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Form 10-Q for ANTEON INTERNATIONAL CORPORATION filed on May 1, 2003
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2003
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission file number 001-31258
ANTEON INTERNATIONAL CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 13-3880755
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3211 Jermantown Road, Fairfax, Virginia 22030-2801
- --------------------------------------------------------------------------------
(Address of principal executive office)
(Zip Code)
(703) 246-0200
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address, and former
fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of the close of business on April 28, 2003, there were 34,610,998 outstanding
shares of the registrant's common stock, par value $.01 per share.
CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS AS OF
MARCH 31, 2003 AND DECEMBER 31, 2002 1
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31,
2003 AND 2002 2
UNADITED CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31,
2003 AND
2002 3
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 21
ITEM 4. CONTROLS AND PROCEDURES
PART II. OTHER INFORMATION REQUIRED IN REPORT
ITEM 1. LEGAL PROCEEDINGS 22
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 22
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS 22
ITEM 5. OTHER INFORMATION 22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 22
i
PART I. FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ANTEON INTERNATIONAL CORPORATION AND SUBSIDIARIES
(A Delaware Corporation)
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
March 31, 2003 December 31,
(Unaudited) 2002
------------------ ----------------
ASSETS
Current assets:
Cash and cash equivalents $ 9,408 $ 4,266
Accounts receivable, net 186,703 189,059
Prepaid expenses and other current assets 11,262 15,071
------------------ -----------------
Total current assets 207,373 208,396
Property and equipment, net 9,751 9,992
Goodwill, net 138,619 138,619
Intangible and other assets, net 6,917 7,685
------------------ -----------------
Total assets $ 362,660 $ 364,692
================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Term loan, current portion $ 3,798 $ 3,798
Subordinated notes payable, current portion 2,500 2,500
Accounts payable 47,937 47,630
Accrued expenses 50,974 57,603
Income tax payable 12,187 7,738
Other current liabilities 684 806
Deferred tax liability 1,692 2,230
Deferred revenue 5,234 5,701
------------------ -----------------
Total current liabilities 125,006 128,006
Term loan, less current portion 16,454 17,403
Revolving facility -- 7,000
Senior subordinated notes payable, less current portion 75,000 75,000
Noncurrent deferred tax liabilities, net 7,238 7,808
Other long term liabilities 400 490
------------------ -----------------
Total liabilities 224,098 235,707
Minority interest in subsidiaries 168 156
Stockholders' equity:
Preferred stock, $.01 par value; 15,000,000 shares authorized, none issued
and outstanding as of March 31, 2003 and December 31, 2002 -- --
Common stock, $.01 par value; 175,000,000 shares authorized, 34,539,559
and 34,419,049 shares issued and outstanding as of March 31, 2003 and
December 31, 2002, respectively. 345 344
Stock subscription receivable (12) (12)
Additional paid-in capital 107,308 106,849
Accumulated other comprehensive loss (479) (509)
Retained earnings 31,232 22,157
------------------ -----------------
Total stockholders' equity 138,394 128,829
------------------ -----------------
Total liabilities and stockholders' equity $ 362,660 $ 364,692
================== =================
See accompanying notes to unaudited condensed consolidated financial statements.
ANTEON INTERNATIONAL CORPORATION AND SUBSIDIARIES
(A Delaware Corporation)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
For the three months ended
March 31,
---------------------------------------------
2003 2002
------------------ ------------------
Revenues $ 228,591 $ 192,629
Costs of revenues 197,176 167,020
------------------ ------------------
Gross profit 31,415 25,609
------------------ ------------------
Operating expenses:
General and administrative expenses 12,972 10,615
Amortization of intangible assets 477 477
------------------ ------------------
Total operating expenses 13,449 11,092
------------------ ------------------
Operating income 17,966 14,517
Other income -- 6
Interest expense, net of interest income of $71 and $43,
respectively 3,191 7,734
Minority interest in earnings of subsidiaries (12) (9)
------------------ ------------------
Income before provision for income taxes 14,763 6,780
Provision for income taxes 5,688 2,646
------------------ ------------------
Net income $ 9,075 $ 4,134
================== ==================
Basic earnings per common share: $ 0.26 $ 0.16
================== ==================
Basic weighted average shares outstanding 34,459,738 26,127,101
Diluted earnings per common share: $ 0.25 $ 0.14
================== ==================
Diluted weighted average shares outstanding 36,629,971 28,548,329
See accompanying notes to unaudited condensed consolidated financial statements.
