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Form 10-Q for ANTEON INTERNATIONAL CORPORATION filed on November 6, 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 September 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
----------------------------- -----------------
(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 November 4, 2002, there were 34,316,948
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
SEPTEMBER 30, 2002 AND DECEMBER 31, 2001 1
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002
AND 2001 2
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 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 OPERATIONS21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 4 CONTROLS AND PROCEDURES 28
PART II. OTHER INFORMATION REQUIRED IN REPORT
ITEM 1. LEGAL PROCEEDINGS 29
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 29
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 29
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS 30
ITEM 5. OTHER INFORMATION 30
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 30
i
PART I. FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ANTEON INTERNATIONAL CORPORATION AND SUBSIDIARIES
(A Delaware Corporation)
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
September 30,
2002 December 31,
(Unaudited) 2001
----------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents $ 6,029 $ 1,930
Accounts receivable, net 195,089 131,345
Prepaid expenses and other current assets 5,563 6,992
Deferred tax assets, net 31 4,151
--------------- ----------------
Total current assets 206,712 144,418
Property and equipment, net 10,101 12,744
Goodwill, net 138,619 136,622
Intangible and other assets, net 8,094 12,867
--------------- ----------------
Total assets $ 363,526 $ 306,651
=============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Term loan, current portion $ 3,798 $ 17,266
Subordinated notes payable 2,476 2,268
Business purchase consideration payable 562 515
Accounts payable 53,633 25,028
Due to related party -- 3,600
Accrued expenses 47,811 56,041
Income tax payable 4,581 509
Other current liabilities 888 2,889
Deferred revenue 7,022 8,743
--------------- ----------------
Total current liabilities 120,771 116,859
Term loan, less current portion 18,353 29,788
Revolving facility 20,000 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 9,587 9,261
Other long term liabilities 337 690
--------------- ----------------
Total liabilities 244,048 309,666
Minority interest in subsidiaries 141 427
Stockholders' equity (deficit):
Preferred stock, $.01 par value 15,000,000 shares authorized, none issued and outstanding
as of September 30, 2002 -- --
Common stock, $.01 par value 175,000,000 shares authorized, 34,277,108 shares issued and
outstanding as of
September 30, 2002 343 --
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 106,026 2,366
Accumulated other comprehensive loss (542) (1,747)
Retained earnings (accumulated deficit) 13,522 (4,287)
--------------- ----------------
Total stockholders' equity (deficit) 119,337 (3,442)
--------------- ----------------
Total liabilities and stockholders' equity $ 363,526 $ 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 nine months ended
September 30, September 30,
2002 2001 2002 2001
-------------- --------------- ---------------- ---------------
Revenues $ 214,314 $ 183,687 $ 608,880 $ 534,840
Costs of revenues 184,585 160,958 526,278 471,295
------------- ------------- ------------- --------------
Gross profit 29,729 22,729 82,602 63,545
------------- ------------- ------------- --------------
Operating expenses:
General and administrative expenses 12,704 10,895 34,085 34,329
Amortization of noncompete agreements -- -- -- 349
Goodwill amortization -- 1,354 -- 4,246
Other intangibles amortization 476 602 1,430 1,708
Total operating expenses 13,180 12,851 35,515 40,632
------------- ------------- ------------ -------------
Operating income 16,549 9,878 47,087 22,913
Other income 57 3,320 417 3,907
Interest expense, net of interest income of $147, $52,
$240 and $240, respectively 3,223 6,351 14,074 20,299
Minority interest in (earnings) losses of subsidiaries 5 (33) (3) (30)
------------- ------------- ------------ -------------
Income before provision for income taxes and extraordinary 13,388 6,814 33,427 6,491
item
Provision for income taxes 5,222 3,429 13,037 3,843
------------- ------------- ------------ -------------
Income before extraordinary item 8,166 3,385 20,390 2,648
Extraordinary (loss) gain, net of tax -- -- (2,581) 330
------------- ------------- ------------ -------------
Net income $ 8,166 $ 3,385 $ 17,809 $ 2,978
============= ============= ============ =============
Basic earnings (loss) per common share:
Income before extraordinary loss $ 0.24 $ 0.14 $ 0.65 $ 0.11
Extraordinary income (loss), net of tax -- -- (0.08) 0.01
------------- ------------- ------------ -------------
Net income $ 0.24 $ 0.14 $ 0.57 $ 0.12
============= ============= ============ =============
Basic weighted average shares outstanding 34,184,263 23,933,184 31,430,331 23,917,425
Diluted earnings (loss) per common share:
Income before extraordinary loss $ 0.22 $ 0.13 $ 0.61 $ 0.11
Extraordinary income (loss), net of tax -- -- (0.08) 0.01
------------- ------------- ------------ -------------
Net income $ 0.22 $ 0.13 $ 0.53 $ 0.12
============= ============= ============ =============
Diluted weighted average shares outstanding 36,554,674 26,394,825 33,915,068 25,610,401
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 nine months ended September 30,
--------------------------------------------------
2002 2001
--------------------- ---------------------
OPERATING ACTIVITIES:
Net income $ 17,809 $ 2,978
Adjustments to reconcile net income to net cash (used for) provided by
operating activities
Gain on sales of assets and closure of business -- (3,907)
Extraordinary item, before income taxes 4,232 (519)
Interest rate swap termination (1,903) --
