically increased with the growth in our business. As of March 31,
2006, working capital increased by $23.7 million to $241.5 million from $217.8
million for the year ended December 31, 2005. 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. In addition, we
are scheduled to pay quarterly installments of $412,500 under the Term Loan B
until the Credit Facility matures on December 31, 2010. As of March 31, 2006, we
did not have any capital commitments greater than $1.0 million.
We have relatively low capital investment requirements. Capital
expenditures were $1.7 million and $1.5 million for the three months ended March
31, 2006 and 2005, respectively, primarily for leasehold improvements and office
equipment.
Without giving consideration to the pending merger with General Dynamics,
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
flows from operations and borrowings under the revolving portion of 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.
Capital Resources
On September 30, 2004, we entered into a second amendment to our Credit
Facility. This amendment provided an additional $16.1 million of borrowings by
increasing our Term Loan B to $165.0 million, and lowered the interest rate on
Term Loan B borrowings by 0.25%. Our Credit Facility consists of a Term Loan B
with a maturity date of December 31, 2010 and the revolving loan portion of our
Credit Facility with a maturity date of December 31, 2008. All borrowings under
our Credit Facility are subject to financial covenants customary for such
financings, including, but not limited to: maximum ratio of net debt to EBITDA
and maximum ratio of senior debt to EBITDA, as defined in the Credit Facility.
For the three months ended March 31, 2006, we were in compliance with all of the
financial covenants. Additionally, as a result of changes made in the amendment,
revolving loans are now based upon an asset test or maximum ratio of net
eligible accounts receivable to revolving loans. Our primary liquidity
requirements have been for debt service under our Credit Facility 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. The Credit Facility also permits us 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. The additional $16.1 million in borrowings described above did
not reduce the $200.0 million in potential additional borrowings. As of March
31, 2006, total debt outstanding was $162.5 million, consisting of $162.5
million of 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 March 31, 2006 were $194.8 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.
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
We use off-balance sheet financing, primarily to finance certain capital
items. Operating leases are used primarily to finance computers, servers, phone
systems, and to a lesser extent, other fixed assets, such as furnishings. As of
March 31, 2006, we financed equipment with an original cost of approximately
$16.5 million through operating leases. Had we not used operating leases, we
would have used our existing Credit Facility to purchase these assets. In
addition, our offices, warehouse and shop facilities are obtained through
operating leases. Other than the operating leases described above, 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 March 31, 2006 because our contract billing rates
typically take inflation into account.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have interest rate exposure relating to certain of our long-term
obligations. 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 do not believe we have significant risks due to changes in interest rates.
A 1% change in interest rates on variable rate debt would have resulted in
our interest expense fluctuating by approximately $402,000 and $423,000 for the
three months ended March 31, 2006 and 2005, 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
March 31, 2006. Based on this evaluation, our chief executive officer and chief
financial officer concluded that, as of March 31, 2006, 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 March 31, 2006 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION REQUIRED IN REPORT
ITEM 1. LEGAL PROCEEDINGS
On November 4, 2005, we received a Customs Export Enforcement Subpoena for
documents from the United States Customs Service. The subpoena requested the
production of records and information in connection with two of our programs,
and a description of our export compliance program. We produced documents
responsive to the subpoena in November and December 2005 and the matter is
on-going. Although we cannot predict the outcome of the matter, we do not
believe that it will have a material impact on our financial position or results
of operations.
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 1. A RISK FACTORS
There were no material changes to the risk factors discussion provided in
Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31,
2005. See also, "Forward-Looking Statements" included in Item 2 of this
Quarterly Report on Form 10-Q.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ISSUER PURCHASES OF EQUITY SECURITIES
The Anteon International Corporation Employee Stock Purchase Plan ("ESPP")
became effective on April 1, 2004. The ESPP allows for the sale of up to 1.2
million shares of the Company's common stock. These shares may be newly issued
shares, treasury shares or shares purchased by the Company on the open market or
otherwise. The Company currently has no other plan or program in place to
repurchase its shares. The Company has suspended the ESPP, pending the closing
of the Merger with General Dynamics. The table below details the total shares
purchased by the Company to fulfill its obligations under the ESPP for the
period covered by this report.
(c) Total Number of (d) Maximum Number
(b) Average Shares Purchased of Shares that May Yet
(a) Total Number of Price Paid per Part of Publicly Be Purchased Under
Purchase Date Shares Purchased Share Announced Plan the Plan
- ---------------------- ----------------------- ---------------- --------------------- -----------------------
January 1 - 31, 2006 13,495 $ 51.63 13,495 1,097,393
February 1 - 28, 2006 -- -- -- 1,097,393
March 1 - 31, 2006 -- -- -- 1,097,393
----------------------- ---------------------
Total 13,495 13,495
====================== =====================
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On March 3, 2006, the Company held a special meeting of stockholders adopted the
Merger Agreement and approved the Merger.
The following table sets forth the votes cast with respect to the matters:
MATTERS FOR AGAINST ABSTAIN
------------------------------------------------ ------ ---------- -----------
Adoption of the Agreement and Plan of Merger 27,041,841 472,226 22,913
dated December 13, 2005, by and among General
Dynamics Corporatoin, Avenger Acquisiton
Corporation, and indirect, wholly-owned
subsidiary of General Dynamics, and Anteon
International Corporation.
Grant of discretionary authority to the proxy 21,219,859 2,350,619 3,966,502
holders to vote for adjournment of the
special meeting for the purpose of soliciting
additional proxies if there are not
sufficeint votes at the special meeting to
approve the merger proposal.
ITEM 5. OTHER INFORMATION
NONE
ITEM 6. EXHIBITS
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.
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: May 10, 2006 /s/ Joseph M. Kampf
- --------------------- ----------------------------------------
Joseph M. Kampf - President and
Chief Executive Officer
Date: May 10, 2006 /s/ Charles S. Ream
- ---------------------- ----------------------------------------
Charles S. Ream - Executive Vice President
and Chief Financial Officer