SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
Commission File Number: 001-31258
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ANTEON INTERNATIONAL CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Delaware 13-3880755
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3211 Jermantown Road
Fairfax, VA 22030-2801
(Address of Principal Executive Offices)
(703) 246-0200
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.01 par value per share
Name of each exchange on which registered: New York Stock Exchange (NYSE)
Securities registered pursuant to Section 12(g) of the Act:
None
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Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant (1) is an accelerated
filer (as defined in Rule 12b-2 of the Act). Yes |_| No |X|
The aggregate market value of the voting stock held by non-affiliates
of the registrant as of June 30, 2002 was $491,132,028 (based on the closing
price of $25.28 per share on June 28, 2002, as reported by the New York
Stock Exchange- Corporate Transactions). For this computation, the
registrant excluded the market value of all shares of its common stock
reported as beneficially owned by named executive officers and directors of
the registrant; such exclusion shall not be deemed to constitute an
admission that any such person is an "affiliate" of the registrant.
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K.
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There were 34,452,928 shares of common stock outstanding as of February 25,
2003.
FORWARD-LOOKING STATEMENTS
This Form 10-K includes and incorporates by reference forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. These statements relate to analyses and other information which are based
on forecasts of future results and estimates of amounts not yet determinable.
These statements also relate to our future projects, developments and business
strategies.
These forward-looking statements are identified by their use of terms
and phrases such as "anticipate," "believe," "could," "estimate," "expect,"
"intend," "may," "plan," "predict," "project," "will" and similar terms and
phrases, and may also include references to assumptions. These statements are
contained in the sections entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business" and other sections of
this Form 10-K.
Such forward-looking statements include, but are not limited to:
o funded backlog;
o estimated contract value;
o our expectations regarding the Federal government's procurement
budgets and reliance on outsourcing of services; and
o our financial condition and liquidity, as well as future cash flows
and earnings.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of these statements.
These statements are only predictions. Actual events or results may differ
materially. In evaluating these statements, you should specifically consider
various factors, including the following:
o changes in general economic and business conditions;
o changes in federal government procurement laws, regulations, policies
and budgets;
o the number and type of contracts and task orders awarded to us;
o technological changes;
o the integration of acquisitions without disruption to our other
business activities;
o the ability to attract and retain qualified personnel;
o competition;
o our ability to retain our contracts during any rebidding process; and
o the other factors outlined under "Risk Factors."
If one or more of these risks or uncertainties materialize, or if
underlying assumptions prove incorrect, actual results may vary materially from
those expected, estimated or projected. We do not undertake to update our
forward-looking statements or risk factors to reflect future events or
circumstances.
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RISK FACTORS
Risks related to our business
Federal Government Contracting Risks--Our business could be adversely
affected by significant changes in the contracting or fiscal policies of the
U.S. federal government.
We derive substantially all of our revenues from contracts with the U.S.
federal government or subcontracts under federal government prime contracts, and
we believe that the success and development of our business will continue to
depend on our successful participation in federal government contract programs.
Accordingly, changes in federal government contracting policies could directly
affect our financial performance. Among the factors that could materially
adversely affect our federal government contracting business are:
o budgetary constraints affecting federal government spending generally,
or specific departments or agencies in particular, and changes in
fiscal policies or available funding;
o changes in federal government programs or requirements;
o curtailment of the federal government's use of technology services
firms;
o the adoption of new laws or regulations;
o technological developments;
o federal governmental shutdowns and other potential delays in the
government appropriations process;
o delays in the payment of our invoices by government payment offices
due to problems with, or upgrades to, government information systems,
or for other reasons;
o competition and consolidation in the information technology industry;
and
o general economic conditions.
These or other factors could cause federal governmental agencies, or prime
contractors where we are acting as a subcontractor, to reduce their purchases
under contracts, to exercise their right to terminate contracts or not to
exercise options to renew contracts, any of which could have a material adverse
effect on our financial condition and operating results. Many of our federal
government customers are subject to stringent budgetary constraints. We have
substantial contracts in place with many federal departments and agencies, and
our continued performance under these contracts, or award of additional
contracts from these agencies, could be materially adversely affected by
spending reductions or budget cutbacks at these agencies.
EarlyTermination of Contracts-- Our federal government contracts may be
terminated by the government at any time prior to their completion, and if we do
not replace them, our operating results may be harmed.
We derive substantially all of our revenues from U.S. federal government
contracts and subcontracts under federal government prime contracts that
typically are awarded through competitive processes and span one or more base
years and one or more option years. The option periods typically cover more than
half of the contract's potential duration. Federal government agencies generally
have the right not to exercise these option periods. In addition, our contracts
typically also contain provisions permitting a government client to terminate
the contract on short notice, with or without cause. A decision not to exercise
option periods or to terminate contracts would reduce the profitability of these
contracts to us. Our contractual costs and revenues are subject to adjustment as
a result of federal government audits. See "Contracts Subject to Audit."
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Upon contract expiration, if the customer requires further services of the
type provided by the contract, there is frequently a competitive rebidding
process and there can be no assurance that we will win any particular bid, or
that we will be able to replace business lost upon expiration or completion of a
contract. The unexpected termination of one or more of our significant contracts
could result in significant revenue shortfalls. The termination or nonrenewal of
any of our significant contracts, short-term revenue shortfalls, the imposition
of fines or damages or our suspension or debarment from bidding on additional
contracts could harm operating results for those periods.
Most federal government contract awards are subject to protest by
competitors. If specified legal requirements are satisfied, these protests
require the federal agency to suspend the contractor's performance of the newly
awarded contract pending the outcome of the protest. These protests could also
result in a requirement to resubmit bids for the contract or in the termination,
reduction or modification of the awarded contract.
Contracts Subject to Audit--Our business could be adversely affected by a
negative audit by the Defense Contract Audit Agency. We could be required to
reimburse the U.S. federal government for costs that we have expended on our
contracts and our ability to compete successfully for future contracts could be
materially impaired.
The Defense Contract Audit Agency, or the "DCAA," and other government
agencies routinely audit and investigate government contracts. These agencies
review a contractor's performance on its contract, cost structure and compliance
with applicable laws, regulations and standards. The DCAA also reviews the
adequacy of, and a contractor's compliance with, its internal control systems
and policies, including the contractor's purchasing, property, estimating,
compensation and management information systems. Any costs found to be
improperly allocated to a specific contract will not be reimbursed, while such
costs already reimbursed must be refunded. Therefore, a DCAA audit could
materially affect our competitive position and result in a substantial
adjustment to our revenues. If a government audit uncovers improper or illegal
activities, we may be subject to civil and criminal penalties and administrative
sanctions, including termination of contracts, forfeitures of profits,
suspension of payments, fines and suspension or debarment from doing business
with the federal government. In addition, we could suffer serious reputational
harm if allegations of impropriety were made against us. If we were suspended or
debarred from contracting with the federal government generally, or any
significant agency in the intelligence community or Department of Defense, if
our reputation or relationship with government agencies were impaired, or if the
government otherwise ceased doing business with us or significantly decreased
the amount of business it does with us, our operating results would be
materially harmed.
Contract Types and Risks--Our estimates of the time, resources and expenses
required to complete our contractual commitments may not be accurate.
We enter into three principal types of contracts with the federal
government: cost-plus, time and materials and fixed price. For the twelve months
ended December 31, 2002, approximately 35% of our federal contracts were
cost-plus, 37% were time and materials and 28% were fixed price (a substantial
majority of which were fixed price level of effort). Under cost-plus type
contracts, which are subject to a contract ceiling amount, we are reimbursed for
allowable costs and paid a fee, which may be fixed or performance based.
However, if our costs exceed the contract ceiling, funding has not been received
or costs are not allowable under the provisions of the contract or applicable
regulations, we may not be able to obtain reimbursement for all such costs.
Under time and materials contracts, we are paid for labor at negotiated hourly
billing rates and for certain expenses. There is financial risk to us should our
costs to perform time and materials contracts exceed the negotiated hourly
billing rates. Under fixed price contracts, we are required to perform the
contract tasks at a fixed price irrespective of the actual costs we incur, and
consequently, any costs in excess of the fixed price are absorbed by us. Fixed
price contracts, in comparison to cost-plus contracts, typically offer higher
profit opportunities because we bear the risk of cost-overruns and receive the
benefit of cost savings. For all contract types, there is risk associated with
the assumptions we use to formulate our pricing of the proposed work. In
addition, when we serve as a subcontractor under our contracts, we are exposed
to the risks of delays in payment from the prime contractor for the services we
provide.
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Risks Under Indefinite Delivery/Indefinite Quantity Contracts, GSA Schedule
contracts and GWACs--Many of our U.S. federal government customers spend their
procurement budgets through Indefinite Delivery/Indefinite Quantity Contracts,
GSA Schedule contracts and GWACs under which we are required to compete for
post-award orders.
Budgetary pressures and reforms in the procurement process have caused many
U.S. federal government customers to increasingly purchase goods and services
through Indefinite Delivery/Indefinite Quantity, or "ID/IQ," contracts, General
Services Administration, or "GSA," Schedule contracts and other multiple award
and/or Government Wide Acquisition Contracts, or "GWAC," vehicles. These
contract vehicles have resulted in increased competition and pricing pressure
requiring that we make sustained post-award efforts to realize revenues under
the relevant contract. There can be no assurance that we will continue to
increase revenues or otherwise sell successfully under these contract vehicles.
Our failure to compete effectively in this procurement environment could harm
our operating results.
Government Regulations--We may be liable for penalties under various
procurement rules and regulations. Changes in government regulations could harm
our operating results.
Our defense and federal civil agency businesses must comply with and are
affected by various government regulations. Among the most significant
regulations are:
o the Federal Acquisition Regulations, and agency regulations
supplemental to the Federal Acquisition Regulations, which
comprehensively regulate the formation, administration and
performance of government contracts;
o the Truth in Negotiations Act, which requires certification and
disclosure of all cost and pricing data in connection with
contract negotiations;
o the Cost Accounting Standards, which impose accounting
requirements that govern our right to reimbursement under certain
cost-based government contracts; and
o laws, regulations and executive orders restricting the use and
dissemination of information classified for national security
purposes and the exportation of certain products and technical
data.
These regulations affect how our customers and we can do business and, in
some instances, impose added costs on our businesses. In addition, we are
subject to industrial security regulations of the Department of Defense and
other federal agencies that are designed to safeguard against foreigners' access
to classified information. If we were to come under foreign ownership, control
or influence, our federal government customers could terminate or decide not to
renew our contracts, and it could impair our ability to obtain new contracts.
Any changes in applicable laws and regulations could also harm our operating
results. Any failure to comply with applicable laws and regulations could result
in contract termination, price or fee reductions or suspension or debarment from
contracting with the federal government.
Risks Relating to Reductions or Changes in Military Expenditures--A decline
in the U.S. defense budget may adversely affect our operations.
Sales under contracts with the U.S. Department of Defense, including under
subcontracts having the Department of Defense as the ultimate purchaser,
represented approximately 78% and 69% of our sales for the twelve months ended
December 31, 2002 and for the twelve months ended December 31, 2001,
respectively. The U.S. defense budget declined from time to time in the late
1980s and the early 1990s, resulting in a slowing of new program starts, program
delays and program cancellations. These reductions caused most defense-related
government contractors to experience declining revenues, increased pressure on
operating margins and, in some cases, net losses. While spending authorizations
for defense-related programs by the government have increased in recent years,
and in particular after the September 11, 2001 terrorist attacks, these spending
levels may not be sustainable, and future levels of expenditures and
authorizations for those programs may decrease, remain constant or shift to
programs in areas where we do not currently provide services. A general
significant decline in military expenditures could harm our operating results.
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We are not able to guarantee that contract orders included in our estimated
contract value will result in actual revenues in any particular fiscal period or
that the actual revenues from such contracts will equal our estimated contract
value.
There can be no assurance that any contracts included in our estimated
contract value presented in this filing will result in actual revenues in any
particular period or that the actual revenues from such contracts will equal our
estimated contract value. Further, there can be no assurance that any contract
included in our estimated contract value that generates revenue will be
profitable. Our estimated contract value consists of funded backlog, which is
based upon amounts actually appropriated by a customer for payment of goods and
services, and unfunded contract value, which is based upon management's estimate
of the future potential of our existing contracts (including contract options)
to generate revenues. These estimates are based on our experience under such
contracts and similar contracts, and we believe such estimates to be reasonable.
However, there can be no assurances that all of such estimated contract value
will be recognized as revenue.
In addition, the federal government's ability to select multiple winners
under ID/IQ contracts and GWACs, as well as its right to compete subsequent task
orders among such multiple winners, means that there is no assurance that
certain of our existing contracts will result in actual orders. Further, the
federal government enjoys broad rights to unilaterally modify or terminate such
contracts and task orders, including the right not to exercise options to extend
multi-year contracts through the end of their potential terms. Accordingly, most
of our existing contracts and task orders are subject to modification and
termination at the federal government's discretion. In addition, funding for
orders from the federal government is subject to approval on an annual basis by
Congress pursuant to the appropriations process.
Government Intent to Replace Legacy Systems--Our business will be harmed if
government agencies are unwilling to replace or supplement expensive legacy
systems.
Government agencies have spent substantial resources over an extended
period of time to develop computer systems and to train their personnel to use
them. These agencies may be reluctant to abandon or supplement these legacy
systems with Internet and other advanced technology systems because of the cost
of developing them or the additional cost of re-training their personnel. Such
reluctance would make it more difficult to acquire new contracts, which would
harm our business prospects.
Reliance on Subcontractors--We regularly employ subcontractors to assist us
in satisfying our contractual obligations. If these subcontractors fail to
adequately perform their contractual obligations, our prime contract performance
and our ability to obtain future business could be materially and adversely
impacted.
Our performance of government contracts may involve the issuance of
subcontracts to other companies upon which we rely to perform all or a portion
of the work we are obligated to deliver to our customers. There is a risk that
we may have disputes with subcontractors concerning a number of issues including
the quality and timeliness of work performed by the subcontractor, customer
concerns about the subcontractor, our decision not to extend existing task
orders or issue new task orders under a subcontract, or our hiring of former
personnel of a subcontractor. A failure by one or more of our subcontractors to
satisfactorily deliver on a timely basis the agreed-upon supplies and/or perform
the agreed-upon services may materially and adversely impact our ability to
perform our obligations as a prime contractor. In extreme cases, such
subcontractor performance deficiencies could result in the government
terminating our contract for default. A default termination could expose us to
liability for excess costs of reprocurement by the government and have a
material adverse effect on our ability to compete for future contracts and task
orders.
5
Dependence on Key Personnel --If we lose our technical personnel or members
of senior management, our business may be adversely affected.
Our continued success depends in large part on our ability to recruit and
retain the technical personnel necessary to serve our clients effectively.
Competition for skilled personnel in the information technology and systems
engineering services industry is intense and technology service companies often
experience high attrition among their skilled employees. Excessive attrition
among our technical personnel could increase our costs of performing our
contractual obligations, reduce our ability to efficiently satisfy our clients'
needs and constrain our future growth. In addition, we must often comply with
provisions in federal government contracts that require employment of persons
with specified levels of education, work experience and security clearances. The
loss of any significant number of our existing key technical personnel or the
inability to attract and retain key technical employees in the future could have
a material adverse effect on our ability to win new business and could harm our
operating results. There is also a risk that our efforts to hire personnel of
our competitors or subcontractors or other persons could lead to claims being
asserted against us that our recruitment efforts violate contractual
arrangements or are otherwise wrongful.
In addition, we believe that the success of our business strategy and our
ability to operate profitably depends on the continued employment of our senior
management team, led by Joseph M. Kampf. None of our senior management team has
an employment contract with us. If Mr. Kampf or other members of our senior
management team become unable or unwilling to continue in their present
positions, our business and financial results could be materially adversely
affected.
Security Clearance--If we cannot obtain the necessary security clearances,
we may not be able to perform classified work for the government and our
revenues may suffer.
Certain government contracts require our facilities and some of our
employees, to maintain security clearances. If we lose or are unable to obtain
required security clearances, the client can terminate the contract or decide
not to renew it upon its expiration. As a result, to the extent we cannot obtain
the required security clearances for our employees working on a particular
contract, we may not derive the revenue anticipated from the contract, which, if
not replaced with revenue from other contracts, could seriously harm our
operating results.
Security Issues--Security breaches in sensitive government systems could
result in the loss of clients and negative publicity.
Many of the systems we develop involve managing and protecting information
involved in national security and other sensitive government functions. A
security breach in one of these systems could cause serious harm to our
business, could result in negative publicity and could prevent us from having
further access to such critically sensitive systems or other similarly sensitive
areas for other governmental clients.
Client Expectations--We could lose revenues and clients and expose our
company to liability if we fail to meet client expectations.
We create, implement and maintain technology solutions that are often
critical to our clients' operations. If our technology solutions or other
applications have significant defects or errors or fail to meet our clients'
expectations, we may:
o lose future contract opportunities due to receipt of poor past
performance evaluations from our customers;
o have contracts terminated for default and be liable to our
customers for reprocurement costs and other damages;
o receive negative publicity, which could damage our reputation and
adversely affect our ability to attract or retain clients; and
6
o suffer claims for substantial damages against us, regardless of
our responsibility for the failure.
While many of our contracts limit our liability for damages that may arise
from negligent acts, errors, mistakes or omissions in rendering services to our
clients, we cannot be sure that these contractual provisions will protect us
from liability for damages if we are sued. Furthermore, our general liability
insurance coverage may not continue to be available on reasonable terms or in
sufficient amounts to cover one or more large claims, or the insurer may
disclaim coverage as to any future claim. The successful assertion of any large
claim against us could seriously harm our business. Even if not successful, such
claims could result in significant legal and other costs and may be a
distraction to management.
Acquisition Strategy--We intend to pursue future acquisitions which may
adversely affect our business if we cannot effectively integrate these new
operations.
We have completed and substantially integrated five strategic acquisitions
since 1997. The federal government information technology solutions and systems
engineering services industry remains fragmented, and we believe that
acquisition and consolidation opportunities will continue to present themselves
periodically. We intend to continue to selectively review acquisition candidates
with a focus on companies with complementary skills or market focus. Our
continued success may depend upon our ability to integrate any businesses we may
acquire in the future. The integration of such businesses into our operations
may result in unforeseen operating difficulties, may absorb significant
management attention and may require significant financial resources that would
otherwise be available for the ongoing development or expansion of our business.
Such difficulties of integration may involve the necessity of coordinating
geographically dispersed organizations, integrating personnel with disparate
business backgrounds and reconciling different corporate cultures. In addition,
in certain acquisitions, federal acquisition regulations may require us to enter
into contract novation agreements with the government, a routinely
time-consuming process. Government agencies may delay in recognizing us as the
successor contractor in these situations, thereby possibly preventing our
realization of some of the anticipated benefits of such acquisitions. There can
be no assurance that acquired entities will operate profitably, that we will
realize anticipated synergies or that these acquisitions will cause our
operating performance to improve.
Although management regularly engages in discussions with and submits
acquisition proposals to acquisition targets, there can be no assurance that
suitable acquisition targets will be available in the future on reasonable
terms. In addition, to the extent that we complete any additional acquisitions,
no assurance can be given that acquisition financing will be available on
reasonable terms or at all, that any new businesses will generate revenues or
net income comparable to our existing businesses or that such businesses will be
integrated successfully or operated profitably.
Potential Undisclosed Liabilities Associated with Acquisitions--We may be
subject to certain liabilities assumed in connection with our acquisitions that
could harm our operating results.
We conduct due diligence in connection with each of our acquisitions. In
connection with any acquisition made by us, there may be liabilities that we
fail to discover or that we inadequately assess in our due diligence efforts. In
particular, to the extent that prior owners of any acquired businesses or
properties failed to comply with or otherwise violated applicable laws or
regulations, or failed to fulfill their contractual obligations to the federal
government or other customers, we, as the successor owner, may be financially
responsible for these violations and failures and may suffer reputational harm
or otherwise be adversely affected. The discovery of any material liabilities
associated with our acquisitions could harm our operating results.
Our Employees may Engage in Improper Activities with Adverse Consequences
to our Business.
As with other government contractors, we are faced with the possibility
that our employees may engage in misconduct, fraud or other improper activities
that may have adverse consequences to our prospects and results of operations.
Misconduct by employees could include failures to comply with federal government
procurement regulations, violation of federal requirements concerning the
protection of classified information, improper labor and cost charging to
contracts and misappropriation of government or third party property and
information. The occurrence of any such employee activities could result in our
suspension or debarment from contracting with the federal government, as well as
the imposition of fines and penalties, which would cause material harm to our
business.
7
Risks Associated with International Operations--Our international business
exposes us to additional risks including exchange rate fluctuations, foreign tax
and legal regulations and political or economic instability that could harm our
operating results.
In connection with our international operations, (including international
operations under U.S. government contracts), we are subject to risks associated
with operating in and selling to foreign countries, including:
o devaluations and fluctuations in currency exchange rates;
o changes in or interpretations of foreign regulations that may
adversely affect our ability to sell all of our products or
repatriate profits to the United States;
o imposition of limitations on conversions of foreign currencies
into dollars;
o imposition of limitations on or increase of withholding and other
taxes on remittances and other payments by foreign subsidiaries
or joint ventures;
o compliance with the local labor laws of the countries in which we
operate;
o hyperinflation or political instability in foreign countries;
o potential personal injury to our personnel who may be exposed to
military conflict situations in foreign countries;
o imposition or increase of investment and other restrictions or
requirements by foreign governments; and
o U.S. arms export control regulations and policies, which govern
our ability to supply foreign affiliates and customers.
Although our international operations are not currently substantial, to the
extent we expand our international operations, these and other risks associated
with international operations are likely to increase. Although such risks have
not harmed our operating results in the past, no assurance can be given that
such risks will not harm our operating results in the future.
Risks related to our capital structure
Leverage--Our debt could adversely affect our financial health.
As of December 31, 2002, our debt was $105.7 million. You should be aware
that this level of debt could have important consequences. Below we have
identified some of the material potential consequences resulting from this
amount of debt.
o We may be unable to obtain additional financing for working
capital, capital expenditures, acquisitions and general corporate
purposes.
o A significant portion of our cash flow from operations must be
dedicated to the repayment of indebtedness, thereby reducing the
amount of cash we have available for other purposes.
o Our ability to adjust to changing market conditions may be
hampered. We may be more vulnerable in a volatile market.
8
Additional Borrowings Available--Despite current debt levels, we and our
subsidiaries may still be able to incur substantially more debt. This could
further increase the risks described above.
We and our subsidiaries may be able to incur additional indebtedness in the
future. The terms of the indenture governing our 12% senior subordinated notes
due 2009, or the "12% Notes," and of our Amended and Restated Credit Agreement,
or "Credit Facility," limit but do not prohibit us or our subsidiaries from
doing so. As of December 31, 2002, our Credit Facility would have permitted
additional borrowings of up to $108.3 million. If new debt is added by us or our
subsidiaries, the related risks that we and they now face could intensify.
Ability to Service Debt--To service our debt, we will require a significant
amount of cash. Our ability to generate cash depends on many factors beyond our
control.
You should be aware that our ability to repay or refinance our debt depends
on our successful financial and operating performance. We cannot assure you that
our business strategy will succeed or that we will achieve our anticipated
financial results. Our financial and operational performance depends upon a
number of factors, many of which are beyond our control. These factors include:
o the current economic and competitive conditions in the
information technology industry;
o budgetary constraints affecting federal government spending, and
changes in fiscal policies or available funding;
o federal government shutdowns and other potential delays in the
government appropriations process;
o delays in the payment of our invoices by government payment
offices due to problems with, or upgrades to, government
information systems, or for other reasons;
o any operating difficulties, operating costs or pricing pressures
we may experience;
o the passage of legislation or other regulatory developments that
affect us adversely; and
o any delays in implementing any strategic projects we may have.
If our financial performance declines and we are unable to pay our debts,
we will be required to pursue one or more alternative strategies, such as
selling assets, refinancing or restructuring our indebtedness or selling
additional equity capital. Also, certain alternative strategies would require
the consent of our senior secured lenders before we engage in any such strategy.
Restrictive Debt Covenants--The terms of our Credit Facility and the
indenture governing our 12% Notes impose significant restrictions on our ability
and that of our subsidiaries to take certain actions which may have an impact on
our business, operating results and financial condition.
The indenture and our Credit Facility impose significant operating and
financial restrictions on us and our subsidiaries and require us to meet certain
financial tests. These restrictions may significantly limit or prohibit us from
engaging in certain transactions, including the following:
o incurring or guaranteeing additional debt;
o paying dividends or other distributions to our stockholders or
redeeming, repurchasing or retiring our capital stock or
subordinated obligations;
o making investments;
o creating liens on our assets;
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o issuing or selling capital stock of our subsidiaries;
o transforming or selling assets currently held by us;
o engaging in transactions with affiliates; and
o engaging in mergers or consolidations.
The failure to comply with any of these covenants would cause a default
under the indenture and our Credit Facility. A default, if not waived, could
result in acceleration of our debt, in which case the debt would become
immediately due and payable. If this occurs, we may not be able to repay our
debt or borrow sufficient funds to refinance it. Even if new financing is
available, it may not be on terms that are acceptable to us.
Item 1. BUSINESS
General
We are a leading provider of information technology solutions and systems
engineering and integration services to government clients as measured by
revenue. We design, integrate, maintain and upgrade state-of-the-art information
systems for national defense, intelligence, emergency response and other high
priority government missions. We also provide many of our government clients
with the systems analysis, integration and program management skills necessary
to manage their mission systems development and operations.
We currently serve over 800 U.S. federal government clients, as well as
state and foreign governments. For the twelve months ended December 31, 2002, we
estimate that approximately 90% of our revenue was from contracts where we were
the lead, or "prime," contractor on our projects. We provide our services under
long-term contracts that have a weighted average term of 8 years. Additionally,
we have contracts with an estimated remaining contract value of $4.3 billion as
of December 31, 2002.
From January 1, 1996 to December 31, 2002, we increased revenues at a
compound annual growth rate, or "CAGR," of approximately 34%. Over the same
period, revenues grew organically at a 15% compound annual rate (which includes
revenue growth from acquired businesses only after the date of acquisition).
During 2002, our revenues grew organically at a rate of 16.9%.
The Federal Government Technology Services Market
The U.S. federal government is the largest single customer for information
technology solutions and systems engineering services in the United States. The
U.S. federal government technology services market is large and growing, with
total expenditures of more than $115.0 billion in the federal government's
fiscal year 2002. Government agency budgets for technology services are forecast
to grow at least 5% annually through government fiscal year 2005. Government
agency budgets for information technology are forecast to grow by 12-14% in
2004, based on the President's requested budget.
Additionally, it is anticipated that technology services spending will grow
an additional $6.0 billion annually over the next five years in the areas
emphasized by the U.S. government's evolving military strategy, including
homeland security, missile defense, information security, logistics management
systems modernization, weapon systems design improvements and military personnel
training. Defense spending is projected to exceed $365.0 billion in fiscal year
2003, a 10% increase over government fiscal year 2002. The President's proposed
budget for fiscal year 2004 includes defense spending of $380.0 billion, a 4%
increase over fiscal year 2003, and the largest Department of Defense budget in
history in actual dollars. Defense budgets are expected to grow by 32% over the
next six years, based on the Department of Defense spending plan submitted to
Congress.
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Government Contracts and Contracting
The federal technology services procurement environment has evolved in
recent years due to statutory and regulatory changes resulting from procurement
reform initiatives. Federal government agencies traditionally have procured
technology solutions and services through agency-specific contracts awarded to a
single contractor. However, the number of procurement contracting methods
available to federal government customers for services procurements has
increased substantially. Today, there are three predominant contracting methods
through which government agencies procure technology services: traditional
single award contracts, GSA Schedule contracts, and Indefinite Delivery and
Indefinite Quantity, or "ID/IQ," contracts.
Traditional single award contracts specify the scope of services that will
be delivered and the contractor that will provide the specified service. These
contracts have been the traditional method for procurement by the federal
government. When an agency has a requirement, interested contractors are
solicited, qualified, and then provided with a request for a proposal. The
process of qualification, request for proposals and evaluation of bids requires
the agency to maintain a large, professional procurement staff and can take a
year or more to complete.
GSA Schedule contracts are listings of services, products and prices of
contractors maintained by the GSA for use throughout the federal government. In
order for a company to provide services under a GSA Schedule contract, the
company must be pre-qualified and selected by the GSA. When an agency uses a GSA
Schedule contract to meet its requirement, the agency or the GSA, on behalf of
the agency, conducts the procurement. The user agency, or the GSA on its behalf,
evaluates the user agency's services requirements and initiates a competition
limited to GSA Schedule qualified contractors. Use of GSA Schedule contracts
provides the user agency with reduced procurement time and lower procurement
costs.
ID/IQ contracts are contract forms through which the federal government
creates preferred provider relationships with contractors. These umbrella
contracts outline the basic terms and conditions under which the government may
order services. An umbrella contract typically is managed by one agency, the
sponsoring agency, and is available for use by any agency of the federal
government. The umbrella contracts are competed within the industry and one or
more contractors are awarded contracts to be qualified to perform the work. The
competitive process for procurement of work to be performed under the contract,
called task orders, is limited to the pre-selected contractor(s). If the ID/IQ
contract has a single prime contractor, the award of task orders is limited to
that single party. If the contract has multiple prime contractors, the award of
the task order is competitively determined. Multiple-contractor ID/IQ contracts
that are open for any government agency to use for the procurement of services
are commonly referred to as GWACs. Due to the lower cost, reduced procurement
time, and increased flexibility of GWACs, there has been greater use of GWACs
among many agencies for large-scale procurements of technology services.
Key Factors Driving Growth
There are several key factors which we believe will continue to drive the
growth of the federal technology services market and our business:
o Increased Outsourcing. The downsizing of the federal government
workforce, declining availability of information technology
management skills among government personnel, and a concomitant
growth in the backlog of software maintenance tasks at many
government agencies are contributing to an increase in technology
outsourcing. According to the Office of Management and Budget,
spending on outsourced information technology solutions is
projected to grow at a rate substantially faster than overall
federal government information technology expenditures. In
government fiscal year 2002, 80% of the federal government's
total information technology solutions spending flowed to
contractors. By government fiscal year 2007, this rate of
outsourcing is projected to increase to 86% of total information
technology spending.
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o Government Efficiency Initiatives. Political pressures and
budgetary constraints are forcing government agencies to improve
their processes and services and to operate in a manner more
consistent with commercial enterprises. To meet these challenges,
government agencies are investing heavily in information
technology to improve effectiveness, enhance productivity and
deliver new services.
o Continued Dependence on Commercial Off-the-Shelf Hardware and
Software. The federal government has increased its use of lower
cost, open architecture systems using commercial off-the-shelf,
or "COTS," hardware and software, which are rapidly displacing
the single purpose, custom systems historically favored by the
federal government. The need for COTS products and COTS
integration services is expected to increase as the government
seeks to ensure the future compatibility of its systems across
agencies. In addition, the continued shortening of software
upgrade cycles is expected to increase the demand for the
integration of new COTS products.
o Increased Spending on National Defense. After years of spending
declines, national defense spending is projected to grow
substantially over the next five years with the Bush
Administration increasing the government's commitment to
strengthen the nation's security, defense and intelligence
capabilities. This support for increased defense spending has
been further reinforced by Congress following the September 2001
terrorist attacks on the United States, and resulted in approval
of 2002 Department of Defense appropriations of $332 billion, an
increase of 12% over fiscal year 2001. The government is
investing in improved homeland security, greater information
systems security, more effective intelligence operations, and new
approaches to warfare simulation training. Additionally, Congress
passed the largest Department of Defense budget (in actual
dollars) ever for fiscal year 2003. The President's proposed
budget for 2004 defense spending is $380 billion, a 4% increase
over fiscal year 2003 and the largest defense budget in actual
dollars.
o Emphasis on System Modernization. To balance the costs of new
initiatives like homeland security with the costs of ongoing
military operations, the Department of Defense is emphasizing
upgrading existing platforms to next generation technologies
rather than procuring completely new systems. For example, rather
than replace an entire generation of aircraft and ships, the U.S.