ANTEON INTERNATIONAL CORPORATION AND SUBSIDIARIES
(A Delaware Corporation)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the three months ended March 31,
--------------------------------------------------
2003 2002
---------------------- --------------------
OPERATING ACTIVITIES:
Net income $ 9,075 $ 4,134
Adjustments to reconcile net income to net cash provided by (used for)
operating activities:
Interest rate swap termination -- (1,903)
Depreciation and amortization of property and equipment 892 1,215
Amortization of intangible assets 477 477
Amortization of deferred financing fees 348 635
Loss on disposals of property and equipment 1 2
Deferred income taxes (1,156) 1,572
Minority interest in earnings of subsidiaries 12 9
Changes in assets and liabilities 3,712 (17,148)
---------------- ----------------
NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES: 13,361 (11,007)
---------------- ----------------
INVESTING ACTIVITIES:
Purchases of property, equipment and other assets (653) (844)
---------------- ----------------
FINANCING ACTIVITIES:
Principal payments on bank and other notes payable (12) (11)
Deferred financing fees and credit facility amendment fee (64) (604)
Principal payments on term loan (950) (23,004)
Proceeds from revolving facility 152,100 240,600
Principal payments on revolving facility (159,100) (253,500)
Proceeds from issuance of common stock, net of expenses 460 77,673
Principal payments on subordinated notes payable to stockholders -- (7,499)
Payment of subordinated notes payable-related party -- (4,369)
---------------- ----------------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES (7,566) 29,286
---------------- ----------------
CASH AND CASH EQUIVALENTS:
Net increase in cash and cash equivalents 5,142 17,435
Cash and cash equivalents, beginning of period 4,266 1,930
---------------- ----------------
Cash and cash equivalents, end of period $ 9,408 $ 19,365
================ ================
Supplemental disclosure of cash flow information (in thousands):
Interest paid $ 914 $ 5,802
================ ================
Income taxes paid $ 2,396 $ 262
================ ================
See accompanying notes to unaudited condensed consolidated financial statements.
ANTEON INTERNATIONAL CORPORATION AND SUBSIDIARIES
(A Delaware Corporation)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Supplemental disclosure of non-cash investing and financing activities:
In March 2002, in connection with the Company's initial public
offering ("IPO") of shares of its common stock, a $22.5 million principal amount
subordinated convertible promissory note held by Azimuth Tech. II LLC, now 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 International Corporation, a
Virginia corporation, at December 31, 2001 into 180,120 shares of the Company's
common stock.
ANTEON INTERNATIONAL CORPORATION AND SUBSIDIARIES
(A Delaware Corporation)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003 AND 2002
(1) Basis of Presentation
The information furnished in the accompanying Unaudited Condensed
Consolidated Balance Sheets, Condensed Consolidated Statements of Operations and
Condensed Consolidated Statements of Cash Flows have been prepared in accordance
with accounting principles generally accepted in the United States of America
for interim financial information. In the opinion of management, such
information contains all adjustments, consisting only of normal recurring
adjustments, considered necessary for a fair presentation of such information.
The operating results for the three months ended March 31, 2003 may not be
indicative of the results of operations for the year ending December 31, 2003,
or any future period. This financial information should be read in conjunction
with the Company's December 31, 2002 audited consolidated financial statements
and footnotes thereto, included in the Annual Report on Form 10-K filed with the
Securities and Exchange Commission by the Company on March 11, 2003 (Commission
File Number: 001-31258).
(2) Organization and Business
Anteon International Corporation, a Delaware Corporation, or "Anteon" or
the "Company," and its subsidiaries provide professional information technology,
systems and software development, high technology research and systems
integration services primarily to the U.S. government and its agencies. The
Company is subject to all of the risks associated with conducting business with
the U.S. federal government, including the risk of contract termination at the
convenience of the government. In addition, government funding continues to be
dependent on congressional approval of program level funding and on contracting
agency approval for the Company's work. The extent to which the Company's
existing contracts will be funded in the future cannot be determined.
(3) Accounting for Stock-Based Compensation
The Company accounts for employee stock-based compensation plans using the
intrinsic value based method of accounting prescribed by APB Opinion No. 25, or
"APB No. 25," Accounting for Stock Issued to Employees. The Company has an
employee stock option plan. Compensation expense for stock options granted to
employees is recognized based on the difference, if any, between the fair value
of the Company's common stock and the exercise price of the option at the date
of grant. The Company discloses the pro forma effect on net income (loss) as if
the fair value based method of accounting as defined in Financial Accounting
Standards No. 123, or "SFAS No. 123," Accounting for Stock-based Compensation
had been applied.
The following table illustrates the effect on net income and earnings per
share for the quarters ended March 31, 2003 and 2002 as if the Company had
applied the fair value recognition provisions of SFAS No. 123 to stock-based
employee compensation:
2003 2002
------------ -----------
(in thousands, except per share data)
Net Income, as reported $ 9,075 $ 4,134
Add: stock-based compensation recorded -- --
Deduct: total stock-based compensation expense
determined under the fair value method, net of tax 585 323
------------ -----------
Pro forma net income $ 8,490 $ 3,811
Earnings Per Share:
Basic-as reported $ 0.26 $ 0.16
============ ===========
Basic-Pro forma $ 0.25 $ 0.15
============ ===========
Diluted-as reported $ 0.25 $ 0.14
============ ===========
Diluted-Pro forma $ 0.23 $ 0.13
============ ===========
(4) Comprehensive Income (Loss)
Comprehensive income (loss) for the three months ended March 31, 2003 and
2002 was approximately $9.1 million and $5.4 million, respectively. Other
comprehensive income (loss) for the three months ended March 31, 2003 and 2002
includes foreign currency translation losses of $32,000 and $32,000,
respectively, and increases in the fair value of interest rate swaps of $62,000
and $600,000, net of tax. For the quarter ended March 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 quarter ended March 31, 2002 includes losses
of $1.9 million associated with these cancellations. Prior to cancellation,
losses associated with these interest rate swap agreements were recorded as a
component of accumulated other comprehensive loss.
