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UNITED STATES
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, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________ TO _____________
Commission File Number: 001-31258
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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 [x] No [x]
The aggregate market value of the voting stock held by non-affiliates
of the registrant as of June 30, 2003 was $549,497,718 (based on the closing
price of $27.91 per share on June 30, 2003, 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.
|X|
There were 35,441,075 shares of common stock outstanding as of February
23, 2004.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the 2004 Annual
Meeting of Shareholders Part III
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. Forward-looking statements relate to future events or our future financial
performance. These statements involve known and unknown risks, uncertainties and
other factors that may cause our or our industry's actual results, levels of
activity, performance or achievements to be materially different from any
results, levels of activity, performance or achievements expressed or implied by
these forward-looking statements.
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 remaining contract value;
o our expectations regarding the U.S. 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 U.S. federal government procurement laws, regulations,
policies and budgets:
o the number and type of contracts and task orders awarded to us;
o the integration of acquisitions without disruption to our other
business activities;
o changes in general economic and business conditions;
o technological changes;
o 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.
1
RISK FACTORS
Risks related to our business
U.S. 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 U.S. federal government prime
contracts, and we believe that the success and development of our business will
continue to depend on our successful participation in U.S. federal government
programs. Accordingly, changes in U.S. federal government contracting policies
could directly affect our financial performance. Among the factors that could
materially adversely affect our U.S. federal government contracting business
are:
o budgetary constraints affecting U.S. federal government
spending generally, or specific departments or agencies in
particular, and changes in fiscal policies or available
funding;
o changes in U.S. federal government programs or requirements;
o curtailment of the U.S. federal government's use of technology
services firms;
o the adoption of new laws or regulations;
o technological developments;
o U.S. 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 U.S. 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
U.S. federal government customers are subject to stringent budgetary
constraints. We have substantial contracts in place with many U.S. 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.
Early Termination of Contracts-- Our U.S. 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 U.S. 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. U.S. 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.
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.
2
Most U.S. federal government contract awards are subject to protest by
competitors. If specified legal requirements are satisfied, these protests
require the U.S. 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 U.S. 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 U.S. 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 U.S. federal
government: time and materials, cost-plus, and fixed price. For the year ended
December 31, 2003, approximately 38% were time and materials, 32% of our U.S.
federal contracts were cost-plus, and 30% were fixed price (a substantial
majority of which were fixed price level of effort). 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
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 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.
3
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 U.S. 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
certain 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 export 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 U.S. federal agencies that are designed to safeguard against unauthorized
persons', including foreigners', access to classified information. If we were to
come under foreign ownership, control or influence, our U.S. federal government
customers could terminate or decide not to renew our contracts, which 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 U.S. federal
government.
Risks Relating to Reductions or Changes in Military and Department of
Defense-related Intelligence Agency 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
sales under subcontracts having the Department of Defense as the ultimate
purchaser, represented approximately 88% and 78% of our sales for the year ended
December 31, 2003 and for the year ended December 31, 2002, 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 currently provide limited or no services. A change in
the U.S. Presidential Administration or in the composition of Congress could
also materially affect levels of support for military expenditures. A general
significant decline in military expenditures could harm our operating results.
4
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 U.S. 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 U.S. 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 U.S. federal government's discretion. In
addition, funding for orders from the U.S. 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. Further, there is a risk that a
subcontractor's technology solution on which certain of our contracts and task
orders are dependent could become obsolete or fall out of favor with customers.
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 U.S. 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
o suffer claims for substantial damages against us, regardless
of our responsibility for the failure.
6
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 six strategic
acquisitions since 1997. The U.S. 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 include the coordination of
geographically dispersed organizations, the integration of personnel with
disparate business backgrounds and the reconciliation of different corporate
cultures. In addition, in certain acquisitions, U.S. 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 of our acquisitions, 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 U.S.