Air Force and the U.S. Navy have decided to invest in upgrades,
using the latest information technology and weapons systems. To
accomplish this in an environment of military personnel
reductions, the armed services are increasingly dependent on
highly skilled contractors that can provide the full spectrum of
services needed to support modernization activities.
o Continuing Impact of Procurement Reform. Recent changes in
federal procurement regulations have incorporated commercial
buying practices, including preferred supplier relationships in
the form of GWACs, into the government's procurement process.
These changes have produced lower acquisition costs, faster
acquisition cycles, more flexible contract terms, and more stable
supplier/customer relationships. Federal expenditures through
GWACs has grown significantly over the past three years, and the
GSA projects growth in its GWAC and Schedule contracts will
average 14% annually over the next three years.
Our Capabilities and Services
We are a leading provider of information technology solutions to government
clients. We design, integrate, maintain and upgrade state-of-the art information
systems for national defense, intelligence, emergency response and other
critical government missions. As a total solutions provider, we maintain the
comprehensive information technology skills necessary to support the entire
lifecycle of our clients' systems, from conceptual development through
operational support. We provide requirements definition and analysis, process
design or re-engineering, systems engineering and design, networking and
communications design, COTS hardware and software evaluation and procurement,
custom software and middleware development, system integration and testing, and
software maintenance and training services. Depending upon client needs, we may
provide total system solutions employing our full set of skills on a single
project, or we may provide more targeted, or "bundled," services designed to
meet the client's specific requirements. For example, we have built and are now
upgrading the National Emergency Management Information System, or "NEMIS," an
enterprise wide management information system, for the Federal Emergency
Management Agency, or "FEMA." This system has been procured in three phases:
system definition and design, base system development and deployment, and
upgrades to incorporate current web technology.
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We also are a leading provider of systems engineering and integration
services to government clients, primarily within the defense community. We
provide these defense clients with the systems analysis, integration and program
management skills necessary to manage the continuing development of their
mission systems, including ships, aircraft, weapons and communications systems.
As a solutions provider in this market, we also maintain the comprehensive
skills to manage the client's system lifecycle. We provide mission area and
threat analyses, research and development management, systems engineering and
design acquisition management, systems integration and testing, operations
concept planning, systems maintenance and training. For example, we provide
threat analysis, operations concept planning and systems integration and testing
for certain U.S. Navy systems, including the radar, missile and command and
control systems, employed to protect its fleet from ballistic missile attack.
Like information technology solutions, these skills may be procured as a
comprehensive mission solution, or they may be procured as specially prescribed
tasks.
Our Service Competencies and Contract Examples
The key to our success in both our information technology solutions and
systems engineering services businesses is a combination of in-depth customer
and mission knowledge, or domain expertise, and comprehensive technical skills.
We believe this combination provides long-term, sustainable competitive
advantage, performance excellence and customer satisfaction. Accordingly, we
have focused our growth strategy on several business areas where the mix of our
domain expertise and our end-to-end technical skills provides us with a strong
competitive advantage and the opportunity to cross-sell our solutions and
services.
The following paragraphs briefly describe our service competencies in our
information technology and systems engineering and integration services
businesses, and provide examples of selected programs in which we utilize these
competencies.
INFORMATION TECHNOLOGY SOLUTIONS
Intelligence Systems. We have more than eleven years of experience in
designing, developing and operating information systems used for intelligence
missions. These missions focus on data and imagery collection, as well as
information analysis and dissemination of information to the battlefield.
o Linked Operations/Intelligence Centers Europe, or "LOCE." In June
1999, we entered into a three-year, $52 million contract with the
Department of Defense to provide U.S., N.A.T.O., and other allied
military forces with near-real-time, correlated situation and
order of battle information for threat analysis, target
recommendations, indications and warnings. Following a six-month
extension of the initial contract award, in December 2002 we
began a new, one year $49 million contract for continued and
expanded support. LOCE is one of the most widely used command,
control, computers, communication and intelligence, or "C4I,"
systems within the international intelligence community. We
provide systems engineering and technical assistance, software
development, configuration management, operational support and
user training. This program recently has been expanded to include
the deployment of new systems to Central Asia and funding for
government fiscal year 2002 was increased significantly to cover
additional system deployments to the Pacific Rim.
Emergency Response Management. We have unique experience in developing
information technology systems to support emergency response management
requirements. Our expertise includes large-scale system design, development,
testing, implementation, training and operational support.
o National Emergency Management Information System. Since early
1995, we have supported the development of the NEMIS system for
FEMA through a series of contracts and task orders. The NEMIS
program, which is expected to continue at least through December
2003, generated total revenues of approximately $87 million
through December 31, 2002. NEMIS is an enterprise-wide
client/server management information system that connects several
thousand desktop and mobile terminals/handsets, providing FEMA
with a fully mobile, nationwide, rapid response disaster
assessment and mitigation system. We designed, developed,
integrated, tested and implemented the NEMIS system. We continue
to provide enhancements to and are beginning the project to
web-enable the system. Additionally, we believe the NEMIS program
will experience growth as FEMA migrates to the Department of
Homeland Security and its role as first responder to disasters
and terrorist attacks.
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Logistics Modernization. We provide a wide range of logistics management
information technology solutions, including process design and re-engineering,
technology demonstrations, proof-of-concept systems development, new systems
development and existing systems upgrades.
o U.S. Air Force Cargo Movement Operations System, or "CMOS." We
designed and developed this system and have maintained it since
1989. It is used by the Department of Defense Traffic Management
Office to provide in-transit visibility of cargo from the
shipment originator to its final destination. CMOS allows our
client to automate the process of cargo movement throughout
Department of Defense bases worldwide. We continue to design and
develop enhancements to the system to take advantage of new
technology, including web-enablement and electronic data
interchange applications.
o Joint Logistics Warfighting Initiative. In March 2000, we entered
into the Joint Logistics Warfighting Initiative, or "JLWI,"
contract. JLWI is a five-year, $24.5 million Department of
Defense contract focused on facilitating the military's logistics
transformation and improving military readiness through business
process improvements and the insertion of new and emerging
technologies. We are providing process re-engineering, system
design, and data base integration as we conduct a variety of
client directed process and technology experiments and
demonstrations. We have developed a proof-of-concept for web
enabling the military's legacy logistics systems in order to
provide real-time visibility of logistics information on the
battlefield (the JLWI Shared Data Environment). Third party
independent validation and verification of the JLWI Shared Data
Environment reflects that it has already gained significant
support through its use by units in the U.S. and in overseas
locations like Afghanistan and Kuwait.
Government Enterprise Solutions. Our supply chain management, software
engineering and integration experience allows us to develop large-scale
e-commerce applications tailored for the specific needs of the federal
government environment. These applications provide end-users with significantly
decreased transaction costs, increased accuracy, reduced cycle times, item price
savings, real-time order status and visibility of spending patterns.
o U.S. Postal Service E-Buy System. In September 1994, we entered
into a 10-year, $65 million contract to develop and implement an
electronic commerce application to serve an estimated 80,000 to
100,000 Postal Service employees, who purchase a wide range of
products on the U.S. Postal Service intranet site. Pre-negotiated
supplier catalogs are hosted on an intranet for security and
performance. Web-based purchasing provides catalog management
capability, multi-catalog searching, self-service ordering,
workflow and approval processing and other status and receiving
functions. Achieving the U.S. Postal Service's requirement to
serve up to 100,000 employees required the development of a very
robust transaction processing application.
Modeling, Simulation and Training. We provide a comprehensive set of
information technology solutions and services to our clients, including
computer-based training, web-based training, distant learning, interactive
electronic technical manuals, performance support systems and organizational
assessment methods.
o Military Operations on Urban Terrain. We entered into two
contracts with the U.S. Army, the first in July 1997, a $60
million five-year contract, which has been subsequently extended
through December 31, 2003, and the second in May 2000, a $20
million three-year contract, which has also been subsequently
extended through December 31, 2003, to design, integrate and
operate the Simulation Training and Instrumentation Command's
most advanced real life urban battlefield training site at Ft.
Polk, Louisiana. The site allows trainers to continuously
observe, control, monitor and record the conduct of training. The
system captures every second of a training exercise through the
use of nearly 1,000 cameras tied together via a fiber optic
backbone and local area network to the control room. The system
is also designed to control targetry and has the flexibility to
support both simulated fire and live fire exercises. We have
received orders for six fixed sites to be built throughout the
U.S. and in Europe and Korea. In addition, two mobile sites have
been ordered for use in Kuwait and Afghanistan.
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o STRICOM. Since January 2000, we have provided life cycle support
for constructive training at 14 U.S. Army Simulation and Training
Command Simulation centers worldwide. This eight-year contract
has grown from an initial value of $126 million to nearly $350
million, with additional growth anticipated. We have more than
500 personnel supporting this program at more than 50 sites
throughout the United States, Germany, Italy and Korea. We
provide program management and exercise support for
computer-driven and manual battle simulations, including
planning, coordination, personnel support, instructional aid
development, simulation training, database and scenario
development and system integrity. We support a variety of mission
specific simulations using highly qualified professionals,
certified in all aspects of simulation support, in each of the
U.S. Army's Battle Simulation Centers.
Healthcare Services. We deliver information technology solutions in
healthcare programs for the Department of Defense, Army, Navy, Air Force and
Marine Corps. Our support for medical research includes statistical analysis,
data mining of complex medical databases and health surveillance. Our solutions
for patient care include diagnostics, image processing, and medical records
management.
o U.S. Army Medical Department. We provide technical, scientific,
and administrative support to the Office of the Surgeon General,
the U.S. Army Medical Research and Material Command and the U.S.
Army Medical Command and its subordinate activities,
laboratories, and medical facilities. This support, which we
began in 1989 under several contracts, generated revenue of
approximately $14 million in the year ended December 31, 2001 and
approximately $15 million for the year ended December 31, 2002.
We support the research, development, acquisition, and/or
fielding of medical equipment and supplies, drugs, vaccines,
diagnostics, and advanced information technology. We assist with
policy development and implementation, strategic planning,
decision-making, information systems design and development,
information management, studies and analyses, logistics planning
and medical research. These services entered into areas of
homeland security, domestic medical preparedness and Chemical
Biological Radiological Nuclear Defense programs.
SYSTEMS ENGINEERING AND INTEGRATION SERVICES
Platform and Weapons Systems Engineering Support. We have more than 10
years experience in providing critical systems engineering and technology
management services in support of defense platform and weapon systems programs.
Our experience encompasses systems engineering and development, mission and
threat analysis and acquisition management for the majority of U.S. Navy and
U.S. Air Force weapon systems. We provide core systems engineering disciplines
in support of most major surface ship and submarine programs as well as
virtually all Air Force weapon systems.
o Secretary of the Air Force Technical and Analytical Support, or
"SAFTAS." In December 2000, we entered into a 15-year contract
with the U.S. Air Force to provide technical and analytical
support to the Headquarters Air Force and Secretary of the Air
Force organizations. Originally estimated at $544 million, the
contract is now estimated to have a total 15-year value of $640
million. Our support under this contract generated revenue of
approximately $27 million for the year ended December 31, 2001
and approximately $37 million for the year ended December 31,
2002. The contract includes support to the Assistant Secretary of
the Air Force for Acquisition, the Joint Strike Fighter Program
Office, the Under Secretary for Space, and all of the Program
Executive Offices which oversee all aircraft, munitions, space
and Command, Control, Computer, Communications, Intelligence,
Surveillance and Reconnaissance, or "C4ISR", systems. We provide
program, budgetary, policy and legislative analysis, information
technology services, systems engineering and technical management
services for all major Air Force acquisition programs. We believe
that this program, as well as similar programs for the U.S. Navy,
will continue to experience growth as the Department of Defense
plans for billions of dollars of system upgrades over the next
decade.
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Missile Defense. We have more than a decade of experience in missile
defense programs. We provide long-range planning, threat assessment, systems
engineering and integration, acquisition support services and program management
services.
o Theater-Wide Ballistic Missile Defense, or "TBMD." In January
1999, we entered into a five-year, $62 million contract with the
U.S. Navy to provide program management, systems engineering and
technical support to the TBMD program. We provide a broad range
of support to develop, test, evaluate, and produce the Navy's
future ballistic missile defense systems. Due to our Navy
Theater-Wide Missile Defense System experience, we were selected
to provide similar support to the National Missile Defense
program. In June 2001, we entered into a 15-year, $130 million
blanket purchase agreement with the Department of Defense's
Missile Defense Agency to provide concept development, systems
analysis and engineering, program management support, and
acquisition support. We believe this program also will experience
near-term growth as the Department of Defense moves forward to
meet the Bush Administration's mandate for a national missile
defense system.
Our Growth Strategy
Our objective is to continue to profitably grow our business as a premier
provider of comprehensive technology solutions and services to the federal
government market. Our strategy to achieve this objective includes the
following.
o Continue to Increase Market Penetration. In the past 10 years,
the federal government's shift towards using significantly
larger, more comprehensive contracts, such as GWACs, has favored
companies with a broad range of technical capabilities and proven
track records. As a prime contractor on three of the four largest
GWACs for information technology services based on overall
contract ceiling value, we have benefited from these changes. We
will continue to expand our role with current customers on
existing programs while also pursuing new opportunities only
available through these larger contracts.
o Capitalize on Increased Emphasis on Information Security,
Homeland Security and Intelligence. The Department of Defense
budget includes a 12% increase in projected spending for
government fiscal year 2003. The President's proposed Department
of Defense budget for the government's fiscal year 2004
represents a 4% increase over the government's fiscal year 2003
budget. We believe that many of the key operational goals of the
Administration correlate with our expertise, including developing
a national missile defense system, increasing homeland security,
protecting information systems from attack, conducting effective
intelligence operations and training for new approaches to
warfare through simulation.
o Cross-Sell our Full Range of Services to Existing Customers. We
plan to continue expanding the scope of existing customer
relationships by marketing and delivering the full range of our
capabilities to each customer. Having developed a high level of
customer satisfaction and critical domain knowledge as the
incumbent on many long-term contracts, we have a unique advantage
and opportunity to cross-sell our services and capture additional
contract opportunities. For example, the strong performance
record and detailed understanding of customer requirements we
developed on the U.S. Air Force Cargo Movement Operations System
led directly to our being awarded a contract for the Joint
Logistics Warfighting Initiative. We believe the ability to
deliver a broad range of technology services and solutions is an
essential element of our success.
o Continue our Disciplined Acquisition Strategy. We employ a
disciplined methodology to evaluate and select acquisition
candidates. We have completed and successfully integrated five
strategic acquisitions since 1997. Our industry remains highly
fragmented and we believe the changing government procurement
environment will continue to provide additional opportunities for
industry consolidation. We will continue to selectively review
acquisition candidates with complementary skills or market focus.
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History and Organization
In April 1996, we acquired all of the outstanding capital stock of our
predecessor corporation, Anteon International Corporation (then known as Ogden
Professional Services Corporation), a Virginia corporation, which we refer to in
this filing as "Anteon Virginia." In connection with the acquisition we changed
the name of Anteon Virginia to Anteon Corporation. Anteon Virginia then acquired
several companies and businesses, including Techmatics, Inc. On January 1, 2001,
Anteon Virginia was renamed Anteon International Corporation and transferred
most of its operations into Techmatics, which became its principal operating
subsidiary, and was in turn renamed Anteon Corporation. As a result, we then
owned approximately 99% of Anteon Virginia and Anteon Virginia owned 100% of
Anteon Corporation (formerly Techmatics).
On March 15, 2002, we entered into certain reorganization transactions in
connection with our initial public offering, including the merger of Anteon
Virginia into us, as more fully described in "Certain
Relationships--Reorganization Transactions." Following the merger, the name
"Anteon International Corporation" is borne solely by a single Delaware
corporation, which is the direct 100% parent company of Anteon Corporation
(formerly Techmatics). For a diagram illustrating these transactions, please see
"Certain Relationships-Reorganization Transactions."
Acquisitions
We employ a highly disciplined methodology to evaluate acquisitions. Since
1997 we have evaluated over 200 targets and have successfully completed and
integrated five strategic acquisitions. Each of these acquired businesses has
been accretive to earnings, exceeded our synergy expectations, added to our
technical capabilities and expanded our customer reach. The acquired businesses
and their roles within our service offerings are summarized in the table below.
Revenues prior to
Year Target Business Description acquisition(1)
($ in millions)
1997 Vector Data Intelligence collection, exploitation, and dissemination systems $ 35.6
1998 Techmatics Surface ship and combat systems and ballistic missile defense 56.7
program management
1999 Analysis & Undersea ship and combat systems, acoustical signal processing, 170.4
Technology modeling and simulation, information technology systems and
software design
2000 Sherikon Military healthcare services systems, networking and 62.7
communications systems
2001 SIGCOM Training Training simulation systems and services 12.5
- ------------------------------------
(1) Consolidated revenue of target for its most recently completed fiscal year
ended prior to the acquisition date.
In August 1997, we purchased Vector Data Systems, Inc., a supplier of
specialized information systems and services for the collection, analysis and
distribution of military intelligence data. In May 1998, we acquired Techmatics,
Inc., an established provider of systems engineering and program management
services for large-scale military system development, including the Navy's
surface ship fleet, on-ship combat systems and missile defense programs. With
the acquisition of Analysis & Technology, Inc. in June 1999, we expanded our
customer base for systems engineering and program management services to the
Navy's undersea systems and added important technical expertise in
computer-based training, modeling, simulation and advanced signal processing. In
October 2000, we purchased Sherikon, Inc., extending the reach of our
information technology solutions to military healthcare delivery system. In July
2001 we acquired the training division of SIGCOM, Inc. and increased the range
of our information technology-enabled training solutions to include the
realistic simulation of urban environments for the planning and preparation of
overseas military operations.
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Existing Contract Profiles
We currently have a portfolio of more than 450 active contracts. Our
contract mix for the year ended December 31, 2002 was 35% cost-plus contracts,
37% time and materials contracts and 28% fixed price contracts (a substantial
majority of which were firm fixed price level of effort). Cost-plus contracts
provide for reimbursement of allowable costs and the payment of a fee, which is
the contractor's profit. Cost-plus fixed fee contracts specify the contract fee
in dollars or as a percentage of allowable costs. Cost-plus incentive fee and
cost-plus award fee contracts provide for increases or decreases in the contract
fee, within specified limits, based upon actual results as compared to
contractual targets for factors such as cost, quality, schedule and performance.
Under a time and materials contract, the contractor is paid a fixed hourly rate
for each direct labor hour expended and is reimbursed for direct costs. To the
extent that actual labor hour costs vary significantly from the negotiated rates
under a time and materials contract, we may generate more or less than the
targeted amount of profit. Under a fixed price contract, the contractor agrees
to perform the specified work for a firm fixed price. To the extent that actual
costs vary from the price negotiated we may generate more or less than the
targeted amount of profit or even incur a loss. In addition, we generally do not
pursue fixed price software development work that may create material financial
risk. We do, however, execute some fixed price labor hour and fixed price level
of effort contracts which represent similar levels of risk as time and materials
contracts. Fixed price percentages in the table below include predominantly
fixed price labor hour and fixed price level of effort contracts. Our historical
contract mix is summarized in the table below.
Contract Mix
Year End
Contract Type 1998 1999 2000 2001 2002
Cost-Plus................................. 34% 37% 41% 37% 35%
Time and Materials........................ 47% 38% 31% 34% 37%
Fixed Price............................... 19% 25% 28% 29% 28%
Our contract mix changes from year to year depending on the contract mix of
companies we acquire, as well as our efforts to obtain more time and materials
and fixed price work.
In addition to a wide range of single award contracts with defense, civil,
state and local government customers, we also hold a number of multiple award
omnibus contracts and GWACs that currently support more than 3,000 separate task
orders. The broad distribution of contract work is demonstrated by the fact that
no single award contract or task order accounted for more than 5.5% of our total
2002 revenue.
Government Wide Acquisition Contracts. We are a leading supplier of
information technology services under GWACs, and a prime contractor for three of
the four largest GWACs for information technology services as measured by
overall contract ceiling value. These contract vehicles are available to any
government customer and provide a faster, more-effective means of procuring
contract services. For example, in December 1998, we were awarded ANSWER, a 10
year multiple award contract with the GSA to provide highly technical
information technology and systems engineering program support and
infrastructure management. We have been awarded over 365 task orders to date,
with an annualized revenue run rate as of the fourth quarter of fiscal 2002 of
approximately $118 million. We are the number one contractor among the 10 ANSWER
prime contractors in terms of revenue. Our total estimated contract value for
this contract is $1 billion over ten years. Listed below are the four largest
GWACs.
Owning Period of Contract Ceiling
Contract Name Agency Performance Value Role
ANSWER GSA 1998 - 2008 $25 billion Prime
Millenia GSA 1999 - 2009 $25 billion Subcontractor
Millenia Lite GSA 2000 - 2010 $20 billion Prime
CIO-SP II NIH 2000 - 2010 $20 billion Prime
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Listed below are our top programs by 2002 revenue, including single award
and multiple award contracts. We are a prime contractor on each of these
programs.
Top Programs by 2002 Revenue
($ in millions)
Estimated
Remaining Contract Contract
Contract Customer Period of Performance 2002 Revenue Value Type
ANSWER GSA 1/1/99-12/31/08 $ 118.4 $ 758.0 T&M/FFP
GSA SCHEDULE & BPAs GSA 10/30/96-10/09/07 99.0 497.8 T&M/FFP
BICES Umbrella Department of Defense 6/01/99-5/31/03 38.8 13.1 CP
SAFTAS U.S. Air Force 1/01/01-12/31/16 37.4 478.9 CP
GSA-PES GSA 5/01/00-2/08/06 36.9 14.6 T&M/FFP
Carrier BPA U.S. Navy 3/10/97-12/31/03 26.3 23.4 FFP
MOUT-IS Army/STRICOM/Training 7/03/97-6/30/02 16.0 5.2 FFP
HM&E Combat Support U.S. Navy 12/15/97-6/30/03 15.4 4.9 CP
GSA PES Contract GSA 1/06/00-1/05/05 13.4 249.0 T&M/FFP
GSA IT TDPI BPA Department of Treasury
------------------------------
8/27/97-10/10/02 11.6 59.2 T&M/FFP
Subcontractors
In fulfilling our contract obligations to customers, we may utilize the
services of one or more subcontractors. The use of subcontractors to support
bidding for and the subsequent performance of awarded contacts is a customary
aspect of federal government contracting. Subcontractors may be tasked by us
with performing work elements of the contract similar to or different from those
performed by us or other subcontractors. We estimate that approximately 24.6% of
our total direct costs result from work performed by subcontractors. As
discussed further in "Risk Factors," if our subcontractors fail to satisfy their
contractual obligations, our prime contract performance could be materially and
adversely affected.
Estimated Contract Value and New Business Development
On December 31, 2002, our total estimated contract value was $4.3 billion,
of which $418 million was funded backlog. In determining estimated contract
value, we do not include any provision for an increased level of work likely to
be awarded under our GWACs. Estimated contract value is calculated as current
revenue run rate over the remaining term of the contract. Our estimated contract
value consists of funded backlog which is based upon amounts actually
appropriated by a customer for payment of goods and services and unfunded
contract value which is based upon management's estimate of the future potential
of our existing contracts to generate revenues for us. These estimates are based
on our experience under such contracts and similar contracts, and we believe
such estimates to be reasonable. However, there can be no assurance that the
unfunded contract value will be realized as contract revenue or earnings. In
addition, almost all of the contracts included in estimated contract value are
subject to termination at the election of the customer.
19
ESTIMATED CONTRACT VALUE
Unfunded Contract Total Estimated
As of December 31, Funded Backlog Value Contract Value
(in millions)
2002 $ 418 $ 3,868 $ 4,286
2001 309 3,217 3,526
2000 308 2,560 2,868
1999 195 1,925 2,121
1998 128 438 566
1997 100 242 342
- -------------------------------------------------------------------------------------------------------------------
From December 31, 2000 to December 31, 2002, our estimated contract value
increased at a 49.4% cumulative annual growth rate. We believe this growth
demonstrates the effectiveness of our two-tiered business development process
that management has developed to respond to the strategic and tactical
opportunities arising from the evolving government procurement environment. New
task order contract vehicles and major high-profile programs are designated
strategic opportunities, and their pursuit and execution are managed centrally.
A core team comprised of senior management and our strategic business unit heads
makes all opportunity selection and resource allocation decisions. Work that can
be performed under our many existing task order contract vehicles is designated
a tactical opportunity, which is then managed and performed at the business unit
level with support as needed from other company resources. All managers and
senior technical personnel are encouraged to source new work, and incentives are
weighted to ensure corporate objectives are given primary consideration.
Customers
We provide information technology and systems engineering solutions to a
highly diverse group of federal, state, local and international government
organizations worldwide. Domestically, we service more than 60 agencies, bureaus
and divisions of the U.S. federal government, including nearly all cabinet-level
agencies and all branches of the military. For the twelve months ended December
31, 2002, the federal government accounted for approximately 96% of our total
revenues. International and state and local governments provided the remaining
4%. Our largest customer group is the U.S. Navy, which management believes
accounted for approximately 40% of revenues during the twelve months ended
December 31, 2002, through 30 different Navy organizations.
An account receivable from a federal government agency enjoys the overall
credit worthiness of the federal government, even though each such agency has
its own budget. Pursuant to the Prompt Payment Act, payments from government
agencies must be made within 30 days of final invoice or interest must be paid.
Competition
The federal information technology and systems engineering services
industries are comprised of a large number of enterprises ranging from small,
niche-oriented companies to multi-billion dollar corporations with a major
presence throughout the federal government. Because of the diverse requirements
of federal government clients and the highly competitive nature of large federal
contracting initiatives, corporations frequently form teams to pursue contract
opportunities. Prime contractors leading large proposal efforts select team
members on the basis of their relevant capabilities and experience particular to
each opportunity. As a result of these circumstances, companies that are
competitors for one opportunity may be team members for another opportunity.
20
We frequently compete against well-known firms in our industry as a prime
contractor. Obtaining a position as either a prime contractor or subcontractor
on government-wide contracting vehicles is only the first step to ensuring a
secure competitive position. Competition then takes place at the task order
level, where knowledge of the client and its procurement requirements and
environment are key to winning the business. We have been successful in ensuring
our presence on GWACs and GSA Schedule contracts, and in competing for work
under those contracts. Through the variety of contractual vehicles at our
disposal, as either a prime contractor or subcontractor, we have the ability to
market our services to any federal agency. Because of our extensive experience
in providing services to a diverse array of federal departments and agencies, we
have first-hand knowledge of our clients and their goals, problems and
challenges. We believe this knowledge gives us a competitive advantage in
competing for tasks and positions us well for future growth.
Employees
As of December 31, 2002, we employed approximately 5,800 employees, 85% of
whom were billable and 82% of whom held security clearances. Our workforce is
well educated and experienced in the defense and intelligence sectors.
Functional areas of expertise include systems engineering, computer science,
business process reengineering, logistics, transportation, materials
technologies, avionics and finance and acquisition management. Nearly half of
our employees provide services in such areas as systems engineering, software
engineering, network/communications engineering, and program/project management.
None of our employees is represented by collective bargaining agreements.
Available Information
Our internet address is www.anteon.com. We make available free of charge
through our internet site, via a hyperlink to the 10KWizard.com web site, our
annual reports on Form 10-K; quarterly reports on Form 10-Q; current reports on
Form 8-K; and any amendments to those reports filed or furnished pursuant to the
Securities Exchange Act of 1934, or the "Exchange Act," as soon as reasonably
practicable after such material is electronically filed with, or furnished to,
the SEC.
Item 2. Properties
Our headquarters are located in leased facilities in Fairfax, Virginia. In
total, we lease approximately 1.2 million square feet of office, shop and
warehouse space in over 90 facilities across the United States, Canada, United
Kingdom and Australia. We own an office building in North Stonington,
Connecticut, which occupies 63,578 square feet of office space and which is
currently being held for sale.
Item 3. 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 our 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. The
subcontractor filed a demand for arbitration to which we filed an answer and
counter demand.
The arbitration hearing concluded on September 16, 2002. On December 18,
2002, the arbitrator issued a decision requiring us to continue to issue task
orders to the subcontractor under the subcontract for so long as our customer
continues to issue task orders to us for these services and enjoining us from
interviewing, offering employment to, hiring or otherwise soliciting employees
of the subcontractor who work on this particular project. The arbitrator's
decision also denied the subcontractor's claim for monetary damages and our
counter-demand. We subsequently filed an action to vacate or modify that portion
of the arbitrator's decision enjoining us from hiring certain subcontractor
employees under any circumstances, since the prohibition conflicts with the
parties' contractual obligations as provided in the non-solicitation clause of
the parties' subcontract, and imposes additional obligations solely on us and to
which the parties never agreed. The subcontractor has filed an action to confirm
the arbitration award. On February 21, 2003, the court heard oral argument on
the parties' respective motions and a decision is pending.
21
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 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders during the fourth
quarter of our fiscal year ended December 31, 2002, through the solicitation of
proxies or otherwise.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Our common stock has been publicly traded on the New York Stock Exchange,
or the "NYSE," since March 11, 2002.
The following table sets forth the high and low sale price per share of our
common stock during the twelve months ended December 31, 2002 as reported by the
NYSE.
2002
Quarter Ended High Low
--------------------- ---------- ------------
March 31 * $ 21.85 $ 19.25
June 30 $ 26.75 $ 20.10
September 30 $ 28.26 $ 18.90
December 31 $ 29.35 $ 19.40
*Trading commenced on March 11, 2002
We have not in the past paid, and do not expect for the foreseeable future
to pay, dividends on our common stock. Instead, we anticipate that all of our
future earnings, if any, will be used in the operation and expansion of our
business, for working capital, and other general corporate purposes. Our board
will determine whether to pay dividends in the future based on conditions then
existing, including our earnings, financial condition and capital requirements,
as well as economic and other conditions as the board may deem relevant. In
addition, our ability to declare and pay dividends on our common stock is
restricted by the provisions of Delaware law and covenants in our Credit
Facility and the indenture governing our 12% Notes.
As of February 25, 2003, the number of stockholders of record of our common
stock was approximately 96.
Recent Sales of Unregistered Securities
Below is a summary of transactions by us during 2002 involving sales of our
securities that were not registered under the Securities Act.
a) Between January 1, 2002 and February 1, 2002, Anteon Virginia
issued 71,840 shares of common stock upon the exercise of options
to some of its then current and former employees at a weighted
average exercise price of $5.7193 per share. This share and price
data does not give effect to the 2,449.95-1 split of our
outstanding common stock effected on February 19, 2002.
b) On February 19, 2002, we issued approximately 23,786,565 shares
of common stock to our existing stockholders upon the split of
9,709 outstanding shares, on the basis of 2,449.95 shares for
each outstanding share.
c) Prior to the consummation of our initial public offering on March
15, 2002, we issued 174,152 shares of common stock to some of the
selling stockholders in that offering upon the exercise of
outstanding stock options at a weighted average exercise price of
$1.38 per share.
22
d) Immediately prior to the consummation of our initial public
offering, we issued approximately 28,595,917 shares of common
stock and 28,595,917 rights to purchase shares of our Series A
Preferred Stock in connection with the merger of Anteon Virginia
with and into us.
The issuances listed above were exempt from registration under Section 4(2)
or Rule 701 of the Securities Act as transactions by an issuer not involving a
public offering, or because such issuances did not represent sales of
securities.
Securities Authorized for Issuance under Equity Compensation Plans
The following table provides information as of December 31, 2002 regarding
compensation plans (including individual compensation arrangements) under which
our equity securities are authorized for issuance.
(a) (b) (c)
Number
of
securities
Number of securities remaining available for
to be issued upon Weighted-average exercise future issuance under equity
exercise of price of outstanding compensation plans
outstanding options, options, warrants and (excluding securities
Plan category warrants and rights rights reflected in column (a))
Equity compensation plans
approved by security holders 4,123,208 $ 8.98 801,040
Equity compensation plans not
approved by security holders -- -- --
Total 4,123,208 $ 8.98 801,040
===================================================================================================================
Use of Proceeds
We consummated an initial public offering of our common shares, or "IPO,"
on March 15, 2002. The use of proceeds from our IPO is described in Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and in the notes to our consolidated financial statements appearing
elsewhere in this filing.