(5) Computation of Earnings Per Share
Three months ended
March 31, 2003
--------------------------------------------------------------------------------
Income Weighted average shares Per Share
(Numerator) (Denominator) Amount
-------------- ----------------------------- --------------------
(in thousands,except share and per share data)
Basic earnings per share:
Net income $ 9,075 34,459,738 $ 0.26
=========== ===========
Dilutive earnings per share
Stock options -- 2,170,233 --
Diluted earnings per share:
Net income $ 9,075 36,629,971 $ 0.25
=========== ===========
Three months ended
March 31, 2002
--------------------------------------------------------------------------------
Income Weighted average shares Per Share
(Numerator) (Denominator) Amount
-------------- ----------------------------- --------------------
(in thousands,except share and per share data)
Basic earnings per share:
Net income $ 4,134 26,127,101 $ 0.16
=========== ===========
Dilutive earnings per share
Stock options -- 2,421,228 --
Diluted earnings per share:
Net income $ 4,134 28,548,329 $ 0.14
=========== ===========
(6) Domestic Subsidiaries Summarized Financial Information
Under the terms of the 12% senior subordinated notes due 2009, or "12%
Notes," and the Company's Credit Facility, the Company's wholly-owned domestic
subsidiaries (the "Guarantor Subsidiaries") are guarantors of the 12% Notes and
the Company's Credit Facility. Such guarantees are full, unconditional and joint
and several. Separate unaudited condensed financial statements of the Guarantor
Subsidiaries are not presented because the Company's management has determined
that they would not be material to investors. The following supplemental
financial information sets forth, on a combined basis, condensed balance sheets,
statements of operations and statements of cash flows information for the
Guarantor Subsidiaries, the Company's Non-Guarantor Subsidiaries and for the
Company.
For the three months ended March 31, 2003
------------------------------------------------------------------------------------
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Consolidated
Unaudited Condensed Consolidated Anteon Anteon
Balance Sheets International Guarantor Non-Guarantor Elimination International
Corporation Subsidiaries Subsidiaries Entries Corporation
----------- ------------ ------------ ------- -----------
(in thousands)
Cash and cash equivalents $ (17) $ 8,666 $ 759 $ -- $ 9,408
Accounts receivable, net -- 185,290 1,413 -- 186,703
Other current assets 1,240 9,358 664 -- 11,262
Property and equipment, net 2,557 7,070 124 -- 9,751
Due from Parent (20,452) 20,981 (529) -- --
Investment in and advances to subsidiaries 23,898 (6,630) -- (17,268) --
Goodwill, net 94,946 43,673 -- -- 138,619
Intangible and other assets, net 65,122 1,597 198 (60,000) 6,917
-------------- ------------- ------------- ------------- ------------
Total assets $ 167,294 $ 270,005 $ 2,629 $ (77,268) $ 362,660
============== ============= ============= ============= ============
Indebtedness $ 97,752 $ 60,000 $ -- $ (60,000) $ 97,752
Accounts payable 300 46,509 1,128 -- 47,937
Accrued expenses and other current
liabilities 3,689 61,408 440 -- 65,537
Deferred revenue -- 5,049 185 -- 5,234
Other long-term liabilities -- 7,498 140 -- 7,638
-------------- ------------- ------------- ------------- ------------
Total liabilities 101,741 180,464 1,893 (60,000) 224,098
Minority interest in subsidiaries -- -- 168 -- 168
Total stockholders' equity 65,553 89,541 568 (17,268) 138,394
-------------- ------------- ------------- ------------- ------------
Total liabilities and stockholders' equity $ 167,294 $ 270,005 $ 2,629 $ (77,268) $ 362,660
============== ============= ============= ============= ============
For the three months ended March 31, 2003
------------------------------------------------------------------------------------
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Consolidated
Unaudited Condensed Consolidated Anteon Anteon
Statements of Operations International Guarantor Non-Guarantor Elimination International
Corporation Subsidiaries Subsidiaries Entries Corporation
----------- ------------ ------------ ------- -----------
(in thousands)
Revenues $ -- $ 226,622 $ 2,043 $ (74) $ 228,591
Costs of revenues 4 195,482 1,764 (74) 197,176
------------ -------------- ---------------- ------------ -------------
Gross profit (4) 31,140 279 -- 31,415
Total operating expenses 780 19,849 196 (7,376) 13,449
------------ -------------- ---------------- ------------ -------------
Operating income (784) 11,291 83 7,376 17,966
Other income 2,354 5,022 -- (7,376) --
Interest expense (income), net 1,247 1,948 (4) -- 3,191
Minority interest in earnings of -- -- (12) -- (12)
subsidiaries
------------ -------------- ---------------- ------------ -------------
Income before provision for income taxes 323 14,365 75 -- 14,763
Provision for income taxes (782) 6,443 27 -- 5,688
------------ -------------- ---------------- ------------ -------------
Net income $ 1,105 $ 7,922 $ 48 $ -- $ 9,075
============ ============== ================ ============ =============
For the three months ended March 31, 2003
------------------------------------------------------------------------
------------------------------------------------------------------------
Unaudited Condensed Consolidated Statements of Cash Consolidated
Flows Anteon Anteon
International Guarantor Non-Guarantor International
Corporation Subsidiaries Subsidiaries Corporation
---------------- ---------------- ----------------- --------------
(in thousands)
Net income $ 1,105 $ 7,922 $ 48 $ 9,075
Adjustments to reconcile in net income to net cash
provided by (used for) operating activities
Depreciation and amortization of property and
equipment 208 674 10 892
Amortization of intangible assets 422 55 -- 477
Amortization of deferred financing fees 318 30 -- 348
