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Form 10-Q for ANTEON INTERNATIONAL CORPORATION filed on August 9, 2002
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2002
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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
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(Exact name of registrant as specified in its charter)
Delaware 13-3880755
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3211 Jermantown Road, Fairfax, Virginia 22030-2801
- --------------------------------------------------------------------------------
(Address of principal executive office)
(Zip Code)
(703) 246-0200
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address, and former
fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
As of the close of business on August 5, 2002, there were 34,154,668 outstanding
shares of the registrant's common stock, par value $.01 per share.
CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS AS OF
JUNE 30, 2002 AND DECEMBER 31, 2001 1
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001 2
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND
2001 3
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 27
PART II. OTHER INFORMATION REQUIRED IN REPORT
ITEM 1. LEGAL PROCEEDINGS 28
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 28
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 28
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS 28
ITEM 5. OTHER INFORMATION 28
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 28
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)
June 30, 2002 December 31,
(Unaudited) 2001
------------------ ----------------
ASSETS
Current assets:
Cash and cash equivalents $ 5,340 $ 1,930
Accounts receivable, net 159,651 131,345
Prepaid expenses and other current assets 4,372 6,992
Deferred tax assets, net 460 4,151
------------------ -----------------
Total current assets 169,823 144,418
Property and equipment, net 11,614 12,744
Goodwill, net 138,619 136,622
Intangible and other assets, net 8,977 12,867
------------------ -----------------
Total assets $ 329,033 $ 306,651
================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Term loan, current portion $ 3,798 $ 17,266
Subordinated notes payable, current portion 2,404 2,268
Business purchase consideration payable 546 515
Accounts payable/Due to related party 44,289 28,628
Accrued expenses 51,559 56,041
Income tax payable 3,259 509
Other current liabilities 723 2,889
Deferred revenue 2,698 8,743
--------------- ----------------
Total current liabilities 109,276 116,859
Term loan, less current portion 19,302 29,788
Revolving facility 7,900 18,700
Senior subordinated notes payable 75,000 100,000
Subordinated convertible note payable-related party -- 22,500
Subordinated notes payable-related party -- 4,369
Subordinated notes payable to stockholders -- 7,499
Noncurrent deferred tax liabilities, net 7,914 9,261
Other long term liabilities 280 690
------------------ -----------------
Total liabilities 219,672 309,666
Minority interest in subsidiaries 146 427
Stockholders' equity:
Preferred stock, $.01 par value 15,000,000 shares authorized, none issued
and outstanding as of June 30, 2002 -- --
Common stock, $.01 par value 175,000,000 shares authorized, 34,050,709
shares issued and outstanding as of June 30, 2002 341 --
Common stock, Class B, voting, $.01 par value, 3,000 shares authorized, 2,450
shares issued and outstanding as of December 31, 2001 -- --
Common stock, Class A, voting, $.01 par value, 30,000,000 shares authorized,
23,784,115 shares issued and outstanding as of December 31, 2001 -- 238
Common stock, non-voting, $.01 par value, 7,500,000 shares authorized,
none issued and outstanding as of December 31, 2001 -- --
Stock subscription receivable (12) (12)
Additional paid-in capital 103,989 2,366
Accumulated other comprehensive loss (459) (1,747)
Retained earnings (accumulated deficit) 5,356 (4,287)
------------------ -----------------
Total stockholders' equity (deficit) 109,215 (3,442)
------------------ -----------------
Total liabilities and stockholders' equity (deficit) $ 329,033 $ 306,651
================== =================
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 For the six months ended
June 30, June 30,
2002 2001 2002 2001
Revenues $ 201,938 $ 188,786 $ 394,566 $ 351,152
Costs of revenues 174,674 167,181 341,693 310,335
------------- ------------- -------------- --------------
Gross profit 27,264 21,605 52,873 40,817
------------- ------------- -------------- --------------
Operating expenses:
General and administrative expenses 10,766 12,530 21,381 23,435
Amortization of noncompete agreements -- 140 -- 349
Goodwill amortization -- 1,446 -- 2,892
Other intangibles amortization 477 560 954 1,106
------------- ------------- -------------- --------------
Total operating expenses 11,243 14,676 22,335 27,782
------------- ------------- -------------- --------------
Operating income 16,021 6,929 30,538 13,035
Other income 354 587 360 587
Interest expense, net of interest income of $36,000,
$96,000, $79,000 and $187,000, respectively 3,421 6,987 10,851 13,948
Minority interest in earnings (losses) of subsidiaries 1 4 (8) 3
------------- ------------- -------------- --------------
Income (loss) before provision for income taxes and
extraordinary item 12,955 533 20,039 (323)
Provision for income taxes 5,050 1,126 7,815 940
------------- ------------- -------------- --------------
Income (loss) before extraordinary item 7,905 (593) 12,224 (1,263)
Extraordinary (loss) gain, net of tax (2,396) 330 (2,581) 330
------------- ------------- -------------- --------------
Net income (loss) $ 5,509 $ (263) $ 9,643 $ (933)
============= ============= ============== ==============
Basic earnings (loss) per common share:
Income (loss) before extraordinary loss $ 0.23 $ (0.02) $ 0.41 $ (0.05)
Extraordinary income (loss), net of tax (0.07) 0.01 (0.09) 0.01
------------- ------------- -------------- --------------
Net income (loss) $ 0.16 $ (0.01) $ 0.32 $ (0.04)
============= ============= ============== ==============
Basic weighted average shares outstanding 33,891,090 23,919,042 30,030,543 23,909,415
Diluted earnings (loss) per common share:
Income (loss) before extraordinary loss $ 0.22 $ (0.02) $ 0.38 $ (0.05)
Extraordinary income (loss), net of tax (0.07) .01 (0.08) 0.01
------------- ------------- -------------- --------------
Net income (loss) $ 0.15 $ (0.01) $ 0.30 $ (0.04)
============= ============= = ============== = ==============
Diluted weighted average shares outstanding 36,554,219 25,681,774 32,573,390 25,211,689
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 six months ended June 30,
--------------------------------------------------
2002 2001
-------------------- ---------------------
OPERATING ACTIVITIES:
Net income (loss) $ 9,643 $ (933)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities
Gain on sales of assets and closure of business -- (587)
Extraordinary item, before income taxes 4,232 (519)
Interest rate swap termination (1,903) --
Depreciation and amortization of property and equipment 2,343 4,931
Amortization of noncompete agreements -- 349
Goodwill amortization -- 2,892
Other intangibles amortization 954 1,106
Amortization of deferred financing fees 612 599
Loss on disposals of property and equipment 79 21
Deferred income taxes 1,470 1,543
Minority interest in earnings (losses) of subsidiaries 8 (3)
Changes in assets and liabilities (16,438) 13,039
-------------------- ---------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,000 22,438
-------------------- ---------------------
INVESTING ACTIVITIES:
Purchases of property, equipment and other assets (1,286) (1,095)
Acquisitions, net of cash acquired -- (21)
-------------------- ---------------------
NET CASH USED FOR INVESTING ACTIVITIES (1,286) (1,116)
-------------------- ---------------------
FINANCING ACTIVITIES:
Principal payments on notes payable (24) (119)
Payment of credit facility amendment fee (604) --
Principal payments on term loan (23,953) (8,014)
Proceeds from revolving facility 443,500 345,500
Principal payments on revolving facility (454,300) (354,900)
Redemption of senior subordinated notes payable (25,000) --
Prepayment premium on senior subordinated notes payable (3,000) --
Proceeds from issuance of common stock, net of expenses 78,945 19
Principal payments on subordinated notes payable to stockholders (7,499) --
Payments on note payable to Ogden (3,212)
Payments on completion bonus -- (20)
Payment of subordinated notes payable-related party (4,369) --
-------------------- ---------------------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 3,696 (20,746)
-------------------- ---------------------
CASH AND CASH EQUIVALENTS:
Net increase in cash and cash equivalents 3,410 576
Cash and cash equivalents, beginning of period 1,930 1,434
-------------------- ---------------------
Cash and cash equivalents, end of period $ 5,340 $ 2,010
==================== =====================
Supplemental disclosure of cash flow information (in thousands):
Interest paid $ 13,335 $ 10,565
Income taxes paid (refunds received), net 857 210
==================== =====================
See accompanying notes to unaudited condensed consolidated financial statements.
ANTEON INTERNATIONAL CORPORATION AND SUBSIDIARIES
(A Delaware Corporation)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Supplemental disclosure of non-cash investing and financing activities:
In March 2002, in connection with the Company's initial public offering
("IPO") of shares of its common stock, a $22.5 million principal amount
subordinated convertible promissory note of the Company held by Azimuth Tech. II
LLC, one of the Company's principal stockholders, was converted pursuant to its
terms into 4,629,232 shares of the Company's common stock at a conversion price
of $4.86 per share.
ANTEON INTERNATIONAL CORPORATION AND SUBSIDIARIES
(A Delaware Corporation)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002 AND 2001
(1) Basis of Presentation
The information furnished in the accompanying Unaudited Condensed
Consolidated Balance Sheets, Unaudited Condensed Consolidated Statements of
Operations and Unaudited Condensed Consolidated Statements of Cash Flows have
been prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information. In the opinion of
management, such information contains all adjustments, consisting only of normal
recurring adjustments, considered necessary for a fair presentation of such
information. The operating results for the three and six months ended June 30,
2002 may not be indicative of the results of operations for the year ending
December 31, 2002, or any future period. This financial information should be
read in conjunction with the Company's December 31, 2001 audited consolidated
financial statements and footnotes thereto, included in the Registration
Statement on Form S-1 declared effective by the Securities and Exchange
Commission on March 11, 2002 (Commission File No. 333-75884).