Item 6. Selected Financial Data
The selected consolidated financial data set forth below have been derived
from our audited consolidated financial statements as of and for the years ended
December 31, 2002, 2001, 2000, 1999 and 1998. These results are not necessarily
indicative of the results that may be expected for any future period and are not
comparable between prior periods as a result of business acquisitions
consummated in 1998, 1999, 2000 and 2001. Results of operations of these
acquired businesses are included in our consolidated financial statements for
the periods subsequent to the respective dates of acquisition.
You should read the selected consolidated financial data presented below in
conjunction with Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations," Item 1. "Business" and our financial
statements and the related notes thereto appearing elsewhere in this filing.
23
Year ended December 31,
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
(in thousands, except per share data and percentage)
Statements of operations data:
Revenues........................................ $ 249,776 $ 400,850 $ 542,807 $ 715,023 $ 825,826
Costs of revenues............................... 21,588 353,245 474,924 627,342 711,328
-------------- -------------- ------------ ------------- -------------
Gross profit.................................... 28,188 47,605 67,883 87,681 114,498
General and administrative expenses,
including acquisition related costs........... 15,401 27,926 28,592 51,442 48,197
Amortization of non-compete agreements.......... 530 909 866 349 --
Goodwill amortization........................... 1,814 3,440 4,714 6,704 1,907
Other intangibles amortization.................. -- -- 2,673 2,321 --
Operating income ............................... 10,443 15,330 21,038 26,865 64,394
Other Income.................................... -- -- -- -- 417
Gains on sales and closures of business......... -- -- -- 4,046 --
Gains on sales of investments and other,
net........................................... -- 2,585 -- -- --
Interest expense, net of interest
income........................................ 6,893 18,230 26,513 26,872 17,394
Minority interest in (earnings) losses of
subsidiaries.................................. (26) (39) 32 (38) (18)
-------------- -------------- ------------ ------------- -------------
Income (loss) before provision for (benefit
from) income taxes and extraordinary
loss.......................................... 3,524 (354) (5,443) 4,001 47,399
Provision for (benefit from) income
taxes......................................... 1,852 710 (153) 4,413 18,374
-------------- -------------- ------------ ------------- -------------
Income (loss) before extraordinary gain
(loss).................................... 1,672 (1,064) (5,290) (412) 29,025
Extraordinary gain (loss), net of.......... -- (463) -- 330 (2,581)
-------------- -------------- ------------ ------------- -------------
Net income (loss).......................... $ 1,672 $ (1,527) $ (5,290) $ (82) $ 26,444
============== ============== ============ ============= =============
Basic earnings (loss) per common share:
Income (loss) before extraordinary
gain (loss).............................. $ 0.07 $ (0.04) $ (0.22) $ (0.02) $ 0.90
Extraordinary gain (loss), net of
tax.............. -- (0.02) -- 0.01 (0.08)
-------------- --------------- ------------ ------------- -------------
Net income (loss).......................... $ 0.07 $ (0.06) $ (0.22) $ ( 0.01) $ 0.82
============== ============== ============ ============= ============
Weighted average shares outstanding....... 23,591 23,785 23,787 23,787 32,163
Diluted earnings (loss) per common share:
Income (loss) before extraordinary
gain (loss).............................. $ 0.07 $ (0.04) $ (0.22) $ (0.02) $ 0.85
Extraordinary gain (loss), net of -- (0.02) -- 0.01 (0.07)
tax.............. -------------- -------------- ------------ ------------- -------------
Net income (loss).......................... $ 0.07 $ (0.06) $ (0.22) $ (0.01) $ 0.78
============== ============== ============ ============= =============
Weighted average shares outstanding........ 23,591 23,785 23,787 23,787 34,022
Other data:
EBITDA (a)..................................... $ 15,869 $ 25,978 $ 36,349 47,357 $ 70,994
EBITDA margin (b)............................. 6.4% 6.5% 6.7% 6.6% 8.6%
Cash flow from (used in) operating
activities.......... $ (8,503) $ 11,767 $ 17,101 37,879 $ 1,278
Cash flow from (used in) investing
activities.......... (35,388) (111,672) (28,912) (1,707) (1,423)
Cash flow from (used in) financing 43,396 100,957 12,036 (35,676) 2,481
activities..........
Capital expenditures............................ 2,089 4,761 6,584 2,181 3,225
Balance sheet data (as of December 31):
Current assets.................................. 73,557 $ 118,583 $ 148,420 144,418 208,396
Working capital................................. 33,857 48,818 56,841 27,559 80,390
Total assets.................................... 136,544 278,691 324,423 306,651 364,692
Long-term debt, including current
portion............. 90,851 212,301 237,695 202,905 105,701
Net debt (c).................................... 84,721 211,092 236,261 200,975 101,435
Stockholders' equity (deficit).................. 5,603 3,672 (1,576) (3,442) 128,829
24
(a) "EBITDA", as defined, represents income before income taxes, plus
depreciation, amortization and net interest expense. EBITDA is a
supplemental financial measure but should not be construed as an
alternative to operating income or cash flows from operating
activities (as determined in accordance with accounting principles
generally accepted in the United States of America, "GAAP"). We
believe that EBITDA is a useful supplement to net income and other
income statement data because it is used by some investors in
understanding and measuring a company's cash flows generated from
operations that are available for taxes, debt service and capital
expenditures. However, all companies do not calculate EBITDA in the
same manner, and as a result, the EBITDA measures presented may not be
comparable to similarly titled measures of other companies. The
computations of EBITDA are as follows:
Year ended December 31,
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
($ in thousands)
Income (loss) before provision for (benefit
from) income taxes and extraordinary gain
(loss).............................................. $ 3,524 $ (354) $ (5,443) $ 4,001 $ 47,399
Interest expense.................................... 6,893 18,230 26,513 26,872 17,394
Depreciation and amortization....................... 5,452 8,102 15,279 16,484 6,201
---------- ----------- ---------- ----------- ----------
EBITDA.............................................. $ 15,869 $ 25,978 $ 36,349 $ 47,357 $ 70,994
========== =========== ========== =========== ==========
Income (loss) before extraordinary gain
(loss) margin 0.7% (0.3%) (1.0%) (0.1%) 3.5%
EBITDA margin (b) 6.4% 6.5% 6.7% 6.6% 8.6%
(b) EBITDA margin represents EBITDA calculated as a percentage
of total revenues.
(c) Net debt represents total indebtedness less cash and
investments in marketable securities.
25
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
You should read the following discussion in conjunction with Item 6.
"Selected Consolidated Financial Data" and our consolidated financial statements
and related notes included elsewhere in this filing. Some of the statements in
the following discussion are forward-looking statements. See "Forward-Looking
Statements."
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 800 U.S federal government clients, as well as
state and foreign governments. For the year ended December 31, 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
have a weighted average term of eight years. We have obtained ISO 9001
registration for our quality management systems at key facilities and have
achieved Software Engineering Institute (SEI) Level 3 certification for our
software development facility's processes. Our contract base is well diversified
among government agencies. No single award contract or task order accounted for
more than 5.5% of revenues for the year ended December 31, 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 and other intangible assets. Management bases its
estimates on historical experience and on various other factors that are
believed to be reasonable at the time the estimates are made. Actual results may
differ from these estimates under different assumptions or conditions.
Management believes that our critical accounting policies which require more
significant judgments and estimates in the preparation of our consolidated
financial statements are revenue recognition, costs of revenues, goodwill
impairment, long-lived assets and identifiable intangible asset impairment and
business combinations.
Revenue Recognition
During the twelve months ended December 31, 2002, we estimate that
approximately 98% of our revenues were derived from services and approximately
2% from product sales. Services are performed under contracts that may be
categorized into three primary types: time and materials, cost-plus
reimbursement and firm fixed price. Revenue for time and materials contracts is
recognized as time is spent at hourly rates, which are negotiated with the
customer. Time and materials contracts are typically more profitable than
cost-plus contracts because of our ability to negotiate rates and manage costs
on those contracts. Revenue is recognized under cost-plus contracts on the basis
of direct and indirect costs incurred plus a negotiated profit calculated as a
percentage of costs or as performance-based award fee. Cost-plus type contracts
provide relatively less risk than other contract types because we are reimbursed
for all direct costs and certain indirect costs, such as overhead and general
and administrative expenses, and are paid a fee for work performed. For
cost-plus award fee type contracts, we recognize the expected fee to be awarded
by the customer at the time such fee can be reasonably estimated, based on
factors such as our prior award experience and communications with the customer
regarding our performance, including any interim performance evaluations
rendered by the customer. Revenues are recognized under substantially all fixed
price contracts based on the percentage-of-completion basis, using the
cost-to-cost method for all services provided. For non-service related fixed
price contracts, revenues are recognized as units are delivered (the
units-of-delivery method).
26
We recognize revenues under our federal government contracts when a
contract is executed, the contract price is fixed and determinable, delivery of
the services or products has occurred, the contract is funded and collectibility
of the contract price is considered probable. Our contracts with agencies of the
federal government are subject to periodic funding by the respective contracting
agency. Funding for a contract may be provided in full at inception of the
contract or ratably throughout the term of the contract as the services are
provided. From time to time we may proceed with work based on customer direction
pending finalization and signing of contractual funding documents. We have an
internal process for approving any such work. All revenue recognition is
deferred during periods in which funding is not received. Costs incurred during
such periods are deferred if the receipt of funding is assessed as probable. In
evaluating the probability of funding being received, we consider our previous
experiences with the customer, communications with the customer regarding
funding status, and our knowledge of available funding for the contract or
program. If funding is not assessed as probable, costs are expensed as they are
incurred.
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, provide services under fixed
price labor hour and fixed price level of effort contracts, which represent
similar levels of risk as time and materials contracts. Our contract mix was
approximately 37% time and materials, 35% cost-plus and 28% fixed price (a
substantial majority of which are firm fixed price level of effort) during the
twelve months ended December 31, 2002. The contract mix 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%.
We maintain reserves for uncollectible accounts receivable which may arise
in the normal course of business. Historically, we have not had significant
write-offs of uncollectible accounts receivable. However, we do perform work on
many contracts and task orders, where on occasion, issues may arise, which would
lead to accounts receivable not being fully collected.
Costs of Revenues
Our costs are categorized as either direct or indirect costs. Direct costs
are those that can be identified with and allocated to specific contracts and
tasks. They include labor, fringe (vacation time, medical/dental, 401K plan
matching contribution, tuition assistance, employee welfare, worker's
compensation and other benefits), subcontractor costs, consultant fees, travel
expenses and materials. Indirect costs are either overhead or general and
administrative expenses. Indirect costs cannot be identified with specific
contracts or tasks, and to the extent that they are allowable, they are
allocated to contracts and tasks using appropriate government-approved
methodologies. Costs determined to be unallowable under the Federal Acquisition
Regulations cannot be allocated to projects. Our principal unallowable costs are
interest expense, amortization expense for goodwill (prior to the adoption of
SFAS No. 142 in January 2002), amortization expense for separately identified
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.
27
Goodwill Impairment
Goodwill relating to our acquisitions represents the excess of cost over
the fair value of net tangible and separately identifiable intangible assets
acquired. 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.
As of June 30, 2002, we had identified our reporting units, allocated our
assets and liabilities, including goodwill, to reporting units and compared the
carrying value of the reporting units to their estimated fair values using a
discounted cash flow approach in performing the transitional impairment analysis
required under SFAS No. 142. There was no indication of goodwill impairment as a
result of the transitional impairment analysis.
As of September 30, 2002, we performed our annual goodwill impairment
analysis required under SFAS No. 142. We applied the same methodology described
above in performing our annual impairment test and we noted there was no
indication of goodwill impairment for any reporting unit. We will perform our
annual impairment test as of September 30, each year unless circumstances
indicate that an impairment test should be performed sooner. If we are required
to record an impairment charge in the future, it would have an adverse non-cash
impact on our results of operations.
Long-Lived Assets and Identifiable Intangible Asset Impairment
Long-lived assets and identifiable intangible assets, excluding goodwill,
are evaluated for impairment when events occur that suggest that such assets may
be impaired. Such events could include, but are not limited to, the loss of a
significant customer or contract, decreases in federal government appropriations
or funding of certain programs, or other similar events. None of these events
occurred for the period ended December 31, 2002. We determine if an impairment
has occurred based on a comparison of the carrying amount of such assets to the
future undiscounted net cash flows, excluding charges for interest. If
considered impaired, the impairment is measured by the amount by which the
carrying amount of the assets exceeds their estimated fair value, as determined
by an analysis of discounted cash flows using a discounted interest rate based
on our cost of capital and the related risks of recoverability.
In evaluating impairment, we consider, among other things, our ability to
sustain our current financial performance on contracts and tasks, our access to
and penetration of new markets and customers and the duration of, and estimated
amounts from, our contracts. Any uncertainty of future financial performance is
dependent on the ability to maintain our customers and the continued funding of
our contracts and tasks by the government. Over the past four years, we have
been able to win 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.
Business Combinations
Subsequent to January 1, 2002 and for business combinations occurring after
June 30, 2001, we apply the provisions of SFAS No. 141, Business Combinations,
whereby the net tangible and separately identifiable intangible assets acquired
and liabilities assumed are recognized at their estimated fair market values at
the acquisition date. The purchase price in excess of the estimated fair market
value of the net tangible and separately identifiable intangible assets acquired
represents goodwill. The allocation of the purchase price related to our
business combinations involves significant estimates and management judgement
that may be adjusted during the allocation period, but in no case beyond one
year from the acquisition date. Costs incurred related to successful business
combinations are capitalized as costs of business combinations, while costs
incurred by us for unsuccessful or terminated acquisition opportunities are
expensed when we determine that such opportunities will no longer be pursued.
Costs incurred related to anticipated business combinations are deferred.
28
Statements of Operations
The following is a description of certain line items from our consolidated
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 and our 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 twelve months ended December 31, 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 approximately $760.0 million, from $3.5
billion as of December 31, 2001, to $4.3 billion at December 31, 2002, of which
approximately $418.2 million was funded backlog as of December 31, 2002. Funded
backlog increased approximately $108.7 million to $418.2 million at December 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 are reasonable. However, there can be no assurance
that our existing contracts will result in actual revenues in any particular
period or at all. These amounts could vary depending upon government budgets and
appropriations. 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 obligated and released for
payment by the customer . In most cases, the government is in the process of
funding the contract or tasks and requests that we continue work to avoid
disruptions to the project. Historically, we have not recorded any significant
write-offs because funding was not ultimately received.
29
Acquisitions, Divestitures and Business Closures
In 1996, we were formed by affiliates of and companies managed by
Caxton-Iseman Capital, Inc., including Azimuth Technologies, L.P., Azimuth Tech.
II LLC and Frederick J. Iseman, which we refer to collectively as the
"Caxton-Iseman Stockholders." On April 1, 1996, we acquired all of the
outstanding stock of Anteon Virginia (then known as Ogden Professional Services
Corporation) from Ogden Corporation in a leveraged transaction. Anteon Virginia
provided information technology and network system services primarily to the
U.S. government and its agencies. We paid an aggregate consideration of
approximately $36.5 million to Ogden, including transaction costs. The
acquisition was accounted for using the purchase method of accounting.
The following table summarizes our acquisitions, divestitures and business
closures.
Revenues for the most
recently completed twelve
month period ended prior
Name Status Acquisition Date to acquisition
(in thousands)
ACQUISITIONS
Vector Data Systems........... Acquired August 1997 $ 35,600
Techmatics.................... Acquired May 1998 56,700
Analysis & Technology......... Acquired June 1999 170,400
Sherikon...................... Acquired October 2000 62,700
SIGCOM Training............... Acquired July 2001 12,500
Revenues for the twelve
months ended prior to
Name Status Divestiture/Closure Date divestiture/closure
(in thousands)
DIVESTITURES/CLOSURES
CITE Sold June 2001 $ 2,411
IMC Sold July 2001 21,710
DisplayCheck.................. Sold April 2002 270
STSR Closed December 2001 3,427
Acquisitions
Vector Data Systems--On August 29, 1997, we acquired all of the outstanding
stock of Vector Data Systems, Inc., or "Vector Data," including Vector Data's
eighty percent equity interest in Vector Data Systems (UK) Limited,
collectively, "Vector." Vector supplied specialized information systems and
services for the collection, analysis and distribution of military intelligence
data. The aggregate consideration paid by us was approximately $19.0 million,
including transaction costs. The acquisition was accounted for using the
purchase method of accounting.
Techmatics--On May 29, 1998, we acquired all of the outstanding stock of
Techmatics, an established provider of systems engineering and program
management services for large-scale military system development, including the
Navy's surface ship fleet, on-ship combat systems and missile defense programs.
The aggregate consideration paid by us was approximately $45.9 million,
including transaction costs. The acquisition was accounted for using the
purchase method of accounting.
Analysis & Technology--On June 23, 1999, we acquired all of the outstanding
stock of Analysis & Technology, Inc., or "A&T," a provider of systems and
engineering technologies, technology-based training systems, and information
technologies to the U.S. government and commercial customers, for an aggregate
consideration, including transaction costs, of approximately $115.6 million. The
acquisition was accounted for using the purchase method of accounting.
30
Sherikon--On October 20, 2000, we purchased all of the outstanding stock of
Sherikon, a technology solutions and services firm, for an aggregate
consideration, including transaction costs, of approximately $34.8 million. We
issued $7.5 million principal amount subordinated promissory notes to former
shareholders of Sherikon of which $2.5 million remains outstanding. On October
18, 2002, we asserted an indemnification claim against the former shareholders
of Sherikon 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. The acquisition was accounted for using the purchase
method of accounting.
SIGCOM Training--On July 20, 2001, we acquired the assets, contracts and
personnel of the training systems division of SIGCOM, Inc., for an aggregate
consideration of $11.0 million, including transaction costs. The training
systems division of SIGCOM, Inc. is a provider of sophisticated simulation
systems used by the most advanced military and government organizations around
the world, including the U.S. Army, U. S. Marine Corps, U. S. Navy Seals, the
FBI, SWAT teams, British Special Forces and NATO troops, to help acclimate
members of the armed forces to combat conditions in urban areas. The acquisition
was accounted for using the purchase method of accounting.
Divestitures/Closures
In June 2001, our management made a strategic decision to focus our
resources on our core services business. As a result, we have sold, closed or
substantially curtailed several small businesses.
Center for Information Technology Education--We established CITE in 1999 to
conduct training for adults in the metropolitan Washington, D.C. area who were
interested in information technology as a second career. CITE offered ORACLE
database and JAVA training. While initially profitable, the business was
impacted by the slowdown of the general economy. On June 29, 2001, we sold the
business for $100,000, of which $50,000 was paid in cash and the remainder was
required to be paid in equal monthly installments of approximately $8,300
beginning August 1, 2001. In addition, we retained the tuition from courses that
were already underway prior to the sale on June 29, 2001. CITE's losses from
operations totaled $1.0 million for the twelve months ended December 31, 2001 on
revenue of $1.2 million. CITE's income from operations totaled $414,000 for the
year ended December 31, 2000 on revenues of $2.5 million.
CITI-SIUSS LLC--We established a joint venture, CITI-SIUSS LLC (formerly
known as Anteon-CITI-LLC), with Criminal Investigative Technology, Inc. in 1999
to participate in the law enforcement software development and services market.
After two years of investment in software and business development expenses, the
joint venture had not generated a sufficient customer base to create a
self-supporting business. In June 2001, we decided to cease software development
operations but to continue to support existing customers. For the twelve months
ended December 31, 2001, the joint venture generated operating losses of $2.6
million on revenues of approximately $1.5 million, compared with operating
losses of $2.5 million on revenues of $879,000 for the twelve months ended
December 31, 2000. We do not intend to make any additional investment in
developing or enhancing the existing software.
Interactive Media Corp.--On July 20, 2001, we sold all of our stock in IMC
for $13.5 million in cash, subject to adjustment based on the amount of working
capital as of the day of sale. IMC specializes in providing training services to
customers primarily in the commercial marketplace. Prior to the sale, IMC
transferred to us the assets of the government division of IMC, which
specializes in training services primarily for the government marketplace. For
the commercial division, revenues were approximately $11.7 million for the
twelve months ended December 31, 2001, as compared to $18.1 million for the
twelve months ended December 31, 2000. Operating loss was approximately $41,000
for the twelve months ended December 31, 2001, as compared to operating income
of $686,000 for the twelve months ended December 31, 2000. The total gain from
the sale recorded for the twelve months ended December 31, 2001, was
approximately $3.5 million.
31
DisplayCheck--Through our acquisition of A&T in June 1999, we acquired
expertise in electronic testing of liquid crystal displays and other
microdisplay products that utilize liquid crystal on silicon technologies. This
newly emergent market was pursued to determine business feasibility. While we
were successful in generating a limited amount of revenue from our test
equipment products, we decided not to make any further investments in this
market. Operations ceased in August 2001. Operating losses of $407,000 on
revenues of $664,000 were incurred in the twelve months ended December 31, 2001.
DisplayCheck generated an operating loss of $15,000 on revenue of $703,000 in
2000. On April 3, 2002, we sold principally all of the assets and transferred
certain liabilities of the business for an aggregate purchase price of $200,000.
South Texas Ship Repair--Through our acquisition of Sherikon in October
2000, we acquired South Texas Ship Repair, or "STSR". STSR specialized in
performing ship repair projects for government, commercial and private
customers. The market conditions for this type of work deteriorated
significantly in late 2000 and early 2001. Management decided to cease the
operations of STSR in December 2001. During the twelve months ended December 31,
2001, we incurred operating losses of $2.1 million on revenues of $3.3 million.
For the twelve months ended December 31, 2001, we also wrote off approximately
$1.0 million in goodwill, which was part of the original goodwill from the
Sherikon acquisition.
Results of Operations
Our historical consolidated financial statements do not reflect the
full-year impact of the operating results of a number of our acquisitions,
divestitures and closures, since their operating results are only included or
excluded from 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 we incurred a number of expenses as
discussed below, the impact of the amortization and reclassification principles
of SFAS No.142 relating to goodwill and certain intangible assets (discussed
below) and the impact of our initial public offering in March 2002.
32
The following table sets forth our consolidated results of operations based
on the amounts and percentage relationship of the items listed to revenues
during the period shown:
Twelve Months Ended
------------------------------------------------------------------------------------------------
December 31,
2002 2001 2000
(in thousands, except percentages)
Revenues $ 825,826 100.0% $ 715,023 100.0% $ 542,807 100.0%
Cost of Revenues........... 711,328 86.1 627,342 87.7 474,924 87.5
Gross Profit............... 114,498 13.9 87,681 12.3 67,883 12.5
Costs and expenses..........
General and administrative. 48,197 5.8 51,442 7.2 38,592 7.1
Amortization(1)............ 1,907 0.3 9,374 1.3 8,253 1.5
Total Operating Expenses 50,104 6.1 60,816 8.5 46,845 8.6
Income from operations........ 64,394 7.8 26,865 3.8 21,038 3.9
Interest expense, net......... 17,394 2.1 26,872 3.8 26,513 4.9
Other (income) expense, net... (417) -- (4,046) (0.6) -- --
Income before taxes and
minority interest........ 47,417 5.7 4,039 0.6 (5,475) (1.0)
Provision (benefit) for income
taxes.................... 18,374 2.2 4,413 0.6 (153) --
Minority interest............. (18) -- (38) -- 32 --
Income (loss) before
extraordinary items 29,025 3.5 (412) (0.1) (5,290) (1.0)
Extraordinary gain (loss) on
early extinguishment of
debt, net of tax......... (2,581) (0.3) 330 -- -- --
Net income (loss)............. $ 26,444 3.2% $ (82) 0.0% $ (5,290) (1.0)%
(1) Includes amortization of non-compete agreements, amortization of contract
backlog intangibles and for 2000 and 2001, before the adoption of SFAS No.
142, goodwill amortization and amortization of employee workforce
intangibles.
2002 compared with 2001
Revenues
For the twelve months ended December 31, 2002, revenues increased to $825.8
million, or 15.5%, from $715.0 million for the twelve months ended December 31,
2001. The increase in revenues was attributable to organic growth and the full
year 2002 impact of the acquisition of SIGCOM Training in July, 2001. This
increase was offset in part by the sale of the commercial business of IMC on
July 20, 2001. IMC's 2001 revenue for the commercial division was $11.7 million
through the sale date. For the twelve months ended December 31, 2002, our
organic growth was 16.9%, or $119.2 million, excluding the impact of acquired,
closed or sold businesses. The increase in our organic growth was primarily
attributable to growth in contracts for the development of information
technology, communications systems for the intelligence community, training,
modeling and simulation across our Department of Defense customer base, support
for U.S. Navy programs and support for U. S. Air Force acquisition and
operations.
33
Costs of Revenues
For the twelve months ended December 31, 2002, costs of revenues increased
by $84.0 million, or 13.4%, to $711.3 million from $627.3 million for the twelve
months ended December 31, 2001. For the twelve months ended December 31, 2002,
costs of revenues as a percentage of revenues decreased to 86.1% from 87.7% for
the twelve months ended December 31, 2001. The costs of revenues increase was
due primarily to the corresponding growth in revenues resulting from organic
growth and our acquisition of SIGCOM Training. The gross margin increased from
12.3% for the twelve months ended December 31, 2001 to 13.9% for the twelve
months ended December 31, 2002, primarily due to reductions in overhead expenses
and depreciation. Depreciation decreased from $7.1 million in 2001 to $4.3
million in 2002. Most of the decrease was due to the curtailment of operations
of CITI-SIUSS LLC in 2001 and completion of the remaining software depreciation
during the first half of 2001.
General and Administrative Expenses
For the twelve months ended December 31, 2002, general and administrative
expenses decreased $3.2 million, or 6.3%, to $48.2 million from $51.4 million
for the twelve months ended December 31, 2001. General and administrative
expenses for the twelve months ended December 31, 2002, as a percentage of
revenues, decreased to 5.8% from 7.2%. Excluding certain items from the twelve
months ended December 31, 2001, as outlined below, and the impact of businesses
sold or closed (described above), general and administrative expenses as a
percentage of revenue would have been 6.3% of our revenues for the twelve months
ended December 31, 2001. Certain items totaling $6.6 million that were incurred
in the twelve months ended December 31, 2001, but were not incurred in the
twelve months ended December 31, 2002, included a $3.6 million fee payable to
Caxton-Iseman Capital, Inc. in connection with the termination of our management
fee agreement as of December 31, 2001, management fees of $1.0 million paid to
Caxton-Iseman Capital, Inc., a $750,000 write-down of the carrying value of our
North Stonington, Connecticut facility, a $600,000 settlement and $497,000 in
legal fees incurred in the first quarter of 2001 for matters relating to a
dispute with a former subcontractor, and a $181,000 severance charge relating to
the termination of a former A&T executive. General and administrative expenses
for the twelve months ended December 31, 2001 also included costs related to
several businesses which were either sold or closed during 2001, including IMC,
CITE, DisplayCheck and STSR.
Amortization
For the twelve months ended December 31, 2002, amortization expenses
decreased $7.5 million, or 79.7 %, to $1.9 million from $9.4 million for the
twelve months ended December 31, 2001. Amortization as a percentage of revenues
was 1.3% for the twelve months ended December 31, 2001. The decrease in
amortization expenses was primarily attributable to the adoption of SFAS No. 142
as of January 1, 2002, which eliminated further amortization of goodwill. In
addition, for the twelve months ended December 30, 2001, we wrote off $1.0
million in goodwill associated with the closure of STSR in 2001. See the notes
to our consolidated financial statements, included elsewhere in this filing.
Operating Income
For the twelve months ended December 31, 2002, operating income increased
$37.5 million, or 139.7%, to $64.4 million from $26.9 million for the twelve
months ended December 31, 2001. Operating income as a percentage of revenues
increased to 7.8% for the twelve months ended December 31, 2002 from 3.8% for
the twelve months ended December 31, 2001. Absent the $6.6 million of expenses
for the twelve months ended December 31, 2001 described in the general and
administrative expenses section above, the $1.0 million for the write-off of
goodwill as a result of the closure of STSR, 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 Training for fiscal 2001, our
operating income would have been $39.8 million for the twelve months ended
December 31, 2001, and our operating margin would have been 5.6%.
34
Interest Expense, Net
For the twelve months ended December 31, 2002, interest expense, net of
interest income, decreased $9.5 million, or 35.3%, to $17.4 million from $ 26.9
million for the twelve months ended December 31, 2001. The decrease in interest
expense was due primarily to a reduction in our debt as a result of our initial
public offering in March 2002, which generated $75.2 million in net cash, and
the conversion of our $22.5 million subordinated convertible promissory note
held by Azimuth Tech. II LLC, one of our principal stockholders. In addition,
interest expense decreased as a result of lower borrowing rates in 2002 compared
with 2001. 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.
Other Income
For the twelve months ended December 31, 2002, other income decreased $3.6
million, to $417,000, from $4.0 million for the twelve months ended December 31,
2001. Other income for the twelve months ended December 31, 2002 included a gain
on the sale of DisplayCheck assets and receipt of insurance proceeds for
misappropriated equipment previously recorded as a loss. Other income for the
twelve months ended December 31, 2001 was comprised primarily of gains on sales
and closure of businesses of $4.0 million. 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
curtailment of operations of CITI-SIUSS, LLC. In addition, for the twelve months
ended December 31, 2001, we sold IMC as discussed above, resulting in a gain of
$3.5 million.
Provision For Income Taxes
Our effective tax rate for the twelve months ended December 31, 2002 was
38.8%, compared with 110.3% for the twelve months ended December 31, 2001, due
primarily to a reduction in non-deductible goodwill amortization expense as a
result of the implementation of SFAS No. 142 as of January 1, 2002.
2001 Compared with 2000
Revenues
For the twelve months ended December 31, 2001, revenues increased to $715.0
million, or 31.7%, from $542.8 million for the twelve months ended December 31,
2000. The increase in revenues was attributable to organic growth, a full year
of revenue from Sherikon, which was acquired in October 2000, and the
acquisition of SIGCOM Training. These increases were offset in part by the sale
of the commercial business of IMC on July 20, 2001. For the twelve months ended
December 31, 2001, organic growth was 21.0%, or $110.9 million. This growth was
driven in part by the expansion of work on several large contracts with the U.S.
Army, FEMA, Office of the Secretary of Defense, GSA and U.S. Postal Service. In
addition, we won several new contracts, including contracts with the Secretary
of the Air Force, the U.S. Army Battle Simulation Center and the U.S. Navy.
Sherikon provided $68.7 million in revenue during the twelve month period ended
December 31, 2001, which was an increase of $53.5 million from the twelve month
period ended December 31, 2000, during which Sherikon was only included for the
period subsequent to its acquisition. SIGCOM Training, which was acquired in
July 2001, provided an additional $7.9 million in revenue subsequent to its
acquisition. IMC's revenues for the commercial division were $11.7 million
during the twelve month period ended December 31, 2001, compared with $18.1
million during the twelve month period ended December 31, 2000. IMC was sold in
July 2001.
Costs of Revenues
For the twelve month period ended December 31, 2001, costs of revenues
increased by $152.4 million, or 32.1%, to $627.3 million from $474.9 million for
the twelve month period ended December 31, 2000. Costs of revenues as a
percentage of revenues grew from 87.5% to 87.7%. The costs of revenues growth
was due primarily to the corresponding growth in revenues resulting from organic
growth, the inclusion of a full year of Sherikon's revenues, and the acquisition
of SIGCOM Training. The majority of this growth was due to a $61.4 million
increase in direct labor and fringe and an $84.1 million increase in other
direct contract costs. Our gross margin declined from 12.5% to 12.3% primarily
due to an increase in the portion of our revenues generated through
subcontractors, which generally result in a lower margin.
35
General and Administrative Expenses
For the twelve month period ended December 31, 2001, general and
administrative expenses increased $12.9 million, or 33.3%, to $51.4 million from
$38.6 million for the twelve month period ended December 31, 2000. General and
administrative expenses as a percentage of revenues increased to 7.2% from 7.1%.