Loss on disposals of property and equipment -- 1 -- 1
Deferred income taxes -- (1,156) -- (1,156)
Minority interest in earnings of subsidiaries -- -- 12 12
Changes in assets and liabilities (1,162) 4,797 77 3,712
------------ ------------ ----------- -----------
Net cash provided by operating activities 891 12,323 147 13,361
------------ ------------ ----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (401) (240) (12) (653)
------------ ------------ ----------- -----------
Cash flow from financing activities:
Principal payments on bank and other notes payable -- (12) -- (12)
Deferred financing fees -- (64) -- (64)
Principal payments on term loan (950) -- -- (950)
Proceeds from revolving facility -- 152,100 -- 152,100
Principal payments on revolving facility -- (159,100) -- (159,100)
Proceeds from issuance of common stock, net of
expenses 460 -- -- 460
------------ ------------ ----------- -----------
Net cash used for financing activities (490) (7,076) -- (7,566)
------------ -----------
------------- --------------
Net increase in cash and cash equivalents -- 5,007 135 5,142
Cash and cash equivalents, beginning of period (17) 3,659 624 4,266
------------ ----------- -----------
-------------
Cash and cash equivalents, end of period $ (17) $ 8,666 $ 759 $ 9,408
============ ============ =========== ===========
For the three months ended March 31, 2002
-----------------------------------------------------------------------------------
-----------------------------------------------------------------------------------
Consolidated
Unaudited Condensed Consolidated Anteon Anteon
Statements of Operations International Guarantor Non-Guarantor Elimination International
Corporation Subsidiaries Subsidiaries Entries Corporation
--------------- -------------- --------------- --------------- ---------------
(in thousands)
Revenues $ -- $ 193,485 $ 1,764 $ (2,620) $ 192,629
Costs of revenues -- 168,030 1,610 (2,620) 167,020
----------- ---------- ---------- ---------- -------------
Gross profit -- 25,455 154 -- 25,609
Total operating expenses (542) 11,542 92 -- 11,092
----------- ---------- ---------- ---------- -------------
Operating income 542 13,913 62 -- 14,517
Other income 8 (2) -- 6
Interest expense (income), net 6,909 829 (4) -- 7,734
Minority interest in earnings of subsidiaries -- -- (9) -- (9)
----------- ---------- ---------- ---------- -------------
Income (loss) before provision for income
taxes (6,359) 13,082 57 -- 6,780
Provision (benefit) for income taxes (2,294) 4,920 20 -- 2,646
----------- ---------- ---------- ---------- -------------
Net income (loss) $ (4,065) $ 8,162 $ 37 $ -- $ 4,134
=========== ========== ========== =========== =============
For the three months ended March 31, 2002
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Unaudited Condensed Consolidated Statements of Cash Consolidated
Flows Anteon Anteon
International Guarantor Non-Guarantor International
Corporation Subsidiaries Subsidiaries Corporation
----------------- ---------------- ------------------- ---------------
(in thousands)
Net income (loss) $ (4,065) $ 8,162 $ 37 $ 4,134
Adjustments to reconcile change in net income (loss)
to net cash provided by (used for) operating
activities:
Interest rate swap termination (1,903) -- - (1,903)
Depreciation and amortization of property and
equipment 211 994 10 1,215
Amortization of intangible assets 422 55 - 477
Amortization of deferred financing fees 635 -- - 635
Loss on disposals of property and equipment -- 2 - 2
Deferred income taxes 2,528 (965) 9 1,572
Minority interest in earnings of subsidiaries 9 -- -- 9
Changes in assets and liabilities (15,214) (2,515) 581 (17,148)
------------ ---------- ---------- ------------
Net cash provided by (used for) operating activities (17,377) 5,733 637 (11,007)
------------ ---------- ---------- ------------
Cash flows from investing activities:
Purchases of property and equipment -- (839) (5) (844)
------------ ---------- ---------- ------------
Cash flow from financing activities:
Principal payments on bank and other notes payable -- (11) -- (11)
Payment of credit facility amendment fee (604) -- -- (604)
Principal payments on term loan (23,004) -- -- (23,004)
Proceeds from revolving facility 240,600 -- -- 240,600
Principal payments on revolving facility (253,500) -- -- (253,500)
Proceeds from issuance of common stock, net of
expenses 77,673 -- -- 77,673
Principal payments on subordinated notes payable
to stockholders (7,499) -- -- (7,499)
Payment of subordinated notes payable-related
party (4,369) -- -- (4,369)
------------ ---------- ---------- ------------
Net cash provided by (used for) financing activities 29,297 (11) -- 29,286
------------ ---------- ---------- ------------
Net increase in cash and cash equivalents 11,920 4,883 632 17,435
Cash and cash equivalents, beginning of period 3,348 (1,668) 250 1,930
------------ ---------- ---------- ------------
Cash and cash equivalents, end of period $ 15,268 $ 3,215 $ 882 $ 19,365
============ ========== ========== ============
(7) Segment Information
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 contracting segment aggregates the operations
of the Company's strategic business units.
(8) Interest Rate Swap Agreements
For the quarter ended March 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 quarter ended March 31, 2002 includes losses of $1.9 million
associated with these cancellations.
Over the next twelve months, approximately $97,000 of losses related to the
interest rate swaps are expected to be reclassified into remaining interest
expense as a yield adjustment of the hedged debt obligation. As of March 31,
2003, the fair value of the Company's interest swap agreements, with a notional
value of $15.0 million, resulted in a net liability of approximately $653,000,
which has been included in other current liabilities.