(2) Organization and Business
Anteon International Corporation, a Delaware Corporation ("Anteon" or the
"Company") (formerly Azimuth Technologies, Inc.), was incorporated on March 15,
1996 for the purpose of acquiring all of the outstanding stock of Ogden
Professional Services Corporation, a wholly owned subsidiary of Ogden Technology
Services Corporation and an indirectly wholly owned subsidiary of Ogden
Corporation (collectively, "Ogden"). Upon completion of the acquisition
effective April 22, 1996, Ogden Professional Services Corporation was renamed
Anteon Corporation, a Virginia corporation, and later renamed Anteon
International Corporation, a Virginia corporation.
Effective February 19, 2002, the Company increased the aggregate authorized
shares of its common stock to 37,503,000 shares, and authorized a 2,449.95 for 1
stock split. All references to the number and per share amounts relating to the
Company's common shares have been retroactively restated for the stock split.
On March 15, 2002, the Company's initial public offering ("IPO") of common
stock was completed. Immediately prior to the IPO, the Company entered into a
series of reorganization transactions. First, the Company's $22.5 million
principal amount subordinated convertible promissory note, held by one of its
principal stockholders, was converted according to its terms into shares of
non-voting common stock. Second, the Company's majority-owned subsidiary, Anteon
International Corporation, a Virginia corporation ("Anteon Virginia"), was
merged with and into the Company. The Company was the surviving corporation of
the merger. In the merger, all the outstanding shares of the Company's existing
classes of stock, including Class A Voting Common Stock, Class B Voting Common
Stock and Non-Voting Common Stock, were converted into a single class of common
stock. All the stock of Anteon Virginia held by the Company was cancelled and
the stock of Anteon Virginia held by certain of the Company's employees and
former employees immediately prior to the consummation of the IPO was converted
into approximately 625,352 shares of the Company's common stock, constituting
approximately 2.15% of the Company's outstanding stock immediately prior to the
IPO. In connection with the merger described above, the outstanding stock
options of Anteon Virginia were exchanged on a 1-for-2 basis for options of the
Company. As a result of the merger, the Company succeeded to Anteon Virginia's
obligations under its credit facility, the indenture governing its 12% Senior
Subordinated Notes due 2009 (the "12% notes") and its Amended and Restated
Omnibus Stock Plan.
On March 15, 2002, in connection with the merger of Anteon Virginia into
the Company, the Company's certificate of incorporation was amended and restated
to increase the aggregate authorized number of its shares of common stock to
175,000,000 and to authorize 15,000,000 shares of preferred stock. In connection
with the IPO, the Company distributed one preferred share purchase right for
each outstanding share of common stock to stockholders of record as of March 15,
2002, and the Company entered into a rights agreement. In general, the rights
agreement imposes a significant penalty upon any person or group (subject to
certain exceptions) that acquires 15% or more of the Company's outstanding
common stock without the approval of the Company's board of directors.
The Company and its subsidiaries provide professional information
technology, systems and software development, high technology research and
systems integration services primarily to the U.S. government and its agencies.
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 at the convenience of the government. In addition, government
funding continues to be dependent on congressional approval of program level
funding and on contracting agency approval for the Company's work. The extent to
which the Company's existing contracts will be funded in the future cannot be
determined.
(3) Sales and Closure of Businesses
(a) Sale of CITE
On June 29, 2001, the Company sold its Center for Information
Technology Education ("CITE") business to a subsidiary of
Pinnacle Software Solutions, Inc. for a total purchase price
of $100,000, of which $50,000 was paid on the date of closing,
with the remainder paid in six equal, monthly payments of
approximately $8,300 beginning on August 1, 2001. CITE
provided evening and weekend training for individuals to
attain certification in Oracle developer and Java. Revenues
generated by CITE were approximately $805,000 and $1.4 million
for the three and six months ended June 30, 2001,
respectively. Operating losses were approximately $835,000 and
$905,000 for the three and six months ended June 30, 2001,
respectively.
(b) Closure of CITI-SIUSS LLC
During 1999, the Company and Criminal Investigative
Technology, Inc. ("CITI") entered into a joint venture
("CITI-SIUSS LLC"), formerly known as Anteon-CITI LLC (the
"Venture"). The Venture developed and marketed certain
investigative support products and services. On June 22, 2001,
the Company decided to cease the software development
operations of the Venture but to continue to support existing
customers. The Company decided to close the business because
it concluded that the Venture was not likely to establish a
self-supporting business without significant capital
contributions. Revenues generated by the Venture were
approximately $728,000 and $834,000 for the three and six
months ended June 30, 2001, respectively. Operating losses
were approximately $1.2 million and $2.6 million for the three
and six months ended June 30, 2001, respectively. The Venture
was obligated to provide maintenance and support services on
existing contracts through June 30, 2002.
Subsequent to the decision to close the Venture, the Company
was approached by several prospective customers about
potential sales opportunities. Through June 30, 2002, none of
these opportunities have resulted in sales, and management
does not intend to make further investments in the software.
(c) Sale of Interactive Media Corporation
On July 20, 2001, the Company sold all of the stock in
Interactive Media Corporation ("IMC") for $13.5 million in
cash, subject to adjustment based on the amount of working
capital (as defined in the sale agreement) as of the date of
sale. In addition, the Company had a contingent right to
receive an additional $500,000 in cash based on IMC's
performance from the date of closing through the end of
calendar year 2001. The Company did not realize any amounts
under this contingent right provision of the sale agreement.
Prior to the sale, IMC transferred to the Company the assets
of the government division of IMC, which specializes in
training services primarily to the government marketplace.
Accordingly, at the date of sale, IMC provided training
services to customers primarily in the commercial marketplace.
For the commercial division, revenues were approximately $5.2
million and $10.8 million for the three and six months ended
June 30, 2001, respectively. Operating income (loss) was
approximately $(102,000) and $257,000 for the three and six
months ended June 30, 2001, respectively. The total gain
recognized on the sale of IMC during the third quarter of 2001
was approximately $3.5 million, which reflected the Company's
best estimate of the ultimate outcome of the working capital
adjustment discussed above. With respect to the working
capital adjustment, the Company had reserved approximately
$550,000 of the gain on the sale at the time of closing.
Subsequently, the Company reached an agreement with the
purchaser of IMC to settle the adjustment in the amount of
$475,000 as a result of working capital deficiencies at the
closing of the transaction. The Company paid this amount to
the purchaser on June 14, 2002. The remaining $75,000 reserve
relates to a retention bonus for a key employee of IMC.
(d) Closure of South Texas Ship Repair
On December 19, 2001, the Company decided to close the South
Texas Ship Repair ("STSR") business, which was acquired as
part of the Sherikon acquisition in October 2000. STSR
specialized in the repair of ships for both government and
commercial customers. Revenues were approximately $1.8 million
and $2.5 million, and operating losses were approximately
$217,000 and $244,000 for the three and six months ended June
30, 2001, respectively. The remaining expected costs of
fulfilling STSR's existing contracts of approximately $310,000
have been accrued at June 30, 2002.
(4) Use of Proceeds from Initial Public Offering
The net proceeds to the Company from the sale of 4,687,500 shares of common
stock in the Company's IPO was $75.5 million, based on an initial public
offering price of $18.00 per share, after deducting underwriting discounts and
commissions of $5.9 million and offering costs and expenses of $3.1 million.
The Company used the net proceeds from the IPO to:
o repay $11.4 million of its debt outstanding under the term
loan portion of its credit facility;
o temporarily paid down $39.5 million on its revolving line of
credit on March 15, 2002; the revolving line of credit was
subsequently increased on April 15, 2002 to pay $25.0
million in senior subordinated notes, plus $3.0 million in
prepayment premium, plus $1.3 million in accrued interest;
without permanently reducing the Company's borrowing
availability under this facility;
o redeem $25.0 million principal amount of its 12% notes on
April 15, 2002, and to pay accrued interest of $1.3 million
thereon and the associated $3.0 million prepayment premium;
(pending the permanent use of such net proceeds, the Company
used such funds to temporarily reduce the revolving portion
of its credit facility)
o repay in full its $7.5 million principal amount subordinated
promissory note held by Azimuth Technologies, L.P., one of
the Company's principal stockholders, including $50,000
aggregate principal amount of the Company's subordinated
promissory notes held by present members of the Company's
management; and
o repay $4.4 million of the Company's subordinated notes,
relating to accrued interest on the Company's $22.5 million
principal amount subordinated convertible promissory note
held by Azimuth Tech. II LLC, one of the Company's principal
stockholders.