The increase in expenses was due to additional costs related to our growth, and
included $3.9 million in general and administrative costs reflecting a full year
of operations from Sherikon, which was acquired on October 20, 2000. This
increase was offset by cost savings from the integration of A&T, Sherikon and
SIGCOM Training. Expenses in 2001 included a $3.6 million fee payable to
Caxton-Iseman Capital, Inc. in connection with the termination of our management
fee agreement as of December 31, 2001; a $1.0 million management fee paid to
Caxton-Iseman Capital, Inc. for 2001; a $750,000 write-down of the carrying
value of our North Stonington, Connecticut facility; a $600,000 settlement,
$497,000 in related legal fees incurred during the first quarter of 2001 for
matters relating to a dispute with a former subcontractor (see Note 16(c) to our
historical consolidated financial statements included elsewhere in this filing);
and a $181,000 severance charge relating to the termination of a former A&T
executive. Excluding the aggregate $6.6 million expenses mentioned above, our
general and administrative expenses for the twelve months ended December 31,
2001 would have represented 6.3% of our revenues for the same period. General
and administrative expenses for the twelve months ended December 31, 2001 also
included costs related to several businesses which were either sold or closed
during the year, including IMC, CITE, DisplayCheck and STSR.
Amortization
For the twelve month period ended December 31, 2001, amortization expenses
increased $1.1 million or 13.6%, to $9.4 million from $8.3 million for the prior
period. Amortization as a percentage of revenues decreased to 1.3% from 1.5%.
The increase in amortization expenses was primarily attributable to a $1.2
million increase in amortization expense due to the inclusion of a full year of
Sherikon goodwill and intangibles amortization expense, as well as $100,000 for
six months of SIGCOM Training intangible amortization expense. In addition, we
wrote off $1.0 million in goodwill relating to the closure of STSR in 2001.
These amounts were offset by a $500,000 decrease in non-compete amortization and
a $859,000 increase due to a large one-time adjustment resulting from the
reclassification of a portion of A&T's goodwill to intangibles, which occurred
in 2000.
Operating Income
For the twelve month period ended December 31, 2001, operating income
increased $5.8 million, or 27.7%, to $26.9 million from $21.0 million. Operating
income as a percentage of revenue decreased to 3.8% for the twelve months ended
December 31, 2001 from 3.9% for the twelve months ended December 31, 2000.
Absent $6.6 million of expenses detailed in general and administrative expenses,
$1.0 million for the write-off of goodwill as a result of the closure of STSR,
assuming the allocation and amortization principles of SFAS No. 142 had been in
effect as of January 1, 2001, and assuming the elimination of our sold or closed
operations for the entire twelve month period ended December 31, 2001, our
operating income would have been $39.8 million for the twelve month period ended
December 31, 2001 and our operating margin would have been 5.6%.
Interest Expense
For the twelve month period ended December 31, 2001, interest expense, net
of interest income, increased $360,000, or 1.4%, to $26.9 million from $26.5
million for the twelve month period ended December 31, 2000. The increase in
interest expense was due primarily to increased borrowings on our revolving line
of credit relating primarily to the purchases of Sherikon in October 2000 and
SIGCOM Training in July 2001, net of proceeds from the sale of IMC used to
reduce our borrowings under the revolving loan portion of our prior credit
facility.
36
Other Income
For the twelve month period ended December 31, 2001, other income, which
includes gains on sales and closures of businesses, was $4.0 million. We sold
IMC in the third quarter of 2001 at a gain of $3.5 million. In addition, other
income includes a $100,000 gain on the sale of CITE's assets and a $487,000 gain
resulting from the closure of the CITI-SIUSS, LLC. Upon cessation of the
operations of CITI-SIUSS, LLC there were no excess proceeds available to us or
the minority interest. Accordingly, the remaining minority interest was written
off to other income.
Provision for Income Taxes
Our effective tax rate for the twelve month period ended December 31, 2001
was 110.3%, compared with a benefit of 2.8% for the twelve month period ended
December 31, 2000 due to an increase in non-deductible goodwill associated with
the acquisition of Sherikon and the increase of our effective federal tax rate
from 34% to 35%.
Liquidity and Capital Resources
Cash Flow for the Twelve Months Ended December 31, 2002 and 2001
We generated $1.3 million in cash from operations for the twelve months
ended December 31, 2002. By comparison, we generated $37.9 million in cash from
operations for the twelve months ended December 31, 2001. The reduced level of
cash from operations for the twelve months ended December 31, 2002 was primarily
the result of an increase in contract receivables created by an upgrade of
software systems and procedures by two government paying offices that process a
substantial percentage of our invoices, which caused delays in payment of
contract receivables. We saw improvement in government payment cycles in the
fourth quarter of 2002, which resulted in a four day improvement in our days
sales outstanding as compared to the third quarter of 2002. We expect collection
of contract receivables from these two paying offices to continue to improve
during 2003. Contract receivables increased $57.7 million for the twelve months
ended December 31, 2002. Principally as a result of the above, total days sales
outstanding were 78 days as of December 2002 compared with 66 days as of
December 2001. Accounts receivable totaled $189.1 million at December 31, 2002
and represented 52% of total assets at that date. Additionally, increases in
accounts payable and accrued expenses resulted in an increase of $22.6 million
of cash from operations, a 43.6% increase from 2001. For the twelve months ended
December 31, 2002, net cash used in investing activities was $1.4 million, 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 $2.5 million for the
twelve months ended December 31, 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 approximately $75.2 million, based on
an IPO 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. We
used the net proceeds from the IPO to: repay $11.4 million of our debt
outstanding under the term loan portion of our prior credit facility;
temporarily pay down $39.5 million on the revolving loan portion of our prior
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 prior 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 our management; and to repay $4.4 million of our subordinated
notes, relating to accrued interest on our $22.5 million principal amount
subordinated convertible promissory note formerly 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 prior credit facility. We also used $2.5 million of the
IPO proceeds temporarily to repay debt under the revolving portion of our prior
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.
37
On October 21, 2002, we entered into an amended and restated credit
agreement related to 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 Credit Facility also permits us to elect from
time to time to (i) repurchase certain amounts of our subordinated debt and
outstanding common stock from our share of excess cash flow (as defined in the
Credit Facility); and (ii) repurchase certain amounts of our subordinated debt
from our share of net cash proceeds of issuances of equity securities. In
addition, the Credit Facility provides flexibility to raise additional financing
to fund future acquisitions.
Historically, our primary liquidity requirements have been for debt service
under our Credit Facility and 12% Notes and for acquisitions and working capital
requirements. We have funded these requirements primarily through internally
generated operating cash flow and funds borrowed under our existing Credit
Facility. Our Credit Facility expires June 23, 2005. The facility consists of a
term loan and a revolving line of credit allowing for aggregate borrowings of up
to $222.3 million as of December 31, 2002. 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 and our ratio of net debt to
EBITDA (as defined in the Credit Facility). The Credit Facility contains
affirmative and negative covenants customary for such financings. The Credit
Facility also contains financial covenants customary for such financing,
including, but not limited to: maximum ratio of net debt to EBITDA; maximum
ratio of senior debt to EBITDA and limitation on capital expenditures. For the
period ended December 31, 2002, we complied with all of the financial covenants.
At December 31, 2002, total debt outstanding under our Credit Facility was
approximately $28.2 million, consisting of $21.2 million of term loan, and $7.0
million outstanding under the revolving loan portion of our Credit Facility. The
total funds available to us under the revolving loan portion of our Credit
Facility as of December 31, 2002 were $108.3 million. Under certain conditions
related to excess annual cash flow, as defined in our Credit Facility, and the
receipt of proceeds from certain asset sales and debt or equity issuances, we
are required to prepay, in amounts specified in our Credit Facility, borrowings
under the term loan. Due to excess cash flows generated during 2001 under our
Credit Facility (prior to its amendment), 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 December 31, 2002, we did not have any
capital commitments greater than $1.0 million.
Our principal working capital need is for funding accounts receivable,
which has increased with the growth in our business and the delays in government
funding and payment. Our principal sources of cash to fund our working capital
needs are cash generated from operating activities and borrowings under our
Credit Facility.
We have relatively low capital investment requirements. Capital
expenditures were $3.2 million and $2.2 million for the twelve months ended
December 31, 2002 and 2001, respectively, primarily for leasehold improvements
and office equipment.
We use off-balance sheet financing, primarily to finance certain capital
expenditures. Operating leases are used primarily to finance the purchase of
computers, servers, phone systems and to a lesser extent, other fixed assets
like furnishings. As of December 31, 2002 we had financed equipment with an
original cost of approximately $14.6 million through operating leases. Had we
not used operating leases, we would have used our existing line of credit to
purchase these assets. Other than the operating leases described above, and
facilities leases, we do not have any other off- balance sheet financing.
Our business acquisition expenditures were $11.0 million in 2001. In 2001,
we acquired SIGCOM Training. The acquisition was financed through borrowings
under our prior credit facility. 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.
38
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 2002 or 2001.
Recent 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. We adopted SFAS
No. 144 as of January 1, 2002, with no impact on our consolidated financial
statements.
In April 2002, the Financial Accounting Standards Board issued Statement
145 ("SFAS No. 145"), Rescission of FASB Statements No. 4, 44, and 64, Amendment
to FASB Statement 13, and Technical Corrections. SFAS No. 145 addresses the
reporting of gains and losses from extinguishment of debt. SFAS No. 145
rescinded FASB Statements 4 and 64. Under the new standard, only gains and
losses from extinguishments meeting the criteria of Accounting Principles Board
Opinion No. 30 would be classified as extraordinary items. Thus, gains or losses
arising from extinguishments of debt that are part of our 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. We will adopt SFAS No.145
as of January 1, 2003, and as a result, we will be required to reclassify
approximately $2.6 million of extraordinary loss and $330,000 of extraordinary
gain for the years ended December 31, 2002 and 2001 respectively, to operating
income.
In June 2002, the FASB issued 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 ("EITF") 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. The provisions of
SFAS No. 146 are effective for exit or disposal activities that are initiated
after December 31, 2002, with early adoption encouraged. We have not yet
determined the impact, if any, this Statement will have on our consolidated
financial statements.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. Interpretation No. 45 requires certain
disclosures to be made by a guarantor in its financial statements about its
obligations under certain guarantees, including product warranties. The
disclosure provisions of this Statement are effective as of the fourth quarter
of 2002. This Statement also requires a guarantor to recognize, at inception,
for all guarantees issued or modified after December 31, 2002, a liability for
the fair value of the obligations it has undertaken in issuing a guarantee. The
adoption of the fair value provisions of this Statement did not have an impact
on our consolidated financial statements.
39
In December 2002, the Emerging Issues Task Force ("EITF") issued EITF Issue
00-21, Accounting for Revenue Arrangements with Multiple Deliverables. EITF
00-21 provides guidance on determining whether a revenue arrangement contains
multiple deliverable items and if so, requires revenue be allocated amongst the
different items based on fair value. EITF 00-21 also requires revenue on any
item in a revenue arrangement with multiple deliverables not delivered
completely must be deferred until delivery of the item is completed. The
effective date of this Issue for the Company will be July 1, 2003. We have not
yet determined the impact, if any, this Statement will have on our consolidated
financial statements.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities. Interpretation No. 46 provides guidance for
identifying a controlling interest in a Variable Interest Entity, or "VIE,"
established by means other than voting interests. Interpretation No. 46 also
requires consolidation of a VIE by an enterprise that holds such a controlling
interest. The effective date for this Interpretation will be July 1, 2003. We
have not yet determined the impact, if any, this Interpretation will have on our
consolidated financial statements.
ITEM 7A. 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 $75.0 million principal
amount of our 12% Notes is fixed at 12%, the interest rate on both the term and
revolving loan portions of our Credit Facility 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 $30.0 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 December 31, 2002,
the fair value of our remaining interest rate swap agreements of $15.0 million
resulted in a net liability of $763,000 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 $249,000 and $208,000 for the
twelve months ended December 31, 2002 and 2001, respectively.
Item 8. Financial Statements and Supplementary Data
Our consolidated financial statements are provided in Part IV., Item
15 of this filing.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
We had no disagreements with our independent accountants on accounting
principles, practices or financial statement disclosure during the two years
prior to the date of our most recent consolidated financial statements included
elsewhere in this report.
40
Management
Item 10. Directors and Executive Officers of the Registrant
The directors and executive officers of Anteon and their respective ages as of
the date of this filing are as follows:
Name Age Position Held
Frederick J. Iseman.................... 50 Chairman of the Board and Director
Joseph M. Kampf........................ 58 President, Chief Executive Officer and Director
Thomas M. Cogburn...................... 59 Executive Vice President, Chief Operating Officer and Director
Carlton B. Crenshaw.................... 57 Senior Vice President and Chief Financial Officer
Mark D. Heilman........................ 54 Senior Vice President, Corporate Development
Seymour L. Moskowitz................... 70 Executive Vice President, Technology
Curtis L. Schehr....................... 44 Senior Vice President, General Counsel and Secretary
Vincent J. Kiernan..................... 44 Vice President, Finance
Gilbert F. Decker...................... 65 Director
Robert A. Ferris....................... 60 Director
Dr. Paul Kaminski...................... 60 Director
Steven M. Lefkowitz.................... 38 Director
William J. Perry....................... 75 Director
General Henry Hugh Shelton, USA (ret.). 61 Director
Thomas J. Tisch........................ 48 Director
Frederick J. Iseman, Chairman of the Board and Director
Frederick J. Iseman has served as our Chairman and a director since April
1996. Mr. Iseman is currently Chairman and Managing Partner of Caxton-Iseman
Capital, Inc. (a private investment firm), which was founded by Mr. Iseman in
1993. Prior to establishing Caxton-Iseman Capital, Inc., Mr. Iseman founded
Hambro-Iseman Capital Partners (a merchant banking firm) in 1990. From 1988 to
1990, Mr. Iseman was a member of Hambro International Venture Fund. Mr. Iseman
is Chairman of Buffets, Inc., a director of Vitality Beverages, Inc. and a
member of the Advisory Board of Duke Street Capital.
Joseph M. Kampf, President and Chief Executive Officer
Joseph M. Kampf has served as our President and Chief Executive Officer and
a director since April 1996. From January 1994 to 1996, Mr. Kampf was a Senior
Partner of Avenac Corporation, a consulting firm providing advice in change
management, strategic planning, corporate finance and mergers and acquisitions
to middle market companies. From 1990 through 1993, Mr. Kampf served as
Executive Vice President of Vitro Corporation, a wholly owned subsidiary of The
Penn Central Corporation. Prior to his position as Executive Vice President of
Vitro Corporation, Mr. Kampf served as the Senior Vice President of Vitro
Corporation's parent company, Penn Central Federal Systems Company and as Chief
Liaison Officer for the group with The Penn Central Corporation. Between 1982
and 1986, Mr. Kampf was Vice President of Adena Corporation, an oil and gas
exploration and development company. He is a life member of the Navy League and
is also active in the Surface Navy Association, Naval Submarine League and
National Defense Industrial Association. He was a Director of the Armed Forces
Communications and Electronics Association and served on the Board of Directors
of Atlantic Aerospace and Electronics Corporation and CPC Health, a non-profit
community mental health agency.
Thomas M. Cogburn, Executive Vice President and Chief Operating Officer
Thomas M. Cogburn has served as our Executive Vice President and Chief
Operating Officer and a director since April 1996. From 1992 to 1996, he served
as Chief Operating Officer at Ogden Professional Services Corporation, a
predecessor company of ours. From 1988 to 1992, Mr. Cogburn served as Vice
President of the Information System Support Division of CACI International, Inc.
Mr. Cogburn's experience also includes 22 years in information systems design,
operation, program management, and policy formulation for the U.S. Air Force.
41
Carlton B. Crenshaw, Senior Vice President and Chief Financial Officer
Carlton B. Crenshaw has served as our Senior Vice President and Chief
Financial Officer since July 1996. From 1989 to 1996, Mr. Crenshaw served as
Executive Vice President, Finance and Administration and Chief Financial Officer
of Orbital Sciences Corporation (a commercial technology company). He served in
a similar capacity with Software AG Systems, Inc. from 1985 to 1989. From 1971
to 1985, Mr. Crenshaw progressed from financial analyst to Vice President of
Strategic Planning for the Sperry Univac division of Sperry Corporation and was
Treasurer for Sperry Corporation.
Mark D. Heilman, Senior Vice President, Corporate Development
Mark D. Heilman has served as our Senior Vice President for Corporate
Development since October 1998. From 1991 to September 1998, Mr. Heilman was a
partner and principal of CSP Associates, Inc., where he specialized in strategic
planning and mergers and acquisition support for the aerospace, defense and
information technology sectors. From 1987 to 1991, Mr. Heilman was Vice
President and an Executive Director of Ford Aerospace and Communications
Corporation.
Seymour L. Moskowitz, Senior Vice President, Technology
Seymour L. Moskowitz has served as our Senior Vice President, Technology
since June 2002 and as Senior Vice President, Technology, from March 1997
through June 2002. Mr. Moskowitz served as a consultant to us from April 1996 to
March 1997. Prior to joining us, Mr. Moskowitz served as an independent
management consultant from 1994 to April 1996. From 1985 to 1994, Mr. Moskowitz
served as Senior Vice President of Technology at Vitro Corporation, where he was
responsible for the development and acquisition of technologies and management
of research and development personnel and laboratory resources. Before working
for the Vitro Corporation, Mr. Moskowitz served as Director of Research and
Development for Curtiss-Wright Corporation. Mr. Moskowitz has been awarded seven
patents, authored and co-authored over 50 articles, and published in ASME
Transactions, ASME Journals of Energy, Power and Aircraft, SAE Journal and
various conference proceedings. He formerly served on the Board of Directors of
the Software Productivity Consortium and is currently a member of the steering
committee of the Fraunhofer Center (MD) for Software Engineering.
Curtis L. Schehr, Senior Vice President, General Counsel and Secretary
Curtis L. Schehr has served as our Senior Vice President, General Counsel
and Secretary since October 1996. From 1991 to 1996, Mr. Schehr served as
Associate General Counsel at Vitro Corporation. During 1990, Mr. Schehr served
as Legal Counsel at Information Systems and Networks Corporation. Prior to 1990,
Mr. Schehr served for six years in several legal and contract oriented positions
at Westinghouse Electric Corporation (Defense Group).
Vincent J. Kiernan, Vice President, Finance
Vincent J. Kiernan has served as our Vice President, Finance since October
1998. From July 1995 to September 1998, he served as a Managing Director at KPMG
LLP, where he provided cost and pricing control reviews, claim analysis,
accounting/contract management and general consulting services to a wide array
of clients including both government contractors and commercial enterprises.
From 1989 to 1995, Mr. Kiernan was a Director for Coopers & Lybrand. From 1985
to 1989, he was a consultant with Peterson & Co. Consulting.
42
Gilbert F. Decker, Director
Gilbert F. Decker has served as a director since June 1997. Mr. Decker
currently serves as a private consultant to the technology industry. From April
1999 until August 2001, Mr. Decker served as Executive Vice President at Walt
Disney Imagineering. From April 1994 to May 1997, Mr. Decker served as the
Assistant Secretary of the U.S. Army for Research, Development and Acquisition.
As Assistant Secretary, Mr. Decker led the Army's acquisition and procurement
reform efforts, with an emphasis on eliminating excessive government
requirements throughout the acquisition process. He also served as the Army
Acquisition Executive, the Senior Procurement Executive, the Science Advisor to
the Secretary and the Senior Research and Development official for the Army.
From 1983 to 1989, Mr. Decker was on the Army Science Board and served as
Chairman from March 1987 until the end of his appointment. In the private
sector, Mr. Decker has served as President and Chief Executive Officer of three
technology companies, including Penn Central Federal Systems Company.
Robert A. Ferris, Director
Robert A. Ferris has served as a director since April 1996. Mr. Ferris is a
Managing Director of Caxton-Iseman Capital, Inc. and has been employed by
Caxton-Iseman Capital, Inc. since March 1998. From 1981 to February 1998, Mr.
Ferris was a General Partner of Sequoia Associates (a private investment firm
headquartered in Menlo Park, California). Prior to founding Sequoia Associates,
Mr. Ferris was a Vice President of Arcata Corporation, a New York Stock
Exchange-listed company. Mr. Ferris currently is a director of Buffets, Inc.
Dr. Paul Kaminski, Director
Dr. Paul Kaminski has served as a director since June 1997. Dr. Kaminski
has served as Chairman and Chief Executive Officer of Technovation, Inc. since
1997 and as a Senior Partner of Global Technology Partners since 1998. From 1994
to May 1997, Dr. Kaminski served as the Under Secretary of Defense for
Acquisition and Technology. In this position, Dr. Kaminski was responsible for
all matters relating to Department of Defense acquisition, including research
and development, procurement, acquisition reform, dual-use technology and the
defense technology and industrial base. Prior to 1994, he served as Chairman of
a technology oriented investment banking and consulting firm. Dr. Kaminski also
served as Chairman of the Defense Science Board and as a consultant and advisor
to many government agencies.
Steven M. Lefkowitz, Director
Steven M. Lefkowitz has served as a director since April 1996. Mr.
Lefkowitz is a Managing Director of Caxton-Iseman Capital, Inc. and has been
employed by Caxton-Iseman Capital, Inc. since 1993. From 1988 to 1993, Mr.
Lefkowitz was employed by Mancuso & Company (a private investment firm) and
served in several positions including Vice President and as a Partner of Mancuso
Equity Partners. Mr. Lefkowitz is a director of Buffets, Inc. and Vitality
Beverages, Inc.
William J. Perry, Director
Dr. William J. Perry has served as a director since February 2002. He is
currently the Michael and Barbara Berberian Professor at Stanford University
with a joint appointment in the School of Engineering and the Institute for
International Studies and Co-director of the Preventive Defense Project. In a
prior term at Stanford (1988-1993), Dr. Perry was Co-director of the Center for
International Security and Arms Control. Dr. Perry was the 19th Secretary of
Defense for the United States, serving from February 1994 to January 1997. He
previously served as Deputy Secretary of Defense (1993-1994) and as Under
Secretary of Defense for Research and Engineering (1977-1981). In the private
sector, Dr. Perry has founded and led two technology firms and serves on the
board of directors of several high technology companies. He currently serves as
Chairman of Global Technology Partners. Dr. Perry has received numerous awards,
including the Presidential Medal of Freedom.
43
General Henry Hugh Shelton, USA (ret.), Director
General Hugh Shelton, USA (ret.), has served as a director since February
2002. During his 37 years of active service in the military, General Shelton
commanded at every level, including the 82nd Airborne Division, the XVIII
Airborne Corps, as the Joint Task Force 180 Commander leading the Haiti
Operation, and as Commander-in-Chief U.S. Special Operations Command. General
Shelton became the 14th Chairman of the Joint Chiefs of Staff on October 1, 1997
and served two terms. General Shelton retired in October 2001 as the Chairman of
the Joint Chiefs of Staff and the nation's principal military advisor to the
President of the United States and the Secretary of Defense.
Thomas J. Tisch, Director
Thomas J. Tisch has served as a director since February 2002. Since 1992,
Mr. Tisch has served as Managing Partner of Four Partners, an investment
partnership focusing on public securities. Prior to 1992, Mr. Tisch worked in a
similar capacity in predecessor partnerships. Mr. Tisch is a Trustee of the
Manhattan Institute, Mount Sinai-NYU Health System, The Henry Kaufman
Campgrounds, Inc. and the Municipal Assistance Corporation for the City of New
York. Mr. Tisch is also a director of InfoNXX, Inc., a provider of directory
assistance to the wireless industry.
Classes and Terms of Directors
Our board is currently comprised of ten directors. Our board is divided
into three classes, as nearly equal in number as possible, with each director
serving a three-year term and one class being elected at each year's annual
meeting of stockholders. As of the date of this filing, the following
individuals are directors and will serve for the terms indicated:
Class 1 Directors (term expiring in 2003)
Robert A. Ferris
William J. Perry
General Henry Hugh Shelton, USA (ret.)
Thomas J. Tisch
Class 2 Directors (term expiring in 2004)
Joseph M. Kampf
Steven M. Lefkowitz
Dr. Paul Kaminski
Class 3 Directors (term expiring in 2005)
Frederick J. Iseman
Thomas M. Cogburn
Gilbert F. Decker
Pursuant to our amended and restated certificate of incorporation, the
Caxton-Iseman Stockholders are entitled to nominate, any such nominees being
referred to as "Caxton-Iseman nominees": (i) for so long as such stockholders
beneficially own in the aggregate at least a majority of our then outstanding
common stock, at least a majority in number of the directors on our board; and
(ii) for so long as such stockholders beneficially own in the aggregate more
than 10% but less than a majority of our then outstanding common stock, a number
of directors approximately equal to that percentage multiplied by the number of
directors on our board. As of the date of this filing, the Caxton-Iseman
nominees consist of Messrs. Iseman, Ferris, Lefkowitz and Tisch. Each of Messrs.
Ferris and Lefkowitz has agreed, for so long as he is a director serving or
elected as a Caxton-Iseman nominee, to resign from our board, upon the request
of the Caxton-Iseman Stockholders. On February 8, 2002, we increased the size of
our board to twelve, and elected three new directors, thereby leaving two
vacancies to be filled. Pursuant to the provisions of our amended and restated
certificate of incorporation, the Caxton-Iseman Stockholders may fill one of
these two vacancies.
44
Committees of Our Board
Our board has established an executive committee, the members of which are
Messrs. Iseman, Lefkowitz, Ferris and Kampf. Our board has also established an
audit committee, the members of which are Messrs. Decker, Tisch and Kaminski.
Upon completion of the IPO, our board established a compensation committee, an
executive compensation committee and a nominating and corporate governance
committee. Messrs. Iseman, Ferris, Lefkowitz, Kaminski and Shelton are currently
members of our compensation committee and the executive compensation committee
is comprised of Messrs. Kaminski and Shelton. Our nominating and corporate
governance committee is currently comprised of Messrs. Lefkowitz, Shelton and
Ferris. The audit committee oversees actions taken by our independent auditors
and reviews our internal controls and procedures. The compensation committee
reviews and approves the compensation of our officers and management personnel
and administers our employee benefit plans and our Amended and Restated Omnibus
Stock Plan. The executive compensation committee administers our Amended and
Restated Omnibus Stock Plan and other executive plans for awards or grants to
our named executive officers and persons subject to Section 16 of the Exchange
Act. The nominating and corporate governance committee nominates candidates for
election to our board. The executive committee exercises the authority of our
board in the interval between meetings of the board.
Compensation of Directors
Our directors who are not employees or Caxton-Iseman Stockholders are
eligible to receive the following annual compensation: $5,000 for each fiscal
quarter; $1,000 for each board meeting attended; $1,500 annually for serving as
chairperson of a committee; and $500 for each committee meeting attended. A
deferred fee plan for non-employee directors, previously established with an
effective date of January 1, 2000 and which allowed non-employee directors to
defer all or any portion of the fees received from us, was amended and
terminated by the board effective December 31, 2001. Each of our directors is
also reimbursed for expenses incurred in connection with serving as a member of
our board.
Compliance with Section 16(a) of the Exchange Act
Based solely on our review of copies of reports filed with the SEC, we
believe that all reports on Form 3, Form 4, and Form 5 required to be filed were
so filed on a timely basis except for a Form 4 on behalf of Mr. Cogburn and a
Form 4 on behalf of Mr. Heilman.
45
Item 11. Executive Compensation
The following table sets forth information on the compensation awarded to,
earned by or paid to our Chief Executive Officer, Joseph M. Kampf, and the four
other most highly compensated executive officers of ours whose individual
compensation exceeded $100,000 during the twelve months ended December 31, 2002
for services rendered in all capacities to us.
Annual Compensation Long-Term Compensation Awards
Number of Shares
Other Annual Underlying Stock
Name and Principal Position Year Salary Bonus Compensation(1) Options
Joseph M. Kampf..................... 2002 $457,042 $299,520 -- 200,000
President and Chief Executive 2001 415,899 240,000 -- --
Officer 2000 391,530 240,000 -- 240,000
Thomas M. Cogburn................... 2002 255,247 147,600 -- 100,000
Executive Vice President and 2001 231,254 110,000 -- --
Chief Operating Officer 2000 211,033 100,000 -- 80,000
Carlton B. Crenshaw................. 2002 220,236 120,000 -- 80,000
Senior Vice President and 2001 204,999 100,000 -- --
Chief Financial Officer 2000 198,927 100,000 -- --
Mark D. Heilman..................... 2002 211,144 120,000 -- 80,000
Senior Vice President, 2001 195,451 100,000 -- --
Corporate Development 2000 185,905 75,000 -- --
Seymour L. Moskowitz................ 2002 211,144 120,000 -- 80,000
Senior Vice President, 2001 195,451 100,000 -- --
Technology 2000 182,991 112,500 -- --
(1) No named executive officer received Other Annual Compensation in an amount
in excess of the lesser of either $50,000 or 10% of the total of salary and
bonus reported for him in the two preceding columns.
Option Grants in 2002
Potential Realizable Value at
Assumed Annual Rates of Stock
Individual Grants Price Appreciation for Option Term
------------------------------ ------------------------------------
------------------------------ ------------------------------------
Number of
Shares % of Total
Underlying Options Granted Exercise or
Options to Employees in Base Price
Granted 2002 Per Share Expiration 5% 10%
Name Date
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Joseph M. Kampf 200,000 14.1% $18.00 3/11/2012 $ 2,264,021 $ 5,737,473
Thomas M. Cogburn 100,000 7.1% $18.00 3/11/2012 1,132,010 2,868,736
Carlton B. Crenshaw 80,000 5.6% $18.00 3/11/2012 905,608 2,294,989
Mark D. Heilman 80,000 5.6% $18.00 3/11/2012 905,608 2,294,989
Seymour L. Moskowitz 80,000 5.6% $18.00 3/11/2012 905,608 2,294,989
46
Aggregated Option Exercises in 2002 and Fiscal Year-End Option Values
The following table sets forth certain information with respect to options
held at the end of fiscal 2002 by each of our named executive officers:
Individual Grants Value of Unexercised
Number of Shares Underlying
Shares Unexercised Options at In-the-Money Options at
Acquired on December 31, 2002 December 31, 2002 Exercisable/
Name Exercise(s) Value Realized Exercisable/Unexercisable(1) Unexercisable(2)
Joseph M. Kampf.......... 0 0 328,320/344,000 $7,083,780/ $3,756,780
Thomas M. Cogburn........ 8,000 0 56,000/156,000 $1,032,140/ $1,606,760
Carlton B. Crenshaw...... 83,642 $1,434,983 28,510/80,000 $660,184/ $480,000
Mark D. Heilman.......... 45,760 $324,368 162,240/152,000 $3,109,236/ $1,853,580
Seymour L. Moskowitz..... 113,030 $1,519,706 292,258/115,200 $6,535,081/ $1,140,088
(1) Represents options granted under our Amended and Restated Omnibus Stock
Plan, after giving effect to the merger of our subsidiary, Anteon Virginia,
into us and the reorganization transactions described in "Certain
Relationships--Reorganization Transactions," and the split of our common
stock we effected on February 19, 2002.
(2) Based on the difference between the closing price of our common stock on
December 31, 2002 as reported by the New York Stock Exchange- Corporate
Transactions and the option exercise price. The above valuations may not
reflect the actual value of unexercised options, as the value of
unexercised options fluctuates with market activity.
Amended and Restated Omnibus Stock Plan
Purposes of the Plan
On March 5, 2002, Anteon Virginia amended and restated its omnibus stock
plan, which was originally adopted in January 1997 and which terminates in
January 2007. We subsequently assumed the plan as part of our IPO reorganization
transactions on March 15, 2002. The plan enables us to make grants of
stock-based incentive compensation to our officers and other key employees,
directors and consultants. The purposes of the plan are to promote our long-term
growth and profitability by (i) providing key people with incentives to improve
stockholder value and to contribute to our growth and financial success and (ii)
enabling us to attract, retain and reward the best available persons for
positions of substantial responsibility. The plan may be used to grant award
compensation which qualifies for the exemption provided under Section 162(m) of
the Internal Revenue Code, but the plan may also be used to grant awards that do
not qualify for that exemption. The amendment and restatement of the plan will
not affect any existing option holders.