Depreciation and amortization of property and equipment 3,382 5,937
Amortization of noncompete agreements -- 349
Goodwill amortization -- 4,246
Other intangibles amortization 1,430 1,708
Amortization of deferred financing fees 892 915
Loss on disposals of property and equipment 79 23
Deferred income taxes 3,638 2,764
Minority interest in earnings of subsidiaries 3 30
Changes in assets and liabilities (41,663) 14,052
----------------- -----------------
NET CASH (USED FOR) PROVIDED BY OPERATING ACTIVITIES (12,101) 28,576
----------------- -----------------
INVESTING ACTIVITIES:
Purchases of property, equipment and other assets (2,476) (1,527)
Proceeds from sale of business -- 11,325
Proceeds from the sale of building 1,802 --
Acquisitions, net of cash acquired -- (11,015)
---------------- -----------------
NET CASH USED FOR INVESTING ACTIVITIES (674) (1,217)
----------------- -----------------
FINANCING ACTIVITIES:
Principal payments on notes payable (34) (173)
Payment of credit facility amendment fee (604) --
Principal payments on term loan (24,903) (8,014)
Proceeds from revolving facility 642,400 552,800
Principal payments on revolving facility (641,100) (564,200)
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 80,983 --
Principal payments on subordinated notes payable to stockholders (7,499) --
Payments on note payable to Ogden -- (3,212)
Payments on completion bonus -- (20)
Proceeds from minority interest, net -- 104
Payment of subordinated notes payable-related party (4,369) --
----------------- -----------------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 16,874 (22,715)
----------------- -----------------
CASH AND CASH EQUIVALENTS:
Net increase in cash and cash equivalents 4,099 4,644
Cash and cash equivalents, beginning of period 1,930 1,434
----------------- -----------------
Cash and cash equivalents, end of period $ 6,029 $ 6,078
================= =================
Supplemental disclosure of cash flow information (in thousands):
Interest paid $ 14,200 $ 16,354
Income taxes paid (refunds received), net 1,244 236
================= =================
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
SEPTEMBER 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 has
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 nine months ended September
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 ("IT"), 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 $121,000
and $1.2 million for the three and nine months ended
September 30, 2001, respectively. Operating losses were
approximately $34,000 and $1.0 million for the three and
nine months ended September 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 $360,000 and $1.2 million for the
three and nine months ended September 30, 2001,
respectively. Operating losses were approximately $51,000
and $2.6 million for the three and nine months ended
September 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 September 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 $976,000 and $11.7 million for the three and
nine months ended September 30, 2001, respectively.
Operating income (loss) was approximately $(214,000) and
$47,000 for the three and nine months ended September 30,
2001, respectively. The total gain recognized on the sale of
IMC during the third quarter of 2001 was approximately $3.3
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 related to a retention bonus
which was substantially paid to a key employee of IMC during
the nine month period ended September 30, 2002. (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 $445,000
and $2.9 million, and operating losses were approximately
$1.1 million and $1.3 million for the three and nine months
ended September 30, 2001, respectively. The remaining
expected costs of fulfilling STSR's existing contracts of
approximately $264,000 have been accrued at September 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 $75.2 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 $3.3 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 pay down $39.5 million on the revolving loan portion
of its credit facility on March 15, 2002 (the revolving loan was
subsequently increased on April 15, 2002 to redeem $25.0 million
principal amount of the Company's 12% notes);
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 $12.5 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 used $2.5 million of the IPO proceeds temporarily to repay debt
under the revolving portion of its credit facility with the intention of
repaying 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. On October 18, 2002, the Company
asserted an indemnification claim against the former shareholders of Sherikon,
Inc. in an aggregate amount exceeding the $2.5 million promissory note. The
Company is treating this indemnification claim as a set off against the $2.5
million promissory note obligation.
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 nine months ended September 30, 2002.
(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 defense
training capabilities. The total purchase price was $11.0 million, excluding
$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 Nine Months Ended
September 30, September 30,
2001 2001
-------------------------- -----------------------------
Total revenues $ 184,924 $ 543,315
Total expenses 181,240 540,050
-------------------------- -------------------------
Income before extraordinary item $ 3,684 $ 3,265
Extraordinary gain net of tax -- 330
------------------------ -----------------------
Net Income $ 3,684 $ 3,595
========================== ==========================
Basic earnings per common share $ 0.15 $ 0.15
========================== =========================
Diluted earnings per common share $ 0.14 $ 0.14
========================== ==========================
(6) Comprehensive Income (Loss)
Comprehensive income (loss) for the three months ended September 30, 2002
and 2001 was approximately $8.1 million and $2.6 million, respectively.