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 U.S. 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 U.S. 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 legal regulations and social,
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 compliance with the 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 or other hostile situations in foreign
countries;
o imposition or increase of investment and other restrictions or
requirements by foreign governments; and
o compliance with 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, 2003, our debt was $158.8 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 Over time, 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.
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 our Amended and Restated Credit Agreement of December
19, 2003, or "Credit Facility," limit, but do not prohibit us or our
subsidiaries from doing so. As of December 31, 2003, our Credit Facility would
have permitted additional borrowings of up to $203.7 million. If new debt is
added by us or our subsidiaries, the related risks that we and they now face
could intensify.
8
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 U.S. federal government spending, and changes in
fiscal policies or available funding;
o U.S. 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 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 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.
Our Credit Facility imposes significant operating and financial
restrictions on us and our subsidiaries and requires 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;
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.
9
The failure to comply with any of these covenants would cause a default
under 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 have
broad service competencies that include strengths in intelligence systems,
emergency response management, logistics modernization, secure identification
and access management solutions, training, platform and weapons systems
engineering support, ballistic missile defense, healthcare services and
government enterprise solutions.
We currently serve over 1,000 U.S. federal government clients in more
than 50 government agencies, as well as state and foreign governments. For the
year ended December 31, 2003, approximately 88% of our revenues were derived
from the Department of Defense, or "DOD," and DOD-related intelligence agencies,
and approximately 10% from civilian agencies of the U.S. federal government, of
which approximately 3% is derived from the Department of Homeland Security, or
"DHS". For the year ended December 31, 2003, approximately 89% of our revenues
were 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 seven years, assuming the exercise of all potential contract
options. Additionally, we have contracts with an estimated remaining contract
value of $5.6 billion as of December 31, 2003, of which approximately $661.1
million is funded backlog.
From January 1996 to December 31, 2003, we increased revenues from
$141.8 million to $1.0 billion, at a compound annual growth rate, of
approximately 33%. Our revenues grew organically by approximately 16% from 2002
to 2003 and approximately 17% from 2001 to 2002. We define organic growth as the
increase in revenues excluding the revenues associated with acquisitions,
divestitures and closures of businesses in comparable periods.
The U.S. 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, which includes
information technology solutions and system engineering services, is large and
growing, with total estimated expenditures of more than $121.7 billion in the
U.S. federal government's fiscal year ending September 30, 2004. Government
agency budgets for these technology services are forecast to grow more than 5%
annually through government fiscal year 2005.
Additionally, it is anticipated that technology services spending will
grow more than $4.5 billion annually over the next four 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 $375.0 billion in government
fiscal year 2004, a 3% increase over government fiscal year 2003. The
President's proposed budget for government fiscal year 2005 includes defense
spending of $401.7 billion, a 7% increase over government fiscal year 2004, and
the largest Department of Defense budget in history in actual dollars. The 2005
Department of Defense spending plan submitted to Congress includes a 30%
increase over the next six years.
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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. U.S. 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 U.S. 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 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 U.S.
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 U.S. federal
government. In order for a company to provide services under a GSA Schedule
contract, the company must be pre-qualified and awarded a contract by GSA. When
an agency uses a GSA Schedule contract to meet its requirements, 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 is expected to provide the user agency with reduced
procurement time and lower procurement costs.
ID/IQ contracts are contract forms through which the U.S. 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
U.S. 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 U.S. federal technology services market and our business:
o Increased Outsourcing. The downsizing of the U.S. federal
government workforce, declining availability of information
technology management skills among government personnel, and a
corresponding 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 U.S. federal government
information technology expenditures. In government fiscal year
2003, 83% of the U.S. federal government's total information
technology solutions spending flowed to contractors. By
government fiscal year 2008, this rate of outsourcing is
projected to increase to 87% of total information technology
spending.
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.