Administration of the Plan
The plan is currently administered by the compensation committee of the
board of directors. The compensation committee has full power and authority to
administer the plan and to adopt such rules, regulations, agreements, guidelines
and instruments for the administration of the plan and for the conduct of its
business as it deems necessary or advisable. The compensation committee is
authorized to interpret the plan, at its sole and absolute discretion, and to
make adjustments in the terms and conditions of, and the criteria included in,
awards in recognition of unusual or recurring events affecting us, or our
financial statements, or of changes in applicable laws, regulations or
accounting principals. The board of directors may modify or terminate the plan
at any time. The board of directors may take no action which would impair the
rights of any participant or any holder or beneficiary of any award without the
consent of the affected participant, holder or beneficiary. All actions of the
compensation committee are conclusive. The board of directors may resolve to
directly administer the plan. All of the compensation committee's decisions
under the plan will be subject to the approval of the board of directors. All
awards under the plan made to persons subject to Section 16(b) of the Exchange
Act or who may be named executive officers, as determined by the compensation
committee, shall be granted by the executive compensation committee. All of the
decisions of the executive compensation committee are subject to the approval of
the compensation committee.
47
Awards Available under the Plan
Each award under the plan, and each right under any award, may be exercised
during the participant's lifetime only by the participant, unless otherwise
determined by the compensation committee or, if permissible under applicable
law, by the participant's guardian or legal representative. The awards may not
be assigned, alienated, pledged, attached, sold or otherwise transferred or
encumbered by a participant other than by will or by the laws of descent and
distribution. The designation of a beneficiary will not constitute an
assignment, alienation, pledge, attachment, sale, transfer or encumbrance for
purposes of the plan.
The plan authorizes the grant of awards with respect to a maximum of
6,242,400 shares of common stock. Any shares covered by awards which are
forfeited, expire or which are terminated or canceled for any reason (other than
as a result of the exercise or vesting of the award) will again be available for
grant under the plan. The plan restricts the number of options or stock
appreciation rights that may be granted to any one participant during a calendar
year to a maximum of 250,000 shares of common stock. In addition, in the event
of a reclassification, recapitalization, stock split, stock dividend,
combination of shares or other similar event, the maximum number and kind of
shares reserved for issuance or with respect to which awards may be granted
under the plan are required to be adjusted to reflect such event, and the
compensation committee is required to make such adjustments as it deems
appropriate and equitable in the number, kind and price of shares covered by
outstanding awards made under the plan (and in any other matters that relate to
awards and that are affected by the changes in the common stock referred to
above). The plan is not subject to the Employee Retirement Income Security Act
of 1974, as amended, or Section 401(a) of the Internal Revenue Code.
Types of Awards
Under the plan, our board of directors may grant awards in the following
forms: non-qualified stock options, incentive stock options, stock appreciation
rights, restricted stock or unrestricted stock awards or phantom stock. Awards
may be granted for no cash consideration or for such consideration as may be
determined by the board of directors.
Stock Options. A stock option granted under the plan provides a participant
the right to purchase, subject to the terms of the stock option agreement, for a
specified period of time, a stated number of shares of common stock at the price
specified in the stock option agreement. All other terms and conditions of the
options are determined by the compensation committee and set forth in the
applicable stock option agreement. An option generally may be exercised by
delivery of an amount equal to the exercise price of that option in cash, shares
of common stock (provided that the common stock delivered has been owned by the
participant for at least six months or was previously acquired by the
participant on the open market), a brokered exercise, any combination of the
above or as the compensation committee may otherwise determine. In the event of
the participant's disability or death, the provisions of the plan will apply to
the participant's legal representative or guardian, executor, personal
representative, or to the person to whom the option and/or shares shall have
been transferred by will or the laws of descent and distribution, as though that
person is the participant.
Stock Appreciation Rights. A stock appreciation right provides the
participant the right to receive an amount equal to the excess of the fair
market value of a share of common stock on the date of exercise of the stock
appreciation right over the grant price of the stock appreciation right. Stock
appreciation rights may be granted in tandem with another award, in addition to
another award, or freestanding and unrelated to another award. The board is
authorized under the plan to determine the terms of the stock appreciation right
and whether a stock appreciation right will be settled in cash, shares of common
stock or a combination of cash and shares of common stock.
48
Stock Awards: Restricted Stock, Unrestricted Stock and Phantom Stock.
Subject to the other applicable provisions of the plan, the compensation
committee may at any time and from time to time grant stock awards to eligible
participants in such amount and for such consideration, as it determines. A
stock award may be denominated in shares of common stock or stock-equivalent
units, and may be paid in common stock, in cash, or in a combination of common
stock and cash, as determined in the sole and absolute discretion of the
compensation committee from time to time.
Change in Control
In the event of any proposed change in control (as defined in the plan),
the compensation committee is required to take such action as it deems
appropriate and equitable to effectuate the purposes of the plan and to protect
the grantees of the awards, which may include, without limitation, the
following:
o acceleration or change of the exercise dates of any award so that the
unvested portion of any award becomes fully vested and immediately
exercisable;
o arrangements with grantees for the payment of appropriate
consideration to them for the cancellation and surrender of any award,
which shall not be less than consideration paid for our other common
stock which is acquired, sold, transferred, or exchanged because of
the proposed change in control; and
o in any case where equity securities other than our common stock are
proposed to be delivered in exchange for or with respect to common
stock, arrangements providing that any award shall become one or more
awards with respect to such other equity securities.
Severance Agreements
Certain of our executive officers and certain key members of management, or
the "Executives," have entered into agreements with our wholly owned operating
subsidiary, Anteon Corporation. The agreements provide for certain compensation
payments and other benefits for periods ranging from 12 months to 24 months,
except in the case of Mr. Kampf, whose payments and benefits will continue for
36 months, to be received by the Executive in the event the Executive's
employment is involuntarily terminated without cause, or in the event the
Executive resigns his/her employment for "Good Reason," as such term is defined
in the agreement. The Executive may not resign for "Good Reason" unless he or
she shall have first given notice to Anteon of the reason for such resignation
and Anteon shall have failed to reasonably cure the situation within thirty days
of receipt of such notice. The compensation and benefits period for Messrs.
Kampf, Crenshaw, Heilman and Moskowitz continue for a 24 month period. If
terminated on December 31, 2002, cash severance payments payable to Messrs.
Kampf, Crenshaw, Heilman and Moskowitz under their respective severance
agreements would have been $2,252,538, $685,359, $651,263 and $676,263,
respectively.
49
Item 12. Security Ownership OF Certain Beneficial Owners and Management
The table below sets forth, as of February 25, 2003, the number of
shares of common stock beneficially owned by each of our 5% stockholders, each
of our directors, the Named Executive Officers and all our directors and
executive officers as a group.
Unless otherwise noted below, the address of each beneficial owner listed
on the table below is c/o Anteon International Corporation, 3211 Jermantown
Road, Suite 700, Fairfax, Virginia 22030-2801.
Shares (1)
Name of Beneficial Owner Shares %
Azimuth Technologies, L.P.(2)(3)........ 11,064,460 32.1
Azimuth Tech. II LLC(2)(3).............. 3,885,465 11.3
Frederick J. Iseman(2)(3)............... 13,365,322 38.8
FMR Corp (14)........................... 2,673,926 7.7
Gilbert F. Decker(4).................... 43,320 *
Dr. Paul Kaminski(4).................... 43,320 *
Joseph M. Kampf(5)...................... 1,352,447 3.9
Carlton B. Crenshaw(6).................. 405,121 1.2
Seymour L. Moskowitz(7)................. 337,758 1.0
Thomas M. Cogburn(8).................... 576,089 1.7
Mark D. Heilman(9)...................... 199,680 *
Robert A. Ferris(10).................... 1,130,137 3.3
Ferris Family 1987 Trust(10)............ 1,130,137 3.3
Steven M. Lefkowitz(11)................. 459,366 1.3
SML Family Investors LLC(11)............ 58,304 *
William J. Perry(12).................... 3,000 *
General Henry Hugh Shelton, USA
(ret.)(12)......................... 3,000 *
Thomas J. Tisch(12)..................... 3,000 *
All Directors and Executive Officers as
a Group(13)........................ 16,411,897 47.6
* Less than 1%.
(1) Determined in accordance with Rule 13d-3 under the Exchange Act.
(2) By virtue of Frederick J. Iseman's indirect control of Azimuth
Technologies, L.P., Azimuth Tech. II LLC and Georgica (Azimuth
Technologies), Inc., which are the investment partnerships organized by
Caxton-Iseman Capital, he is deemed to beneficially own the 11,773,369
shares held by these entities. Mr. Iseman has (i) sole voting and
dispositive power over 11,775,819 shares of our common stock, and (ii)
shared voting and dispositive power over the 1,589,503 shares of our common
stock held in the aggregate by the Ferris Family 1987 Trust, Mr. Lefkowitz
and SML Family Investors LLC and may be deemed to be the beneficial owner
thereof. Mr. Iseman's address is c/o Caxton-Iseman Capital, Inc., 667
Madison Avenue, New York, New York 10021.
(3) Includes 1,130,137, 401,062 and 58,304 shares held by the Ferris Family
1987 Trust, Mr. Lefkowitz and SML Family Investors LLC, respectively. The
Ferris Family 1987 Trust, Mr. Lefkowitz and SML Family Investors LLC are
parties to a stockholders agreement with Azimuth Technologies, L.P. and
Azimuth Tech. II LLC with respect to the shares of our common stock held by
them. Pursuant to the terms of this stockholders agreement, the Ferris
Family 1987 Trust, Mr. Lefkowitz and SML Family Investors LLC are required
to vote all of their shares of common stock at the direction of Azimuth
Technologies, L.P. and Azimuth Tech. II LLC, and are bound by specified
transfer restrictions.
50
(4) Includes 3,000 shares of common stock issuable pursuant to stock options
exercisable within 60 days of February 25, 2003. Does not include 12,000
shares of common stock issuable pursuant to stock options that are not
exercisable within 60 days of that date. Mr. Decker's address is 45
Glenridge Avenue, Los Gatos, California 95030. Dr. Kaminski's address is
6691 Rutledge Drive, Fairfax, Virginia 22039.
(5) Includes 368,320 shares of common stock issuable pursuant to stock options
exercisable within 60 days of February 25, 2003. Does not include 304,000
shares of common stock issuable pursuant to stock options that are not
exercisable within 60 days of that date. Excludes shares held by Azimuth
Technologies, L.P., of which he is a limited partner.
(6) Includes 88,932 shares held by the Carlton Crenshaw Grantor Trust and
25,000 shares held by Carlton Crenshaw Charitable Remainder Annuity Trust
and 44,510 shares of common stock issuable pursuant to stock options
exercisable within 60 days of February 25, 2003. Excludes 64,000 shares of
common stock issuable pursuant to stock options that are not exercisable
within 60 days of that date.
(7) Includes 308,258 shares of common stock issuable pursuant to stock options
exercisable within 60 days of February 25, 2003. Does not include 99,200
shares of common stock issuable pursuant to stock options that are not
exercisable within 60 days of that date. Excludes shares held by Azimuth
Technologies, L.P., of which he is a limited partner.
(8) Includes 27,000 shares held by the Thomas Cogburn Charitable Remainder
Annuity Trust and 76,000 shares of common stock issuable pursuant to stock
options exercisable within 60 days of February 25, 2003. Does not include
136,000 shares of common stock issuable pursuant to stock options that are
not exercisable within 60 days of that date.
(9) Includes 178,240 shares of common stock issuable pursuant to stock options
exercisable within 60 days of February 25, 2003. Does not include 136,000
shares of common stock issuable pursuant to stock options that are not
exercisable within 60 days of that date. Excludes shares held by CSP
Associates LLC, a limited liability company of which he is a non-managing
member
(10) Represents 1,130,137 shares held by the Ferris Family 1987 Trust, of which
Mr. Ferris is trustee, and with respect to which Mr. Ferris shares voting
and dispositive power with Azimuth Technologies, L.P., Azimuth Tech. II LLC
and Mr. Iseman. The address of Mr. Ferris and the Ferris Family 1987 Trust
is c/o Caxton-Iseman Capital, Inc., 667 Madison Avenue, New York, New York
10021. Excludes shares held by Azimuth Technologies, L.P. and Azimuth Tech.
II LLC of which the Ferris Family 1987 Trust is, respectively, a limited
partner and a non-managing member.
(11) Includes 58,304 shares held by SML Family Investors LLC, a limited
liability company affiliated with Mr. Lefkowitz. Mr. Lefkowitz's address is
c/o Caxton-Iseman Capital, Inc., 667 Madison Avenue, New York, New York
10021. Excludes shares held by Azimuth Technologies, L.P. and Azimuth Tech.
II LLC of which he is, respectively, a limited partner and a non-managing
member. Includes 401,062 shares with respect to which Mr. Lefkowitz shares
voting and dispositive power with Azimuth Technologies, L.P., Azimuth Tech.
II LLC and Mr. Iseman.
(12) Includes 3,000 shares of common stock issuable pursuant to stock options
exercisable within 60 days of February 25, 2003. Excludes 12,000 shares of
common stock issuable pursuant to stock options that are not exercisable
within 60 days of that date. Gen. Shelton's address is 11911 Freedom Drive,
One Fountain Square, 10th Floor Reston, VA 20190. Mr. Tisch's address is
667 Madison Avenue, New York, NY 10021. Mr. Perry's address is 320 Galvez
Street, Stanford, CA 94305-6165
(13) Includes 941,968 shares of common stock issuable pursuant to stock options
exercisable within 60 days of February 25, 2003. Does not include 1,053,040
shares of common stock issuable pursuant to stock options that are not
exercisable within 60 days of that date.
51
(14) Based solely upon a Schedule 13G filed by FMR Corp. on February 13, 2003.
The address for FMR Corp. provided in such Schedule 13G is 82 Devonshire
Street, Boston, MA 02109
Tag Along Rights
On March 15, 2002, Azimuth Technologies, L.P., Azimuth Tech. II LLC,
Frederick J. Iseman, Joseph M. Kampf, the Ferris Family 1987 Trust, Steven M.
Lefkowitz, SML Family Investors LLC and certain members of our management and
certain of our other stockholders who were selling shares in connection with our
initial public offering, collectively the "Management Tag Stockholders," entered
into a Tag Along Agreement granting to Mr. Kampf and the Management Tag
Stockholders specified rights in the event of a sale of our common stock by any
of the Caxton-Iseman Stockholders. If, at any time before the Caxton-Iseman
Stockholders no longer beneficially own, in the aggregate, more than 20% of our
outstanding common stock, any Caxton-Iseman Stockholder or a group of them sells
shares of our common stock to a purchaser, who, after such sale or series of
related sales, would beneficially own, in the aggregate, 51% or more of our
outstanding common stock, Mr. Kampf and the Management Tag Stockholders may
participate in that sale pro rata with such Caxton-Iseman Stockholder(s). The
Tag Along Agreement terminates in accordance with its terms twenty (20) years
after its signing.
52
Item 13. Certain Relationships AND RELATED TRANSACTIONS
Reorganization Transactions
Immediately prior to the consummation of our initial public offering on
March 15, 2002, we entered into a series of reorganization transactions. First,
our $22.5 million principal amount subordinated convertible note held by Azimuth
Tech. II LLC, one of our principal stockholders, was converted according to its
terms into shares of our non-voting common stock. Second, our subsidiary, Anteon
Virginia merged into us. We were the surviving corporation of the merger. In the
merger, all the outstanding shares of our 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 us was cancelled and the stock of Anteon Virginia held
by certain of our employees and former employees (other than stockholders who
exercised appraisal rights) immediately prior to the consummation of the initial
public offering were converted into shares of our common stock on March 15,
2002. As a result of the merger, we succeeded to all of Anteon Virginia's
obligations under its credit facility, the indenture governing the 12% Notes and
its Amended and Restated Omnibus Stock Plan.
The following diagram illustrates our organizational structure before and
after these reorganization transactions:
- ----------------------------------------------------------- ------------------------------------------------------------
Prior to Reorganization After Reorganization
- ----------------------------------------------------------- ------------------------------------------------------------
- ----------------------------------------------------------- ------------------------------------------------------------
Anteon International Corporation Anteon International Corporation
A Delaware corporation A Delaware corporation
(formerly Azimuth Technologies, Inc.) (formerly Azimuth Technologies, Inc.)
o Issuer of common stock in our o Issuer of the common stock in our
initial public offering initial publicoffering
o Issuer of 12% Notes
o Borrower under the Credit Facility
- ----------------------------------------------------------- ------------------------------------------------------------
- ----------------------------------------------------------- ------------------------------------------------------------
Anteon International Corporation Anteon Corporation
A Virginia corporation A Virginia corporation
(which we refer to as Anteon Virginia) (formerly Techmatics, Inc.)
o Borrower under 12% Notes o Main operating subsidiary
o Borrower under the Credit Facility o Borrower under the Credit Facility
- ----------------------------------------------------------- ------------------------------------------------------------
- ----------------------------------------------------------- ------------------------------------------------------------
Anteon Corporation
A Virginia corporation
(formerly Techmatics, Inc.)
o Main operating subsidiary
- ----------------------------------------------------------- ------------------------------------------------------------
53
Azimuth Technologies, L.P. and Azimuth Tech. II LLC
Azimuth Technologies, L.P. and Azimuth Tech. II LLC are our principal
stockholders. The sole general partner of Azimuth Technologies, L.P. and the
sole managing member of Azimuth Tech. II LLC is Georgica (Azimuth Technologies),
L.P., the sole general partner of which is Georgica (Azimuth Technologies),
Inc., a corporation wholly owned by Frederick J. Iseman, the chairman of our
board of directors. As a result, Mr. Iseman controls both Azimuth Technologies,
L.P. and Azimuth Tech. II LLC. In addition, Mr. Iseman, Steven M. Lefkowitz, a
director of our company, and Robert A. Ferris, a director of our company, are
each employed by Caxton-Iseman Capital, Inc. Mr. Iseman is the chairman,
managing partner and founder of that firm.
Azimuth Technologies, L.P., Azimuth Tech. II LLC, Mr. Lefkowitz, SML Family
Investors LLC, a limited liability company affiliated with Mr. Lefkowitz, and
the Ferris Family 1987 Trust, of which Mr. Ferris is a trustee, entered into a
stockholders agreement immediately prior to the consummation of the IPO. Under
this stockholders agreement, the Ferris Family 1987 Trust, Mr. Lefkowitz and SML
Family Investors LLC agreed to vote all of the shares of our common stock they
beneficially own on any matter submitted to the vote of our stockholders whether
at a meeting or pursuant to a written consent at the direction of Azimuth
Technologies, L.P. and Azimuth Tech. II LLC, unless otherwise agreed to by these
entities, and will constitute and appoint these entities or any nominees thereof
as their respective proxies for purposes of any stockholder vote. In addition,
except pursuant to the Tag Along Agreement described in this filing, the
agreement provides that none of the Ferris Family 1987 Trust, Mr. Lefkowitz or
SML Family Investors LLC may sell or in any way transfer or dispose of the
shares of our common stock they beneficially own without the prior written
consent of either Azimuth Technologies, L.P. or Azimuth Tech. II LLC, unless
Azimuth Technologies, L.P. and Azimuth Tech. II LLC are participating in that
sale, and then the Ferris Family 1987 Trust, Mr. Lefkowitz and SML Family
Investors LLC may participate in such sale in a pro rata amount. The Ferris
Family 1987 Trust, Mr. Lefkowitz and SML Family Investors LLC will be required
to participate pro rata in any sale by Azimuth Technologies, L.P. and Azimuth
Tech. II LLC, unless otherwise agreed to by these entities.
Registration Rights
On March 11, 2002, Azimuth Technologies, L.P., Azimuth Tech. II LLC,
Messrs. Frederick J. Iseman, Joseph M. Kampf, Carlton B. Crenshaw, Thomas M.
Cogburn, Seymour L. Moskowitz and Steven M. Lefkowitz, SML Family Investors LLC
and the Ferris Family 1987 Trust and certain of our other selling stockholders
who were selling shares in connection with our initial public offering, entered
into a registration rights agreement with us relating to the shares of common
stock they hold. Subject to several exceptions, including our right to defer a
demand registration under certain circumstances, the Caxton-Iseman Stockholders
can require that we register for public resale under the Securities Act all
shares of common stock they request be registered at any time after 180 days
following March 15, 2002. The Caxton-Iseman Stockholders may demand five
registrations so long as the securities being registered in each registration
statement are reasonably expected to produce aggregate proceeds of $5 million or
more. If we become eligible to register the sale of our securities on Form S-3
under the Securities Act, the Caxton-Iseman Stockholders have the right to
require us to register the sale of common stock held by them on Form S-3,
subject to offering size and other restrictions. Mr. Kampf and each of Messrs.
Crenshaw, Cogburn and Moskowitz, to the extent that such individual holds more
than 1% of our outstanding common stock, and Mr. Lefkowitz, SML Family Investors
LLC and the Ferris Family 1987 Trust are entitled to piggyback registration
rights with respect to any registration request made by the Caxton-Iseman
Stockholders. If the registration requested by the Caxton-Iseman Stockholders is
in the form of a firm underwritten offering, and if the managing underwriter of
the offering determines that the number of securities to be offered would
jeopardize the success of the offering, the number of shares included in the
offering shall be determined as follows: (i) first, shares offered by the
Caxton-Iseman Stockholders and Messrs. Kampf, Crenshaw, Cogburn, Moskowitz and
Lefkowitz, SML Family Investors LLC and the Ferris Family 1987 Trust (pro rata,
based on their respective ownership of our common equity), (ii) second, shares
offered by other stockholders (pro rata, based on their respective ownership of
our common equity) and (iii) third, shares offered by us for our own account.
54
In addition, the Caxton-Iseman Stockholders, Mr. Kampf, and each of Messrs.
Crenshaw, Cogburn and Moskowitz, to the extent that such individual holds more
than 1% of our outstanding common stock, and Mr. Lefkowitz, SML Family Investors
LLC and the Ferris Family 1987 Trust have been granted piggyback rights on any
registration for our account or the account of another stockholder. If the
managing underwriter in an underwritten offering determines that the number of
securities offered in a piggyback registration would jeopardize the success of
the offering, the number of shares included in the offering shall be determined
as follows: (i) first, shares offered by us for own account, (ii) second, shares
offered by the Caxton-Iseman Stockholders, Messrs. Kampf, Crenshaw, Cogburn,
Moskowitz and Lefkowitz, SML Family Investors LLC and the Ferris Family 1987
Trust (pro rata, based on their respective ownership of our common equity), and
(iii) third, shares offered by other stockholders (pro rata, based on their
respective ownership of our common equity).
Pursuant to the registration rights agreement, we paid $2.4 million in
expenses related to the registration of shares of common stock in our initial
public offering on behalf of the parties to the registration rights agreement.
55
PART IV
ITEM 14. 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
annual 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. There have been no significant changes in our
internal controls or in other factors that could significantly affect these
controls subsequent to the date of our evaluation.
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Page Number
in 2002
Annual Report
(a) 1. Financial Statements
Independent Auditors' Report F-1
Consolidated Balance Sheets as of December 31, 2002 and 2001 F-2
Consolidated Statements of Operations for Each of the Years in the
Three-Year Period Ended December 31, 2002 F-3
Consolidated Statements of Stockholders' Equity for Each of the Years in
the Three-Year Period Ended December 31, 2002 F-4
Consolidated Statements of Cash Flows for Each of the Years in the
Three-Year Period Ended December 31, 2002 F-5 - F-6
Notes to Consolidated Financial Statements F-7 - F-41
(a) 2. Financial Statement Schedules
Independent Auditors' Report S-1
Valuation and Qualifying Accounts S-2
(a) 3. Exhibits
See Exhibit Index beginning on page 60
(b) No current reports on Form 8-K were filed during the fourth quarter of 2002
56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By: /s/ JOSEPH M. KAMPF
---------------------
Joseph M. Kampf
President and Chief Executive
Officer
Date: March 10, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
Name Title Date
---- ----- ----
/s/ Joseph M. Kampf President and Chief Executive Officer
- -------------------
Joseph M. Kampf and Director March 10, 2003
(Principal Executive Officer)
/s/ CARLTON B. CRENSHAW Senior Vice President and Chief Financial
- -----------------------
Carlton B. Crenshaw and Administrative Officer March 10, 2003
(Principal Financial and Accounting Officer)
/s/ Frederick J. Iseman
Frederick J. Iseman Chairman of the Board and Director March 10, 2003
/s/ THOMAS M. COGBURN
Thomas M. Cogburn Director March 10, 2003
/s/ GILBERT F. DECKER
Gilbert F. Decker Director March 10, 2003
/s/ ROBERT A. FERRIS
Robert A. Ferris Director March 10, 2003
/s/ PAUL KAMINSKI
Paul Kaminski Director March 10, 2003
/s/ steven m. lefkowitz
Steven M. Lefkowitz Director March 10, 2003
/s/ Thomas J.Tisch
Thomas J. Tisch Director March 10, 2003
- --------------------
/s/ General Henry Hugh Shelton
General Henry Hugh Shelton Director March 10, 2003
- --------------------------------
/s/ WILLIAM J. PERRY
William J. Perry Director March 10, 2003
- ---------------------
57
Independent Auditors' Report
The Board of Directors
Anteon International Corporation and subsidiaries:
We have audited the accompanying consolidated balance sheets of Anteon
International Corporation (a Delaware Corporation) and subsidiaries as of
December 31, 2002 and 2001, and the related consolidated statements of
operations, stockholders' equity (deficit), and cash flows for each of the years
in the three-year period ended December 31, 2002. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Anteon International
Corporation and subsidiaries, as of December 31, 2002 and 2001 and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2002, in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note 2(g) to the consolidated financial statements, effective
January 1, 2002, the Company adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets.
McLean, Virginia KPMG LLP
February 14, 2003
F-1
ANTEON INTERNATIONAL CORPORATION AND SUBSIDIARIES
(a Delaware Corporation)
Consolidated Balance Sheets
December 31, 2002 and 2001
(in thousands, except share data)
Assets 2002 2001
------------------ -----------------
Current assets:
Cash and cash equivalents $ 4,266 $ 1,930
Accounts receivable, net 189,059 131,345
Prepaid expenses and other current assets 15,071 6,992
Deferred tax assets, net -- 4,151
------------------ -----------------
------------------ -----------------
Total current assets 208,396 144,418
Property and equipment, at cost, net of accumulated depreciation and amortization
of $18,971 and $11,815, respectively 9,992 12,744
Goodwill, net of accumulated amortization of $17,376 and $16,323, respectively 138,619 136,622
Intangible and other assets, net of accumulated amortization of $9,279 and $7,372,
respectively 7,685 12,867
------------------ -----------------
------------------ -----------------
Total assets 364,692 306,651
================== =================
================== =================
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Term loan, current portion 3,798 17,266
Subordinated notes payable, current portion 2,500 2,268
Business purchase consideration payable -- 515
Accounts payable 47,630 25,028
Due to related party -- 3,600
Accrued expenses 57,603 56,041
Income tax payable 7,738 509
Other current liabilities 806 2,889
Deferred tax liability 2,230 --
Deferred revenue 5,701 8,743
------------------ -----------------
Total current liabilities 128,006 116,859
Term loan, less current portion 17,403 29,788
Revolving facility 7,000 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 7,808 9,261
Other long term liabilities 490 690
------------------ -----------------
------------------ -----------------
Total liabilities 235,707 309,666
------------------ -----------------
------------------ -----------------
Minority interest in subsidiaries 156 427
Stockholders' equity (deficit):
Preferred stock, $.01 par value, 15,000,000 shares authorized, zero issued and
outstanding as of December 31, 2002 and 2001 -- --
Common stock, $.01 par value, 175,000,000 shares authorized and 34,419,049 shares
issued and outstanding as of December 31, 2002 and 2001, respectively 344 --
Common stock, Class B, voting, $0.01 par value, 3,000 shares authorized, zero and
2,450 shares issued and outstanding as of December 31, 2002 and 2001,
respectively -- --
Common stock, Class A, voting, $0.01 par value, 30,000,000 shares authorized,
zero and 23,784,115 shares issued and outstanding as of December 31, 2002 and
2001, respectively -- 238
Common stock, non voting, $0.01 par value, 7,500,000 shares authorized, zero
issued and outstanding as of December 31, 2002 and 2001 -- --
Stock subscription receivable (12) (12)
Additional paid-in capital 106,849 2,366
Accumulated other comprehensive loss (509) (1,747)
Retained earnings (accumulated deficit) 22,157 (4,287)
------------------ -----------------
------------------
Total stockholders' equity (deficit) 128,829 (3,442)
------------------ -----------------
------------------
Commitments and contingencies
Total liabilities and stockholders' equity (deficit) $ 364,692 $ 306,651
================== =================
See accompanying notes to consolidated financial statements.
F-2
ANTEON INTERNATIONAL CORPORATION AND SUBSIDIARIES
(a Delaware Corporation)
Consolidated Statements of Operations
Years ended December 31, 2002, 2001 and 2000
(in thousands, except share and per share data)
2002 2001 2000
----------------- -------------- --------------
Revenues $ 825,826 $ 715,023 $ 542,807
Costs of revenues 711,328 627,342 474,924
----------------- -------------- --------------
Gross profit 114,498 87,681 67,883
----------------- -------------- --------------
Operating Expenses:
General and administrative expenses 48,197 51,442 38,592
Amortization of noncompete agreements -- 349 866
Goodwill amortization -- 6,704 4,714
Other intangibles amortization 1,907 2,321 2,673
----------------- -------------- --------------
----------------- -------------- --------------
Total operating expenses 50,104 60,816 46,845
----------------- -------------- --------------
Operating income 64,394 26,865 21,038
Other income 417 -- --
Gains on sales and closures of businesses -- 4,046 --
Interest expense, net of interest income of $289,
$344, and $410, respectively 17,394 26,872 26,513
Minority interest in (earnings) losses of
subsidiaries (18) (38) 32
----------------- -------------- --------------
Income (loss) before provision for income taxes
and extraordinary gain (loss) 47,399 4,001 (5,443)
Provision (benefit) for income taxes 18,374 4,413 (153)
----------------- -------------- --------------
Loss before extraordinary gain (loss) 29,025 (412) (5,290)
Extraordinary gain (loss), net of tax (2,581) 330 --
----------------- -------------- --------------
Net income (loss) $ 26,444 $ (82) $ (5,290)
================= ============== ==============
================= ============== ==============
Basic earnings (loss) per common share:
Income (loss) before extraordinary gain (loss) $ 0.90 $ (0.02) $ (0.22)
Extraordinary gain (loss), net of tax (0.08) 0.01 --
----------------- -------------- --------------
----------------- -------------- --------------
Net income (loss) $ 0.82 $ (0.01) $ (0.22)
================= ============== ==============
================= ============== ==============
Basic weighted average shares outstanding 32,163,150 23,786,565 23,786,565
================= ============== ==============
================= ============== ==============
Diluted earnings (loss) per common share:
Income (loss) before extraordinary gain (loss) $ 0.85 $ (0.02) $ (0.22)
Extraordinary gain (loss), net of tax (0.07) 0.01 --
----------------- -------------- --------------
Net income (loss) $ 0.78 $ (0.01) $ (0.22)
================= ============== ==============
Diluted weighted average shares outstanding 34,021,597 23,786,565 23,786,565
================= ============== ==============
See accompanying notes to consolidated financial statements.
F-3
ANTEON INTERNATIONAL CORPORATION AND SUBSIDIARIES
(a Delaware Corporation)
Consolidated Statements of Stockholders' Equity (Deficit)
Years ended December 31, 2002, 2001 and 2000
(in thousands, except share data)
Accumulated Retained Total
All series Stock Additional other earnings stockholders'
common stock subscription paid-in comprehensive (accumulated equity
receivable capital income (loss) deficit) (deficit)
Shares Amount
Balance, December 31, 1999 23,786,565 238 (12) 2,366 (5) 1,085 3,672
Comprehensive income (loss):
Foreign currency translation -- -- -- -- 42 -- 42
Net loss -- -- -- -- -- (5,290) (5,290)
Comprehensive income (loss) -- -- -- -- 42 (5,290) (5,248)
Balance, December 31, 2000 23,786,565 238 (12) 2,366 37 (4,205) (1,576)
Transition adjustment-interest
rate swaps (net of tax of $419) -- -- -- -- (629) -- (629)
Comprehensive income (loss):
Interest rate swaps (net of tax of -- -- -- -- (1,075) -- (1,075)
$717)
Foreign currency translation -- -- -- -- (80) -- (80)
Net loss -- -- -- -- -- (82) (82)
Comprehensive income (loss) -- -- -- -- (1,155) (82) (1,237)
Balance, December 31, 2001 23,786,565 238 (12) 2,366 (1,747) (4,287) (3,442)
Issuance of common stock, net 4,687,500 47 -- 75,130 -- -- 75,177
Conversion of minority interest to
common stock 180,120 2 -- 279 -- -- 281
Exercise of stock options 1,135,632 11 -- 3,954 -- 3,965
Conversion of subordinated promissory
note 4,629,232 46 -- 22,454 -- -- 22,500
Tax benefit from exercise of stock
options -- -- -- 2,666 -- -- 2,666
Comprehensive income (loss):
Interest rate swaps (net of tax of
$298) -- -- -- -- 1,239 -- 1,239
Foreign currency translation -- -- -- -- (1) -- (1)
Net income -- -- -- -- -- 26,444 26,444
Comprehensive income (loss) -- -- - -- 1,238 26,444 27,682
Balance, December 31, 2002 34,419,049 $ 344 $ (12) $ 106,849 $ (509) $ 22,157 $ 128,829
See accompanying notes to consolidated financial statements.