Comprehensive income (loss) for the nine months ended September 30, 2002 and
2001 was approximately, $19.0 million and $1.6 million, respectively. Other
comprehensive income (loss) for the three months ended September 30, 2002 and
2001 includes foreign currency translation gains (losses) of approximately
$17,000, and $(16,000), respectively, and increases (decreases) in the fair
value of interest rate swaps of approximately $(101,000) and $(816,000),
respectively, net of tax. Comprehensive income (loss) for the nine months ended
September 30, 2002 and 2001, includes foreign currency translation gains of
approximately $11,000 and $92,000, respectively, and increases (decreases) in
the fair value of interest rate swaps of approximately $1.2 million and $(1.3)
million, respectively, net of tax. For the nine months ended September 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 nine months ended September 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
September 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 $ 8,166 34,184,263 $ 0.24
Extraordinary loss, net of tax -- 34,184,263 --
------------------------ ------------------------
Net income $ 8,166 34,184,263 $ 0.24
======================= =======================
Stock options 2,370,411 --
Diluted earnings per share:
Income before extraordinary item $ 8,166 36,554,674 $ 0.22
Extraordinary loss, net of tax -- 36,554,674 --
------------------------ ------------------------
Net income $ 8,166 36,554,674 $ 0.22
======================= =======================
For the three months ended
September 30, 2001
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 $ 3,385 23,933,184 $ 0.14
Extraordinary gain, net of tax -- 23,933,184 --
------------------------ ------------------------
Net income $ 3,385 23,933,184 $ 0.14
======================== =======================
Stock options 2,461,641 --
Diluted earnings per share:
Income before extraordinary item $ 3,385 26,394,825 $ 0.13
Extraordinary gain, net of tax -- 26,394,825 --
------------------------ ------------------------
Net income $ 3,385 26,394,825 $ 0.13
======================== =======================
For the nine months ended
September 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 $ 20,390 31,430,331 $ 0.65
Extraordinary loss, net of tax (2,581) 31,430,331 (0.08)
------------------------ ------------------------
Net income $ 17,809 31,430,331 $ 0.57
======================= ========================
Stock options -- 2,484,737 --
Diluted earnings per share:
Income before extraordinary item $ 20,390 33,915,068 $ 0.61
Extraordinary loss (2,581) 33,915,068 (0.08)
------------------------ ------------------------
Net income, net of tax $ 17,809 33,915,068 $ 0.53
======================= =======================
For the nine months ended
September 30, 2001
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 $ 2,648 23,917,425 $ 0.11
Extraordinary gain, net of tax 330 23,917,425 0.01
------------------------ -----------------------
Net income $ 2,978 23,917,425 $ 0.12
======================== =======================
Stock options -- 1,692,976 --
Diluted earnings per share:
Income before extraordinary item $ 2,648 25,610,401 $ 0.11
Extraordinary gain, net of tax 330 25,610,401 0.01
------------------------ -----------------------
Net income $ 2,978 25,610,401 $ 0.12
======================== =======================
(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 September 30, 2002
----------------------------------------------------------------------------------------
Guarantor Consolidated
Unaudited Condensed Consolidated Anteon Anteon
Balance Sheets International Non-Guarantor Elimination International
Corporation Subsidiaries Subsidiaries Entries Corporation
----------- ------------ ------------ ------- -----------
(in thousands)
Cash and cash equivalents $ 983 $ 4,192 $ 854 $ -- $ 6,029
Accounts receivable, net -- 194,658 431 -- 195,089
Other current assets 1,257 3,892 445 -- 5,594
Property and equipment, net 1,524 8,455 122 -- 10,101
Due from parent (21,906) 22,527 (621) -- --
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 66,564 1,333 197 (60,000) 8,094
----------- --------- --------- ----------- -------------
Total assets $ 167,266 $ 277,600 $ 1,428 $ (82,768) $ 363,526
============ ========= ========== ============ =============
Indebtedness $ 99,627 $ 80,562 $ -- $ (60,000) $ 120,189
Accounts payable 607 52,812 214 -- 53,633
Accrued expenses and other current
liabilities 4,380 48,603 297 -- 53,280
Deferred revenue -- 6,800 222 -- 7,022
Other long-term liabilities -- 9,854 70 -- 9,924
----------- --------- --------- ----------- -------------
Total liabilities 104,614 198,631 803 (60,000) 244,048
Minority interest in subsidiaries -- -- 141 -- 141
Total stockholders' equity (deficit) 62,652 78,969 484 (22,768) 119,337
----------- --------- --------- ----------- -------------
Total liabilities and stockholders'
equity (deficit) $ 167,266 $ 277,600 $ 1,428 $ (82,768) $ 363,526
========== ========= ========= =========== =============
For the nine months ended September 30, 2002
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
Consolidated
Unaudited Condensed Consolidated Anteon
Statements of Operations International Guarantor Non-Guarantor Elimination International
Corporation Subsidiaries Subsidiaries Entries Corporation
--------------- -------------- ----------------- ------------- --------------
(in thousands)
Revenues $ -- $ 610,905 $ 3,556 $ (5,581) $ 608,880
Costs of revenues 10 528,650 3,199 (5,581) 526,278
----------- ------------ -------------- ----------- -------------
Gross profit (loss) (10) 82,255 357 -- 82,602
----------- ------------ -------------- ----------- --------------
Total operating expenses 1,792 40,500 265 (7,042) 35,515
----------- ------------ -------------- ----------- -------------
Operating income (loss) (1,802) 41,755 92 7,042 47,087
Other income (loss) 4,609 2,850 -- (7,042) 417
Interest expense (income), net 8,250 5,836 (12) -- 14,074
Minority interest in earnings of
subsidiaries -- -- (3) -- (3)
----------- ------------ -------------- ----------- -------------
Income (loss) before provision for income
taxes and extraordinary loss (5,443) 38,769 101 -- 33,427
Provision for (benefit from) income taxes (2,542) 15,491 88 -- 13,037
----------- ------------ -------------- ----------- -------------
Income (loss) before extraordinary loss (2,901) 23,278 13 -- 20,390
Extraordinary loss, net of tax (2,581) -- -- -- (2,581)
----------- ------------ -------------- ----------- -------------
Net income (loss) $ (5,482) $ 23,278 $ 13 $ -- $ 17,809
=========== ============ ============== =========== =============
For the nine months ended September 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) $ (5,482) $ 23,278 $ 13 $ 17,809
Adjustments to reconcile net income (loss) to net
cash provided by (used for) operating activities:
Extraordinary item, before income taxes 4,232 -- -- 4,232
Interest rate swap termination (1,903) -- -- (1,903)
Depreciation and amortization of property and
equipment 502 2,832 48 3,382
Other intangibles amortization 1,266 164 -- 1,430
Amortization of deferred financing fees 892 -- -- 892
Loss on disposals of property and equipment -- 79 -- 79