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o Continued Dependence on Commercial Off-the-Shelf Hardware and
Software. The U.S. 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 U.S. 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 U.S.
federal government increasing its commitment to strengthen the
nation's security, defense and intelligence capabilities. The
U.S. federal government is investing in improved homeland
security, greater information systems security, more effective
intelligence operations, and new approaches to warfare
simulation training. Defense spending is projected to exceed
$375.0 billion in government fiscal year 2004, an increase of
almost 13% over government fiscal year 2003. The President's
proposed budget for 2005 defense spending is $401.7 billion, a
7% increase over the government fiscal year 2004 budget and
the largest defense budget in history 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
U.S. 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. U.S. 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 6% annually over the next four 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 high priority 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 built, and continuously
maintain and upgrade, the National Emergency Management Information System, or
"NEMIS," an enterprise wide management information system, for the U.S. 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 ten 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. An
example of our working in this area includes:
o Coalition Enterprise Regional Information Exchange System CENTRIXS and
CENTRIXS N.A.T.O. Since 1993, through a series of contracts, we have
provided services to the 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. CENTRIXS is one of the most widely-used command, control,
computers, communication and intelligence, 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 additional system deployments to the coalition
countries in the war on terrorism and Operation Iraqi Freedom.
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. Our work in this area
includes:
o National Emergency Management Information System. Since early 1996, we
have supported the development of the NEMIS system for FEMA through a
series of contracts and task orders. We believe our support to FEMA
will continue to grow with FEMA's increased responsibility as a first
responder to disasters and terrorist attacks and as FEMA supports its
mission within DHS. NEMIS provides mission critical functionality for
FEMA's core mission of disaster response and recovery. This
enterprise-wide management information system connects several thousand
desktop and mobile terminals/handsets, providing FEMA with a fully
mobile, nationwide, rapid response disaster assessment and mitigation
system. We continue to provide enhancements to the current system, and
we are in the process of expanding our support to this mission area to
include an internet-based capability that will integrate with the DHS
technology infrastructure.
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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. Our working logistics
modernization includes:
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 DOD 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 or "JLWI." In March 2000, we
entered into the Joint Logistics Warfighting Initiative contract. JLWI
represents the DOD's efforts focused on facilitating the military's
logistics transformation and improving military readiness through
business process improvements and the implementation of new and
emerging technologies. We are providing process re-engineering, system
design, and database 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, or 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 U.S. 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. We have been providing lifecycle
information technology services to the U.S. Postal Service since 1983.
We have developed and implemented an electronic commerce application to
serve an estimated 80,000 to 100,000 U.S. Postal Service employees who
purchase a wide range of products on the U.S. Postal Service intranet
web 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. Fulfilling the U.S. Postal Service's requirement to serve up
to 100,000 employees required the development of a very robust
transaction processing application.
o Joint and Service Enterprise Information Technology Support. We have
provided Enterprise Information Technology support for numerous Joint
and Service Commands, or the "Commands," for the past decade, both in
the U.S. and in numerous locations abroad. Our support comprises all
functions of the Enterprise including telecommunications engineering,
planning and operation, network development, administration and
management, software life-cycle support, and business process
engineering. Our employees deploy with the Commands during both
peacetime operations and war and are making vital contributions to the
Commands' capabilities to accomplish their missions. The supported
Commands include U.S. Central Command and its Army, Third U.S.
Army/ARCENT, and the U.S. Air Force, 9th U.S. Air Force/CENTAF,
component commands, U.S. Army Forces Command, the U.S. Army Reserve
Command, and the U.S. Army Network Engineering and Technology Command.
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o Coalition, Joint and Service Training Exercise Support Commands. We
have provided mission Exercise Program Support from the individual unit
to multi-national coalition level. We plan events that prepare
commanders and their staff to measure training proficiency, correct
deficiencies, and prepare for wartime missions. We are adept at
planning, implementing, and critiquing all aspects of these events to
include augmentation with senior mentor and subject matter experts. We
have planned every facet of the events to include logistical support,
communications system planning and provisioning, and other support
functions. These exercises have played a major part in preparation of
United States and Coalition Forces to meet the global war on Terrorism,
and Operations Iraqi Freedom and DHS missions.