The remainder of the net proceeds to the Company from the IPO,
approximately $12.7 million, was temporarily invested in short-term investment
grade securities and subsequently liquidated and used to repay amounts
outstanding under the Company's revolving portion of its credit facility. The
Company also intends to use $2.5 million of the IPO proceeds temporarily used to
repay debt under the revolving portion of its credit facility to repay in full,
on or before October 20, 2002, a $2.5 million principal amount promissory note
held by former stockholders of Sherikon, Inc., which was acquired by the Company
in October 2000. As a result of the permanent reduction of a portion of its debt
under the term loan, the Company wrote-off a proportionate amount of the
unamortized deferred financing fees related to the portion of the term loan that
was repaid. The write-off of $185,000, net of tax, has been reflected as an
extraordinary loss in the accompanying unaudited condensed consolidated
statements of operations. In addition, as a result of the redemption of the
$25.0 million principal amount of the Company's 12% notes, the Company incurred
a $3.0 million prepayment premium and wrote-off a proportionate amount of the
unamortized deferred financing fees related to the portion of the 12% notes that
were repaid. The prepayment premium and write-off of deferred financing fees,
totaling $2.4 million, net of tax, have been reflected as an extraordinary loss
in the accompanying unaudited condensed consolidated statements of operations
for the three and six months ended June 30, 2002.
For the six months ended June 30, 2002, the Company incurred approximately
$604,000 in expenses related to obtaining an amendment to the Company's credit
facility. These expenses have been capitalized as additional deferred financing
fees and are being amortized over the remaining term of the credit facility.
(5) Acquisition of the Training Division of SIGCOM, Inc.
On July 20, 2001, the Company acquired the assets, contracts and personnel
of the training division of SIGCOM, Inc. ("SIGCOM"). The principal business of
SIGCOM's training division is the design, construction, instrumentation,
training and maintenance of simulated live-fire training facilities to help
acclimate members of the armed forces to combat conditions for mobile operations
on urban terrain. The Company's primary reason for acquiring SIGCOM was the
significant capabilities of SIGCOM that will augment the Company's U.S. homeland
defense training capabilities. The total purchase price was $11.0 million,
including $409,000 of transaction costs, of which $10.0 million was paid in cash
to the seller and $1.0 million of which was placed in escrow to secure the
seller's obligations to indemnify the Company for certain potential liabilities
which were not assumed. Transaction costs included a $100,000 fee paid to
Caxton-Iseman Capital, Inc., an affiliate of and advisor to the Company. The
transaction was accounted for using the purchase method, whereby the net
tangible and identifiable intangible assets acquired and liabilities assumed
were recognized at their estimated fair market values at the date of
acquisition. The Company allocated approximately $4.1 million of the purchase
price to accounts receivable, approximately $1.5 million to acquired accounts
payable and accrued liabilities, and $440,000 of the purchase price to an
intangible asset related to contract backlog, continues to be amortized over a
two-year period, in accordance with SFAS No. 142. Approximately $8.1 million has
been allocated to tax deductible goodwill arising from the acquisition, which,
in accordance with SFAS No. 141 and 142, is not being amortized (see note 12).
The following unaudited pro forma summary presents consolidated information
as if the acquisition of SIGCOM had occurred as of January 1, 2001. The pro
forma summary is provided for informational purposes only and is based on
historical information that does not necessarily reflect actual results that
would have occurred nor is it necessarily indicative of future results of
operations of the combined entities (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
2001 2001
--------------------------- -----------------------------
Total revenues $ 192,685 $ 358,391
Total expenses 193,184 359,336
-------------------------- --------------------------
Loss before extraordinary item $ (499) $ (945)
Extraordinary gain net of tax 330 330
------------------------ ------------------------
Net loss (169) (615)
========================== ==========================
Basic loss per common share $ (0.01) $ (0.03)
-------------------------- --------------------------
Diluted loss per common share $ (0.01) $ (0.02)
========================== ==========================
(6) Comprehensive Income (Loss)
Comprehensive income (loss) for the three months ended June 30, 2002 and
2001 was approximately $5.5 million and $527,000. Comprehensive income (loss)
for the six months ended June 30, 2002 and 2001 was approximately, $8.4 million
and $(138,000), respectively. Other comprehensive income (loss) for the three
months ended June 30, 2002 and 2001 includes foreign currency translation losses
of approximately $27,000, and $20,000, respectively, and increases (decreases)
in the fair value of interest rate swaps of approximately $4,000 and $113,000,
net of tax. Comprehensive income (loss) for the six months ended June 30, 2002
and 2001, includes foreign currency translation gains (losses) of approximately
$6,000 and $(76,000), respectively, and increases (decreases) in the fair value
of interest rate swaps of approximately $1.3 million and $(486,000), net of tax.
For the six months ended June 30, 2002, the Company exercised its cancellation
rights under certain interest rate swap agreements and cancelled $30.0 million
of such agreements. These interest rate swap agreements related primarily to
term loan obligations that have been permanently reduced. Interest expense for
the six months ended June 30, 2002 includes losses of $1.9 million associated
with these cancellations. Prior to cancellation, losses associated with these
interest rate swap agreements were recorded as a component of accumulated other
comprehensive loss.
(7) Computation of Earnings Per Share
For the three months ended
June 30, 2002
Income Weighted average shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
(in thousands, except share and per share data)
Basic earnings per share:
Income before extraordinary item $ 7,905 33,891,090 $ 0.23
Extraordinary loss, net of tax (2,396) 33,891,090 (0.07)
------------------------ -------------------------
Net income $ 5,509 33,891,090 $ 0.16
======================= ========================
Stock options -- 2,663,129 --
Diluted earnings per share:
Income before extraordinary item $ 7,905 36,554,219 $ 0.22
Extraordinary loss, net of tax (2,396) 36,554,219 (0.07)
------------------------ -------------------------
Net income $ 5,509 36,554,219 $ 0.15
======================= ========================
For the three months ended
June 30, 2001
Income Weighted average shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
(in thousands, except share and per share data)
Basic earnings per share:
Loss before extraordinary item $ (593) 23,919,042 $ (0.02)
Extraordinary gain, net of tax 330 23,919,042 0.01
----------------------- -----------------------
Net loss $ (263) 23,919,042 $ (0.01)
======================== ========================
Stock options -- 1,762,732 --
Diluted earnings per share:
Loss before extraordinary item $ (593) 25,681,774 $ (0.02)
Extraordinary gain, net of tax 330 25,681,774 0.01
----------------------- -----------------------
Net loss $ (263) 25,681,774 $ (0.01)
======================== ========================
For the six months ended
June 30, 2002
Income Weighted average shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
(in thousands, except share and per share data)
Basic earnings per share:
Income before extraordinary item $ 12,224 30,030,543 $ 0.41
Extraordinary loss, net of tax (2,581) 30,030,543 (0.09)
------------------------ -------------------------
Net income $ 9,643 30,030,543 $ 0.32
======================= ========================
Stock options -- 2,542,847 --
Diluted earnings per share:
Income before extraordinary item $ 12,224 32,573,390 $ 0.38
Extraordinary loss (2,581) 32,573,390 (0.08)
------------------------ -------------------------
Net income, net of tax $ 9,643 32,573,390 $ 0.30
======================= ========================
For the six months ended
June 30, 2001
Income Weighted average shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
(in thousands, except share and per share data)
Basic earnings per share:
Loss before extraordinary item $ (1,263) 23,909,415 $ (0.05)
Extraordinary gain, net of tax 330 23,909,415 0.01
----------------------- -----------------------
Net loss $ (933) 23,909,415 $ (0.04)
======================== ========================
Stock options -- 1,302,274 --
Diluted earnings per share:
Loss before extraordinary item $ (1,263) 25,211,689 $ (0.05)
Extraordinary gain, net of tax 330 25,211,689 0.01
----------------------- -----------------------
Net loss $ (933) 25,211,689 $ (0.04)
======================== ========================
(8) Domestic Subsidiaries Summarized Financial Information
Under the terms of the 12% notes and the Company's credit facility, the
Company's 100 percent-owned domestic subsidiaries (the "Guarantor Subsidiaries")
are guarantors of the 12% notes and 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 following supplemental financial information sets forth, on a
combined basis, condensed balance sheets, statements of operations and
statements of cash flows information for the Guarantor Subsidiaries, the
Company's Non-Guarantor Subsidiaries and for the Company.