Deferred income taxes 2,537 1,101 -- 3,638
Minority interest in earnings of subsidiaries -- -- 3 3
Changes in assets and liabilities (1,117) (41,129) 583 (41,663)
----------- ------------ ------------ ------------
NET CASH PROVIDED BY (USED FOR)
OPERATING ACTIVITIES 927 (13,675) 647 (12,101)
----------- ------------ ------------ ------------
INVESTING ACTIVITIES:
Purchases of property, equipment and other assets (198) (2,234) (44) (2,476)
Proceeds from the sale of building -- 1,802 -- 1,802
----------- ------------ ------------ -------------
NET CASH USED FOR INVESTING ACTIVITIES (198) (432) (44) (674)
----------- ------------ ------------ ------------
FINANCING ACTIVITIES:
Principal payments on notes payable -- (34) -- (34)
Payment of credit facility amendment fee (604) -- -- (604)
Principal payments on term loan (24,903) -- -- (24,903)
Proceeds from revolving facility -- 642,400 -- 642,400
Principal payments on revolving facility (18,700) (622,400) -- (641,100)
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 80,983 -- -- 80,983
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 (3,092) 19,966 -- 16,874
----------- ------------ ------------ ------------
CASH AND CASH EQUIVILANTS:
Net increase (decrease) in cash and cash equivalents (2,363) 5,859 603 4,099
Cash and cash equivalents, beginning of period 3,347 (1,668) 251 1,930
----------- ------------ ------------ ------------
Cash and cash equivalents, end of period $ 984 $ 4,191 $ 854 $ 6,029
=========== ============ ============ ============
For the nine months ended September 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 $ -- $ 532,123 $ 6,963 $ (4,246) $ 534,840
Costs of revenues -- 469,183 6,358 (4,246) 471,295
--------------- ------------- ------------- ----------- -------------
Gross profit -- 62,940 605 -- 63,545
Total operating expenses 2,210 38,085 337 -- 40,632
--------------- ------------- ------------- ----------- -------------
Operating income (loss) (2,210) 24,855 268 -- 22,913
Other income -- 3,907 -- 3,907
Interest expense (income), net 14,673 5,634 (8) -- 20,299
Minority interest in (earnings) losses of
subsidiaries (20) 32 (42) -- (30)
--------------- ------------- ------------- ----------- -------------
Income (loss) before provision for income (16,903) 23,160 234 -- 6,491
taxes and extraordinary item
Provision for (benefit from) income taxes (7,615) 11,372 86 -- 3,843
------------- ----------- ----------- --------- ----------
Income (loss) before extraordinary item (9,288) 11,788 148 -- 2,648
Extraordinary gain, net of tax 330 -- -- -- 330
------------- ----------- ----------- --------- ----------
Net income (loss) $ (8,958) $ 11,788 $ 148 $ -- $ 2,978
============= =========== =========== ========== ==========
For the nine months ended September 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 $ (8,958) $ 11,788 $ 148 $ 2,978
Adjustments to reconcile net income to net cash provided
by operating activities
Gain on sales of assets and closure of business -- (3,907) -- (3,907)
Extraordinary item, before income taxes (519) -- -- (519)
Depreciation and amortization of property and equipment 716 5,188 33 5,937
Amortization of noncompete agreements -- 349 -- 349
Goodwill amortization 3,219 1,027 -- 4,246
Other intangibles amortization 1,665 43 -- 1,708
Amortization of deferred financing fees 915 -- -- 915
Loss on disposals of property and equipment -- 23 -- 23
Deferred income taxes 2,405 359 -- 2,764
Minority interest in (earnings) losses of subsidiaries 20 (32) 42 30
Changes in assets and liabilities 15,343 (1,488) 197 14,052
----------- ------------ ------------- ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 14,806 13,350 420 28,576
----------- ------------ ------------- ------------
INVESTING ACTIVITIES:
Purchases of property equipment and other assets (217) (1,223) (87) (1,527)
Inter-company transfers (337) 120 217 --
Proceeds from sale of business -- 11,325 -- 11,325
Acquisitions, net of cash acquired (21) (10,994) -- (11,015)
----------- ------------ ------------- ------------
NET CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES (575) (772) 130 (1,217)
----------- ------------ ------------- ------------
FINANCING ACTIVITIES:
Principal payments on notes payable -- (173) -- (173)
Principal payments on term loan (8,014) -- -- (8,014)
Proceeds from revolving facility 552,800 -- -- 552,800
Principal payments on revolving facility (564,200) -- -- (564,200)
Proceeds from issuance of common stock, net of expenses -- -- -- 104 --
Payments on note payable to Ogden (3,212) -- -- (3,212)
Payments on completion bonus -- (20) -- (20)
Proceeds from minority interest, net 104 -- -- 104
----------- ------------ ------------- ------------
NET CASH USED FOR FINANCING ACTIVITIES (22,522) (193) -- (22,715)
----------- ------------ ------------- ------------
CASH AND CASH EQUIVALENTS
Net increase (decrease) in cash and cash equivalents (8,291) 12,385 550 4,644
Cash and cash equivalents, beginning of period 844 491 99 1,434
----------- ------------ ------------- ------------
----------- ------------ ------------- ------------
Cash and cash equivalents, at end of period $ (7,447) $ 12,876 $ 649 $ 6,078
=========== ============ ============= ============
(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 Nine Months Ended September 30, 2001
(amounts in thousands)
Government
Contracting Interactive Media Eliminations Consolidated
----------------- ----------------- ---------------- ----------------
Total assets $ 312,581 $ 5,680 $ -- $ 318,261
============= ============== =========== =============
Sales to unaffiliated customers 514,428 20,412 -- 534,840
Intersegment sales 49 15 (64) --
------------- - -------------- - ----------- - -------------
Total revenues $ 514,477 $ 20,427 $ (64) $ 534,840
Operating income 21,944 969 -- 22,913
Other Income 3,907
Interest expense, net 20,299
Minority interest in earnings of subsidiaries (30)
-------------
Income before provision for income taxes
and extraordinary item 6,491
Provision for income taxes 3,843
-------------
Income before extraordinary item 2,648
Extraordinary gain, net of tax 330
-------------
Net income $ 2,978
=============
As of and for the Three Months Ended September 30, 2001
(amounts in thousands)
Government
Contracting Interactive Media Eliminations Consolidated
---------------- ------------------- -------------- ---------------
Total assets $ 312,581 $ 5,680 $ -- $ 318,261
============= ============== ========= =============
Sales to unaffiliated customers 179,676 4,011 -- 183,687
Intersegment sales 13 -- (13) --
------------- -------------- --------- -------------
Total revenues $ 179,689 $ 4,011 $ (13) $ 183,687
Operating income 9,668 210 -- 9,878
Other Income 3,320
Interest expense, net 6,351
Minority interest in earnings of subsidiaries (33)
-------------
Income before provision for income taxes
and extraordinary item 6,814
Provision for income taxes 3,429
-------------
Income before extraordinary item 3,385
Extraordinary gain net of tax --
-------------
Net Income $ 3,385
=============
For the three and nine months ended September 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 September
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
September 30, 2002.