(9) Legal Proceedings
The Company is involved in various legal proceedings in the ordinary course
of business. On March 8, 2002, the Company received a letter from one of its
principal competitors, which is the parent company of one of its subcontractors,
claiming that it 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 the Company's 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 cannot predict the ultimate outcome of these matters, but does
not believe that they will have a material impact on its financial position or
results of operations.
(10) New Accounting Pronouncements
In April 2002, the Financial Accounting Standards Board issued Statement
145, or "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 and
rescinds FASB Statements 4 and 64. Under the new standard, only gains and losses
from extinguishments meeting the criteria of Accounting Principles Board Opinion
No. 30 would be classified as extraordinary items. Thus, gains or losses arising
from extinguishments of debt that are part of the Company's recurring operations
would not be reported as extraordinary items. Upon adoption, previously reported
extraordinary gains or losses not meeting the requirements for classification as
such in accordance with Accounting Principles Board Opinion No. 30 would be
required to be reclassified for all periods presented. The Company adopted SFAS
No. 145 as of January 1, 2003, and as a result, the Company reclassified
approximately $304,000 ($185,000 net of tax) of losses previously recorded as
extraordinary for the three months ended March 31, 2002 to interest expense.
In December 2002, EITF issued Issue 00-21, or "EITF 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 among the different items based on fair
value. EITF 00-21 also requires that 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 EITF 00-21 for
the Company will be July 1, 2003. The Company does not believe that the adoption
of EITF 00-21 will have a significant impact on its consolidated financial
statements.
In November 2002, the FASB issued Interpretation No. 45, or "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 Interpretation No. 45 were effective as
of the fourth quarter of 2002. Interpretation No. 45 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 Interpretation
No. 45 did not have an impact on the Company's consolidated financial statements
as there were no guarantees or modifications of guarantees for the three months
ended March 31, 2003.
In January 2003, the FASB issued Interpretation No. 46, or "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 Interpretation No. 46
will be July 1, 2003. The Company does not believe that it has any interests
qualifying as VIE's as of March 31, 2003. As a result, Interpretation No. 46
will not have an impact on its consolidated financial statements.
(11) Subsequent Event
On April 22, 2003, the Company signed a definitive agreement to acquire all
of the outstanding stock of Information Spectrum, Inc., or "ISI," a provider of
critical defense and homeland security solutions based in Annandale, Virginia,
for a total cash purchase price of $90.7 million. The Company intends to fund
the purchase of ISI using the existing revolving loan portion of its Credit
Facility. ISI will not have any outstanding indebtedness at closing. The
transaction will be accounted for under the purchase method of accounting. ISI
is a privately held company and provides services in the areas of credential
card technologies, military logistics and training systems.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Forward-looking statements
relate to future events or our future performance. These statements involve
known and unknown risks, uncertainties and other factors that may cause our
Company's actual results, level of activity, performance or achievements to be
materially different from any results, levels of activity, performance or
achievements expressed or implied by these forward-looking statements. In some
cases, you can identify forward-looking statements by terminology like "may" ,
"will", "should", "expects", "plans", "projects", anticipates", "believes",
"estimates", "predicts", "potential" or "continue" or the negative of these
terms or other comparable terminology. Such forward-looking statements include,
but are not limited to, funded backlog, estimated contract value, our
expectations regarding the federal government's procurement budgets and reliance
on outsourcing of services, and our financial condition and liquidity, as well
as future cash flows and earnings.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of these statements. We
are under no duty to update any of the forward-looking statements after the date
of this quarterly report to conform these statements to actual results and do
not intend to do so. These statements are only predictions. Actual events or
results may differ materially. The factors that could cause actual results to
differ materially include the following: the integration of acquisitions without
disruption to our other business activities; changes in general economic and
business conditions; changes in federal government procurement laws,
regulations, policies, and budgets; the number and type of contracts and task
orders awarded to us; technological changes; our ability to attract and retain
qualified personnel; competition; and our ability to retain our contracts during
any rebidding process.
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 quarter ended March 31, 2003, we estimate
that approximately 89% 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 diversified
among government agencies. No single award contract or task order accounted for
more than 6.5% of revenues for the quarter ended March 31, 2003.
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 quarter ended March 31, 2003, we estimate that approximately 99%
of our revenues were derived from services and approximately 1% from product
sales. Services are performed under contracts that may be categorized into three
primary types: time and materials, cost-plus reimbursement and firm fixed price.
Revenue for time and materials contracts is recognized as time is spent at
hourly rates, which are negotiated with the customer. Time and materials
contracts are typically more profitable than cost-plus contracts because of our
ability to negotiate rates and manage costs on those contracts. Revenue is
recognized under cost-plus contracts on the basis of direct and indirect costs
incurred plus a negotiated profit calculated as a percentage of costs or as a
performance-based award fee. Cost-plus type contracts provide relatively less
risk than other contract types because we are reimbursed for all direct costs
and certain indirect costs, such as overhead and general and administrative
expenses, and are paid a fee for work performed. For cost-plus award fee type
contracts, we recognize the expected fee to be awarded by the customer at the
time such fee can be reasonably estimated, based on factors such as our prior
award experience and communications with the customer regarding our performance,
including any interim performance evaluations rendered by the customer. Revenues
are recognized under substantially all fixed price contracts based on the
percentage-of-completion basis, using the cost-to-cost method for all services
provided. For non-service related fixed price contracts, revenues are recognized
as units are delivered (the units-of-delivery method).