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. We provide service to the following programs:
o Program Executive Office Simulation Training and Instrumentation, or
"PEO STRI." Since January 2000, we have provided life cycle support for
constructive training at fourteen U.S. Army Simulation and Training
Command Simulation centers worldwide. We have more than 700 personnel
supporting this program at more than 50 sites throughout the United
States, Germany, Italy and South Korea. We provide 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,
providing highly qualified professionals who are certified in all
aspects of simulation support, to each of the U.S. Army's Battle
Simulation Centers.
o Military Operations on Urban Terrain, or "MOUT." We have supported the
U.S. Army's MOUT program since July 1997. Our support to MOUT primarily
focuses on the design and instrumentation of the most advanced MOUT
site in the world located at the Joint Readiness Training Center, Fort
Polk, LA, as well as other sites worldwide. 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 high-speed local area network to the control room. The
system is also designed to control targetry and multiple battlefield
effects and has the flexibility to support both simulated fire and live
fire exercises. We have also developed a mobile version of MOUT to
facilitate training in the theater of operation. For example, two
Mobile MOUT, or "Mobile MOUT," sites were ordered and delivered for use
in Kuwait and Afghanistan in early 2003 to support operations in the
global war on terrorism.
Secure Identification and Access Management Solutions. Our acquisition
of ISI enhances our position in this market and provides us with capabilities in
optical memory card technology, which is used primarily for high-capacity
portable secure data storage and authentication through multiple biometrics.
This capability, combined with our expertise in integrated circuit card
technology, which is used primarily for access control and related transaction
processing, positions us to capitalize on the growing demand in this market.
Both of the secure identification and access control technologies are gaining
significant and increased support with U.S. federal agencies, including the DOD,
DHS and foreign governments.
o Integrated Card Production System. We are the prime contractor for
secure identification and border control card solutions for the DHS's
Bureau of Citizenship and Immigration Services, or "BCIS." Through a
contract with the BCIS, we provide the Permanent Resident Card
solution, as well as the Department of State Border Crossing
"LaserVisa" Card solution. To date, the U.S. federal government has
procured over 20 million secure identification cards through this
contract. We are positioned to grow from the expanding budget of DHS,
as secure identification and credential card technologies proliferate
within DHS and other U.S. federal government agencies.
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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. We have been providing this support since 1989 under
several contracts. 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.
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
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.
o Shipbuilding Engineering Support. For over twenty years, we have
provided acquisition management and engineering support to the U.S.
Navy's shipbuilding program offices. Today, this includes the AEGIS
shipbuilding program, the aircraft carrier program, all submarine
programs and the developmental programs, such as the new DDX destroyer,
and the Littoral Combatant Ship. We also develop software serving the
global ship design industry. In addition to support for the acquisition
offices and industry, we provide support for the ships during their
in-service phase of the life cycle through multiple contracts. This
includes installation support, refurbishment of equipment and provision
of new software.
o Research, Development, Test and Evaluation Support. We support various
DOD laboratories and field activities in the provision of technology,
testing, operation of facilities and general research and development,
or "R&D," support. Our technologies range from the provision of
advanced algorithms for the Virginia class submarines, software for
decision support systems, video compression algorithms, advanced sonar
concepts and unique software for technology assessment. We operate the
Air Force Research Laboratory's Laser Facilities and conduct material
testing on their behalf. We operate special test facilities in
Annapolis, MD that are nationally unique and include a deep diving test
facility. We support almost every U.S. Navy R&D facility and have a
significant presence in the Office of Naval Research.
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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." Since January 1999,
we have supported the U.S. Navy by providing 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 TBMD
System experience, we were selected to provide similar support to the
National Missile Defense program. We believe missile programs will
experience near-and-long-term growth as the DOD moves forward to meet
the U.S. federal government's mandate for a national missile defense
system.