(10) Interest Rate Swap Agreements and Amendment to Credit Facility
For the nine months ended September 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 nine months ended September 30, 2002 includes losses of $1.9
million associated with these cancellations.
Over the next twelve months, approximately $170,000 of losses related to
the interest rate swaps are expected to be reclassified into remaining interest
expense as a yield adjustment of the hedged debt obligation. As of September 30,
2002, the fair value of the Company's remaining interest rate swap agreements of
$14.2 million resulted in a net liability of $839,000 and has been included in
other current liabilities.
For the nine months ended September 30, 2002, the Company incurred
approximately $604,000 in expenses related to an amendment, dated February 1,
2002, 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.
(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 the Company 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 initial arbitration hearing
concluded on September 16, 2002. Post-hearing briefs were filed with the
arbitrator on October 21, 2002. A final decision is expected in December 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 occurring after June 30, 2001, for
which the provisions of SFAS No. 141 and SFAS No. 142 were 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 September 30, 2002, the Company has
approximately $8.5 million of intangible assets ($3.2 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 as soon as possible. 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 operations.
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 Nine months ended
September 30, 2001 September 30, 2001
------------------ ------------------
Income before extraordinary item $ 3,385 $ 2,648
Add back: Goodwill amortization 1,354 4,246
Add back: Workforce amortization 136 408
---------------------- ----------------------
Adjusted income before extraordinary item $ 4,679 $ 6,714
---------------------- ----------------------
Adjusted net income $ 4,679 $ 7,044
---------------------- ----------------------
Basic earnings per share:
Income before extraordinary item $ 0.14 $ 0.11
Goodwill amortization 0.06 0.18
Workforce amortization 0.01 0.02
---------------------- ----------------------
Adjusted income before extraordinary item $ 0.20 $ 0.28
---------------------- ----------------------
Adjusted net income $ 0.20 $ 0.29
---------------------- ----------------------
Diluted earnings per share:
Income before extraordinary item $ 0.13 $ 0.11
Goodwill amortization 0.05 0.17
Workforce amortization 0.01 0.02
---------------------- ----------------------
Adjusted income before extraordinary item $ 0.18 $ 0.26
---------------------- ----------------------
Adjusted net income $ 0.18 $ 0.28
---------------------- ----------------------
(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
consolidated financial statements.
In April 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 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.
In June 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 146 ("SFAS No. 146"), Accounting for Costs
Associated with Exit or Disposal Activities. SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EFIT) Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (Including Certain Costs Incurred in a Restructuring). Under the new
standard, a liability for a cost associated with an exit or disposal activity
must be recognized and measured at its fair value in the period in which the
liability is incurred. SFAS No. 146 is effective for exit or disposal activities
initiated after December 31, 2002. The Company plans to adopt SFAS No. 146 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 payable 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 redeemed. 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.
(15) Subsequent Event
On October 21, 2002, the Company entered into an amended and restated
credit agreement governing its credit facility. This amendment and restatement,
among other things, provides for the potential increase to the revolving loan
portion of the Company's credit facility to a maximum of $200 million, loosens
certain restrictions on its ability to incur indebtedness and make investments,
and makes appropriate revisions to the definition of change in control to
reflect the fact that the Company's IPO has occurred. The amended and restated
credit agreement also permits the Company to elect from time to time to (i)
repurchase certain amounts of its subordinated debt and outstanding common stock
from its share of excess cash flow (as defined in the credit agreement); and
(ii) repurchase certain amounts of its subordinated debt from its share of net
cash proceeds of issuances of equity securities.
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 nine months ended September 30, 2002,
we estimate that approximately 90% 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 five years or more. 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 5.6 % of revenues for the three and nine months ended September 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 nine months ended September 30, 2002, we estimate that
approximately 99% of our revenues were derived from services and approximately
1% from product sales. Services are performed under contracts that may be
categorized into three primary types: time and materials, cost-plus
reimbursement and firm fixed price. 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 substantially all fixed
price contracts based on the percentage-of-completion basis, using the
cost-to-cost method for all services provided. For non-service related fixed
price contracts, revenues are recognized using the units-of-delivery method.
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. From time to time the Company may proceed with work based on customer
direction pending finalization and signing of formal funding documents. The
Company has an internal process for approving any such work. Revenue recognized
prior to finalization of formal funding documents is recorded at the lesser of
net realizable value or actual cost incurred, and only when realization is
probable and can be reliably estimated.