As of June 30, 2002
-------------------------------------------------------------------------------------
Consolidated
Unaudited Condensed Consolidated Anteon Anteon
Balance Sheets International Guarantor Non-Guarantor Elimination International
Corporation Subsidiaries Subsidiaries Entries Corporation
----------- ------------ ------------ ------- -----------
(in thousands)
Cash and cash equivalents $ 456 $ 3,951 $ 933 $ -- $ 5,340
Accounts receivable, net -- 159,001 650 -- 159,651
Other current assets 1,237 3,565 30 -- 4,832
Property and equipment, net 1,476 10,008 130 -- 11,614
Due from parent (19,464) 19,937 (473) -- --
Investments in and advances to subsidiaries 23,898 (1,130) -- (22,768) --
Goodwill, net 94,946 43,673 -- -- 138,619
Intangible and other assets, net 67,265 1,522 190 (60,000) 8,977
------------- ------------ ------------- ----------- -----------
Total assets $ 169,814 $ 240,527 $ 1,460 $ (82,768) $ 329,033
============= ============ ============= =========== ===========
Indebtedness $ 108,405 $ 60,545 $ -- $ (60,000) $ 108,950
Accounts payable 292 43,865 132 -- 44,289
Accrued expenses and other current
liabilities 1,652 53,444 445 -- 55,541
Deferred revenue -- 2,447 251 -- 2,698
Other long-term liabilities -- 8,194 -- -- 8,194
------------- ----------- ------------- ----------- ----------
Total liabilities 110,349 168,495 828 (60,000) 219,672
Minority interest in subsidiaries -- -- 146 -- 146
Total stockholders' equity (deficit) 59,465 72,032 486 (22,768) 109,215
------------- ----------- ------------- ----------- ----------
Total liabilities and stockholders' equity
(deficit) $ 169,814 $ 240,527 $ 1,460 $ (82,768) $ 329,033
============= =========== ============= =========== ==========
For the six months ended June 30, 2002
-------------------------------------------------------------------------------------
Unaudited Condensed Consolidated
Statements of Operations
Consolidated
Anteon Anteon
International Guarantor Non-Guarantor Elimination International
Corporation Subsidiaries Subsidiaries Entries Corporation
--------------- -------------- ----------------- ------------- ----------------
(in thousands)
Revenues $ -- $ 396,518 $ 2,826 $ (4,778) $ 394,566
Costs of revenues 20 343,861 2,590 (4,778) 341,693
----------- ----------- -------------- ----------- --------------
Gross profit (loss) (20) 52,657 236 -- 52,873
Total operating expenses 994 23,852 184 (2,695) 22,335
----------- ----------- -------------- ----------- --------------
Operating income (loss) (1,014) 28,805 52 2,695 30,538
Other income (loss) 2,703 352 -- (2,695) 360
Interest expense (income), net 8,492 2,369 (10) -- 10,851
Minority interest in losses of
subsidiaries -- -- (8) -- (8)
----------- ----------- -------------- ----------- --------------
Income (loss) before provision for income
taxes and extraordinary loss (6,803) 26,788 54 -- 20,039
Provision for (benefit from) income taxes (2,653) 10,445 23 -- 7,815
----------- ----------- -------------- ----------- --------------
Income (loss) before extraordinary loss (4,150) 16,343 31 -- 12,224
Extraordinary loss, net of tax (2,581) -- -- -- (2,581)
----------- ----------- -------------- ----------- --------------
Net income (loss) $ (6,731) $ 16,343 $ 31 $ -- $ 9,643
=========== =========== ============== =========== ==============
For the six months ended June 30, 2002
----------------------------------------------------------------------------
Unaudited Condensed Consolidated Statements of Cash Consolidated
Flows Anteon Anteon
International Guarantor Non-Guarantor International
Corporation Subsidiaries Subsidiaries Corporation
----------------- ----------------- ------------------- ----------------
(in thousands)
Operating Activities:
Net income (loss) $ (6,731) $ 16,343 $ 31 $ 9,643
Adjustments to reconcile net income (loss) to net
cash provided by (used for) operating activities:
Extraordinary item, before income taxes 4,232 -- -- 4,232
Loss on disposals of property and equipment -- 79 -- 79
Interest rate swap termination (1,903) -- -- (1,903)
Depreciation and amortization of property and
equipment 377 1,935 31 2,343
Other intangibles amortization 844 110 -- 954
Amortization of deferred financing fees 612 -- -- 612
Deferred income taxes 2,537 (1,067) -- 1,470
Minority interest in earnings of subsidiaries -- -- 8 8
Changes in assets and liabilities (6,555) (10, 531) 648 (16,438)
-------------- --------------- ---------------- --------------
Net cash provided by (used for) operating activities (6,587) 6,869 718 1,000
-------------- --------------- ---------------- --------------
Investing activities:
Purchases of property, equipment and other assets (24) (1,226) (36) (1,286)
--------------- --------------- ---------------- --------------
Net cash used for investing activities (24) (1,226) (36) (1,286)
--------------- --------------- ---------------- --------------
Financing activities:
Principal payments on notes payable -- (24) -- (24)
Payment of credit facility amendment fee (604) -- -- (604)
Principal payments on term loan (23,953) -- -- (23,953)
Proceeds from revolving facility 443,500 -- -- 443,500
Principal payments on revolving facility (454,300) -- -- (454,300)
Redemption of senior subordinated notes payable (25,000) -- -- (25,000)
Prepayment premium on senior subordinated notes
payable (3,000) -- -- (3,000)
Proceeds from issuance of common stock, net of
expenses 78,945 -- -- 78,945
Principal payments on subordinated notes payable
to stockholders (7,499) -- -- (7,499)
Payment of subordinated notes payable-related
party (4,369) -- -- (4,369)
--------------- --------------- ---------------- --------------
Net cash provided by (used for) financing activities 3,720 (24) -- 3,696
--------------- --------------- ---------------- --------------
Net increase (decrease) in cash and cash equivalents (2,891) 5,619 682 3,410
Cash and cash equivalents, beginning of period 3,348 (1,669) 251 1,930
--------------- --------------- ---------------- --------------
Cash and cash equivalents, end of period $ 457 $ 3,950 $ 933 $ 5,340
=============== =============== ================ ==============
For the six months ended June 30, 2001
Consolidated
Unaudited Condensed Consolidated Statements Anteon Anteon
of Operations International Guarantor Non-Guarantor Elimination International
Corporation Subsidiaries Subsidiaries Entries Corporation
--------------- -------------- ----------------- ------------- --------------
(in thousands)
Revenues $ -- $ 347,949 $ 4,385 $ (1,182) $ 351,152
Costs of revenues -- 307,769 3,748 (1,182) 310,335
--------------- --------------- ----------------- ------------- -----------
Gross profit -- 40,180 637 -- 40,817
Total operating expenses 3,313 24,004 465 -- 27,782
--------------- --------------- ----------------- ------------- -----------
Operating income (loss) (3,313) 16,176 172 -- 13,035
Other income -- 587 -- 587
Interest expense (income), net 10,196 3,760 (8) -- 13,948
Minority interest in earnings (losses) of
subsidiaries (2) 32 (27) -- 3
--------------- --------------- ----------------- ------------- -----------
Income (loss) before provision for income
taxes and extraordinary item (13,511) 13,035 153 -- (323)
Provision for (benefit from) income taxes (4,849) 5,737 52 -- 940
------------- ------------- --------------- ----------- ----------
Income (loss) before extraordinary item (8,662) 7,298 101 -- (1,263)
Extraordinary gain, net of tax 330 -- -- -- 330
------------- ------------- --------------- ----------- ----------
Net income (loss) $ (8,332) $ 7,298 $ 101 $ -- $ (933)
============= = ============= =============== =========== ==========
For the six months ended June 30, 2001
Consolidated
Unaudited Condensed Consolidated Statements of Cash Flows Anteon Anteon
International Guarantor Non-Guarantor International
Corporation Subsidiaries Subsidiaries Corporation
--------------- --------------- ------------------- --------------
(in thousands)
Operating activities:
Net income (loss) $ (8,332) $ 7,298 $ 101 $ (933)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities
Loss on disposals of property and equipment -- 21 -- 21
Extraordinary item, before income taxes (519) -- -- (519)
Depreciation and amortization of property and equipment 498 4,416 17 4,931
Gain on sales of assets and closure of business -- (587) -- (587)
Goodwill amortization 2,207 685 -- 2,892
Other intangibles amortization 1,106 -- -- 1,106
Noncompete amortization -- 349 -- 349
Amortization of deferred financing fees 599 -- -- 599
Deferred income taxes -- 1,543 -- 1,543
Minority interest in earnings (losses) of subsidiaries 2 (32) 27 (3)
Changes in assets and liabilities 25,285 (12,232) (14) 13,039
----------- - ------------- ------------- ------------
Net cash provided by operating activities 20,846 1,461 131 22,438
----------- - ------------- ------------- ------------
Investing activities:
Purchases of property equipment and other assets (216) (800) (79) (1,095)
Inter-company transfers (337) 120 217 --
Acquisitions, net of cash acquired (21) -- -- (21)
----------- ------------- ------------- -------------
Net cash provided by (used for) investing activities (574) (680) 138 (1,116)
----------- ------------- ------------- -------------
Financing activities:
Principal payments on notes payable -- (119) -- (119)
Proceeds from revolving facility 345,500 -- -- 345,500
Principal payments on revolving facility (354,900) -- -- (354,900)
Principal payments on term loan (8,014) -- -- (8,014)
Proceeds from issuance of common stock, net of expenses 19 -- -- 19
Payments on completion bonus -- (20) -- (20)
Payments on note payable to Ogden (3,212) -- -- (3,212)
----------- ------------- ------------- ------------
----------- ------------- ------------- ------------
Net cash used for financing activities (20,607) (139) -- (20,746)
----------- ------------- ------------- ------------
Net increase (decrease) in cash and cash equivalents (335) 642 269 576
Cash and cash equivalents, beginning of year 844 491 99 1,434
----------- ------------- ------------- ------------
----------- ------------- ------------- ------------
Cash and cash equivalents, at end of year $ 509 $ 1,133 $ 368 $ 2,010
=========== ============= ============= ============
(9)
Segment Information
Based on the Company's organization through July 20, 2001, the Company
reported two business segments: the Company's government contracting business
and the Company's commercial, custom training and performance solutions group
(collectively, "IMC", which was sold by the Company during the third quarter of
fiscal 2001). Although the Company is organized by strategic business unit, the
Company considers each of its government contracting units to have similar
economic characteristics, provide similar types of services, and have a similar
customer base. Accordingly, the Company's government contracting segment
aggregates the operations of the Company with Vector Data Systems, Inc.,
Techmatics, Inc., Analysis & Technology, Inc., Sherikon, Inc. and SIGCOM. Prior
acquisitions that have been integrated into the Company's government contracting
business. The amounts shown below reflect both IMC Commercial, the unit sold on
July 20, 2001, and IMC Government. Immediately prior to the sale of IMC
Commercial, the Company integrated the IMC Government unit into the government
contracting business.