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 38% time and materials, 33% cost-plus and 29% fixed price (a
substantial majority of which were firm fixed price level of effort) during the
quarter ended March 31, 2003. 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 could
lead to accounts receivable not being fully collected.
Costs of Revenues
Our costs are categorized as either direct or indirect costs. Direct costs
are those that can be identified with and allocated to specific contracts and
tasks. They include labor, fringe (vacation time, medical/dental, 401K plan
matching contribution, tuition assistance, employee welfare, worker's
compensation and other benefits), subcontractor costs, consultant fees, travel
expenses and materials. Indirect costs are either overhead or general and
administrative expenses. Indirect costs cannot be identified with specific
contracts or tasks, and to the extent that they are allowable, they are
allocated to contracts and tasks using appropriate government-approved
methodologies. Costs determined to be unallowable under the Federal Acquisition
Regulations cannot be allocated to projects. Our principal unallowable costs are
interest expense, amortization expense for separately identified intangibles
from acquisitions, certain general and administrative expenses. A key element to
our success has been our ability to control indirect and unallowable costs,
enabling us to profitably execute our existing contracts and successfully bid
for new contracts. In addition, with the acquisition of new companies, we have
been able to manage our indirect costs and improve operating margins by
integrating the indirect cost structures and realizing opportunities for cost
synergies.
Goodwill Impairment
Goodwill relating to our acquisitions represents the excess of cost over
the fair value of net tangible and separately identifiable intangible assets
acquired, and has a carrying amount of approximately $138.6 million at March 31,
2003 and December 31, 2002. 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 our goodwill for
impairment 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. As of and for the quarter ended March 31,
2003, there were no events or circumstances that occurred which lead us to
believe that an interim impairment evaluation was required.
Long-Lived Assets and Identifiable Intangible Asset Impairment
The carrying amount of long-lived assets and identifiable intangible assets
was approximately $12.0 million and $12.7 million at March 31, 2003 and December
31, 2002, respectively. Long-lived assets and identifiable intangible assets,
excluding goodwill, are evaluated for impairment when events occur that suggest
that such assets may be impaired. Such events could include, but are not limited
to, the loss of a significant customer or contract, decreases in federal
government appropriations or funding of certain programs, or other similar
events. None of these events occurred for the quarter ended March 31, 2003. 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 nearly all 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
We apply the provisions of SFAS No. 141, Business Combinations, whereby the
net tangible and separately identifiable intangible assets acquired and
liabilities assumed are recognized at their estimated fair market values at the
acquisition date. The purchase price in excess of the estimated fair market
value of the net tangible and separately identifiable intangible assets acquired
represents goodwill. The allocation of the purchase price related to our
business combinations involves significant estimates and management judgment
that may be adjusted during the allocation period, but in no case beyond one
year from the acquisition date. Costs incurred related to successful business
combinations are capitalized as costs of business combinations, while costs
incurred by us for unsuccessful or terminated acquisition opportunities are
expensed when we determine that such opportunities will no longer be pursued.
Costs incurred related to anticipated business combinations are deferred. During
the quarter ended March 31, 2003, we did not engage in any business
combinations. However, on April 22, 2003, we signed a definitive agreement to
purchase all of the stock of ISI (see Note 11 to the accompanying Unaudited
Condensed Consolidated Financial Statements). We anticipate that this business
combination will be recorded during the quarter ended June 30, 2003.
Statements of Operations
The following is a description of certain line items from our statement of
operations.
Costs of revenues include direct labor and fringe costs for program
personnel and direct expenses incurred to complete contracts and task orders.
Costs of revenues also include subcontract work, consultant fees, materials,
depreciation and overhead. Overhead consists of indirect costs relating to
operational managers, rent/facilities, administration, travel and other
expenses.
General and administrative expenses are primarily for corporate functions
such as management, legal, finance and accounting, contracts and administration,
human resources, company management information systems and depreciation, and
also include other unallowable costs such as marketing, certain legal fees and
reserves.
Amortization expenses relate to intangible assets from our acquisitions.
These intangible assets represent contract backlog acquired as part of our
acquisitions of Analysis & Technology, Inc., Sherikon, Inc., and the training
division of SIGCOM, Inc.
Interest expense is primarily for our 12% Notes, our term loan and
revolving credit facility, our subordinated debt and subordinated convertible
promissory notes held by our stockholders prior to their repayment or conversion
in connection with our IPO, and other miscellaneous interest costs.
Other income is from non-core business items such as gains on the sales and
closures of businesses and investments.
Backlog/ESTIMATED CONTRACT VALUE
Each year a significant portion of our revenue is derived from existing
contracts with our government clients, and a portion of the revenue represents
work related to maintenance, upgrade or replacement of systems under contracts
or projects for which we are the incumbent provider. Proper management of
contracts is critical to our overall financial success and we believe that we
manage costs effectively, making us competitive on price. Historically, we
believe that our demonstrated performance record and service excellence have
enabled us to maintain our position as an incumbent service provider on more
than 90% of our contracts that have been recompeted. We have increased our total
estimated contract value by $230 million, from December 31, 2002, to $4.5
billion at March 31, 2003, of which $502 million was funded backlog as of March
31, 2003. Our total estimated contract value represents the aggregate estimated
contract revenue to be earned by us at a given time over the remaining life of
our contracts. When more than one company is awarded a contract for a given work
requirement, we include in total estimated contract value only our estimate of
the contract revenue we expect to earn over the remaining term of the contract.