Our Growth Strategy
Our goal is to become the first pure-play technology services company
to be included in the top tier of government technology service providers. Our
objective is to continue to profitably grow our business as a premier provider
of comprehensive technology solutions and services to the U.S. federal
government market. Our strategy to achieve this objective includes the
following:
o Continue to Increase Market Penetration. In the past 10 years, the U.S.
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. Defense spending is projected to exceed
$375.0 billion in government fiscal year 2004, an increase of almost 3%
over government fiscal year 2003, and is expected to reach $401.7
billion in government fiscal year 2005, a 7% increase over projected
government fiscal year 2003 spending. Defense budgets are expected to
grow by 30% over the next six years, based on the Department of Defense
spending plan submitted to Congress. We believe that many of the key
operational goals of the U.S. federal government correlate with our
expertise, including developing a national missile defense system,
increasing homeland security, protecting information systems from
attack, conducting effective intelligence homeland security, protecting
information systems from attack, conducting effective intelligence
operations, and training for new approaches to warfare through
simulation.
o Capitalize on Growing Demand in the Secure Identification and Access
Management Solutions Market. The use of credential card technologies
for secure identification and access control solutions is rapidly
gaining momentum with U.S. federal agencies, the DOD and foreign
governments. These cards are used for cardholder authentication,
physical access control and logical access control. Our acquisition of
ISI enhances our position in this market and provides us with a full
range of capabilities to meet our customers' requirements. ISI brings
us extensive experience with optical storage card technology, which is
used primarily for authentication using biometrics and physical access
control. This capability, combined with our expertise in integrated
circuit card technology, used primarily for logical access control,
uniquely positions us to capitalize on the growing demand in this
market regardless of the application or credential card technology
selected by customers.
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, we believe
our strong performance record and detailed understanding of customer
requirements developed on the U.S. Air Force Cargo Movement Operations
System led directly to our being awarded a contract relating to the
Joint Logistics Warfighting Initiative.
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o Continue our Disciplined Acquisition Strategy. We employ a disciplined
methodology to evaluate and select acquisition candidates. We have
completed six 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.
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. 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).
Acquisitions
We employ a highly disciplined methodology to evaluate acquisitions.
Since 1997 we have evaluated several hundred targets and have successfully
completed and integrated six 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 Acquired Business 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
2003 ISI Secure identification and access management solutions and military 130.5
logistics and training
- --------------------------------------------------------
(1) Consolidated revenue of acquired business for its most recently completed
fiscal year ended prior to the acquisition date.
18
In August 1997, we purchased Vector Data Systems, Inc., or "Vector
Data," 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.,
or "A&T," 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., or
"Sherikon," 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. In May 2003, we purchased ISI, a provider of secure identification
and access management solutions and military logistics and training to primarily
the Department of Defense.
Existing Contract Profiles
We currently have a portfolio of more than 500 active contracts. Our
contract mix for the year ended December 31, 2003 was 38% time and materials
contracts, 32% cost-plus contracts and 30% fixed price contracts (a substantial
majority of which were firm fixed price level of effort).
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.
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 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. The substantial majority of these fixed price contracts involve a
defined number of hours or a defined category of personnel. We refer to such
contracts as "level of effort" 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 1999 2000 2001 2002 2003
- --------------------------------------------------------------------------------
Cost-Plus............................. 37% 41% 37% 35% 32%
Time and Materials.................... 38% 31% 34% 37% 38%
Fixed Price........................... 25% 28% 29% 28% 30%
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 3,600
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 8%
of our total 2003 revenue.
19
Government Wide Acquisition Contracts. We are one of the leading
suppliers 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 560 task orders to date,
with an annualized revenue run rate as of the fourth quarter of fiscal 2003 of
approximately $150 million. Our total estimated contract value for this contract
is approximately $1.6 billion for the period January 1999 to December 2008.
Listed below are the four largest GWACs.
Contract
Owning Period of 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 $20 billion Prime
Listed below are our top programs by 2003 revenue, including single
award and multiple award contracts. We are a prime contractor on each of these
programs.