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 nine months
ended September 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 (prior to the adoption
of SFAS No. 142 in January 2002) and intangibles from acquisitions, certain
general and administrative expenses and, prior to our initial public offering,
management fees paid to Caxton-Iseman Capital, Inc., an affiliate of our
principal stockholders. 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. 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. Suc 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 estimated 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. 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 notes payable 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 nine
months ended September 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 $617.5 million, from $3.5 billion as of
December 31, 2001, to $4.1 billion at September 30, 2002, of which $399.0
million was funded backlog as of September 30, 2002. Funded backlog increased
$89.5 million to $399.0 million at September 31, 2002 from $309.5 million as of
December 31, 2001. 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 September 30,
2002 2001
---------------------------- ------------------------------
($ in thousands)
Revenues $ 214,314 100.0% $ 183,687 100.0%
Costs of revenues 184,585 86.1 160,958 87.6
----------------- ----------- ---------------- ------------
Gross profit 29,729 13.9 22,729 12.4
----------------- ----------- ---------------- ------------
Operating expenses:
General and administrative expenses 12,704 5.9 10,895 5.9
Amortization 476 0.2 1,956 1.1
----------------- ----------- ---------------- ------------
Total operating expenses 13,180 6.1 12,851 7.0
----------------- ----------- ---------------- ------------
Operating income 16,549 7.8 9,878 5.4
Other income, net 57 -- 3,320 1.8
Interest expense, net 3,223 1.5 6,351 3.5
Minority interest in (earnings) losses of subsidiaries 5 - (33) --
----------------- ----------- ---------------- ------------
Income before income taxes and extraordinary item 13,388 6.3 6,814 3.7
Provision for income taxes 5,222 2.4 3,429 1.9
----------------- ----------- ---------------- ------------
Income before extraordinary item 8,166 3.9 3,385 1.8
Extraordinary gain (loss), net of tax -- -- -- --
----------------- ----------- ---------------- ------------
Net income $ 8,166 3.9% $ 3,385 1.8%
================= ============= ================ ==============
For the Nine Months Ended September 30,
2002 2001
---------------------------- -----------------------
($ in thousands)
Revenues $ 608,880 100.0% $ 534,840 100.0%
Costs of revenues 526,278 86.4 471,295 88.1
----------------- ----------- ---------------- ------------
Gross profit 82,602 13.6 63,545 11.9
----------------- ----------- ---------------- ------------
Operating expenses:
General and administrative expenses 34,085 5.6 34,329 6.4
Amortization 1,430 0.3 6,303 1.2
----------------- ----------- ---------------- ------------
Total operating expenses 35,515 5.9 40,632 7.6
----------------- ----------- ---------------- ------------
Operating income 47,087 7.7 22,913 4.3
Other income, net 417 0.1 3,907 0.7
Interest expense, net 14,074 2.3 20,299 3.8
Minority interest in earnings of subsidiaries (3) -- (30) --
----------------- ----------- ---------------- ------------
Income before income taxes and extraordinary item 33,427 5.5 6,491 1.2
Provision for income taxes 13,037 2.2 3,843 0.7
----------------- ----------- ---------------- ------------
Income before extraordinary item 20,390 3.3 2,648 0.5
Extraordinary gain (loss), net of tax (2,581) (0.4) 330 0.1
----------------- ----------- ---------------- ------------
Net income $ 17,809 2.9% $ 2,978 0.6%
================= ============= ================ ==============
REVENUES
For the quarter ended September 30, 2002, revenues increased to $214.3
million, or 16.7%, from $183.7 million for the quarter ended September 30, 2001.
For the nine months ended September 30, 2002, revenues increased to $608.9
million, or 13.8%, from $534.8 million for the nine months ended September 30,
2001. The increase in revenues was attributable to organic 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 $976,000 and $11.7 million during the three and nine month period
ended September 30, 2001, respectively. For the three and nine month periods
ended September 30, 2002, our internal growth was 17.7% or $32.2 million and
15.6% or $82.1 million, respectively, excluding the impact of the closed or sold
businesses. The increase in revenues resulted from growth in contracts for: the
development of IT and communications systems for the intelligence community;
training, modeling & simulation across our Defense department customer base; and
support for Air Force acquisition and operations, which exhibited particularly
strong growth. In addition, revenue for the three and nine months ended
September 30, 2002 included approximately $3.9 million of unplanned revenue from
direct materials supplied in support of military preparedness related to several
international theaters of conflict.
COSTS OF REVENUES
For the quarter ended September 30, 2002, costs of revenues increased by
$23.6 million, or 14.7%, to $184.6 million from $161.0 million, for the quarter
ended September 30, 2001. Costs of revenues as a percentage of revenues
decreased to 86.1% from 87.6% for the quarter ended September 30, 2002. For the
nine months ended September 30, 2002, costs of revenues increased by $55.0
million or 11.7% to $526.3 million from $471.3 million for the nine months ended
September 30, 2001. For the nine months ended September 30, 2002, costs of
revenues as a percentage of revenues decreased to 86.4% from 88.1% for the nine
months ended September 30, 2001. The costs of revenues increase was due
primarily to the corresponding growth in revenues resulting from organic growth
and the acquisition of SIGCOM. The majority of the increase in cost of revenues
for the three and nine month periods ended September 30, 2002 was due to a $9.3
million and $24.5 million increase in direct labor and fringe and a $16.2
million and $35.3 million increase in other direct contract costs, respectively.
The increases in direct labor and fringe and other direct contract costs were
offset in part by reductions in certain overhead expenses.