Funded backlog is based upon amounts actually appropriated by a customer for
payment for goods and services. Because the federal government operates under
annual appropriations, agencies of the federal government typically fund
contracts on an incremental basis. Accordingly, the majority of the total
estimated contract value is not funded backlog. Our estimated contract value is
based on our experience under contracts and we believe our estimates to be
reasonable. However, there can be no assurance that our existing contracts will
result in actual revenues in any particular period or at all. These amounts
could vary depending upon government budgets and appropriations. In addition, we
are periodically asked to work at-risk on projects. At-risk means that the
customer has asked us to work, or to continue working, on a project even though
there are no funds appropriated and released for payment. In most cases, the
government is in the process of funding the contract or tasks and makes the
request to avoid disruptions to the project. Historically, we have not recorded
any significant write-offs because funding was not ultimately received.
RESULTS OF OPERATIONS
The following table sets forth our results of operations based on the
amounts and percentage relationship of the items listed to contract revenues
during the period shown:
For the Three Months Ended March 31,
2003 2002
---------------------------- ------------------------------
($ in thousands)
Revenues $ 228,592 100.0% $ 192,629 100.0%
Costs of revenues 197,177 86.2 167,020 86.7
----------------- ----------- ---------------- ------------
Gross profit 31,415 13.7 25,609 13.3
----------------- ----------- ---------------- ------------
Operating expenses:
General and administrative expenses 12,972 5.7 10,615 5.5
Amortization of intangible assets 477 0.2 477 0.3
----------------- ----------- ---------------- ------------
Total operating expenses 13,449 5.9 11,092 5.8
----------------- ----------- ---------------- ------------
Operating income 17,966 7.9 14,517 7.5
Interest expense, net 3,191 1.4 7,734 4.0
Minority interest in earnings of subsidiaries (12) -- (9) --
Other income, net -- -- 6 --
----------------- ----------- ---------------- ------------
Income before income taxes 14,763 6.4 6,780 3.5
Provision for income taxes 5,688 2.5 2,646 1.4
----------------- ----------- ---------------- ------------
Net income $ 9,075 3.9% $ 4,134 2.1%
================= =========== ================ ==============
REVENUES
For the quarter ended March 31, 2003, revenues increased to $228.5 million,
or 18.6%, from $192.6 million for the quarter ended March 31, 2002. The increase
in revenues was attributable to internal growth. The growth in revenue was
primarily driven by our Secretary of the Air Force Technical and Analytical
Support contract, expansion of our Battlefield Information Collection
Exploitation Systems contract, our contracts with the U.S. Army for military
operations on urban terrain, ANSWER and our Professional Engineering Services
schedule contract, and growth under our other General Services Administration
contracts.
COSTS OF REVENUES
For the quarter ended March 31, 2003, costs of revenues increased by $30.2
million, or 18.1%, to $197.2 million from $167.0 million, for the quarter ended
March 31, 2002. Costs of revenues as a percentage of revenues decreased to 86.2%
from 86.7%. The decrease in costs of revenues as a percentage of revenue was due
primarily to the corresponding growth in revenues resulting from internal
growth. The majority of this growth was due to a $10.6 million increase in
direct labor and fringe and a $19.6 million increase in other direct contract
costs. For the quarter ended March 31, 2003, gross profit increased $5.8
million, or 22.7%, to $31.4 million from $25.6 million for the quarter ended
March 31, 2002, primarily as a result of the corresponding growth in revenues
resulting from internal growth. Overhead expenses increased only 2.2%,
representing one of the principal drivers of our increased gross profit margin.
GENERAL AND ADMINISTRATIVE EXPENSES
For the quarter ended March 31, 2003, general and administrative expenses
increased $2.4 million, or 22.6%, to $13.0 million from $10.6 million for the
quarter ended March 31, 2002. General and administrative expenses for the
quarter ended March 31, 2003, as a percentage of revenues, increased to 5.7%
from 5.5%. The increase was primarily attributable to the corresponding growth
in revenue.
AMORTIZATION
For the quarter ended March 31, 2003, amortization expenses remained
constant at $477,000 from the comparable period in 2002. As a result of the
growth in revenues, amortization as a percentage of revenues decreased to 0.2%
from 0.3%.
OPERATING INCOME
For the quarter ended March 31, 2003, operating income increased $3.4
million or 23.4% to $18.0 million from $14.5 million for the quarter ended March
31, 2002. Operating income as a percentage of revenue increased to 7.8% for the
quarter ended March 31, 2003 from 7.5% for the same period in fiscal 2002,
primarily as a result of the corresponding growth in revenues and gross profit.
INTEREST EXPENSE
For the quarter ended March 31, 2003, interest expense, net of interest
income, decreased $4.5 million, or 58.7% to $3.2 million from $7.7 million for
the quarter ended March 31, 2002. For the three months ended March 31, 2003, we
reclassified approximately $304,000 of losses previously recorded as
extraordinary. The decrease in interest expense was due primarily to fees of
$1.9 million related to the termination of $30.0 million of interest rate swap
agreements, which occurred in the three months ended March 31, 2002, a decrease
in interest rates and to a reduction in our debt.