The Company's chief operating decision maker utilizes both revenue and
earnings before interest and taxes in assessing performance and making overall
operating decisions and resource allocations. Certain indirect costs such as
corporate overhead and general and administrative expenses are allocated to the
segments. Allocations of overhead costs to segments are based on measures such
as cost and employee headcount. General and administrative costs are allocated
to segments based on the government-required three-factor formula, which uses
measures of revenue, labor and net book value of fixed assets. Interest expense,
investment income and income taxes are not allocated to the Company's segments.
As of and for the Six Months Ended
June 30, 2001
(amounts in thousands)
Government Interactive Media
Contracting Eliminations Consolidated
------------------ ------------------- ---------------- -----------------
Total assets $ 309,503 $ 5,680 $ -- $ 315,183
================== =================== ================ =================
Sales to unaffiliated customers 334,736 16,416 -- 351,152
Intersegment sales 36 15 (51) --
------------------ ------------------- ---------------- ----------------
Total revenues $ 334,772 $ 16,431 $ (51) $ 351,152
Operating income 12,276 759 -- 13,035
Other Income 587
Minority interest in earnings of subsidiaries 3
Interest expense, net 13,948
-----------------
-----------------
Loss before provision for income taxes and (323)
extraordinary item
Provision for income taxes 940
----------------
Loss before extraordinary item (1,263)
Extraordinary gain, net of tax 330
----------------
Net loss $ (933)
================
As of and for the Three Months Ended June 30, 2001
(amounts in thousands)
Government
Contracting Interactive Media Eliminations Consolidated
----------------- ------------------- ---------------- --------------
Total assets $ 309,503 $ 5,680 $ -- $ 315,183
================= =================== ================ ==============
Sales to unaffiliated customers 180,663 8,123 -- 188,786
Intersegment sales 9 -- (9) --
------------------ ------------------- ---------------- -------------
Total revenues $ 180,672 $ 8,123 $ (9) $ 188,786
Operating income 6,809 120 -- 6,929
Other Income 587
Minority interest in earnings of subsidiaries 4
Interest expense, net 6,987
-------------
-------------
Income before provision for income taxes 533
and extraordinary item
Provision for income taxes 1,126
-------------
Loss before extraordinary item (593)
Extraordinary gain, net of tax 330
-------------
Net loss $ (263)
=============
For the three and six months ended June 30, 2002, the Company reports one
aggregated segment, delivering a broad array of information technology and
systems engineering and integration services under contracts with the U.S.
Government. No single customer or individual contract accounted for 10% or more
of the Company's accounts receivable or revenues for the period ended June 30,
2002. In addition, there were no sales to any customers within a single country
except for the United States where the sales accounted for 10% or more of total
revenue. Substantially all assets were held in the United States as of June 30,
2002.
(10) Interest Rate Swap Agreements
For the six months ended June 30, 2002, the Company exercised its
cancellation rights under certain interest rate swap agreements and cancelled
$30.0 million of such agreements. These interest rate swap agreements related
primarily to term loan obligations that have been permanently reduced. Interest
expense for the six months ended June 30, 2002 includes losses of $1.9 million
associated with these cancellations.
Over the next twelve months, the Company does not expect to record any
additional losses related to the remaining interest rate swaps that are to be
reclassified into interest expense as a yield adjustment of the hedged debt
obligation. As of June 30, 2002, the fair value of the Company's interest rate
swap agreements resulted in a net liability of $674,000 and has been included in
other current liabilities.
(11) Legal Proceedings
The Company is involved in various legal proceedings in the ordinary course
of business. On March 8, 2002, the Company received a letter from one of the
Company's principal competitors, which is the parent company of one of the
Company's subcontractors, claiming that the Company had repudiated its
obligation under a subcontract with the subcontractor. The letter also alleged
that the Company was soliciting employees of the subcontractor in violation of
the subcontract and stated that the subcontractor would seek arbitration,
injunctive relief and other available remedies. The Company notified the parent
company of the subcontractor that the Company believed that it had completely
abided by its agreement with the subcontractor and advised that the Company
intended to defend itself vigorously against any claims asserted in the letter.
The subcontractor has filed a demand for arbitration to which Anteon has filed
an answer and counter demand.
The parties have agreed to stipulate to a continuation during the
arbitration proceeding of the substance of a previously issued temporary
injunction, with certain modifications. The parties are engaged in written and
oral discovery with the commencement of the arbitration hearing scheduled for
September 9, 2002.
We cannot predict the ultimate outcome of these matters, but do not believe
that they will have a material impact on our financial position or results of
operations.
(12) Goodwill and Intangible Assets
In June, 2001, the FASB issued SFAS No. 141, Business Combinations, and
SFAS No 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that
the purchase method of accounting be used for all business combinations. SFAS
No. 141 specifies the criteria that intangible assets acquired in a business
combination must meet to be recognized and reported separately from goodwill.
SFAS No. 142 requires that goodwill and intangible assets with indefinite useful
lives no longer be amortized, but instead tested for impairment at least
annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also
requires that intangible assets with estimable useful lives be amortized over
their respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS No. 121 and, subsequently, SFAS
No. 144 after its adoption (see New Accounting Pronouncements, below).
The Company adopted the provisions of SFAS No. 141 and SFAS No. 142 as of
January 1, 2002, except for acquisitions, which occurred after June 30, 2001,
for which the provisions of SFAS No. 141 and SFAS No. 142 are applicable. As of
January 1, 2002, the Company reclassified approximately $1.9 million of
intangible assets associated with an acquired employee workforce from intangible
assets to goodwill, which in accordance with SFAS No. 142, are no longer
separately identifiable from goodwill. As of June 30, 2002, the Company has
approximately $8.5 million of intangible assets ($3.7 million net of accumulated
amortization) related to contract backlog intangible assets, which are being
amortized straight-line over periods of up to 5 years.
Upon adoption of SFAS No. 142, the Company evaluated its existing
intangible assets and goodwill that were acquired in purchase business
combinations, and made any necessary reclassifications in order to conform with
the new classification criteria in SFAS No. 141 for recognition separate from
goodwill. The Company also reassessed the useful lives and residual values of
all intangible assets acquired, and made any necessary amortization period
adjustments as of March 31, 2002. If an intangible asset was identified as
having an indefinite useful life, the Company tested the intangible asset for
impairment in accordance with the provisions of SFAS No. 142 as of March 31,
2002. No impairments were recognized as a result of these tests.
In connection with SFAS No. 142's transitional goodwill impairment
evaluation, the Statement requires the Company to perform an assessment of
whether there is an indication that goodwill is impaired as of the date of
adoption. To accomplish this, the Company identified its reporting units and
determined the carrying value of each reporting unit by assigning the assets and
liabilities, including the existing goodwill and intangible assets, to these
reporting units as of January 1, 2002. The Company determined the estimated fair
value of each reporting unit and compared it to the carrying amount of the
reporting unit. As a result of this comparison, no indication that the reporting
units' fair value was less than the carrying value was noted. In the future, to
the extent the carrying amount of a reporting unit exceeds the fair value of a
reporting unit, an indication would exist that a reporting unit's goodwill may
be impaired, and the Company would be required to perform the second step of the
transitional impairment test. The second step would be required to be completed
as soon as possible, but no later than the end of the year of adoption. In the
second step, the Company must compare the implied fair value of the reporting
unit goodwill with the carrying amount of the reporting unit goodwill, both of
which would be measured as of the date of adoption. The implied fair value of
goodwill is determined by allocating the fair value of the reporting unit to all
of the assets (recognized and unrecognized) and liabilities of the reporting
unit in a manner similar to a purchase price allocation, in accordance with SFAS
No. 141. The residual fair value after this allocation is the implied fair value
of the reporting unit goodwill. Any transitional impairment loss would be
recognized immediately as the cumulative effect of a change in accounting
principle in the Company's consolidated statement of operation.
Had the amortization provisions of SFAS No. 142 been applied as of January
1, 2001 for all of the Company's acquisitions, the Company's income (loss)
before extraordinary gain, net income (loss) and earnings (loss) per common
share would have been as follows (unaudited) (in thousands, except per share
data):
Three months ended Six months ended
June 30, 2001 June 30, 2001
------------- -------------
Loss before extraordinary item $ (593) $ (1,263)
Add back: Goodwill amortization 1,706 2,892
Add back: Workforce amortization 160 272
---------------------- ----------------------
Adjusted income before extraordinary item $ 1,129 $ 1,509
---------------------- ----------------------
Adjusted net income $ 1,459 $ 1,839
---------------------- ----------------------
Basic earning per share:
Loss before extraordinary item $ (0.02) $ (0.05)
Goodwill amortization 0.07 0.11
Workforce amortization -- --
---------------------- ----------------------
Adjusted income before extraordinary item $ 0.05 $ 0.06
---------------------- ----------------------
Adjusted net income $ 0.06 $ 0.08
---------------------- ----------------------
Diluted earnings per share:
Loss before extraordinary item $ (0.02) $ (0.05)
Goodwill amortization 0.06 0.10
Workforce amortization -- 0.01
---------------------- ----------------------
Adjusted income before extraordinary item $ 0.04 $ 0.06
---------------------- ----------------------
Adjusted net income $ 0.06 $ 0.07
---------------------- ----------------------
(13) New Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144 ("SFAS No. 144"), Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS No. 144 addresses financial
accounting and reporting for the impairment of long-lived assets to be disposed
of and supersedes SFAS No. 121, and the accounting and reporting provisions of
Accounting Principles Board Opinion No. 30 ("APB No. 30"), Reporting the Results
of Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual or Infrequently Occurring Events and Transactions, for
the disposal of a segment of a business (as previously defined in APB No. 30).