Top Programs by 2003 Revenue
($ in millions)
Estimated
Period of Remaining Contract
Contract Customer Performance 2003 Revenue Contract Value Type
- ----------------------------------------------------------------------------------------------------------------------------
ANSWER GSA 1/1/99-12/31/08 $ 158.3 $ 818.5 T&M/FFP
GSA SCHEDULE & BPAs GSA 10/30/96-10/09/07 102.6 469.8 T&M/FFP
SAFTAS U.S. Air Force 01/01/01-12/31/15 42.8 436.1 CP
GSA PES Contract GSA 01/06/00-01/05/05 33.1 381.5 CP
CENTRIX/LOCE Department of Defense 12/01/02-05/31/04 26.4 22.6 CP
Millenia Lite-Area GSA 07/06/00-07/05/10
2 24.7 272.5 CP
GSA-PES GSA 05/01/00-02/08/06 24.5 10.3 FFP
GSA-MOBIS GSA 11/21/97-09/30/07 21.6 58.1 CP
Carrier BPA U.S. Navy 03/10/97-12/31/03 19.2 0.7 T&M/FFP
MOUT-IS Army/STRICOM/Training 07/03/97-08/31/05 17.0 7.5 FFP
20
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 U.S. 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. For the year ended December 31,
2003, approximately 22% 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 Remaining Contract Value and New Business Development
On December 31, 2003, our estimated remaining contract value was $5.6
billion, of which $661.1 million was funded backlog. In determining estimated
remaining contract value, we do not include any provision for an increased level
of work likely to be awarded under our GWACs. The estimated remaining contract
value is calculated as current revenue run rate over the remaining term of the
contract. Our estimated remaining 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 remaining contract value are subject to termination at the election
of the customer.
ESTIMATED REMAINING CONTRACT VALUE
Unfunded Estimated
Funded Contract Remaining
As of December 31, Backlog Value Contract Value
- --------------------------------------------------------------------------------
(in millions)
2003 $ 661 $ 4,948 $ 5,609
2002 418 3,868 4,286
2001 309 3,217 3,526
2000 308 2,560 2,868
1999 195 1,926 2,121
From December 31, 1999 to December 31, 2003, our estimated remaining
contract value increased at a 28% compound 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 U.S. federal, state, local and international
government organizations worldwide. Domestically, we service more than 50
agencies, bureaus and divisions of the U.S. federal government, including nearly
all cabinet-level agencies and all branches of the military. For the year ended
December 31, 2003, the U.S. federal government accounted for approximately 99%
of our total revenues. International and state and local governments provided
the remaining 1%. The DOD accounted for approximately 88% of our total revenues
and services to U.S. federal civilian organizations were approximately 10%. Our
largest customer group is the U.S. Navy, which management believes accounted for
approximately 44% of revenues during the year ended December 31, 2003, through
30 different Navy organizations.
21
An account receivable from a U.S. federal government agency enjoys the
overall credit worthiness of the U.S. 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 U.S. federal government. Because of the diverse
requirements of U.S. federal government clients and the highly competitive
nature of large U.S. 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.
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 keys 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, 2003, we employed approximately 7,600 employees, 97%
of whom were billable and 69% 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. None of our
employees is represented by any 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 1.3 million square feet of office, shop and
warehouse space in over 100 facilities across the United States, Canada, the
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.
22
Item 3. Legal Proceedings
We are involved in various legal proceedings in the ordinary course of
business.
We cannot predict the ultimate outcome of these matters, but do not
believe that 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, 2003, through the solicitation of
proxies or otherwise.
23
Part II
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 year ended December 31, 2003 and 2002 as reported by
the NYSE.
2003
Quarter Ended High Low
--------------------- ---------- ------------
March 31 $ 25.85 $ 20.00
June 30 $ 29.50 $ 21.86
September 30 $ 35.10 $ 27.30
December 31 $ 38.95 $ 30.71
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.