PROVISION FOR INCOME TAXES
As a result of our tax planning strategies, our effective tax rate for the
quarter ended March 31, 2003 was 38.5% compared with an effective tax rate of
39.0% for the quarter ended March 31, 2002.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows for the Quarter Ended March 31, 2003
We generated $13.4 million in cash from operations for the quarter ended
March 31, 2003. By comparison, we used $11.0 million in cash from operations for
the quarter ended March 31, 2002. The increase in cash flow from operations was
primarily attributable to our net income of $9.1 million and a decrease in
contract receivables. Contract receivables decreased $2.4 million for the
quarter ended March 31, 2003. Total days sales outstanding decreased from 78
days as of December 31, 2002 to 73 days as of March 31, 2003. Accounts
receivable totaled $186.7 million at March 31, 2003 and represented 51.5% of
total assets at that date. Accrued expenses decreased $6.9 million for the
quarter ended March 31, 2003, reflecting payment under our annual bonus program.
For the quarter ended March 31, 2003, net cash used in investing activities was
$653,000, which was attributable to purchases of property, plant and equipment.
Cash used by financing activities was $7.6 million for the quarter ended March
31, 2003.
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
(which were 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.
Our Credit Facility 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 $145.0 million as of March 31, 2003. 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 a limitation on capital expenditures. For the
period ended March 31, 2003, we complied with all of the financial covenants. At
March 31, 2003, total debt outstanding under our Credit Facility was
approximately $20.2 million, consisting of $20.2 million of term loan, and zero
outstanding under the revolving loan portion of our Credit Facility. The total
funds available to us under the revolving loan portion of our Credit Facility as
of March 31, 2003 were $140.3 million. Based on this availability, we intend to
fund the purchase of ISI using the existing revolving portion of our Credit
Facility. 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
March 31, 2003, we did not have any capital commitments greater than $1.5
million.
Our principal working capital need is for funding accounts receivable,
which has increased with the growth in our business, and the delays in
government funding. Our principal sources of cash to fund our working capital
needs are cash generated from operating activities and borrowings under our
revolving credit facility.
We have relatively low capital investment requirements. Capital
expenditures were $653,000 and $844,000 for the quarters ended March 31, 2003
and 2002, respectively, primarily for leasehold improvements and office
equipment. We use operating leases to fund some of its equipment needs,
primarily for personal computers. As of March 31, 2003, we had equipment with an
original cost basis of approximately $14.6 million on lease.
We intend to, and expect over the next twelve months to be able to, fund
our operating cash, capital expenditure and debt service requirements through
cash flow from operations and borrowings under our credit facility. Over the
longer term, our ability to generate sufficient cash flow from operations to
make scheduled payments on our debt obligations will depend on our future
financial performance, which will be affected by a range of economic,
competitive and business factors, many of which are outside our control.
INFLATION
We do not believe that inflation has had a material effect on our business
in the quarter ended March 31, 2003.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have interest rate exposure relating to certain of our long-term
obligations. While the interest rate on the remaining $75 million principal
amount of our 12% Notes is fixed at 12%, the interest rate on both the term and
revolving portions of our credit facilities is affected by changes in market
interest rates. We manage these fluctuations in part through interest rate swaps
and by focusing 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 $30 million of interest swap agreements
and recognized losses of $1.9 million of interest expense for the quarter ended
March 31, 2002. As of March 31, 2003, the fair value of our interest swap
agreements resulted in a net liability of approximately $653,000 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 $43,000 and $41,000 for the
quarters ended March 31, 2003 and 2002, respectively.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Our Chief Executive
Officer and Chief Financial Officer (our principal executive officer and
principal financial officer, respectively) have concluded, based upon their
evaluation as of a date within 90 days prior to the date of filing of this
quarterly report, that our disclosure controls and procedures are effective to
ensure that material information required to be disclosed by us in reports filed
or submitted by us under the Securities Exchange Act of 1934, as amended, is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms, and includes controls and procedures designed to
ensure that material information required to be disclosed by us in such reports
is accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate to allow timely decisions
regarding required disclosure.
(b) Changes in internal controls. 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.
PART II. OTHER INFORMATION REQUIRED IN REPORT
ITEM 1. LEGAL PROCEEDINGS
We are involved in various legal proceedings in the ordinary course of
business. On March 8, 2002, we received a letter from one of our principal
competitors, which is the parent company of one of our subcontractors, claiming
that we had repudiated 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.
We cannot predict the ultimate outcome of these matters, but do not believe
that they will have a material impact on our financial position or results of
operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
NONE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
ITEM 5. OTHER INFORMATION
NONE.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
99.1 Certification of Joseph M. Kampf
99.2 Certification of Carlton B. Crenshaw
B. REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the
quarter ended March 31, 2003.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ANTEON INTERNATIONAL CORPORATION
Date: May 1, 2003 /s/ Joseph M. Kampf
------------------
--------------------------------------
Joseph M. Kampf - President
and Chief Executive Officer
Date: May 1, 2003 /s/ Carlton B. Crenshaw
------------------
-----------------------------------------
Carlton B. Crenshaw - Senior Vice President
and Chief Financial Officer
Certifications
I, Joseph M. Kampf, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Anteon International
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 1, 2003 By: /s/ Joseph M. Kampf
--------------------- ----------------------------------------
Joseph M. Kampf
President and Chief Executive Officer
Certifications
I, Carlton B. Crenshaw, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Anteon International
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 1, 2003 By: /s/ Carlton B. Crenshaw
--------------------- ----------------------------------------
Carlton B. Crenshaw
Senior Vice President and
Chief Financial Officer