F-4
ANTEON INTERNATIONAL CORPORATION AND SUBSIDIARIES
(a Delaware Corporation)
Consolidated Statements of Cash Flows
Years ended December 31, 2002, 2001 and 2000
(in thousands)
2002 2001 2000
--------------- ---------------- ---------------
Cash flows from operating activities:
Net income (loss) $ 26,444 $ (82) $ (5,290)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Extraordinary (gain) loss before tax 4,232 (519) --
Gains on sales and closures of businesses -- (4,046) --
Interest rate swap termination (1,903) -- --
Depreciation and amortization of property and equipment 4,294 7,110 7,024
Goodwill amortization -- 6,704 4,714
Amortization of noncompete agreements -- 349 866
Other intangibles amortization 1,907 2,321 2,673
Amortization of deferred financing costs 1,210 1,216 1,208
Loss (gain) on disposals of property and equipment 25 791 (187)
Deferred income taxes 4,090 3,512 (747)
Minority interest in earnings (losses) of subsidiaries 18 38 (32)
Changes in assets and liabilities, net of acquired assets
and liabilities:
Decrease (increase) in accounts receivable (57,715) 1,268 (14,261)
Decrease in income tax receivable -- -- 2,535
(Increase) decrease in prepaid expenses and other (8,059) 727 (1,691)
current assets
Decrease in other assets 105 178 75
Increase in accounts payable and accrued expenses 22,601 15,744 13,783
Increase (decrease) in income tax payable 7,229 (22) --
(Decrease) increase in deferred revenue (3,042) 2,254 6,489
(Decrease) increase in other liabilities (158) 336 (58)
------------ ------------- ------------
Net cash provided by operating activities 1,278 37,879 17,101
------------ ------------- ------------
Cash flows from investing activities:
Purchases of property and equipment and other assets (3,225) (2,181) (6,584)
Acquisition of Sherikon, Inc., net of cash acquired -- (21) (23,906)
Acquisition of SIGCOM, net of cash acquired -- (10,975) --
Proceeds from sales of businesses, net -- 11,464 --
Proceeds from sale of building 1,802 -- --
Other, net -- 6 1,578
------------ ------------- ------------
Net cash used in investing activities (1,423) (1,707) (28,912)
------------ ------------- ------------
Cash flows from financing activities:
Principal payments on bank and other notes payable (47) (185) (1,629)
Principal payments on Techmatics obligations -- -- (15,350)
Payment on subordinated notes payable (567) (5,000) --
Payments on business purchase consideration payable -- (1,185) --
Payments on note payable to Ogden -- (3,212) --
Deferred financing costs (1,292) -- (151)
Principal payments on term loan (25,853) (12,946) --
Proceeds from revolving facility 862,600 771,200 533,000
Principal payments on revolving facility (874,300) (784,500) (503,900)
Redemption of senior subordinated notes payable (25,000) -- --
Prepayment premium on senior subordinated notes payable (3,000) -- --
Proceeds from issuance of common stock, net of expenses 81,808 -- --
Principal payments on subordinated notes payable to stockholders (7,499) -- --
Payment of subordinated notes payable-related party (4,369) -- --
Proceeds from minority interest, net -- 152 66
------------ ------------- ------------
Net cash provided by (used in) financing activities 2,481 (35,676) 12,036
------------ ------------- ------------
Net increase in cash and cash equivalents 2,336 496 225
Cash and cash equivalents, beginning of year 1,930 1,434 1,209
------------ ------------- ------------
------------ ------------- ------------
Cash and cash equivalents, end of year $ 4,266 $ 1,930 $ 1,434
============ ============= ============
(continued)
F-5
ANTEON INTERNATIONAL CORPORATION AND SUBSIDIARIES
(a Delaware Corporation)
Consolidated Statements of Cash Flows, continued
Years Ended December 31, 2002, 2001 and 2000
2002 2001 2000
------------- ---------------- ---------------
Supplemental disclosure of cash flow information (in thousands):
Interest paid $ 20,181 $ 23,396 $ 21,714
============ =========== ===========
Income taxes paid (refunds received), net $ 2,634 $ (52) $ (2,028)
============ =========== ===========
Supplemental disclosure of noncash 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.
In March 2002, the Company exchanged approximately 90,060 shares held by
minority interest holders in Anteon Virginia at December 31, 2001 into
180,120 shares of the Company.
During 2001, the Company finalized the allocation of the purchase price of
Sherikon, Inc., resulting in an increase of $100,000 in accrued
liabilities and in the goodwill from the acquisition for contingencies
identified at the date of acquisition (see note 5(a)).
In October 2000, in connection with the acquisition of Sherikon (note
5(a)), the Company issued $7.5 million of subordinated notes payable
discounted as of the date of the acquisition to approximately $6.5
million. Also in connection with the Sherikon acquisition, the Company
guaranteed bonuses of approximately $1.75 million to certain former
employees of Sherikon. These bonuses are not contingent on future
employment with the Company and, accordingly, have been included as
additional purchase consideration, discounted to approximately $1.5
million.
During 2000, the Company converted approximately $3.0 million of accrued
interest related to the subordinated convertible note payable (note 9(g))
to additional notes payable.
In accordance with SFAS No. 133, the changes in the fair value of the
interest rate swaps are reported, net of tax, in accumulated other
comprehensive income. For the year ended December 31, 2002, the change in
the fair value of the interest rate swaps generated an $838,000 deferred
tax liability.
See accompanying notes to consolidated financial statements.
F-6
ANTEON INTERNATIONAL CORPORATION AND SUBSIDIARIES
(a Delaware Corporation)
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(1) 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 were
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 creation 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 engineering and 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.
F-7
(2) Summary of Significant Accounting Policies
(a) Basis of Presentation and Principles of Consolidation
The consolidated financial statements include the accounts of
the Company and its directly and indirectly, majority-owned
subsidiaries. All material intercompany transactions and
accounts have been eliminated in consolidation.
(b) Cash and Cash Equivalents
Cash and cash equivalents include all cash balances and highly
liquid investments that have original maturities of three
months or less.
(c) Property and Equipment
Property and equipment is stated at cost, or fair value at the
date of acquisition if acquired through a purchase business
combination. For financial reporting purposes, depreciation
and amortization is recorded using the straight-line method
over the estimated useful lives of the assets as follows:
Computer hardware and software 3 to 7 years
Furniture and equipment 5 to 12 years
Leasehold and building improvements shorter of estimated useful
life or lease term
Buildings 31.5 years
(d) Deferred Financing Costs
Costs associated with obtaining the Company's financing
arrangements are deferred and amortized over the term of the
financing arrangements using a method that approximates the
effective interest method, and are included in intangible and
other assets in the accompanying consolidated balance sheets.
(e) Impairment or Disposal of Long Lived Assets
SFAS No. 144 requires the Company 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 discounted cash flows and measure an
impairment loss as the difference between the carrying amount
and fair value of the asset. The Company adopted SFAS No. 144
as of January 1, 2002, with no impact on the Company's
consolidated financial statements.
During 2001, the Company recognized an impairment charge of
$750,000, included in general and administrative expenses in
the accompanying consolidated statement of operations, to
write-down the carrying value of a building to its fair market
value.
(f) Goodwill
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. 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.
F-8
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 December 31, 2002, the
Company has approximately $8.5 million of intangible assets
($2.7 million net of accumulated amortization) related to
contract backlog intangible assets, which are being amortized
straight-line over periods of up to 5 years.
Upon adoption of SFAS No. 142, the Company evaluated its
existing intangible assets and goodwill that were acquired in
purchase business combinations, and made any necessary
reclassifications in order to conform with the new
classification criteria in SFAS No. 141 for recognition of
intangible assets separate from goodwill. The Company also
reassessed the useful lives and residual values of all
definite-lived intangible assets acquired. No impairment was
recognized as a result of these tests.
In connection with SFAS No. 142's transitional goodwill
impairment evaluation, the Company is required 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 values were less than their
carrying values 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.
As of September 30, 2002, the Company performed its annual
goodwill impairment analysis required under SFAS No. 142. The
Company applied the same methodology described above in the
performing its annual impairment test and did not identify any
indication of goodwill impairment for any reporting unit. The
Company will perform the annual impairment test as of
September 30 each year unless circumstances or events indicate
that an impairment test should be performed sooner.
F-9
Had the amortization provisions of SFAS No. 142 been applied
as of January 1, 2000, for all of the Company's acquisitions,
the Company's income (loss) before extraordinary gain (loss),
net income (loss) and earnings (loss) per common share would
have been as follows (unaudited) (in thousands, except per
share data):
Years ended December 31,
------------------------------
------------- -- ------------
2001 2000
------------- ------------
Income (loss) before extraordinary item $ (412) $ (5,290)
Add back: Goodwill amortization 5,663 4,714
Add back: Workforce in place amortization 545 570
------------- ------------
------------- ------------
Adjusted income (loss), before extraordinary item 5,796 (6)
Extraordinary gain, net of tax 330 --
------------- ------------
------------
Adjusted net income $ 6,126 $ (6)
============= ============
Basic earnings per share:
Income (loss) before extraordinary item $ (0.02) (0.22)
Goodwill amortization 0.24 0.20
Workforce amortization 0.02 0.02
------------- ------------
Adjusted income (loss) before extraordinary item 0.24 --
Extraordinary gain, net of tax 0.01 --
------------- ------------
------------- ------------
Adjusted net income (loss) $ 0.25 --
============= ============
============= ============
Diluted earnings per share:
Income (loss) before extraordinary item $ (0.02) $ (0.22)
Goodwill amortization 0.24 0.20
Workforce amortization 0.02 0.02
------------- ------------
Adjusted income (loss) before extraordinary item 0.24 --
Extraordinary gain, net of tax .01 --
------------- ------------
Adjusted net income (loss) $ 0.25 $ --
(g) Other Intangible Assets
The Company amortizes the allocated cost of noncompete
agreements entered into in connection with business
combinations on a straight-line basis over the terms of the
agreements. Other acquired intangibles related to workforce in
place (prior to the adoption of SFAS No. 142) and acquired
contracts are amortized straight-line based upon expected
employment and contract periods, respectively. The expected
amortization expense of other intangible assets for the
remaining two years beginning January 1, 2003, is as follows:
2003, $1.8 million; and 2004, $943,000. As of December 31,
2004, all other intangibles will be fully amortized
Upon the adoption of SFAS No. 141, on January 1, 2002,
intangible assets acquired in a business combination are
recognized only if such assets arise from a contractual or
other legal right and are separable, that is, capable of being
sold, transferred, licensed, rented, or exchanged. Intangible
assets acquired in a business combination that do not meet
this criteria are considered a component of goodwill. As of
January 1, 2002, the Company reclassified approximately $1.9
million, net of accumulated amortization, of intangible assets
associated with acquired employee workforce from intangible
assets to goodwill, which in accordance with SFAS No. 142, are
no longer separately identifiable from goodwill.
F-10
Software development costs represent expenditures for the
development of software products that have been capitalized in
accordance with Statement of Financial Accounting Standards
No. 86, Accounting for the Costs of Computer Software to be
Sold, Leased, or Otherwise Marketed. Amortization is computed
on an individual product basis and is the greater of (a) the
ratio of current gross revenues for a product to the total of
current and anticipated future gross revenues for that product
or (b) the amount computed using the straight-line method over
the remaining estimated economic useful life of the product.
The Company uses economic lives ranging from one to three
years for all capitalized software development costs.
Amortization of software development costs begins when the
software product is available for general release to
customers. As of December 31, 2001, approximately $4.8 million
had been capitalized for software development, all of which
had been amortized.
(h) Revenue Recognition
For each of the years ended December 31, 2002, 2001 and 2000
we estimate that in excess of 90% of our revenues were derived
from services performed under contracts that may be
categorized into three primary types: time and materials,
cost-plus reimbursement and firm fixed price. For the year
December 31, 2002, approximately 35% of our contracts are
cost-plus, 37% are time and material and 28% are fixed price
(a substantial majority of which are firm fixed price level of
effort.) Revenue for time and materials contracts is
recognized as time is spent at hourly rates, which are
negotiated with the customer. 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. For cost-plus
award fee type contracts, we recognize the expected fee to be
awarded by the customer at the time such fee can be reasonably
estimated, based on factors such as our prior award experience
and communications with the customer regarding our
performance, including any interim performance evaluations
rendered by the customer. Revenues are recognized under fixed
price contracts for services are based on the
percentage-of-completion basis, using the cost-to-cost method.
For non-service related fixed price contracts, revenues are
recognized using the units-of-delivery method.
The Company recognizes revenues under our federal government
contracts when a contract is executed, the contract price is
fixed and determinable, funding has been received, delivery of
the services or products has occurred and collectibility of
the contract price is considered probable. The Company
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. From time to time we 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. All revenue
recognition is deferred during periods in which funding is not
received. Allowable contract costs incurred during such
periods are deferred if the receipt of funding is assessed as
probable. In evaluating the probability of funding being
received, the Company considers its previous experience with
the customer, communications with the customer regarding
funding status, and our knowledge of available funding for the
contract or program. If funding is not assessed as probable
costs are expensed as they are incurred.
The Company recognizes revenues under our federal government
contracts based on allowable contract costs, as mandated by
the federal government's cost accounting standards. The costs
the Company incurs 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. The Company may be exposed to variations in
profitability, including potential losses, if the Company
encounters variances from estimated fees earned under award
fee contracts and estimated costs under fixed price contracts.
Software revenue is generated from licensing software and
providing services, including maintenance and technical
support, and consulting. The Company recognizes the revenue
when the license agreement is signed, the license fee is fixed
and determinable, delivery of the software has occurred, and
collectibility of the fee is considered probable. The
Company's software license sales are not multi-element
arrangements, i.e., they are not bundled with any other
elements, such as maintenance and consulting services, and are
recognized at the contractual price when all other recognition
criteria are met. Services revenue consists of maintenance and
technical support and is recognized ratably over the service
period. Other services revenue are recognized as the related
services are provided. Revenues from sales of products are
generally recognized upon acceptance by the customer, which is
typically within thirty days of shipment. Subsequent to the
curtailment of operations of CITI-SIUSS in 2001 (see note
3(b)), there have been no new product or license sales. All
software revenue recognized in 2002 relates to maintenance
services provided on existing software arrangements.
Amounts collected in advance of being earned are recognized as
deferred revenues.
F-11
(i) Costs of Acquisitions
Costs incurred on successful acquisitions are capitalized as a
cost of the acquisition, while costs incurred by the Company
for unsuccessful or terminated acquisition opportunities are
expensed when the Company determines that the opportunity will
no longer be pursued. Costs incurred on anticipated
acquisitions are deferred.
(j) Income Taxes
The Company calculates its income tax provision using the
asset and liability method. Under the asset and liability
method, deferred income taxes are recognized for the future
tax consequences attributable to differences between the
financial statement carrying amounts and the tax bases of
existing assets and liabilities. Deferred tax assets and
liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The
effect on deferred taxes of a change in tax rates would be
recognized in income in the period that includes the enactment
date.
(k) Foreign Currency Translation and Transactions
The balance sheets of the Company's foreign subsidiaries are
translated to U.S. dollars for consolidated financial
statement purposes using the current exchange rates in effect
as of the balance sheet date. The revenue and expense accounts
of foreign subsidiaries are converted using the weighted
average exchange rate during the period. Gains or losses
resulting from such translations are included in accumulated
comprehensive income (loss) in stockholders' equity (deficit).
Gains and losses from transactions denominated in foreign
currencies are included in current period income. Foreign
currency transaction gains and losses were not significant for
the years ended December 31, 2002, 2001 and 2000.
(l) Accounting for Stock-Based Compensation
The Company accounts for employee stock-based compensation
plans using the intrinsic value based method of accounting
prescribed by APB Opinion No. 25 ("APB No. 25"), Accounting
for Stock Issued to Employees. The Company has an employee
stock option plan. Compensation expense for stock options
granted to employees is recognized based on the difference, if
any, between the fair value of the Company's common stock and
the exercise price of the option at the date of grant. The
Company has also granted stock appreciation rights to certain
of its directors. The Company recognizes compensation expense
associated with the stock appreciation rights equal to the
fair value of the underlying stock at each reporting period.
The Company discloses the pro forma effect on net income
(loss) as if the fair value based method of accounting as
defined in Statement of Financial Accounting Standards No. 123
("SFAS No. 123"), Accounting for Stock-based Compensation had
been applied.
F-12
The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value
recognition provisions of SFAS No. 123, to stock-based
employee compensation:
2002 2001 2000
----------- ----------- -----------
(in thousands, except per share data)
Net Income, as reported $ 26,444 $ (82) $ (5,290)
Deduct: Total stock-based compensation expense
determined under fair value method, net of tax (2,505) (742) (1,124)
----------- ----------- -----------
Pro forma net income $ 23,939 $ (824) $ (6,414)
Earnings Per Share:
Basic-as reported $ 0.82 $ (0.01) $ (0.22)
===========
=========== ===========
Basic-Pro forma $ 0.74 $ (0.03) $ (0.27)
=========== ===========
===========
Diluted-as reported $ 0.78 $ (0.01) $ (0.22)
===========
=========== ===========
Diluted-Pro forma $ 0.70 $ (0.03) $ (0.27)
=========== =========== ===========
(m) Fair Value of Financial Instruments
The carrying amounts of accounts receivable, accounts payable
and accrued liabilities approximate their fair values as of
December 31, 2002 and 2001, due to the relatively short
duration of these financial instruments. Except for the senior
subordinated notes payable and the subordinated notes payable
to stockholders, the carrying amounts of the Company's
indebtedness approximate their fair values as of December 31,
2002 and 2001, as they bear interest rates that approximate
market. The fair value of the senior subordinated notes
payable on principal amounts of $75.0 million and $100.0
million, based on quoted market value, was approximately $81.0
million and $105.3 million as of December 31, 2002 and 2001,
respectively. The fair value of the subordinated notes payable
to stockholders as of December 31, 2001, based on management's
estimates considering current market conditions, was
approximately $7.3 million.
(n) Derivative Instruments and Hedging Activities
Effective January 1, 2001, the Company adopted Statement of
Financial Accounting Standards No. 133 ("SFAS No. 133"),
Accounting for Derivative Instruments and Hedging Activities,
as amended. The Company has entered into certain interest rate
swap agreements, which are accounted for under SFAS No. 133.
SFAS No. 133 requires that derivative instruments be
recognized at fair value in the balance sheet. Changes in the
fair value of derivative instruments that qualify as effective
hedges of cash flows are recognized as a component of other
comprehensive income (loss). Changes in the fair value of
derivative instruments for all other hedging activities,
including the ineffective portion of cash flow hedges, are
recognized in current period earnings. The adoption of SFAS
No. 133 did not have significant impact on the Company's
consolidated financial statements.
(o) Earnings (Loss) Per Common Share
The Company computes earnings (loss) per common share in
accordance with Statement of Financial Accounting Standards
No. 128 ("SFAS No. 128"), Earnings Per Share. Under the
provisions of SFAS No. 128, basic earnings (loss) per common
share is computed by dividing the net earnings (loss)
available to common stockholders for the period by the
weighted average number of common shares outstanding during
the period. Diluted earnings (loss) per common share is
computed by dividing net earnings (loss) for the period by the
weighted average number of common and dilutive common
equivalent shares outstanding during the period. Potentially
dilutive common equivalent shares are comprised of the
Company's employee stock options and shares associated with
the Company's subordinated convertible note payable prior to
the Company's IPO.
F-13
(p) Use of Estimates
The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in
the United States of America requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and 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. Actual results could differ from
those estimates.
(q) Stock Split
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 common 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.
(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 due and 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 $1.2 million and $2.5
million for the years ended December 31, 2001 and 2000,
respectively. As of the date of sale, the carrying value of
the net assets of CITE was approximately zero, resulting in a
gain on the sale of the business of approximately $100,000.
(b) Curtailment of Operations 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. At the date of
formation, CITI contributed certain assets to the Venture. The
Company has the sole ability to control the management and
operations of CITI-SIUSS LLC and, accordingly, consolidated
its results. Under the joint venture agreement, the Company
was allocated 98% of the profits and losses of CITI-SIUSS
until its investment in the Venture was recovered, at which
time profits and losses were shared based on the respective
ownership interests of the joint venturers. As the Company had
not yet recovered its investment, 98% of the Venture's losses
had been allocated to the Company and 2% recognized as
minority interest in losses in the consolidated statements of
operations. Upon the occurrence of certain events, the Company
had the option to purchase the 50% interest owned by CITI, at
a formula price as included in the joint venture agreement.
On June 22, 2001, the Company decided to cease software
development operations of the Venture 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 $1.5 million and
$880,000 for the years ended December 31, 2001 and 2000,
respectively. Operating losses were approximately $2.6 million
and $2.5 million for the years December 31, 2001 and 2000,
respectively. The Venture was obligated to provide maintenance
and support services on existing contracts through June 30,
2002. Upon the completion of this obligation, the Company
anticipated that no excess proceeds would be available to the
Company or the minority interest party in the Venture.
Accordingly, the remaining minority interest of approximately
$487,000 was reversed during the quarter ended June 30, 2001,
and the resulting gain was included in gains on sales and
closures of businesses in the accompanying consolidated
statement of operations.
F-14
(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. 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 $11.7 million and $18.1 million for the years
ended December 31, 2001 and 2000, respectively. Operating
income (loss) was approximately $(41,000) and $686,000 for the
years ended December 31, 2001 and 2000, respectively. 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 paid to a key employee of IMC during the year ended
December 31, 2002. The total gain recognized on the sale of
IMC recognized was approximately $3.5 million.
As a result of the sale of IMC, the Company realized an income
tax benefit of approximately $1.6 million relating to
differences between the income tax and financial statement
carrying amounts of the Company's investment in IMC.
Approximately $760,000 of this benefit resulted from
differences that existed as of the date of the Company's
acquisition of A&T, of which IMC was a subsidiary.
Accordingly, during the third quarter of 2001, the Company
recognized the income tax benefit related to the
pre-acquisition difference as a reduction of goodwill from the
acquisition of A&T, and recognized the remaining tax benefit
of $790,000 as a reduction of income tax expense.
(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 $3.3 million and $714,000,
respectively, and operating loss was $(2.1) million and
$(29,000), respectively, for the years ended December 31, 2001
and 2000. In conjunction with the closure of STSR, the Company
recognized a charge of approximately $1.0 million for the
write-down of goodwill from the Sherikon acquisition, which
was attributable to STSR. This charge is included in goodwill
amortization in the accompanying consolidated statement of
operations, for the year ended December 31, 2001. The
remaining expected costs of fulfilling STSR's existing
contracts of approximately $266,000 have been accrued as of
December 31, 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);
F-15
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 to temporarily 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 has not made this $2.5 million scheduled payment
pending this indemnification claim.
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 consolidated
statements of operations for the period ended December 31, 2002. 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 consolidated
statements of operations for the year ended December 31, 2002.
(5) Acquisitions
(a) Sherikon, Inc.
On October 20, 2000, the Company purchased all of the outstanding
stock of Sherikon, Inc., a technology solutions and services firm
based in Chantilly, Virginia, for a total purchase price of
approximately $34.8 million, including transaction costs of
approximately $861,000. Under the terms of the sale, the total
purchase price included, at closing, a cash payment of $20.8 million
to the shareholders of Sherikon, Inc., cash payments of approximately
$5.2 million to certain executives and employees of Sherikon, Inc.,
and subordinated notes payable totaling $7.5 million, of which $5.0
million was due and paid in 2001 and $2.5 million was due at the end
of the second year after closing. 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 has not made this $2.5 million scheduled
payment pending the resolution of this indemnification claim. The
subordinated notes carry a 0% coupon rate and have been
present-valued. The present value of the subordinated notes payable,
using an assumed borrowing rate of 11.75%, was approximately $6.5
million as of the date of purchase. In addition, the Company
guaranteed certain bonuses totaling approximately $1.75 million to
former Sherikon employees payable in two installments, the first of
which was paid in October 2001 and the second of which was paid in
October 2002. Such bonuses were not contingent on continued employment
with the Company, and the present value of such amount, assuming an
11.75% discount rate, of $1.5 million, was recognized as additional
purchase consideration. 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, based on
preliminary estimates by management. The identifiable intangible
assets were acquired contracts and workforce in place. These assets
were valued, based on an independent appraisal, at $1.3 million and
$760,000, respectively. Both have expected useful lives of 4 years. As
of January 1, 2002 the Company reclassified the unamortized balance of
the intangible asset associated with the acquired employee workforce
from intangible assets to goodwill, which in accordance with SFAS No.
142, are no longer separately identifiable from goodwill. Goodwill was
being amortized on a straight-line basis over twenty years, prior to
the adoption of SFAS No. 142.
F-16
The total purchase price paid, including transaction costs, of $34.8
million, was allocated to the assets and liabilities acquired as
follows (in thousands):
Cash $ 2,924
Accounts receivable 15,191
Prepaid expenses and other current assets 544
Property and equipment 353
Other assets 248
Contracts 1,310
In place workforce 760
Goodwill 20,177
Deferred tax assets, net 2,932
Accounts payable and accrued expenses (9,423)
Long-term liabilities (207)
------------
Total consideration $ 34,809
During the third quarter of 2001, the Company finalized the allocation
of the purchase price, resulting in an increase of $100,000 in
goodwill and accrued liabilities related to contingencies identified
at the date of acquisition. During the fourth quarter of 2001, the
Company made the decision to close STSR, which was acquired as part of
Sherikon. The Company wrote off goodwill of approximately $1.0 million
in connection with the closure (see note 3(d)).
Transaction costs of approximately $861,000 include a $300,000 fee
paid to Caxton-Iseman Capital, Inc., an affiliate of and advisor to
the Company.
(b) 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 the training division of SIGCOM's 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 SFAS No. 142, is not being amortized (see note
2(f)).
F-17
Unaudited Pro Forma Data
The following unaudited pro forma summary presents consolidated
information as if the acquisition of the Training Division of SIGCOM
and the acquisition of Sherikon had occurred as of January 1, 2000.
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, except per share data):
2001 2000
---------------- ---------------
----------------
Total revenues $ 723,498 $ 612,278
Total expenses 723,260 615,250
---------------- ---------------
Income (loss) before extraordinary item 224 (2,972)
Extraordinary gain, net of tax 330 --
---------------- ---------------
Net income (loss) $ 554 $ (2,972)
================ ===============
================ ===============
Basic and diluted earnings (loss) per common share:
Income (loss) before extraordinary item $ 0.01 $ (0.12)
Extraordinary gain, net of tax 0.01 --
---------------- ---------------
Net income (loss) $ 0.02 $ (0.12)
================ ===============
(6) Accounts Receivable
The components of accounts receivable as of December 31, 2002 and 2001,
are as follows (in thousands):
2002 2001
-------------- --------------
Billed and billable $ 179,216 116,539
Unbilled 8,929 15,508
Retainages due upon contract completion 5,162 3,797
Allowance for doubtful accounts (4,248) (4,499)
-------------- --------------
Total $ 189,059 131,345
============== ==============
In excess of 95% of the Company's revenues for each of 2002, 2001 and
2000 have been earned, and accounts receivable as of December 31, 2002
and 2001 are due from agencies of the U.S. federal government.
Unbilled costs and fees and retainages billable upon completion of
contracts are amounts due primarily within one year and will be billed
on the basis of contract terms and delivery schedules.
The accuracy and appropriateness of the Company's direct and indirect
costs and expenses under its government contracts, and therefore its
accounts receivable recorded pursuant to such contracts, are subject
to extensive regulation and audit, including by the U.S. Defense
Contract Audit Agency ("DCAA") or by other appropriate agencies of the
U.S. government. Such agencies have the right to challenge the
Company's cost estimates or allocations with respect to any government
contract. Additionally, a substantial portion of the payments to the
Company under government contracts are provisional payments that are
subject to potential adjustment upon audit by such agencies. Incurred
cost audits have been completed by DCAA through 2000. Historically,
such audits have not resulted in any significant disallowed costs.
Although the Company can give no assurances, in the opinion of
management, any adjustments likely to result from inquiries or audits
of its contracts would not have a material adverse impact on the
Company's financial condition or results of operations.
F-18
(7) Property and Equipment
Property and equipment consists of the following as of December 31,
2002 and 2001 (in thousands):
2002 2001
------------------ -----------------
Land $ 393 544
Buildings 1,717 2,429
Computer hardware and software 13,348 10,649
Furniture and equipment 8,697 5,890
Leasehold improvements 4,808 5,047
------------------ -----------------
28,963 24,559
Less - accumulated depreciation and amortization (18,971) (11,815)
------------------ -----------------
$ 9,992 12,744
================== =================
(8) Accrued Expenses
The components of accrued expenses as of December 31, 2002 and 2001 are
as follows (in thousands):
2002 2001
------------------ -----------------
Accrued payroll and related benefits $ 38,819 31,585
Accrued subcontractor costs 13,396 14,438
Accrued interest 1,138 3,636
Other accrued expenses 4,250 6,382
------------------ -----------------
$ 57,603 56,041
================== =================
(9) Indebtedness
(a) Credit Agreement
On June 23, 1999, the Company entered into a Credit Agreement ("Credit
Facility") with a syndicate of nine commercial banks. Under the terms
of the Credit Facility, the Company entered into promissory notes with
aggregate available financing facilities of $180.0 million. The Credit
Facility was comprised of a revolving credit facility for aggregate
borrowings of up to $120.0 million ("Revolving Facility"), as
determined based on a portion of eligible billed accounts receivable
and a portion of eligible unbilled accounts receivable and the ratio
of net debt to earnings before interest, taxes, depreciation and
amortization ("EBITDA"), as defined, and maturing on June 23, 2005;
and a $60.0 million note ("Term Loan") with principal payments due
quarterly commencing June 30, 2001, and $15.0 million at maturity on
June 23, 2005. However, under certain conditions related to excess
annual cash flow, as defined in the agreement, and the receipt of
proceeds from certain asset sales, and debt or equity issuances, the
Company is required to prepay, in amounts specified in the agreement,
borrowings under the Term Loan. Due to excess cash flows, as defined,
generated in 2001, an additional principal payment of $10.7 million
was paid under the term loan on March 14, 2002. A portion of the net
proceeds from the IPO were used to make an additional principal
payment of $11.4 million in March 2002. Effective October 21, 2002,
this Credit Facility was replaced by an Amended and Restated Credit
Agreement, as discussed below.
Under the Credit Facility, the interest rate on both the Revolving
Facility and the Term Loan bear interest at a floating rate based
upon, at the Company's option, LIBOR, or the Alternate Base Rate
("ABR"), which is the higher of CSFB's prime rate (less one quarter of
one percent) and the Federal Funds Effective Rate, plus one half of
one percent, in each case plus a margin determined based on our ratio
of net debt to EBITDA. Interest is payable on the last day of each
quarter. During the years ended December 31, 2002, 2001 and 2000, the
interest rates on the Revolving Facility and Term Loan ranged from
3.53 percent to 6.00 percent, 4.61 percent to 11.75 percent, and 8.84
percent to 11.75 percent, respectively.