For the quarter ended September 30, 2002, gross profit increased $7.0
million, or 30.8 %, to $29.7 million from $22.7 million for the quarter ended
September 30, 2001. For the nine month period ended September 30, 2002, gross
profit increased $19.1 million, or 30.0%, to $82.6 million from $63.5 million
for the nine month period ended September 30, 2001. The increase in gross profit
for the quarter and nine month period ended September 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 September 30, 2002, general and administrative
expenses increased $1.8 million, or 16.6%, to $12.7 million from $10.9 million
for the quarter ended September 30, 2001. General and administrative expenses
for the quarter ended September 30, 2002, as a percentage of revenues, remained
constant at 5.9%. For the nine month period ended September 30, 2002, general
and administrative expenses decreased $244,000, or 0.7%, to $34.1 million from
$34.3 million for the nine months ended September 30, 2001. General and
administrative expenses for the nine months ended September 30, 2002, as a
percentage of revenues, decreased to 5.6% from 6.4%. Excluding certain items
from the three and nine month periods ended September 30, 2001 and the impact of
businesses sold or closed (described below), general and administrative expenses
as a percentage of revenue would have been 5.7% and 5.5% of our revenues for the
three and nine months ended September 30, 2001, respectively. Certain items
totaling $1.9 million that were incurred in the first nine months of 2001, but
not in 2002, included management fees of $750,000 paid to Caxton-Iseman Capital,
Inc. for the nine months ended September 30, 2001 ($250,000 paid in the third
quarter of 2001), a $600,000 settlement, and $497,000 in related 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
nine months ended September 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 September 30, 2002, amortization expenses decreased
$1.5 million, or 75.6%, to $476,000 from $2.0 million for the comparable period
in 2001. Amortization as a percentage of revenues for the quarter ended
September 30, 2002 decreased to 0.2% from 1.1%. For the nine months ended
September 30, 2002, amortization expenses decreased $4.9 million, or 77.3%, to
$1.4 million from $6.3 million for the comparable period in 2001. Amortization
as a percentage of revenues decreased to 0.3% from 1.2%. The decrease in
amortization expenses was primarily attributable to the adoption of SFAS No. 141
and SFAS No. 142 as of 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 September 30, 2002, operating income increased $6.7
million, or 67.5%, to $16.5 million from $9.9 million for the quarter ended
September 30, 2001. Operating income as a percentage of revenues increased to
7.8% for the quarter ended September 30, 2002 from 5.4% for the comparable
period in fiscal 2001. For the nine month period ended September 30, 2002,
operating income increased $24.2 million, or 105.5%, to $47.1 million from $22.9
million for the nine month period ended September 30, 2001. Operating income as
a percentage of revenues increased to 7.7% for the nine month period ended
September 30, 2002 from 4.3% for the same period in fiscal 2001. Excluding this
quarter's unplanned revenue from direct materials of $3.9 million, which bore no
profit, the operating margin would have been 7.9% and 7.8% for the three and
nine months ended September 30, 2002, respectively. Absent the $250,000 of
management fees paid to Caxton-Iseman Capital and $1.9 million of expenses for
the three and nine months ended September 30, 2001, respectively, 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 nine
months ended September 30, 2001, our operating income would have been $13.0
million and $36.3 million for the three and nine months ended September 30,
2001, and our operating margins would have been 7.1% and 6.9%, respectively.
OTHER INCOME
For the quarter ended September 30, 2002, other income decreased $3.3
million to $57,000 from $3.3 million for the quarter ended September 30, 2001.
For the nine months ended September 30, 2002 other income decreased $3.5
million, to $417,000, from $3.9 million for the nine months ended September 30,
2002. Other income for the nine months ended September 30, 2002 includes a gain
on the sale of Displaycheck assets, a previously discontinued business, and
receipt of insurance proceeds for misappropriated equipment previously recorded
as a loss. Other income for the three and nine month periods ended September 30,
2001 was comprised of gains on sales and closure of businesses of $3.3 million
and $3.9 million, respectively. Gains on sales and closure of businesses
consisted of a $100,000 gain on the sale of CITE's assets and $487,000
representing the remaining minority interest as of the date of closure of the
Venture. In addition, in the third quarter of 2001 the Company sold IMC as
discussed above, resulting in a gain of $3.3 million in the quarter.
INTEREST EXPENSE, NET
For the quarter ended September 30, 2002, interest expense, net of interest
income, decreased $3.1 million, or 49.3%, to $3.2 million from $6.3 million for
the quarter ended September 30, 2001. For the nine months ended September 30,
2002, interest expense, net of interest income, decreased $6.2 million, or
30.7%, to $14.1 million from $20.3 million for the nine months ended September
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 the recognition of previously unrecognized losses 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 nine months ended September 30,
2002 was 39.0% compared with 50.3% and 59.2% for the three and nine months ended
September 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 Nine Months Ended September 30, 2002
We used $12.1 million in cash from operations for the nine months ended
September 30, 2002. By comparison, we generated $28.6 million in cash from
operations for the nine months ended September 30, 2001. The use of cash from
operations for the nine months ended September 30, 2002 was primarily the result
of an increase in contract receivables created by an upgrade of software systems
and procedures in preparation for electronic billing by two government paying
offices that process a substantial percentage of our invoices, which caused
delays in payment of contract receivables. The government systems upgrades are
still in progress, however we expect collection of contract receivables from
these two paying offices to improve over the next two quarters. Contract
receivables increased $63.7 million for the nine months ended September 30,
2002. Principally as a result of the above, total days sales outstanding
increased from 66 days in September 2001 to 82 days as of September 30, 2002.