SFAS No. 144 retains the requirements of SFAS No. 121 to review long-lived
assets for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable from its undiscounted
cash flows and measure an impairment loss as the difference between the carrying
amount and fair value of the asset. SFAS No. 144 removes goodwill from its
scope, which is now addressed in accordance with SFAS No. 142. The Company
adopted SFAS No. 144 as of January 1, 2002, with no impact on the Company's
financial statements.
In April 2002, the Financial Accounting Standards Board issued Statement
145 ("SFAS No. 145"), Rescission of FASB Statements No. 4, 44, and 64, Amendment
to FASB Statement 13, and Technical Corrections. SFAS No. 145 addresses the
reporting of gains and losses from extinguishment of debt. SFAS No. 145
rescinded FASB Statements 4 and 64. Under the new standard, only gains and
losses from extinguishments meeting the criteria of Accounting Principles Board
Opinion No. 30 would be classified as extraordinary items. Thus, gains or losses
arising from extinguishments of debt that are part of the Company's recurring
operations would not be reported as extraordinary items. Upon adoption,
previously reported extraordinary gains or losses not meeting the requirements
for classification as such in accordance with Accounting Principles Board
Opinion No. 30 would be required to be reclassified for all periods presented.
SFAS No. 145 is effective for fiscal years beginning after May 15, 2002. The
Company plans to adopt SFAS No. 145 as of January 1, 2003.
(14) Senior Subordinated Notes
In connection with the Company's IPO, on April 15, 2002 the Company
redeemed $25.0 million of the outstanding principal amount of its 12% senior
subordinated notes due in 2009. The redemption payment of $29.3 million included
a $3.0 million pre-payment premium and $1.3 million in accrued interest through
the date of redemption. In addition, the Company wrote-off a proportionate
amount of the unamortized deferred financing fees related to the portion of the
12% notes that were repaid. The $3.0 million prepayment premium and write-off of
the deferred financing fees totaling $2.4 million, net of tax, have been
reflected as an extraordinary loss in the accompanying unaudited condensed
consolidated statements of operations.
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
Company'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, funded backlog, estimated contract value, our
expectations regarding the federal government's procurement budgets and reliance
on outsourcing of services, and 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. The factors that could cause actual results to
differ materially include the following: the integration of acquisitions without
disruption to our other business activities; changes in general economic and
business conditions; changes in federal government procurement laws,
regulations, policies, and budgets; the number and type of contracts and task
orders awarded to us; technological changes; our ability to attract and retain
qualified personnel; competition; our ability to retain our contracts during any
rebidding process, and the other factors outlined in "Risk Factors" included in
our Registration Statement on Form S-1, declared effective by the Securities and
Exchange Commission on March 11, 2002.
GENERAL
We provide information technology solutions and systems engineering and
integration services to government clients. 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 currently serve over six hundred U.S federal government clients, as well
as state and foreign governments. For the six months ended June 30, 2002, we
estimate that 89% of our revenue was from contracts where we were the lead, or
"prime" contractor. We provide our services under long-term contracts that
generally have terms of four to five years. We have obtained ISO 9001
registration for our quality management systems at key facilities and have
achieved Software Engineering Institute (SEI) Level 3 certification for our
software development facility's processes. Our contract base is well diversified
among government agencies. No single award contract or task order accounted for
more than 6% of revenues for the three and six months ended June 30, 2002.
DESCRIPTION OF CRITICAL ACCOUNTING POLICIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these 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 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 and other contingent liabilities, revenue
recognition and goodwill. 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 the
following critical accounting policies affect its more significant judgments and
estimates used in the preparation of our consolidated financial statements.
Reserves
We maintain reserves for uncollectible accounts receivable and other
liabilities 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 would lead to accounts receivable not being
fully collected. Should these issues occur more frequently, additional reserves
may be required.
Revenues
During the six months ended June 30, 2002, we estimate that 98% of our
revenues were derived from services and 2% 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. Revenue for time
and materials contracts is 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. Revenue is recognized under cost-plus
contracts on the basis of direct and indirect costs incurred plus a negotiated
profit calculated as a percentage of costs or as 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 fixed price
contracts based on the percentage-of-completion basis, using the cost-to-cost or
units-of-delivery methods.
We recognize revenues under our federal government contracts when a
contract has been executed, the contract price is fixed and determinable,
delivery of the services or products has occurred and collectibility of the
contract price is considered probable. Our contracts with agencies of the
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. In evaluating the probability of funding for purposes of assessing
collectibility of the contract price, 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, revenue recognition is deferred until realization is
probable.
We recognize revenues under our federal government contracts based on
allowable contract costs, as mandated by the federal government's cost
accounting standards. The costs we incur under federal government contracts are
subject to regulation and audit by certain agencies of the federal government.
Contract cost disallowances, resulting from government audits, have not
historically 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.
We generally do not pursue fixed price software development work that may
create material financial risk. We do, however, perform 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 36%
time and materials, 36% cost-plus and 28% fixed price during the six months
ended June 30, 2002, and can change over time depending on contract awards and
acquisitions. Under cost-plus contracts, 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
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%.
Costs
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, workman'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 unallowable under the Federal Acquisition
Regulations can not be allocated to projects. Our principal unallowable costs
are interest expense, amortization expense for goodwill and intangibles from
acquisitions, and, prior to our initial public offering, management fees paid to
Caxton-Iseman Capital, Inc., an affiliate of our principal stockholders, 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 manage our indirect costs and improve operating margins by integrating the
indirect cost structures and realizing opportunities for cost synergies.
Goodwill
Goodwill relating to our acquisitions represents the excess of cost over
the fair value of net tangible and identifiable intangible assets acquired and,
for acquisitions completed prior to July 1, 2001, and until the adoption of SFAS
No. 141 and SFAS No. 142 on January 1, 2002, goodwill was amortized on a
straight-line basis over periods ranging from twenty to thirty years.
Determination of the amortization period was dependent on the nature of the
operations acquired. Effective January 1, 2002, we adopted SFAS No. 142, and no
longer amortize goodwill, but rather test for impairment of our goodwill at
least annually using a fair value approach.
Long-Lived Assets and Identifiable Intangibles
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. 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 fair value, as determined
by an analysis of discounted cash flows using a discounted interest rate
considering 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 the majority 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 would have an adverse impact on
our results of operations.
Statements of Operations
The following is a description of certain line items from our statement of
operations.
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 subcontract work, consultant fees, materials,
depreciation and overhead. 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
accruals.
Amortization expenses relate to the costs associated with goodwill (prior
to our adoption of SFAS No. 142 on January 1, 2002) and intangible assets from
our acquisitions. These intangible assets represent the fair value assigned to
employee workforce as part of our acquisitions of A&T and Sherikon (prior to our
adoption of SFAS No. 141 on January 1, 2002) and contract backlog as part of our
acquisitions of A&T, Sherikon and SIGCOM Training. Amortization expenses also
include costs associated with certain non-compete agreements entered into in
connection with acquisitions.
Interest expense is primarily for our 12% notes due 2009, our term loan and
revolving credit facility, our subordinated debt and subordinated convertible
promissory notes held by our stockholders prior to their repayment or conversion
in connection with our IPO, and other miscellaneous interest costs. In addition,
approximately $1.9 million of interest expense for the six months ended June 30,
2002 relates to the recognition of previously unrecognized losses related to the
termination of approximately $30.0 million in interest rate swaps.
Other income is from non-core business items such as gains on the sales and
closures of businesses and investments.
Backlog
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 we
manage costs effectively, making us competitive on price. 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 over the past four years. We have increased
our total estimated contract value by $367.8 million, from December 31, 2001, to
$3.9 billion at June 30, 2002, of which $377.2 million was funded backlog as of
June 30, 2002. Our total estimated contract value represents the aggregate
estimated contract revenue to be earned by us at a given time over the remaining
life of our contracts. When more than one company is awarded a contract for a
given work requirement, we include in total estimated contract value only our
estimate of the contract revenue we expect to earn over the remaining term of
the contract. Funded backlog is based upon amounts actually appropriated by a
customer for payment for goods and services. Because the federal government
operates under annual appropriations, agencies of the federal government
typically fund contracts on an incremental basis. Accordingly, the majority of
the total estimated contract value is not funded backlog. Our estimated contract
value is based on our experience under contracts and we believe our estimates to
be 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. In addition, we
are periodically asked to work at-risk on projects. At-risk means that the
customer has asked us to work, or to continue working, on a project even though
there are no funds appropriated and released for payment. In most cases, the
government is in the process of funding the contract or tasks and makes the
request to avoid disruptions to the project. Historically, we have not recorded
any significant write-offs because funding was not ultimately received.
RESULTS OF OPERATIONS
Our historical consolidated financial statements included herein do not
reflect the full impact of the operating results of certain of our acquisitions,
divestitures and closures, including our acquisition of the training division of
SIGCOM, Inc. ("SIGCOM"), since their operating results are only included with
our results from the date of acquisition, divestiture or closure, as applicable.
In addition, our operating results from period to period may not be comparable
with future results because of the impact of the allocation and amortization
principles of SFAS No. 141 and SFAS No. 142 (discussed above).