F-19
(b) Amended and Restated Credit Agreement
On October 21, 2002, the Company entered into an amendment and
restatement of its existing Credit Agreement (the "Amended and
Restated Credit Agreement"). Pursuant to the terms of the Amended and
Restated Credit Agreement, the Credit Facility was amended to allow
for the following: (1) a $200.0 million senior secured revolving
credit facility (the "Revolving Credit Facility"), including a $25.0
million letter of credit sublimit; and (2) a $22.3 million three-year
senior secured term loan facility (the "Term Loan Facility"). The
aggregate amount available for borrowing under the Revolving Credit
Facility is determined based on a portion of eligible accounts
receivable. In general, the Company's borrowing availability under the
Revolving Credit Facility is subject to our borrowing base (defined as
portions of eligible billed and unbilled accounts receivable) and the
Company's ratio of net debt to EBITDA and net senior debt to EBITDA,
as defined in the Amended and Restated Credit Agreement. The Company
incurred approximately $626,000 in expenses related to this Amended
and Restated Credit Agreement. These expenses have been capitalized as
additional deferred financing fees and are being amortized over the
remaining term of the Credit Facility.
Borrowings under the Term Loan Facility and the Revolving Credit
Facility mature on June 30, 2005. Principal payments of approximately
$950,000 are due quarterly under the Term Loan Facility, with
approximately $12.7 million due at final maturity. Borrowings under
the Revolving Credit Facility and Term Loan Facility bear interest at
a floating rate based upon, at the Company's option, LIBOR, or the
Alternate Base Rate ("ABR"), which is the higher of Credit Suisse
First Boston's ("CSFB") prime rate (less one quarter of one percent)
and the Federal Funds Effective Rate, plus one half of one percent, in
each case plus a margin determined based upon our ratio of net debt to
EBITDA (as defined in the Amended and Restated Credit Agreement). From
the date of the amendment through December 31, 2002, the interest
rates for the Term Loan Facility and the Revolving Credit Facility
ranged from 3.63 percent to 5.75 percent. The Company may, under
certain conditions described in the Amended and Restated Credit
Agreement, request an extension to the maturity date of the Revolving
Credit Facility.
In certain cases, the Company is required to make excess cash payments
(as defined in the Amended and Restated Credit Agreement) to the
extent certain conditions and ratios are met.
All of the Company's existing and future domestic subsidiaries
unconditionally guarantee the repayment of amounts borrowed under the
Amended and Restated Credit Agreement. The Amended and Restated Credit
Agreement is secured by substantially all of the Company's and its
domestic subsidiaries' tangible and intangible assets, including
substantially all of the capital stock of the Company's subsidiaries.
The Amended and Restated Credit Agreement contains affirmative and
negative covenants in addition to financial covenants, customary for
such financings.
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 it share of
net cash proceeds of issuances of equity securities.
F-20
The Amended and Restated Credit Agreement contains customary events of
default, certain of which allow for grace periods.
As of December 31, 2002, the outstanding amounts under the Amended and
Restated Credit Agreement were as follows (in thousands): 2002
Revolving Facility $ 7,000
Term Loan Facility 21,201
--------------
$ 28,201
==============
The remaining available borrowings under the Revolving Credit Facility
as of December 31, 2002 was $108.3 million.
For the years ended December 31, 2002, 2001 and 2000, total interest
expense incurred on the Revolving Credit Facility was approximately
$1.1 million, $2.7 million and $2.3 million, respectively. For the
years ended December 31, 2002, 2001 and 2000, total interest expense
incurred on the Term Loan Facility was approximately $1.2 million,
$4.1 million and $5.9 million, respectively.
(c) Senior Subordinated Notes Payable
On May 11, 1999, the Company sold $100.0 million, in aggregate
principal amount of ten-year, 12% Notes. The proceeds of the issuance
of the 12% notes were principally used to purchase A&T. The Notes are
subordinate to the Company's Amended and Restated Credit Facility but
rank senior to any other subordinated indebtedness. The 12% Notes
mature May 15, 2009 and interest is payable semi-annually on May 15
and November 15. The Company cannot redeem the 12% Notes prior to May
15, 2004 except under certain conditions. The Company used net
proceeds from its IPO to redeem $25.0 million principal amount of its
12% Notes on April 15, 2002. 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 approximately $185,000, net of
tax, 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 $2.6 million, net of
tax, have been reflected as an extraordinary loss in the accompanying
unaudited consolidated statements of operations for the year ended
December 31, 2002. In addition, under certain conditions after May 15,
2004, the Company can redeem some portion of the 12% Notes at certain
redemption prices. Total interest expense for the 12% Notes incurred
during 2002, 2001 and 2000 approximated $9.9 million, $12.0 million,
and $12.1 million, respectively.
The 12% Notes are guaranteed by each of the Company's existing and
certain future domestic subsidiaries (see note 17). The 12% Notes
include certain restrictions regarding additional indebtedness,
dividend distributions, investing activities, stock sales,
transactions with affiliates, and asset sales and transfers.
(d) Subordinated Notes Payable
In connection with the purchase of Techmatics, in 1998, the Company
entered into subordinated promissory notes with the Techmatics
shareholders and option holders as of the date of acquisition in the
principal amount of $10.0 million, discounted as of the date of
acquisition to approximately $8.9 million. One-tenth of the total
amount of principal was paid on May 31, 1999, with the remaining
nine-tenths paid on May 31, 2000. Interest began accruing on May 31,
1999 at 6 percent per year on four-ninths of the principal amount
outstanding. Total interest expense incurred on the subordinated notes
payable to the Techmatics shareholders for the year ended December 31,
2000 was approximately $117,000.
F-21
In connection with the purchase of Sherikon (note 5(a)), the Company
entered into subordinated promissory notes with the Sherikon
shareholders as of the date of acquisition in the aggregate principal
amount of $7.5 million, discounted to approximately $6.5 million.
During 2001, $5.0 million of the subordinated promissory notes were
repaid. The remaining $2.5 million of subordinated promissory notes
were due on October 20, 2002. 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 has not made this $2.5 million scheduled
payment pending resolution of the indemnification claim. During the
year ended December 31, 2002, 2001 and 2000, total interest expense on
the subordinated promissory notes with the Sherikon shareholders was
approximately $232,000, $665,000 and $156,000, respectively.
(e) Subordinated Note Payable to Ogden
As partial consideration for the acquisition of Anteon Virginia, the
Company entered into a subordinated promissory note with Ogden in the
principal amount of $8.5 million, bearing interest at 12 percent
payable quarterly. The principal amount of the note was due in April
2004, but could be prepaid without penalty at any time prior to
maturity. On June 29, 2001, Anteon Virginia purchased from Ogden the
then outstanding principal amount of the subordinated note payable to
Ogden due from the Company for $3.2 million in full settlement of the
Company's obligation to Ogden. In connection with the payment, the
Company recognized an extraordinary gain of $330,000, net of tax, on
the retirement of the subordinated note payable to Ogden.
Total interest expense incurred on the subordinated note payable to
Ogden for the years ended December 31, 2001 and 2000 was approximately
$86,000, and $329,000, respectively.
(f) Subordinated Notes Payable to Stockholders
Concurrent with the acquisition of Anteon Virginia, the Company and
its majority stockholder, Azimuth Technologies, L.P., and three other
stockholders entered into subordinated promissory note agreements in
the aggregate principal amount of $7.5 million, all bearing interest
at 6%, which were payable quarterly. The principal amount of the notes
was due in April 2004, but could be prepaid without penalty at any
time prior to maturity. The Company used a portion of the net proceeds
from its IPO to repay in full this subordinated promissory note held
by Azimuth Technologies, L.P., one of the Company's principal
stockholders.
Total interest expense incurred on the subordinated notes payable for
the years ended December 31, 2002, 2001 and 2000 was approximately
$90,000, $450,000, and $447,000, respectively.
(g) Subordinated Convertible Note Payable - Related Party
On June 23, 1999, the Company and Azimuth Tech. II LLC, an affiliate
of Azimuth Technologies, L.P., the Company's majority stockholder, and
Caxton-Iseman Capital, Inc., entered into a subordinated convertible
promissory note agreement for $22.5 million. The note bore interest at
12 percent, with interest payable semi-annually each June 30 and
December 31, through maturity on June 23, 2010. The Company could not
prepay the note prior to December 23, 2001, unless there was a sale of
the Company or an initial public offering of the Company's common
stock. On or after December 23, 2001, the note could be prepaid by the
Company without penalty. The note was convertible into the Company's
non-voting common stock at the option of the holder at any time at the
conversion price of $4.86 per share, subject to adjustment for stock
splits, dividends and certain issuances of common stock. At the
Company's option, accrued interest on the note could have been paid
either in cash or additional notes which are identical to the above
note, except that the additional notes were not convertible into
shares of the Company's common stock. In March 2002, in connection
with the Company's IPO, the Company repaid $4.4 million in accrued
interest related to the note, and the $22.5 million principal amount
subordinated convertible promissory note 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.
F-22
During the years ended December 31, 2002, 2001 and 2000, the Company
incurred approximately $667,000, $3.2 million, and $3.0 million,
respectively, of interest expense on the notes.
(h) Future Maturities
Scheduled future maturities under the Company's indebtedness,
excluding the $2.5 million Subordinated Notes Payable, are as follows
(in thousands):
Year ending December 31,
2003 $ 3,798
2004 3,798
2005 20,605
2006 --
2007 --
Thereafter 75,000
------------
$ 103,201
============
(i) Interest Rate Swap Agreements
OBJECTIVES AND CONTEXT
The Company uses variable-rate debt to finance its operations through
its Revolving Facility and Term Loan. These debt obligations expose
the Company to variability in interest payments due to changes in
interest rates. If interest rates increase, interest expense
increases. Conversely, if interest rates decrease, interest expense
also decreases.
Management believes it is prudent to limit the variability of a
portion of its interest payments. It is the Company's objective to
hedge a portion of its longer-term variable interest payments for the
Revolving Facility and Term Loan.
STRATEGIES
To meet this objective, management enters into various interest rate
swap derivative contracts to manage fluctuations in cash flow
resulting from fluctuations in interest rates. The interest rate swaps
change the variable-rate cash flow exposure on the Company's long-term
debt obligations to fixed-rate cash flows by entering into
receive-variable, pay-fixed interest rate swaps. Under the interest
rate swaps, the Company receives variable interest rate payments and
makes fixed interest rate payments, thereby creating fixed-rate
long-term debt.
The Company does not enter into derivative instruments for any purpose
other than cash flow hedging purposes. That is, the Company does not
speculate using derivative instruments.
RISK MANAGEMENT POLICIES
The Company assesses interest rate cash flow risk by continually
identifying and monitoring changes in interest rate exposures that may
adversely impact expected future cash flows and by evaluating hedging
opportunities.
F-23
The Company monitors interest rate cash flow risk attributable to both
the Company's outstanding or forecasted debt obligations as well as
the Company's offsetting hedge positions and estimates the expected
impact of changes in interest rates on the Company's future cash
flows.
Upon adoption of SFAS No. 133, the fair value of interest rate swaps
was recorded as a transition adjustment to accumulated other
comprehensive income. This resulted in a decrease of $629,000, net of
tax, to accumulated other comprehensive income as of January 1, 2001.
Changes subsequent to January 1, 2001 in the fair value of interest
rate swaps designed as hedging instruments of the variability of cash
flows associated with floating-rate, long-term debt obligations are
reported in accumulated other comprehensive income (loss). These
amounts subsequently are reclassified into interest expense as a yield
adjustment in the same period in which the related interest on the
floating-rate debt obligations affects earnings.
During the year ended December 31, 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 year ended December 31,
2002 includes losses of $1.9 million associated with these
cancellations.
Over the next twelve months, approximately $137,000 of losses in
accumulated other comprehensive loss related to the interest rate
swaps are expected to be reclassified into interest expense as a yield
adjustment of the hedged debt obligation. As of December 31, 2002, the
fair value of the Company's interest swap agreements resulted in a net
liability of $763,000 and has been included in other current
liabilities.
The Company's interest rate swap agreements effectively changed the
Company's interest rate exposure for the following amounts, as of
December 31, 2002, to the following fixed rates:
Fair Value as
Effective of December 31,
Date of Swap Notional Maturity of Fixed Rate 2002
Agreement Amount Swap Agreement of Interest (in thousands)
--------------------- -- ------------- -- ---------------------- -- ------------- --- -----------------
---------------------
September 1998 $5 million September 25, 2003 5.02 percent $(137)
---------------------
June 2001 $10 million June 30, 2004 5.78 percent $(626)
--------------------- -- ------------- -- ---------------------- -- ------------- --- -----------------
The fair value of interest rate swaps is the estimated amount, based
on quoted market prices, that the counterparty would (receive) pay to
terminate the swap agreements at December 31, 2002.
(10) Common Stock
The Company's authorized capital stock currently consists of
175,000,000 shares of common stock and 15,000,000 shares of preferred
stock.
The holders of the Company's common stock are entitled to one vote per
share on all matters submitted to a vote of stockholders, including
the election of directors. The common stock does not have cumulative
voting rights, which means that the holders of a majority of the
outstanding common stock voting for the election of directors can
elect all directors then being elected. The holders of our common
stock are entitled to receive dividends, when, and if declared by the
Company's board out of legally available funds. Upon our liquidation
or dissolution, the holders of common stock will be entitled to share
ratably in our assets legally available for distribution to
stockholders after payment of liabilities and subject to the prior
rights of any holders of preferred stock then outstanding. The rights,
preferences and privileges of holders of common stock are subject to
the rights of the holders of shares of any series of preferred stock,
which may be issued in the future.
F-24
Preferred Stock
The Company's preferred stock may be issued from time to time in one
or more series. The Company's board is authorized to fix the dividend
rights, dividend rates, any conversion rights or right of exchange,
any voting rights, rights and terms of redemption, the redemption
price or prices, the payments in the event of liquidation, and any
other rights, preferences, privileges, and restrictions of any series
of preferred stock and the number of shares constituting such series
and their designation. The Company has no present plans to issue any
shares of preferred stock other than in connection with the rights
distribution described below.
Depending upon the rights of such preferred stock, the issuance of
preferred stock could have an adverse effect on holders of our common
stock by delaying or preventing a change in control, adversely
affecting the voting power of the holders of common stock, including
the loss of voting control to others, making removal of the present
management more difficult, or resulting in restrictions upon the
payment of dividends and other distributions to the holders of common
stock.
Rights Agreement
In connection with the Company's IPO, the Company distributed one
preferred share purchase right for each outstanding share of common
stock to the stockholders of record on that date (the "Rights
Agreement"). Under the Company's Rights Agreement, each right entitles
the registered holder to purchase from the Company one one-thousandth
of a share of Series A Preferred Stock, par value $0.01 per share, at
a price of $76.50 per one one-thousandth of a share, under certain
circumstances provided for in the Rights Agreement.
Until a "separation date" (as defined in the Rights Agreement) occurs,
the rights will: o Not be exercisable; o Be evidenced by certificates
that represent shares of the Company's common stock; and o Trade with
the Company's common stock.
The rights will expire at the close of business on the ten-year
anniversary of the Rights Agreement, unless earlier redeemed or
exchanged by the Company.
(11) Income Taxes
The provisions for income taxes for the years ended December 31, 2002,
2001 and 2000, consist of the following (in thousands), respectively:
Years ended December 31,
-----------------------------------------------
2002 2001 2000
----------- ------------ -------------
Current provision (benefit):
Federal $ 11,727 1,140 293
State 1,600 802 197
Foreign 119 62 104
----------- ------------ -------------
Total current provision (benefit) 13,446 2,004 594
----------- ------------ -------------
Deferred provision (benefit):
Federal 4,331 1,501 (880)
State 597 853 198
Foreign -- 55 (65)
----------- ------------ -------------
Total deferred provision (benefit) 4,928 2,409 (747)
----------- ------------ -------------
Total income tax provision (benefit) $ 18,374 4,413 (153)
=========== ============ =============
F-25
The income tax provisions for the years ended December 31, 2002, 2001
and 2000, respectively, are different from that computed using the
statutory U.S. federal income tax rate of 34% for the year December
31, 2000 and 35% for December 31, 2001 and 2002 as set forth below (in
thousands):
Years ended December 31,
-----------------------------------------------
2002 2001 2000
----------- ------------ -------------
Expected tax expense (benefit), computed at statutory rate $ 16,590 1,401 (1,853)
State taxes, net of federal expense 1,428 1,251 7
Nondeductible expenses 330 304 264
Goodwill amortization -- 1,804 1,074
Valuation allowance -- - 295
Increase in marginal federal rate -- 200 -
Stock basis difference on sale of subsidiary -- (790) -
Foreign rate differences 53 (21) 8
Other (27) 264 52
----------- ------------ -------------
$ 18,374 4,413 (153)
=========== ============ =============
The tax effect of temporary differences that give rise to the deferred
tax assets and deferred tax liabilities as of December 31, 2002 and
2001 was presented below (in thousands):
2002 2001
-------------- --------------
Deferred tax assets:
Accrued expenses $ 6,244 $ 6,101
Intangible assets, due to differences in amortization 2,492 4,411
Interest rate swaps 298 1,136
Accounts receivable allowances 706 634
Property and equipment, due to differences in depreciation 831 493
Net operating loss carryforwards 356 3,262
-------------- --------------
Total gross deferred tax assets 10,927 16,037
Less: Valuation allowance (295) (295)
-------------- --------------
-------------- --------------
Net deferred tax assets 10,632 15,742
-------------- --------------
-------------- --------------
Deferred tax liabilities:
Deductible goodwill, due to differences in amortization 7,502 7,552
Revenue recognition differences 6,616 6,500
Accrued expenses 5,741 6,058
Property and equipment, due to differences in depreciation 811 742
-------------- --------------
Total deferred tax liabilities 20,670 20,852
-------------- --------------
--------------
Deferred tax liabilities, net $ (10,038) $ (5,110)
============== ==============
============== ==============
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all
of the deferred tax asset will be realized. The ultimate realization
of the deferred tax asset is dependent upon the generation of future
taxable income during the periods in which temporary differences
become deductible. Management considers scheduled reversals of
deferred tax liabilities, projected future taxable income, and tax
planning strategies that can be implemented by the Company in making
this assessment. Based upon the level of historical taxable income,
scheduled reversal of deferred tax liabilities, and projections of
future taxable income over the periods in which the temporary
differences become deductible based on available tax planning
strategies, management presently believes that it is more likely than
not that the company will realize the portion of the benefits of these
deductible differences related to Federal income taxes. The Company
has established a valuation allowance as of December 31, 2002 and 2001
of $295,000 and $295,000, respectively against certain state net
operating loss carryforwards. At December 31, 2002, the Company had
federal and state net operating loss carryforwards of approximately
$116,000 and $5.8 million, respectively. Carryforwards have various
expiration dates beginning in 2004.
F-26
(12) Employee Benefit Plans
Employees of the Company may participate in 401(k) retirement savings
plans, whereby employees may elect to make contributions pursuant to a
salary reduction agreement upon meeting eligibility requirements.
Participants may contribute up to 22 percent (20 percent prior to
January 1, 2001) of salary in any calendar year to these plans,
provided that amounts in total do not exceed certain statutory limits.
The Company matches up to 50 percent of the first 6 percent of a
participant's contributions, subject to certain limitations. The
Company made contributions to these plans of approximately $7.1
million, $5.6 million and $5.3 million for the years ended December
31, 2002, 2001, and 2000 respectively.
The A&T Savings and Investment Plan was a discretionary contribution
plan as defined in the Internal Revenue Code, Section 401 (a)(27).
Effective December 31, 2000, the plan's assets were transferred to the
Anteon Virginia 401(k) plan. The plan covered substantially all of
A&T's full-time employees. A&T's contributions were made at the
discretion of the Board of Directors for any plan year. A&T's matching
contribution to this plan for the year ended December 31, 2000 was
approximately $2.3 million.
(13) Stock Option and Other Compensation Plans
(a) Stock Option Plan
In January 1997, the Company's Board of Directors approved the
adoption of the Anteon Virginia Corporation Omnibus Stock Plan ("the
Stock Option Plan"). At the discretion of the Board of Directors, the
stock option plan permits the granting of stock options, stock
appreciation rights, restricted or unrestricted stock awards, and/or
phantom stock to employees or directors of the Company. As of December
31, 2002, an aggregate of 801,040 shares of the Company's common stock
were reserved for issuance under the stock option plan.
The exercise price of stock options granted is the market value of the
common stock at the grant date. Prior to the Company's IPO, the
exercise price of stock options granted was determined by the
Company's Board of Directors but was not to be less than the fair
value of the underlying shares of common stock at the grant date.
For stock options granted to employees, 20% of the shares subject to
the options vest on the first anniversary of the grant date and an
additional 20% vest on each succeeding anniversary of the grant date.
For options granted from the date of the adoption of the Company's
stock option plan until September 21, 2000, employees have a period of
three years from the vesting date to exercise the option to purchase
shares of the Company's common stock. In 1997, the Company's Board of
Directors approved that 20 percent of the options issued on the August
1, 1997 grant date vested immediately. On September 21, 2000, the
Company's Board of Directors approved that, with respect to stock
options granted from that date forward, each grantee has a period of 8
years from the date of grant in which to exercise options which vest.
On March 11, 2002, the Company's Board of Directors approved that,
with respect to stock options granted from that date forward, each
grantee has a period of 10 years from the date of grant in which to
exercise options which vest.
F-27
For stock options granted to two directors of the Company on August 1,
1997, 33 1/3% of the shares subject to the options vested on the first
anniversary of the grant date, and an additional 33 1/3% vested on the
two succeeding anniversaries of the grant date. As of December 31,
2002 these directors' options were fully vested and exercised.
The following tables summarize information regarding options under the
Company's stock option plan:
Weighted
average Outstanding
Number Option price exercise and
of shares per share price exercisable
------------ ---------------- ---------------- ----------------
Outstanding at December 31, 1999 3,627,680 $ 0.84-5.25 $ 3.65 853,728
Granted 965,000 6.25-6.49 6.31
Exercised (42,880) 4.86-6.41 6.21
Cancelled or expired (263,800) 0.84-6.25 5.00
------------ ---------------- ----------------
Outstanding at December 31, 2000 4,286,000 $ 0.84-6.49 $ 4.27 1,489,516
Granted 64,000 8.10 8.10
Exercised (82,680) 0.84-6.41 1.84
Cancelled or expired (250,480) 0.84-8.10 5.64
------------ ---------------- ----------------
------------ ---------------- ----------------
Outstanding at December 31, 2001 4,016,840 $ 0.84-8.10 $ 4.21 2,178,960
Granted 1,417,000 18.00-27.25 19.04
Exercised (1,135,632) 0.84-8.10 3.49
Cancelled or expired (175,000) 2.30-18.00 6.24
------------ ---------------- ----------------
Outstanding as of December 31, 2002 4,123,208 $ 0.84-27.25 $ 8.98 1,647,368
============ ================ ================
Option and weighted average price information by price group is as
follows:
Shares outstanding Exercisable shares
---------------------------------------------- ------------------------------
Number Weighted Weighted Weighted
average average average
exercise remaining Number exercise
of shares price life of shares price
------------ --------------- --------------- ------------- ---------------
December 31, 2002:
$0.84 596,848 $ 0.84 1.8 596,848 $ 0.84
$2.30 to $3.36 32,000 $ 2.43 2.8 30,400 $ 2.38
$4.02 to $4.66 590,320 $ 4.61 3.7 388,400 $ 4.61
$4.86 to $5.25 737,440 $ 5.20 4.6 377,520 $ 5.21
$6.25 to $6.49 722,800 $ 6.30 4.5 250,000 $ 6.30
$8.10 33,800 $ 8.10 6.3 4,200 $ 8.10
$18.00 to $27.25 1,410,000 $ 17.77 6.8 --
------------ -------------
------------ -------------
4,123,208 1,647,368
============ =============
(b) Directors' Deferred Compensation Plan
Under a plan established during 2000, certain of the Company's
directors are compensated on a deferred basis. In lieu of their annual
director fees, each director under the plan has the choice of
receiving deferred compensation, payable in either: (1) cash upon the
completion of their service as a director, equal to the annual fees
due them plus interest accruing at an annual rate equal to the
Company's one-year borrowing cost in effect at the beginning of each
quarter and the end of each quarter, (2) a stock appreciation right
based on the number of shares that could be acquired in consideration
of the annual fees, or (3) a combination of each of the above. The
Company recognized approximately $144,000 during the year ended
December 31, 2001 as compensation expense. The amount of compensation
expense for the year ended December 31, 2000 was not significant. The
plan was terminated by the board effective as of December 31, 2001.
(c) Pro Forma Disclosures
The Company applies APB No. 25 and related interpretations in
accounting for the Company stock option plan. Adoption of the fair
market value provisions prescribed in SFAS No. 123 is optional with
respect to stock-based compensation to employees; however, pro forma
disclosures are required as if the Company adopted the fair value
recognition requirements under SFAS No. 123.
F-28
Had compensation cost for the grants under the Company stock option
plan been determined consistent with the fair market value provisions
prescribed in SFAS No. 123, the Company's pro forma net income (loss)
for the years ended December 31, 2002, 2001 and 2000 would approximate
$23.9 million, $(824,000) and $(6.4 million), respectively, using an
expected option life of 5, 7 and 7 years, respectively, dividend yield
rate of 0% and volatility rates of 47.8%, 70% and 20%, respectively,
and risk-free interest rates of 2.78%, 4.84% and 5.16% for 2002, 2001
and 2000, respectively (see note 2 l). The effects of applying SFAS
No. 123 in this pro forma disclosure are not indicative of future
amounts.
(14) Comprehensive Income (Loss)
Comprehensive income (loss), the accumulated foreign currency
translation adjustment and changes in the fair values of interest rate
swaps. The Company presents comprehensive income (loss) as a component
of the accompanying consolidated statements of stockholders' equity
(deficit). The amount of accumulated foreign currency translation
adjustment was approximately $(44,000), $(43,000) and $37,000, as of
December 31, 2002, 2001 and 2000, respectively. The amount of
accumulated other comprehensive income related to interest rate swaps
was $763,000 ($465,000 net of tax) and $2.8 million ($1.7 million net
of tax) as of December 31, 2002 and December 31, 2001, respectively.
(15) Earnings (Loss) Per Common Share
The computations of basic and diluted income (loss) per common share
are as follows:
For the period ended
December 31, 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 $ 29,025 32,163,150 $ 0.90
Extraordinary loss, net of tax (2,581) 32,163,150 (0.08)
-------------------------- ==========================
Net income $ 26,444 32,163,150 $ 0.82
========================== ==========================
Stock options 1,858,447
Diluted earnings per share:
Income before extraordinary item $ 29,025 34,021,597 $ 0.85
Extraordinary loss, net of tax (2,581) 34,021,597 (0.07)
-------------------------- ==========================
Net income $ 26,444 34,021,597 $ 0.78
========================== ==========================
F-29
For the period ended
December 31, 2001
Income Weighted average shares Per Share
(Numerator) (Denominator) Amount
(in thousands, except share and per share data)
Basic earnings per share:
Loss before extraordinary item $ (412) 23,786,565 $ (0.02)
Extraordinary gain, net of tax 330 23,786,565 0.01
========================== =========================
Net loss $ (82) 23,786,565 $ (0.01)
========================== =========================
Stock options --
Diluted earnings per share:
Loss before extraordinary item $ (412) 23,786,565 $ (0.02)
Extraordinary gain, net of tax 330 23,786,565 0.01
========================== =========================
Net loss $ (82) 23,786,565 $ (0.01)
========================== =========================
For the period ended
December 31, 2000
Income Weighted average shares Per Share
(Numerator) (Denominator) Amount
(in thousands, except share and per share data)
Basic earnings per share:
Loss before extraordinary item $ (5,290) 23,786,565 $ (0.22)
Extraordinary loss, net of tax -- 23,786,565 --
========================== ==========================
Net loss $ (5,290) 23,786,565 $ (0.22)
========================== ==========================
Stock options --
Diluted earnings per share:
Loss before extraordinary item $ (5,290) 23,786,565 $ (0.22)
Extraordinary loss -- 23,786,565 --
========================== ==========================
Net loss, net of tax $ (5,290) 23,786,565 $ (0.22)
========================== ==========================
(16) Commitments and Contingencies
(a) Leases
The Company leases facilities and certain equipment under operating
lease agreements expiring at various dates through 2010. As of
December 31, 2002, the aggregate minimum annual rental commitments
under noncancelable operating leases are as follows (in thousands):
Year ending December 31,
2003 $ 26,209
2004 23,915
2005 20,839
2006 19,025
2007 15,688
Thereafter 60,474
-------------
Total minimum lease payments $ 166,150
=============
F-30
Rent expense under all operating leases for the years ended December
31, 2002, 2001 and 2000 was approximately $24.2 million, $23.1 million
and $17.7 million, respectively.
(b) Management Fees
Effective June 1, 1999, the Company entered into an arrangement with
Caxton-Iseman Capital, Inc., an affiliate and advisor to the Company,
whereby the amount the Company was required to pay for management fees
to Caxton-Iseman Capital, Inc. increased to $1.0 million per year.
During the years ended December 31, 2002, 2001, and 2000, the Company
incurred $0, $1.0 million and $1.0 million, respectively, of
management fees with Caxton-Iseman Capital, Inc.
Effective December 31, 2001, the Company entered into a new agreement
with Caxton-Iseman Capital, Inc. that terminated the management fee
agreement. Under the terms of this new agreement, the Company was
obligated to pay Caxton-Iseman Capital, Inc. a one-time, $3.6 million
fee, which was recognized as general and administrative expense in
2001 and is reflected as due to related party in the accompanying
consolidated balance sheet as of December 31, 2001. As a result,
Caxton-Iseman no longer provides management advisory services to the
Company. Any further services requested by the Company that are
provided by Caxton-Iseman, if any, will be paid for by the Company at
rates negotiated at that time.
(c) Legal Proceedings
The Company is involved in various legal proceedings in the ordinary
course of business. Management of the Company and its legal counsel
cannot currently predict the ultimate outcome of these matters, but do
not believe that they will have a material impact on the Company's
financial position or results of operations.
On March 8, 2002, the Company received a letter from one of its
principal competitors, which is the parent company of one of its
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 subcontractor filed a demand for arbitration to which
the Company filed an answer and counter demand.
The arbitration hearing concluded on September 16, 2002. On December
18, 2002, the arbitrator issued a decision requiring the Company to
continue to issue task orders to the subcontractor under the
subcontract for so long as its customer continues to issue task orders
to the Company for these services and enjoining the Company from
interviewing, offering employment to, hiring or otherwise soliciting
employees of the subcontractor who work on this particular project.
The arbitrator's decision also denied the subcontractor's claim for
monetary damages and our counter-demand. The Company subsequently
filed an action to vacate or modify that portion of the arbitrator's
decision enjoining it from hiring certain subcontractor employees
under any circumstances, since the prohibition conflicts with the
parties' contractual obligations as provided in the non-solicitation
clause of the parties' subcontract, and imposes additional obligations
solely on the Company and to which the parties never agreed. The
subcontractor has filed an action to confirm the arbitration award. On
February 21, 2003, the court heard oral argument on the parties'
respective motions and a decision is pending.
The Company entered into a settlement agreement on April 24, 2001 with
Cambridge Technology Partners, Inc. ("Cambridge") to resolve a legal
action brought by Cambridge against the Company for work performed
solely by Cambridge for the United States Customs Service ("Customs
Service"). In 1998, the Customs Service requested that the Company
enter into a contract for the sole purpose of allowing the Customs
Service to direct all work to Cambridge to develop software as part of
a Customs Service information system modernization program. The
Company awarded Cambridge a subcontract to perform all of the software
development effort required by the contract without any work being
performed by the Company. In 1999, the Customs Service rejected the
Cambridge developed software. As a result, the Company terminated the
Cambridge subcontract. In 2000, Cambridge filed a lawsuit seeking
payment of the subcontract amount, approximately $3.0 million, plus
pre-judgment interest. Settlement discussions with Cambridge just
prior to the trial date in April 2001 resulted in Anteon Virginia
deciding to settle the matter. Under the terms of the settlement
agreement, the Company agreed to pay Cambridge $600,000. In exchange,
Cambridge agreed to dismiss all claims against the Company. The
Company also agreed to dismiss its counter-claims against Cambridge.
The settlement was recognized in general and administrative expense
during the quarter ended March 31, 2001.