Accounts receivable totaled $195.1 million at September 30, 2002 and represented
53.6% of total assets at that date. Additionally, increases in accounts payable
and accrued expenses generated $18.8 million of cash from operations, a 5.9%
decrease from 2001. For the nine months ended September 30, 2002, net cash used
for investing activities was $674,000, which was attributable to purchases of
property, plant and equipment, offset in part by $1.8 million in proceeds
received from the sale of our facility in Butler, Pennsylvania. Cash provided by
financing activities was $16.9 million for the nine months ended September 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 $75.2 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 $3.3 million. We used
the net proceeds from the IPO to: repay $11.4 million of our debt outstanding
under the term loan portion of our credit facility; temporarily pay down $39.5
million on the revolving loan portion of our credit facility on March 15, 2002
(the revolving loan was subsequently increased on April 15, 2002 to redeem $25.0
million principal amount of our 12% notes); redeem $25.0 million principal
amount of our 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 we used such funds to temporarily reduce the
revolving portion of our credit facility); to repay in full 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 to repay $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.
The remainder of the net proceeds to us from the IPO, approximately $12.5
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 used $2.5 million of the IPO
proceeds, temporarily to repay debt under the revolving portion of our credit
facility with the intention of repaying in full, on or before October 20, 2002,
a $2.5 million principal amount promissory note held by former stockholders of
Sherikon, Inc. On October 18, 2002, we asserted an indemnification claim against
the former shareholders of Sherikon, Inc. in an aggregate amount exceeding the
$2.5 million promissory note. We are treating this indemnification claim as a
set off against the $2.5 million promissory note obligation.
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 allowing for aggregate borrowings 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
September 30, 2002, we complied with all the financial covenants. At September
30, 2002, total debt outstanding under our credit facility was approximately
$42.2 million, consisting of $22.2 million of term loan, and $20.0 million
outstanding under our revolving credit facility. The total funds available to us
under the revolving loan portion of our credit facility as of September 30, 2002
were $93.0 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, borrowings 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 September 30, 2002, we did not have any
capital commitments greater than $1.0 million.
On October 21, 2002, we entered into an amended and restated credit
agreement governing our credit facility. This amendment and restatement, among
other things, provides for the potential increase to the revolving loan portion
of our credit facility to a maximum of $200 million, loosens certain
restrictions on our ability to incur indebtedness and make investments, and made
appropriate revisions to the definition of change in control to reflect the fact
that our IPO has occurred. The amended and restated credit agreement also
permits the Company to elect from time to time to (i) repurchase certain amounts
of its subordinated debt and outstanding common stock from its share of excess
cash flow (as defined in the credit agreement); and (ii) repurchase certain
amounts of its subordinated debt from its share of net cash proceeds of
issuances of equity securities.
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 and payment. 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 $2.5 million and $1.5 million for the nine months ended
September 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 September 30, 2002, we had
equipment with a book value of approximately $14.3 million on lease.
In the past we have engaged in acquisition activity, and we intend to do so
in the future. Historically, we have financed our acquisitions through a
combination of bank debt, subordinated debt, subordinated public and private
debt and equity investments. We expect to be able to finance any future
acquisitions either with cash provided from operations, borrowings under our
credit facility, bank loans, equity offerings, or some combination of the
foregoing.
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 September 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, we cancelled approximately $30 million of interest
swap agreements and recognized previously unrecognized losses of $1.9 million in
interest expense for the quarter ended March 31, 2002. As of September 30, 2002,
the fair value of our remaining interest rate swap agreements of $14.2 million
resulted in a net liability of $839,000 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 $182,000 and $180,000 for the
nine months ended September 30, 2002 and 2001, respectively.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Our Chief Executive
Officer and Chief Financial Officer (our principal executive officer and
principal financial officer, respectively) have concluded, based on their
evaluation as of a date within 90 days prior to the date of filing of this
quarterly report, that our disclosure controls and procedures are effective to
ensure that material information required to be disclosed by us in reports filed
or submitted by us under the Securities Exchange Act of 1934, as amended, is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms, and includes controls and procedures designed to
ensure that material information required to be disclosed by us in such reports
is accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate to allow timely decisions
regarding required disclosure.
(b) Changes in internal controls.
Not applicable.
PART II. OTHER INFORMATION REQUIRED IN REPORT
ITEM 1. LEGAL PROCEEDINGS
We are involved in various legal proceedings in the ordinary course of
business. On March 8, 2002, we received a letter from one of our principal
competitors, which is the parent company of one of our subcontractors, claiming
that we had repudiated its obligation under a subcontract with the
subcontractor. The letter also alleged that we were soliciting employees of the
subcontractor in violation of the subcontract and stated that the subcontractor
would seek arbitration, injunctive relief and other available remedies. We
notified the parent company of the subcontractor that we believed that we had
completely abided by our agreement with the subcontractor and advised that we
intended to defend ourselves vigorously against any claims asserted in the
letter. The subcontractor has filed a demand for arbitration to which we have
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 initial arbitration hearing
concluded on September 16, 2002. Post-hearing briefs were filed with the
arbitrator on October 21, 2002. A final decision is expected in December 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
99.2 Certification of Carlton B. Crenshaw
B. REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the quarter ended
September 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: November 6 2002 By: /s/ Joseph Kampf
------------------- -------------------------------------
Joseph Kampf - President and
Chief Executive Officer
Date: November 6 2002 By: /s/ Carlton B. Crenshaw
------------------- -------------------------------------
Carlton B. Crenshaw-Executive Vice
President and Chief Financial Officer
Certifications
I, Joseph M. Kampf, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Anteon International
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 6, 2002 By: /s/ Joseph M. Kampf
--------------------- --------------------------------
Joseph M. Kampf
President and Chief Executive Officer
Certifications
I, Carlton B. Crenshaw, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Anteon International
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 6, 2002 By: /s/ Carlton B. Crenshaw
--------------------- --------------------------------
Carlton B. Crenshaw
Executive Vice President and
Chief Financial Officer