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 June 30,
2002 2001
---------------------------- ---------------------------
($ in thousands)
Revenues $ 201,938 100.0% $ 188,786 100.0%
Costs of revenues 174,674 86.5 167,181 88.6
----------------- ----------- ---------------- ------------
Gross profit 27,264 13.5 21,605 11.4
----------------- ----------- ---------------- ------------
Operating expenses:
General and administrative expenses 10,766 5.4 12,530 6.6
Amortization 477 0.2 2,146 1.1
----------------- ----------- ---------------- ------------
Total operating expenses 11,243 5.6 14,676 7.7
----------------- ----------- ---------------- ------------
Operating income 16,021 7.9 6,929 3.7
Other income, net 354 0.2 587 0.3
Interest expense, net 3,421 1.7 6,987 3.7
Minority interest in earnings of subsidiaries 1 - 4 --
----------------- ----------- ---------------- ------------
Income (loss) before income taxes and extraordinary item 12,955 6.4 533 0.3
Provision for income taxes 5,050 2.5 1,126 0.6
----------------- ----------- ---------------- ------------
Income (loss) before extraordinary item 7,905 3.9 (593) (0.3)
Extraordinary gain (loss), net of tax (2,396) (1.2) 330 0.2
----------------- ----------- ---------------- ------------
Net income (loss) $ 5,509 2.7% $ (263) (0.1)%
================= ============= ================ ==============
For the Six Months Ended June 30,
2002 2001
---------------------------- ---------------------------
($ in thousands)
Revenues $ 394,566 100.0% $ 351,152 100.0%
Costs of revenues 341,693 86.6 310,335 88.4
----------------- ----------- ---------------- ------------
Gross profit 52,873 13.4 40,817 11.6
----------------- ----------- ---------------- ------------
Operating expenses:
General and administrative expenses 21,381 5.4 23,435 6.7
Amortization 954 0.2 4,347 1.2
----------------- ----------- ---------------- ------------
Total operating expenses 22,335 5.7 27,782 7.9
----------------- ----------- ---------------- ------------
Operating income 30,538 7.7 13,035 3.7
Other income, net 360 0.1 587 0.2
Interest expense, net 10,851 2.8 13,948 4.0
Minority interest in earnings (losses) of subsidiaries (8) -- 3 --
----------------- ----------- ---------------- ------------
Income (loss) before income taxes and extraordinary item 20,039 5.1 (323) (0.1)
Provision for income taxes 7,815 2.0 940 0.3
----------------- ----------- ---------------- ------------
Income (loss) before extraordinary item 12,224 3.1 (1,263) (0.4)
Extraordinary gain (loss), net of tax (2,581) 0.7 330 0.1
----------------- ----------- ---------------- ------------
Net income (loss) $ 9,643 2.4% $ (933) (0.3)%
================= ============= ================ ==============
REVENUES
For the quarter ended June 30, 2002, revenues increased to $201.9 million,
or 7.0%, from $188.8 million for the quarter ended June 30, 2001. For the six
months ended June 30, 2002, revenues increased to $394.6 million, or 12.4%, from
$351.2 million for the six months ended June 30, 2001. The increase in revenues
was attributable to internal growth and the acquisition of SIGCOM. These
increases were offset in part by the sale of the commercial business of IMC on
July 20, 2001. IMC's revenues for the commercial division were $5.2 million and
$10.8 million during the three and six month period ended June 30, 2001,
respectively. For the three and six month periods ended June 30, 2002, our
internal growth was 9.1% or $16.8 million and 14.5% or $49.9 million,
respectively, excluding the impact of the closed or sold businesses. The
internal growth in revenue was primarily driven by growth under our SAFTAS
contract, expansion of intelligence systems contracts, and growth under our
General Services Administration ("GSA") contracts.
COSTS OF REVENUES
For the quarter ended June 30, 2002, costs of revenues increased by $7.5
million, or 4.5%, to $174.7 million from $167.2 million, for the quarter ended
June 30, 2001. Costs of revenues as a percentage of revenues decreased to 86.5%
from 88.6% for the quarter ended June 30, 2002. For the six months ended June
30, 2002, costs of revenues increased by $31.4 million or 10.1% to $341.7
million from $310.3 million for the six months ended June 30, 2001. For the six
months ended June 30, 2002, costs of revenues as a percentage of revenues
decreased to 86.6% from 88.4% for the six months ended June 30, 2001. The costs
of revenues increase was due primarily to the corresponding growth in revenues
resulting from internal growth and the acquisition of SIGCOM. The majority of
the increase in cost of revenues for the three and six month periods ended June
30, 2002 was due to a $7.4 million and $15.1 million increase in direct labor
and fringe and a $1.7 million and $19.0 million increase in other direct
contract costs, respectively.
For the quarter ended June 30, 2002, gross profit increased $5.7 million or
26.2% to $27.3 million from $21.6 million for the quarter ended June 30, 2001.
For the six month period ended June 30, 2002, gross profit increased $12.1
million, or 29.5% to $52.9 million from $40.8 million for the six month period
ended June 30, 2001. The increase for the quarter and six month period ended
June 30, 2002 was primarily a result of the sale or closure of unprofitable
businesses during the prior year quarter and the impact of certain indirect cost
reductions.
GENERAL and ADMINISTRATIVE EXPENSES
For the quarter ended June 30, 2002, general and administrative expenses
decreased $1.8 million, or 14.1%, to $10.8 million from $12.5 million for the
quarter ended June 30, 2001. General and administrative expenses for the quarter
ended June 30, 2002, as a percentage of revenues, decreased to 5.4% from 6.6%.
For the six month period ended June 30, 2002, general and administrative
expenses decreased $2.1 million or 8.8% to $21.4 million from $23.4 million for
the six months ended June 30, 2001. General and administrative expenses for the
six months ended June 30, 2002, as a percentage of revenues, decreased to 5.4%
from 6.7%. Excluding certain items from the three and six month periods ended
June 30, 2001 and the impact of businesses sold or closed (described below),
general and administrative expenses as a percentage of revenue would have been
6.1% and 5.9% of our revenues for the three and six months ended June 30, 2001,
respectively. Certain items that were incurred in the first six months of 2001,
but not in 2002, included management fees of $500,000 paid to Caxton-Iseman
Capital, Inc. for the six months ended June 30, 2001 ($250,000 paid for the
second quarter of 2001), and a $600,000 settlement and $497,000 in legal fees
incurred in the first quarter of 2001, for matters relating to a dispute with a
former subcontractor. General and administrative expenses for the quarter and
six months ended June 30, 2001 also included costs related to several businesses
which were either sold or closed during 2001, including IMC, Center for
Information Technology Education ("CITE"), DisplayCheck and South Texas Ship
Repair ("STSR").
AMORTIZATION
For the quarter ended June 30, 2002, amortization expenses decreased $1.7
million, or 77.8%, to $477,000 from $2.1 million for the comparable period in
2001. Amortization as a percentage of revenues for the quarter ended June 30,
2002 decreased to 0.2% from 1.1%. For the six months ended June 30, 2002,
amortization expenses decreased $3.4 million, or 78.1%, to $954,000 from $4.3
million for the comparable period in 2001. Amortization as a percentage of
revenues decreased to 0.2% from 1.2%. The decrease in amortization expenses was
primarily attributable to the implementation of SFAS No. 141 and SFAS No. 142 on
January 1, 2002, which eliminated further amortization of goodwill. (See note 12
to our Unaudited Condensed Consolidated Financial Statements included elsewhere
in this Quarterly Report for further details.)
OPERATING INCOME
For the quarter ended June 30, 2002, operating income increased $9.1
million, or 131.2%, to $16.0 million from $6.9 million for the quarter ended
June 30, 2001. Operating income as a percentage of revenues increased to 7.9%
for the quarter ended June 30, 2002 from 3.7% for the same period in fiscal
2001. For the six month period ended June 30, 2002, operating income increased
$17.5 million, or 134.2%, to $30.5 million from $13.0 million for the six month
period ended June 30, 2001. Operating income as a percentage of revenues
increased to 7.7% for the six month period ended June 30, 2002 from 3.7% for the
same period in fiscal 2001. Absent the $250,000 and $1.6 million of expenses for
the three and six months ended June 30, 2001 described in the general and
administrative expenses section above, assuming the allocation and amortization
principles of SFAS No. 141 and SFAS No. 142 had been in effect as of January 1,
2001, assuming the elimination of our sold or closed operations, and including
the operating results of SIGCOM for the three and six month periods ended June
30, 2001, our operating income would have been $11.0 million and $20.9 million
for the three and six months ended June 30, 2001, and our operating margin would
have been 6.0% and 6.1%, respectively.
OTHER INCOME
For the quarter ended June 30, 2002, other income decreased $233,000 to
$354,000 or 39.7%, from $587,000 for the quarter ended June 30, 2001. For the
six months ended June 30, 2002, other income decreased $227,000, to $360,000, or
38.7% from $587,000 for the six months ended June 30, 2002. Other income for the
three and six months ended June 30, 2002, includes a gain on the sale of
Displaycheck assets, a previously discontinued business and receipt of insurance
proceeds for lost equipment previously recorded as a loss. For the three and six
month periods ended June 30, 2001, the other income consisted of a $100,000 of
gain on the sale of CITE's assets and $487,000 representing the remaining
minority interest as of the date of closure of the Anteon-CITI LLC joint
venture.