F-31
(17) 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 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 December 31, 2002
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Consolidated
Anteon Non- Anteon
Condensed Consolidated International Guarantor Guarantor Elimination International
Balance Sheets Corporation Subsidiaries Subsidiaries Entries Corporation
---------------------------------------------------------------------------------------------------------------
(in thousands)
Cash and cash equivalents $ (17) $ 3,659 $ 624 $ -- $ 4,266
Accounts receivable, net -- 188,466 593 -- 189,059
Prepaid expenses and other 1,288 13,365 418 -- 15,071
current assets
Property and equipment, net 2,364 7,505 123 -- 9,992
Due from Parent (22,607) 22,746 (139) -- --
Investment in and advances to 23,898 --
subsidiaries (2,630) -- (21,268)
Goodwill, net 94,946 43,673 -- -- 138,619
Intangible and other assets, net 65,863 1,621 201 (60,000) 7,685
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total assets 165,735 278,405 1,820 (81,268) 364,692
============================================================================
============================================================================
Indebtedness 98,701 67,000 -- (60,000) 105,701
Accounts payable 526 46,804 300 -- 47,630
Accrued expenses and other 2,582 73,470 623 -- 76,675
liabilities
Deferred revenue 5,512 189 -- 5,701
--
----------------------------------------------------------------------------
Total liabilities 101,809 192,786 1,112 (60,000) 235,707
Minority interest in subsidiaries -- -- 156 -- 156
Total stockholders' equity 63,926 85,619 552 (21,268) 128,829
(deficit)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total liabilities and
stockholders' equity (deficit) $ 165,735 $ 278,405 $ 1,820 $ (81,268) $ 364,692
============================================================================
F-32
For the Year Ended December 31, 2002
--------------------------------------------------------------------------------
Consolidated
Anteon Non- Anteon
Condensed Consolidated International Guarantor Guarantor Elimination International
Statements of Operations Corporation Subsidiaries Subsidiaries Entries Corporation
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
(in thousands)
Revenues $ -- $ 826,640 $ 5,252 $ (6,066) $ 825,826
Costs of revenues 2 712,725 4,667 (6,066) 711,328
------------ ------------- ------------ ------------- -------------
------------ ------------- ------------ ------------- -------------
Gross profit (2) 113,915 585 -- 114,498
Total operating expenses 1,699 63,136 368 (15,099) 50,104
------------ ------------- ------------ ------------- -------------
------------ ------------- ------------ ------------- -------------
Operating income (1,701) 50,779 217 15,099 64,394
Other income 7,181 8,335 -- (15,099) 417
Interest expense (income), net 9,559 7,850 (15) -- 17,394
Minority interest in (earnings)
losses of subsidiaries -- -- (18) -- (18)
------------ ------------- ------------ ------------- -------------
------------ ------------- ------------ ------------- -------------
Income (loss) before provision
for income taxes and
extraordinary loss (4,079) 51,264 214 -- 47,399
Provision (benefit) for income (1,581) 19,835 120 -- 18,374
taxes
------------ ------------- ------------ ------------- -------------
------------ ------------- ------------ ------------- -------------
Income (loss) before (2,498) 31,429 94 29,025
extraordinary loss
Extraordinary loss, net of tax (2,581) -- -- -- (2,581)
------------ ------------- ------------ ------------- -------------
------------ ------------- ------------ ------------- -------------
Net income (loss) $ (5,079) $ 31,429 $ 94 $ -- $ 26,444
============ ============= ============ ============= =============
F-33
For the Year Ended December 31, 2002
--------------------------------------------------------------
Consolidated
Anteon Non- Anteon
Condensed Consolidated International Guarantor Guarantor International
Statements of Cash Flows Corporation Subsidiaries Subsidiaries Corporation
------------------------------------------------------------------------------------------------------------------
(in thousands)
Net income (loss) $ (5,079) $ 31,429 $ 94 $ 26,444
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Loss on disposals of property and equipment -- 24 1 25
Extraordinary loss before tax 4,232 -- -- 4,232
Interest rate swap termination (1,903) -- -- (1,903)
Depreciation and amortization of property and
equipment 632 3,613 49 4,294
Other intangibles amortization 1,687 220 -- 1,907
Amortization of deferred financing costs 1,210 -- -- 1,210
Deferred income taxes 2,537 1,553 -- 4,090
Minority interest in earnings (losses) of
subsidiaries -- -- 18 18
Changes in assets and liabilities, net of
acquired assets and liabilities (2,256) (37,041) 258 (39,039)
--------------- ---------------- ----------- -------------
Net cash provided by (used in) operating
activities 1,060 (202) 420 1,278
Cash flows from investing activities:
Purchases of property and equipment and other
assets (1,169) (2,009) (47) (3,225)
Proceeds from sale of building -- 1,802 -- 1,802
--------------- ---------------- ----------- -------------
--------------- ---------------- ----------- -------------
Net cash used in investing activities (1,169) (207) (47) (1,423)
Cash flows from financing activities:
Principal payments on bank and other notes
payable -- (47) -- (47)
Deferred financing costs (642) (650) -- (1,292)
Payment on subordinated notes payable -- (567) -- (567)
Principal payments on term loan (25,853) -- -- (25,853)
Proceeds from revolving facility -- 862,600 -- 862,600
Principal payments on revolving facility (18,700) (855,600) -- (874,300)
Redemption of senior subordinated notes payable (25,000) -- -- (25,000)
Prepayment premium on senior subordinated notes
payable (3,000) -- -- (3,000)
Proceeds from issuance of common stock, net of
expenses 81,808 -- -- 81,808
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 in) financing
activities (3,255) 5,736 -- 2,481
---------------- --------------- ----------- -------------
---------------- --------------- ----------- -------------
Net increase (decrease) in cash and cash
equivalents (3,364) 5,327 373 2,336
Cash and cash equivalents, beginning of year 3,347 (1,668) 251 1,930
---------------- --------------- ----------- -------------
Cash and cash equivalents, end of year $ (17) $ 3,659 $ 624 $ 4,266
================ =============== =========== =============
F-34
As of December 31, 2001
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Consolidated
Anteon Non- Anteon
Condensed Consolidated International Guarantor Guarantor Elimination International
Balance Sheets Corporation Subsidiaries Subsidiaries Entries Corporation
---------------------------------------------------------------------------------------------------------------
(in thousands)
Cash and cash equivalents $ 3,348 $ (1,669) $ 251 $ -- $ 1,930
Accounts receivable, net -- 129,709 1,636 -- 131,345
Prepaid expenses and other 4,045 6,603 495 -- 11,143
current assets
Property and equipment, net 1,828 10,791 125 -- 12,744
Due from Parent (24,841) 25,430 (589) -- --
Investment in and advances to
subsidiaries 116,220 26 -- (116,246) --
Goodwill, net 92,949 43,673 -- -- 136,622
Intangible and other assets, net 11,106 1,579 182 -- 12,867
------------ -------------- ----------- ------------- -----------
Total assets 204,655 216,142 2,100 (116,246) 306,651
============ ============== =========== ============= ===========
Indebtedness 202,390 515 -- -- 202,905
Accounts payable -- 24,448 580 -- 25,028
Due to related party -- 3,600 -- -- 3,600
Accrued expenses and other --
current liabilities 6,479 52,633 327 59,439
Deferred revenue -- 8,529 214 -- 8,743
Other long-term liabilities -- 9,570 381 -- 9,951
------------ -------------- ----------- ------------- -----------
------------ -------------- ----------- ------------- -----------
Total liabilities 208,869 99,295 1,502 -- 309,666
Minority interest in subsidiaries 289 -- 138 -- 427
Total stockholders' equity (4,503) 116,847 460 (116,246) (3,442)
(deficit)
------------ -------------- ----------- ------------- -----------
------------ -------------- ----------- ------------- -----------
Total liabilities and
stockholders' equity
(deficit) $ 204,655 $ 216,142 $ 2,100 $ (116,246) $ 306,651
============ ============== =========== ============= ===========
For the Year Ended December 31, 2001
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Consolidated
Anteon Non- Anteon
Condensed Consolidated International Guarantor Guarantor Elimination International
Statements of Operations Corporation Subsidiaries Subsidiaries Entries Corporation
---------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------
(in thousands)
Revenues $ -- $ 716,616 $ 8,662 $ (10,255) $ 715,023
Costs of revenues -- 629,729 7,868 (10,255) 627,342
------------ -------------- ------------ ------------- --------------
------------ -------------- ------------ ------------- --------------
Gross profit -- 86,887 794 -- 87,681
Total operating expenses 4,123 56,262 431 -- 60,816
------------ -------------- ------------ ------------- --------------
------------ -------------- ------------ ------------- --------------
Operating income (4,123) 30,625 363 -- 26,865
Other income -- 4,046 -- -- 4,046
Interest expense (income), net 17,382 9,507 (17) -- 26,872
Minority interest in (earnings)
losses of subsidiaries (14) 32 (56) -- (38)
------------ -------------- ------------ ------------- --------------
------------ -------------- ------------ ------------- --------------
Income (loss) before provision
for income taxes and (21,519) 25,196 324 -- 4,001
extraordinary gain
Provision (benefit) for income (8,259) 12,555 117 -- 4,413
taxes
------------ -------------- ------------ ------------- --------------
------------ -------------- ------------ ------------- --------------
Income (loss) before (13,260) 12,641 207 -- (412)
extraordinary gain
Extraordinary gain, net of tax 330 -- -- -- 330
------------ -------------- ------------ ------------- --------------
------------ -------------- ------------ ------------- --------------
Net income (loss) $ (12,930) $ 12,641 $ 207 $ -- $ (82)
============ ============== ============ ============= ==============
F-35
For the Year Ended December 31, 2001
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Consolidated
Anteon Non- Anteon
Condensed Consolidated International Guarantor Guarantor Elimination International
Statements of Cash Flows Corporation Subsidiaries Subsidiaries Entries Corporation
---------------------------------------------------------------------------------------------------------------
(in thousands)
Net income (loss) $ (12,930) $ 12,641 $ 207 $ -- $ (82)
Adjustments to reconcile net
income (loss) to net cash
provided by (used in)
operating activities:
Extraordinary gain (519) -- -- -- (519)
Gain on sales and closures of -- (4,046) -- -- (4,046)
business
Depreciation and amortization
of property and equipment 885 6,182 43 -- 7,110
Goodwill amortization 5,334 1,370 -- -- 6,704
Other intangibles amortization 2,223 98 -- -- 2,321
Amortization of noncompete
agreements -- 349 -- -- 349
Amortization of deferred
financing costs 1,216 -- -- -- 1,216
Loss on disposals of property
and equipment -- 791 -- -- 791
Deferred income taxes (476) 3,988 -- -- 3,512
Minority interest in earnings
(losses) of subsidiaries 14 (32) 56 -- 38
Changes in assets and
liabilities, net of acquired 43,401 (20,973) (278) (1,665) 20,485
assets and liabilities
------------ ------------- ----------- ------------ -------------
Net cash provided by (used in)
operating activities 39,148 368 28 (1,665) 37,879
------------- ------------ ----------- ------------ -------------
------------- ------------ ----------- ------------ -------------
Cash flows from investing activities:
Purchases of property and
equipment and other assets (314) (1,774) (93) -- (2,181)
Acquisition of Sherikon, net
of cash acquired (21) -- -- -- (21)
Acquisition of SIGCOM, net of
cash acquired -- (10,975) -- -- (10,975)
Proceeds from sales of business -- 11,464 -- -- 11,464
Other, net -- 6 -- -- 6
Intercompany transfers (338) 121 217 -- --
--------------- ------------ ----------- ------------ -------------
Net cash provided by (used in)
investing activities (673) (1,158) 124 -- (1,707)
--------------- ------------ ----------- ------------ -------------
Cash flows from financing activities:
Principal payments on bank and
other notes payable -- (185) -- -- (185)
Payments on business purchase
consideration payable and
subordinated notes payable (5,000) (1,185) -- -- (6,185)
Payments on note payable to (3,212) -- -- -- (3,212)
Ogden
Principal payments on term loan (12,946) -- -- -- (12,946)
Proceeds from revolving 771,200 -- -- -- 771,200
facility
Principal payments on (784,500) -- -- -- (784,500)
revolving facility
Distribution to parent for (1,665) -- -- 1,665 --
debt service
Proceeds from minority 152 -- -- -- 152
interest, net
--------------- ------------ ----------- ------------ -------------
--------------- ------------ ----------- ------------ -------------
Net cash provided by (used in)
financing activities (35,971) (1,370) -- 1,665 (35,676)
--------------- ------------ ----------- ------------ -------------
--------------- ------------ ----------- ------------ -------------
Net increase (decrease) in cash
and cash equivalents 2,504 (2,160) 152 -- 496
--------------- ------------ ----------- ------------ -------------
Cash and cash equivalents,
beginning of year 844 491 99 -- 1,434
--------------- ------------ ----------- ------------ -------------
Cash and cash equivalents, end of
year $ 3,348 $ (1,669) $ 251 $ -- $ 1,930
=============== ============ =========== ============ =============
F-36
For the Year Ended December 31, 2000
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Consolidated
Anteon Non- Anteon
Condensed Consolidated International Guarantor Guarantor Elimination International
Statements of Operations Corporation Subsidiaries Subsidiaries Entries Corporation
---------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------
(in thousands)
Revenues $ 200,300 $ 343,191 $ 2,519 $ (3,203) $ 542,807
Costs of revenues 178,847 296,879 2,401 (3,203) 474,924
----------- ---------- ---------- -------------- -------------
----------- ---------- ---------- -------------- -------------
Gross profit 21,453 46,312 118 -- 67,883
Total operating expenses 18,700 28,115 30 -- 46,845
----------- ---------- ---------- -------------- -------------
----------- ---------- ---------- -------------- -------------
Operating income 2,753 18,197 88 -- 21,038
Interest and other expense 26,452 59 2 -- 26,513
(income), net
Minority interests in (earnings)
losses of subsidiaries 8 24 -- -- 32
----------- ---------- ---------- -------------- -------------
----------- ---------- ---------- -------------- -------------
Income (loss) before provision
for income taxes (23,691) 18,162 86 -- (5,443)
Provision (benefit) for income (7,431) 7,240 38 -- (153)
taxes
----------- ---------- ---------- -------------- -------------
----------- ---------- ---------- -------------- -------------
Net income (loss) $ (16,260) $ 10,922 $ 48 $ -- $ (5,290)
=========== ========== ========== ============== =============
F-37
For the Year Ended December 31, 2000
---------------------------------------------------------------------
---------------------------------------------------------------------
Consolidated
Anteon Non- Anteon
Condensed Consolidated International Guarantor Guarantor Elimination International
Statements of Cash Flows Corporation Subsidiaries Subsidiaries Entries Corporation
---------------------------------------------------------------------------------------------------------------
(in thousands)
Net income (loss) $ (16,260) $ 10,922 $ 489 $ -- $ (5,290)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization of
property and equipment 1,707 5,303 14 -- 7,024
Goodwill amortization 4,714 -- -- -- 4,714
Amortization of noncompete agreements 866 -- -- -- 866
Other intangibles amortization 2,673 -- -- -- 2,673
Amortization of deferred financing 1,208 -- -- -- 1,208
costs
Gain on disposals of property and -- (187) -- -- (187)
equipment
Deferred income taxes (674) -- (73) -- (747)
Minority interest in earnings
(losses) of subsidiaries (8) (24) -- -- (32)
Changes in assets and liabilities,
net of acquired assets and
liabilities 19,131 (10,508) (466) (1,285) 6,872
------------ ------------- ------------ ---------- -----------
Net cash provided by (used in)
operating activities 13,357 5,506 (477) (1,285) 17,101
------------ ------------- ------------ ---------- -----------
------------ ------------- ------------ ---------- -----------
Cash flows from investing activities:
Purchases of property and equipment
and other assets (1,331) (5,256) 3 -- (6,584)
Acquisition of Sherikon, net of cash (23,906) -- -- -- (23,906)
acquired
Other, net (128) 1,706 -- -- 1,578
------------ ------------- ------------ ----------- -----------
Net cash provided by (used in)
investing activities (25,365) (3,550) 3 -- (28,912)
------------ ------------- ------------ ---------- -----------
------------ ------------- ------------ ---------- -----------
Cash flows from financing activities:
Principal payments on bank and other
notes payable -- (1,629) -- -- (1,629)
Principal payments of Techmatics
obligations (15,350) -- -- -- (15,350)
Deferred financing costs (151) -- -- -- (151)
Proceeds from revolving facility 533,000 -- -- -- 533,000
Principal payments on revolving (503,900) -- -- -- (503,900)
facility
Intercompany investment 335 (335) -- -- --
Distribution to parent for debt
service (1,285) -- -- 1,285 --
Proceeds from minority interest, net 66 -- -- -- 66
------------ ------------- ---------------------------------------
------------ ------------- ---------------------------------------
Net cash provided by (used in)
financing activities 12,715 (1,964) -- 1,285 12,036
------------ ------------- ---------------------------------------
------------ ------------- ---------------------------------------
Net increase (decrease) in cash and cash
equivalents 707 (8) (474) -- 225
Cash and cash equivalents, beginning of 137 499 573 -- 1,209
year............................
------------ ------------- ---------------------------------------
------------ ------------- ---------------------------------------
Cash and cash equivalents, end of year $ 844 $ 491 $ 99 $ -- $ 1,434
============ ============= =======================================
F-38
(18) Quarterly Results of Operations (Unaudited)
The following summarizes the unaudited quarterly results of operations
for the years ended December 31, 2002 and 2001 (in thousands, except
per share data):
Quarter ended: March 31 June 30 September 30 December 31 Total
-------------- ------------ --------------- --------------- -----------
2002
Revenues $ 192,629 201,938 214,314 216,945 825,826
Operating income 14,517 16,021 16,549 17,307 64,394
Income (loss) before
extraordinary gain 4,319 7,905 8,166 8,635 29,025
Net income (loss) 4,134 5,509 8,166 8,635 26,444
Basic earnings (loss) per
common share:
Income (loss) before
extraordinary gain 0.17 0.23 0.24 0.25 0.90
Net income (loss) 0.16 0.16 0.24 0.25 0.82
Diluted earnings (loss) per
common share:
Income (loss) before
extraordinary gain 0.15 0.22 0.22 0.24 0.85
Net income (loss) 0.14 0.15 0.22 0.24 0.78
2001
Revenues $ 162,366 188,786 183,687 180,184 715,023
Operating income 6,106 6,929 9,878 3,952 26,865
Income (loss) before
extraordinary gain (670) (67) 3,385 (3,060) (412)
Net income (loss) (670) 263 3,385 (3,060) (82)
Basic earnings (loss) per
common share:
Income (loss) before
extraordinary gain (0.03) -- 0.14 (0.13) (0.02)
Net income (loss) (0.03) (0.01) 0.14 (0.13) (0.01)
Diluted earnings (loss) per
common share:
Income (loss) before
extraordinary gain (0.03) -- 0.13 (0.13) (0.02)
Net income (loss) (0.03) (0.01) 0.13 (0.13) (0.01)
During the second quarter of 2001, the Company acquired the training
division of SIGCOM, Inc. (note 5(b)), and during the second, third and
fourth quarters of 2001 sold or closed several other businesses (note
3). Also during the fourth quarter of 2001, Anteon Virginia incurred a
fee of $3.6 million with an affiliate of the Company (note 16(b)) and
recognized an approximate $1.0 million charge to write-off goodwill as
a result of the closure of STSR. During the fourth quarter of 2000,
the Company acquired Sherikon (note 5(a)).
(19) Segment Reporting
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, Ins., 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 (see note 3(c)), and IMC Government. Immediately prior to the
sale of IMC Commercial, the Company integrated the IMC Government unit
into the government contracting business.
F-39
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. Allocation of overhead costs
to segments are based on measures such as revenue 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, gains on sales and closures of
businesses and income taxes are not allocated to the Company's
segments.
The following tables present information about the Company's segments
as of and for the years ended December 31, 2001 and 2000 and for the
years then ended (in thousands).
As of and for the year ended Government Interactive
December 31, 2001 Contracting Media Eliminations Consolidated
----------------------------------------------- -------------- ------------- --------------- --------------
Total assets $ 306,651 -- -- 306,651
============== ============= =============== ==============
Sales to unaffiliated customers $ 696,420 18,603 -- 715,023
Intersegment sales 36 15 (51) --
-------------- ------------- --------------- --------------
696,456 18,618 (51) 715,023
============== ============= =============== ==============
Operating income, net $ 25,839 1,026 -- $ 26,865
--------------
Gains on sales and closures of businesses 4,046
Interest expense, net 26,872
Minority interest in earnings of (38)
subsidiaries
--------------
Income before income taxes and 4,001
extraordinary gain
Income taxes 4,413
--------------
Loss before extraordinary gain (412)
Extraordinary gain, net of tax 330
--------------
--------------
Net loss $ (82)
==============
F-40
As of and for the year ended Government Interactive
December 31, 2000 Contracting Media Eliminations Consolidated
---------------------------------------- -------------- ------------- -------------- ---------------
Total assets $ 316,101 8,322 -- 324,423
============== ============= =============== ===============
Sales to unaffiliated customers $ 514,269 28,538 -- 542,807
Intersegment sales 394 28 (422) --
-------------- ------------- --------------- ---------------
514,663 28,566 (422) 542,807
============== ============= =============== ===============
Operating income, net $ 19,610 $ 1,428 $ -- $ 21,038
---------------
Interest expense, net 26,513
Minority interest in losses of 32
subsidiaries
---------------
---------------
Loss before income taxes (5,443)
Income taxes (153)
---------------
Net loss $ (5,290)
===============
F-41
Certifications
I, Joseph M. Kampf, certify that:
1. I have reviewed this annual report on Form 10-K of Anteon International
Corporation;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements and other financial
information included in this annual 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 annual 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 annual 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
annual 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
annual 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: March 11, 2003 By: /s/ Joseph M. Kampf
-------------- ---------------------------------
Joseph M. Kampf
President and Chief Executive
Officer
58
Certifications
I, Carlton B. Crenshaw, certify that:
1. I have reviewed this annual report on Form 10-K of Anteon International
Corporation;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements and other financial
information included in this annual 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 annual 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 annual 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
annual 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
annual 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: March 11, 2003 By: /s/ Carlton B. Crenshaw
-------------- ----------------------------
Carlton B. Crenshaw
Senior Vice President and
Chief Financial Officer
59
EXHIBIT INDEX
2.1 Agreement and Plan of Merger, dated as of March 7, 1999, by and among
Anteon Corporation, Buffalo Acquisition Corporation and Analysis &
Technology, Inc. (incorporated by reference to Exhibit Z to Analysis &
Technologies, Inc.'s Current Report on Form 8-K filed on March 9,
1999).
2.2 Agreement and Plan of Merger between Anteon International Corporation,
a Virginia corporation, and the Registrant (incorporated by reference
to Exhibit 2.2 to Anteon International Corporation's Amendment No. 1
to Form S-1 registration statement, filed on February 5, 2002
(Commission File No. 333-75884)).
3.1 Amended and Restated Certificate of Incorporation of Anteon
International Corporation (incorporated by reference to Exhibit 3.1 of
Anteon International Corporation's Quarterly Report on Form 10-Q filed
on May 14, 2002.)
3.2 Certificate of Designations of Series A Preferred Stock of Anteon
International Corporation (incorporated by reference to Exhibit 3.2 of
Anteon International Corporation's Quarterly Report on Form 10-Q filed
on May 14, 2002.)
3.3 Amended and Restated By-laws of Anteon International Corporation
(incorporated by reference to Exhibit 3.3 of Anteon International
Corporation's Quarterly Report on Form 10-Q filed on May 14, 2002.)
4.1 Indenture, dated as of May 11, 1999, by and among Anteon Corporation,
Vector Data Systems, Inc., Techmatics, Inc. and IBJ Whitehall Bank &
Trust Company, as trustee (incorporated by reference to Exhibit 4.1 to
Anteon International Corporation's Registration Statement on Form S-4
filed on August 9, 1999 (Commission File No. 333-84835)).
4.2 First Supplemental Indenture, effective as of June 23, 1999, among
Anteon Corporation, Analysis & Technology, Inc., Interactive Media
Corp. and IBJ Whitehall Bank & Trust Company, as trustee (incorporated
by reference to Exhibit 4.2 to Anteon International Corporation's
Annual Report on Form 10-K for the fiscal year ended December 31,
2000).
4.3 Second Supplemental Indenture, effective as of October 14, 1999, among
Anteon Corporation, Anteon-CITI LLC and IBJ Whitehall Bank & Trust
Company, as trustee (incorporated by reference to Exhibit 4.3 to
Anteon International Corporation's Annual Report on Form 10-K for the
fiscal year ended December 31, 2000).
4.4 Third Supplemental Indenture, dated as of October 20, 2000, among
Anteon Corporation, Sherikon, Inc. and The Bank of New York, as
trustee (incorporated by reference to Exhibit 4.4 to Anteon
International Corporation's Annual Report on Form 10-K for the fiscal
year ended December 31, 2000).
4.5 Fourth Supplemental Indenture, dated January 1, 2001, among Anteon
International Corporation (formerly Anteon Corporation), Anteon
Corporation (formerly Techmatics, Inc.) and The Bank of New York, as
successor trustee of IBJ Whitehall Bank & Trust Company (incorporated
by reference to Exhibit 4.5 to Anteon International Corporation's
Annual Report on Form 10-K for the fiscal year ended December 31,
2000).
4.6 Fifth Supplemental Indenture between the Registrant and The Bank of
New York, as trustee (incorporated by reference to Exhibit 4.1 of
Anteon International Corporation's Quarterly Report on Form 10-Q filed
on May 14, 2002.)
4.8 Registration Rights Agreement dated March 11, 2002, among the
Registrant, Azimuth Technologies, L.P., Azimuth Tech. II LLC,
Frederick J. Iseman, Joseph M. Kampf and the other parties named
therein (incorporated by reference to Exhibit 4.8 to Anteon
International Corporation's Amendment No. 1 to Form S-1 Registration
Statement filed on February 5, 2002 (Commission File No. 333-75884)).
60
4.9 Rights Agreement, dated March 15, 2002 (incorporated by reference to
Exhibit 4.1 to Anteon International Corporation's Current Report on
Form 8-K, filed on April 5, 2002).
10.4 Credit Agreement, dated as of June 23, 1999, among Anteon Corporation,
Credit Suisse First Boston, Mellon Bank, N.A., Deutsche Bank AG and
the lenders named therein (incorporated by reference to Exhibit 10.4
to Anteon International Corporation's Registration Statement on Form
S-4 filed on August 9, 1999 (Commission File No. 333-84835)).
10.5 Amendment No. 1, dated as of January 13, 2000, to the Credit
Agreement, dated as of June 23, 1999, among Anteon Corporation, Credit
Suisse First Boston, Mellon Bank, N.A., Deutsche Bank AG and the
lenders named therein (incorporated by reference to Exhibit 10.17 of
Anteon Corporation's Quarterly Report on Form 10-Q/A filed on June 15,
2001).
10.6 Amendment No. 2, dated as of March 29, 2000, to the Credit Agreement,
dated as of June 23, 1999, among Anteon Corporation, Credit Suisse
First Boston, Mellon Bank, N.A., Deutsche Bank AG and the lenders
named therein (incorporated by reference to Exhibit 10.18 of Anteon
Corporation's Quarterly Report on Form 10-Q/A filed on June 15, 2001).
10.7 Amendment No. 3, dated as of June 30, 2000, to the Credit Agreement,
dated as of June 23, 1999, among Anteon Corporation, Credit Suisse
First Boston, Mellon Bank, N.A., Deutsche Bank AG and the lenders
named therein (incorporated by reference to Exhibit 10.19 of Anteon
Corporation's Quarterly Report on Form 10-Q/A filed on June 15, 2001).
10.8 Amendment No. 4, dated as of October 19, 2000, to the Credit
Agreement, dated as of June 23, 1999, among Anteon Corporation, Credit
Suisse First Boston, Mellon Bank, N.A., Deutsche Bank AG and the
lenders named therein (incorporated by reference to Exhibit 10.20 of
Anteon Corporation's Quarterly Report on Form 10-Q/A filed on June 15,
2001).
10.9 Amendment No. 5, dated as of December 31, 2000, to the Credit
Agreement, dated as of June 23, 1999, among Anteon Corporation, Credit
Suisse First Boston, Mellon Bank, N.A., Deutsche Bank AG and the
lenders named therein (incorporated by reference to Exhibit 10.25 of
Anteon Corporation's Quarterly Report on Form 10-Q/A filed on June 15,
2001).
10.10 Amendment No. 6, dated as of February 1, 2002, to the Credit
Agreement, dated as of June 23, 1999, among Anteon Corporation, Credit
Suisse First Boston, Mellon Bank, N.A., Deutsche Bank AG and the
lenders named therein (incorporated by reference to Exhibit 10.10 to
Anteon International Corporation's Amendment No.1 to Form S-1
Registration Statement filed on February 5, 2002 (Commission File No.
333-75884)).
10.11 Amended and Restated Credit Agreement, dated as of October 21, 2002,
to the Credit Agreement, dated as of June 23, 1999, among Anteon
Corporation Credit Suisse First Boston, Mellon Bank, N.A., Duetsche
Bank AG and the lenders named therein.
10.15 Security Agreement, dated as of June 23, 1999, among Anteon
Corporation, Analysis & Technology, Inc., Interactive Media Corp.,
Techmatics, Inc., Vector Data Systems, Inc. and Mellon Bank, N.A.
(incorporated by reference to Exhibit 10.8 to Anteon International
Corporation's Registration Statement on Form S-4 filed on August 9,
1999 (Commission File No. 333-84835)).
10.16 Fee Agreement, dated as of June 1, 1999, between Anteon Corporation,
and Caxton-Iseman Capital, Inc. (incorporated by reference to Exhibit
10.9 to Anteon International Corporation's Registration Statement on
Form S-4 filed on August 9, 1999 (Commission File No. 333-84835)).
10.17 Amended and Restated Omnibus Stock Plan (incorporated by reference to
Exhibit 10.2 to Anteon International Corporation's Quarterly Report on
Form 10-Q filed May 14, 2002).
10.18 Stock Option Agreement (incorporated by reference to Exhibit 10.17 to
Anteon International Corporation's Amendment No. 2 to Form S-1
Registration Statement filed on February 19, 2002 (Commission File No.
333-75884)). 61
10.19 Stock Purchase Agreement, by and among Anteon Corporation, Sherikon,
Inc. and the stockholders of Sherikon, Inc., dated as of October 20,
2000 (incorporated by reference to Exhibit 2 to Anteon International
Corporation's Current Report on Form 8-K filed on November 6, 2000).
10.20 Asset Purchase Agreement, dated as of July 20, 2001, between Anteon
Corporation and SIGCOM, Inc. (incorporated by reference to Anteon
International Corporation's Current Report on Form 8-K filed on August
3, 2001).
10.21 Stock Purchase Agreement, dated July 20, 2001, by and among Anteon
International Corporation, Interactive Media Corporation and FTK
Knowledge (Holdings) Inc. (incorporated by reference to Anteon
International Corporation's Current Report on Form 8-K filed on August
3, 2001).
10.22 Asset Purchase Agreement, dated June 29, 2001, between Anteon
International Corporation and B&G, LLC (incorporated by reference to
Anteon International Corporation's Current Report on Form 8-K filed on
August 3, 2001).
10.23 Letter Agreement between Anteon International Corporation and
Caxton-Iseman Capital, Inc., dated as of January 30, 2002, terminating
Fee Agreement between such parties dated as of June 1, 1999
(incorporated by reference to Exhibit 10.2 to Anteon International
Corporation's Amendment No. 1 to Form S-1 Registration statement filed
on February 5, 2002 (Commission File No. 333-75884)).
10.24 Retention Agreement (incorporated by reference to Exhibit 10.22 to
Anteon International Corporation's Amendment No. 1 to Form S-1
Registration Statement filed on February 5, 2002 (Commission File No.
333-75884)).
21.1 Subsidiaries of the Registrant.
23.1 Consent of KPMG LLP.
99.1 Certification pursuant to section 906 of the Sarbanes Oxley Act of
2002.
99.2 Certification pursuant to section 906 of the Sarbanes Oxley Act of
2002.
62