INTEREST EXPENSE, NET
For the quarter ended June 30, 2002, interest expense, net of interest
income, decreased $3.6 million, or 51.0%, to $3.4 million from $7.0 million for
the quarter ended June 30, 2001. For the six months ended June 30, 2002,
interest expense, net of interest income, decreased $3.1 million, or 22.2%, to
$10.9 million from $13.9 million for the six months ended June 30, 2001. The
decrease in interest expense was due primarily to a reduction in our debt as a
result of the IPO and interest earned on excess funds available from the
proceeds of the IPO. The decrease in interest expense was offset in part by fees
of $1.9 million related to the termination of $30.0 million of interest rate
swap agreements.
PROVISION FOR INCOME TAXES
Our effective tax rate for the three and six months ended June 30, 2002 was
39% compared with a provision (benefit) of (211.3)% and 291.0% for the three and
six months ended June 30, 2001, due to a reduction in non-deductible goodwill
amortization expense as a result of the implementation of SFAS No. 141 and SFAS
No. 142 as of January 1, 2002.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows for the Six Months Ended June 30, 2002
We generated $1.0 million in cash from operations for the six months ended
June 30, 2002. By comparison, we generated $22.4 million in cash from operations
for the six months ended June 30, 2001. In addition, there was a temporary
increase in contract receivables due to delays in billings as a result of the
conversion of business units acquired as part of our acquisition of Analysis &
Technology, Inc. ("A&T") from A&T's legacy accounting system to our current
accounting system. The conversion is substantially completed, and billing under
normal schedules have resumed. Contract receivables increased $28.3 million for
the six months ended June 30, 2002. Total days sales outstanding increased from
66 days in 2001 to 71 days in 2002. Accounts receivable totaled $159.7 million
at June 30, 2002 and represented 48.5% of total assets at that date.
Additionally, increases in accounts payable and accrued expenses generated $13.2
million of cash from operations, a 25.0% decrease from 2001. For the six months
ended June 30, 2002, net cash used for investing activities was $1.3 million,
which was attributable to purchases of property, plant and equipment. Cash
provided by financing activities was $3.7 million for the six months ended June
30, 2002.
On March 15, 2002, we completed our IPO with the sale of 4,687,500 shares
of our common stock. Our net proceeds were $75.5 million, based on an IPO price
of $18.00 per share, after deducting underwriting discounts and commissions of
$5.9 million and estimated offering costs and expenses of $3.1 million. We used
the net proceeds from the IPO to repay: $11.4 million of its debt outstanding
under the term loan portion of its credit facility; temporarily paid down $39.5
million on its revolving line of credit on March 15, 2002; the revolving line of
credit was subsequently increased on April 15, 2002 to pay $25.0 million in
senior subordinated notes, plus $3.0 million in prepayment premium, plus $1.3
million in accrued interest without permanently reducing our borrowing
availability under this facility; our $7.5 million principal amount subordinated
promissory note held by Azimuth Technologies, L.P., one of our principal
stockholders, including $50,000 aggregate principal amount of our subordinated
promissory notes, held by present members of the Company's management; and $4.4
million of our subordinated notes, relating to accrued interest on the Company's
$22.5 million principal amount subordinated convertible promissory note held by
Azimuth Tech. II LLC, one of our principal stockholders. We redeemed $25.0
million principal amount of our 12% notes on April 15, 2002, paid accrued
interest of $1.3 million thereon, and paid a $3.0 million prepayment premium.
The Company, pending the permanent use of such net proceeds, used such funds to
temporarily reduce the revolver portion of its credit facility.
The remainder of the net proceeds redemption premium from the IPO,
approximately $12.7 million, was temporarily invested in short-term investment
grade securities and subsequently liquidated and used to repay amounts
outstanding under the revolving portion of our credit facility. We also intend
to use $2.5 million of the IPO proceeds, temporarily used to repay debt under
the revolving portion of its credit facility, to repay in full, on or before
October 20, 2002, a $2.5 million principal amount promissory note held by former
stockholders of Sherikon, Inc., which we acquired in October 2000. As a result
of the permanent reduction of a portion of our debt under the term loan, we
wrote-off a proportionate amount of the unamortized deferred financing fees
related to the portion of the term loan that was repaid. The write-off of
$185,000, net of tax, has been reflected as an extraordinary loss in the
accompanying unaudited condensed consolidated statements of operations. In
addition, as a result of the redemption of the $25.0 million principal amount of
our 12% notes, we incurred a $3.0 million prepayment premium and wrote-off a
proportionate amount of the unamortized deferred financing fees related to the
portion of the 12% notes that were repaid. The prepayment premium and write-off
of deferred financing fees, totaling $2.4 million, net of tax, have been
reflected as an extraordinary loss in the accompanying unaudited condensed
consolidated statements of operations.
Historically, our primary liquidity requirements have been for debt service
under our existing 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 existing credit facility is a six-year line of
credit that expires June 23, 2005. The facility consists of a term loan and a
revolving line of credit of up to $120.0 million. Borrowings from the revolving
line of credit can be made based upon a borrowing base consisting of a portion
of our eligible billed and unbilled receivable balances. In addition, the credit
facility requires us to meet certain quarterly financial covenants. The key
covenants are the leverage ratio, fixed charge coverage ratio and interest
coverage ratio. For the period ended June 30, 2002, we complied with all the
financial covenants. At June 30, 2002, total debt outstanding under our credit
facility was approximately $31.0 million, consisting of $23.1 million of term
loan, and $7.9 million outstanding under our revolving credit facility. The
total funds available to us under the revolving loan portion of our credit
facility as of June 30, 2002 were $106.0 million. However, under certain
conditions related to excess annual cash flow, as defined in our credit
agreement, 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
agreement, borrowings under the term loan. Due to excess cash flows generated
during 2001, we made an additional principal payment of $10.7 million under the
term loan portion of our credit facility during the quarter ended March 31,
2002. In addition, loans under the credit facility mature on June 23, 2005, and
we are scheduled to pay quarterly installments of approximately $950,000 under
the term portion until the credit facility matures on June 23, 2005. As of June
30, 2002, we did not have any capital commitments greater than $1.0 million.
Our principal working capital need is for funding accounts receivable,
which has increased with the growth in our business and the delays in government
funding. Our principal sources of cash to fund our working capital needs are
cash generated from operating activities and borrowings under our revolving
credit facility.
We have relatively low capital investment requirements. Capital
expenditures were $1.3 million and $1.1 million for the six months ended June
30, 2002 and 2001, respectively, primarily for leasehold improvements and office
equipment. We use operating leases to fund some of our equipment needs,
primarily for personal computers. As of June 30, 2002, we had equipment worth
approximately $14.5 million on lease.
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.
INFLATION
We do not believe that inflation has had a material effect on our business
in the quarter ended June 30, 2002.
ITEM 3. QUANTITATIVE and QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have interest rate exposure relating to certain of our long-term
obligations. While the interest rate on the remaining $75 million principal
amount of our 12% notes is fixed at 12%, the interest rate on both the term and
revolving portions of our credit facilities is affected by changes in market
interest rates. We manage these fluctuations in part through interest rate swaps
that are currently in place and our focus on reducing the amount of outstanding
debt through cash flow. In addition, we have implemented a cash flow management
plan focusing on billing and collecting receivables to pay down debt.
On January 29, 2002, the Company cancelled approximately $30 million of
interest swap agreements and recognized losses of $1.9 million in interest
expense for the quarter ended March 31, 2002. As of June 30, 2002, the fair
value of the Company's interest swap agreements resulted in a net liability of
$674,000 and has been included in other current liabilities.
A 1% change in interest rates on variable rate debt would have resulted in
our interest expense fluctuating by approximately $104,000 and $152,000 for the
six months ended June 30, 2002 and 2001, respectively.
PART II. OTHER INFORMATION REQUIRED IN REPORT
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in various legal proceedings in the ordinary course
of business. On March 8, 2002, the Company received a letter from one of the
Company's principal competitors, which is the parent company of one of the
Company's subcontractors, claiming that the Company had repudiated its
obligation under a subcontract with the subcontractor. The letter also alleged
that the Company was soliciting employees of the subcontractor in violation of
the subcontract and stated that the subcontractor would seek arbitration,
injunctive relief and other available remedies. The Company notified the parent
company of the subcontractor that the Company believed that it had completely
abided by its agreement with the subcontractor and advised that the Company
intended to defend itself vigorously against any claims asserted in the letter.
The subcontractor has filed a demand for arbitration to which Anteon has filed
an answer and counter demand.
The parties have agreed to stipulate to a continuation during the
arbitration proceeding of the substance of a previously issued temporary
injunction, with certain modifications. The parties are engaged in written and
oral discovery with the commencement of the arbitration hearing scheduled for
September 9, 2002.
We cannot predict the ultimate outcome of these matters, but do not believe that
they will have a material impact on our financial position or results of
operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
NONE
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 AND REPORTS ON FORM 8-K
A. EXHIBITS
99.1 Certification of Joseph M. Kampf pursuant to 18 U.S.C.
Section 1350, as adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
99.2 Certification of Carlton B. Crenshaw pursuant to 18
U.S.C. Section 1350, as adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
B. REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the
quarter ended June 30, 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: August 9, 2002 /s/ Joseph Kampf
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Joseph Kampf - President and
Chief Executive Officer
Date: August 9, 2002 /s/ Carlton B. Crenshaw
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Carlton B. Crenshaw - Executive Vice
President and Chief Financial Officer