As of February 23, 2004, the number of stockholders of record of our
common stock was approximately 402.
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, 2003, 2002, 2001, 2000 and 1999. 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 1999, 2000, 2001, and 2003. 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
consolidated financial statements and the related notes thereto appearing
elsewhere in this filing.
24
Year ended December 31,
1999 (a) 2000 2001 (a) 2002 (a) 2003
-------- ------ ---------- ---------- -------
(in thousands, except per share data and percentages)
-----------------------------------------------------
Statements of operations data:
Revenues........................................$ 400,850 $ 542,807 $ 715,023 $ 825,826 $ 1,042,474
Costs of revenues............................... 353,245 474,924 627,342 711,328 897,264
------------ -------------- ------------ -------------- --------------
Gross profit.................................... 47,605 67,883 87,681 114,498 145,210
General and administrative expenses,
including acquisition related costs........... 27,926 38,592 51,442 48,197 58,647
Amortization of non-compete agreements.......... 909 866 349 -- 101
Goodwill amortization........................... 3,440 4,714 6,704 -- --
Other intangibles amortization.................. -- 2,673 2,321 1,907 2,349
------------ -------------- ---------- ------------ --------------
Operating income ............................... 15,330 21,038 26,865 64,394 84,113
Other Income.................................... -- -- -- 417 --
Gains on sales and closures of business......... -- -- 4,046 -- --
Gains on sales of investments and other,
net........................................... 2,585 -- -- -- --
Secondary offering expenses..................... -- -- -- -- 852
Interest expense, net of interest
income........................................ 19,002 26,513 26,353 21,626 24,244
Minority interest in (earnings) losses of
subsidiaries.................................. (39) 32 (38) (18) (54)
------------ -------------- ------------ -------------- --------------
Income (loss) before provision for (benefit
from) income taxes............................ (1,126) (5,443) 4,520 43,167 58,963
Provision for (benefit from) income
taxes......................................... 401 (153) 4,602 16,723 22,773
------------ -------------- ------------ -------------- --------------
Net income (loss)..........................$ (1,527) $ (5,290) $ (82) $ 26,444 $ 36,190
============ ============== ============ ============== ==============
Basic earnings (loss) per common share $ (0.06) $ (0.22) $ (0.01) $ 0.82 $ 1.04
============ ============== ============ ============== ==============
Weighted average shares outstanding........ 23,785 23,787 23,787 32,163 34,851
Diluted earnings (loss) per common share.......$ (0.06) $ (0.22) $ (0.01) $ 0.78 $ 0.98
============ ============== ============ ============== ==============
Weighted average shares outstanding........ 23,785 23,787 23,787 34,022 36,925
Other data:
EBITDA (b)......................................$ 25,978 $ 36,347 $ 47,357 $ 70,994 $ 90,097
EBITDA margin (c).............................. 6.5% 6.7% 6.6% 8.6% 8.6%
Cash flow from (used in) operating
activities....................................$ 11,767 $ 17,101 $ 37,879 $ (1,722) $ 37,443
Cash flow from (used in) investing
activities.................................... (111,672) (28,912) (1,707) (1,423) (95,431)
Cash flow from (used in) financing
activities.................................... 100,957 12,036 (35,676) 5,481 55,810
Capital expenditures............................ 4,761 6,584 2,181 3,225 3,049
Balance sheet data (as of December 31):
Current assets..................................$ 118,583 $ 148,420 $ 144,418 $ 208,396 $ 244,591
Working capital (d)............................. 48,818 56,841 27,559 80,390 105,287
Total assets.................................... 278,691 324,423 306,651 364,692 479,280
Long-term debt, including current
portion....................................... 212,301 237,695 202,905 105,701 158,776
Stockholders' equity (deficit).................. 3,672 (1,576) (3,442) 128,829 174,492
(a) On January 1, 2003, we adopted SFAS No. 145, and as a result,
reclassified $4.2 million ($2.6 million net of tax) of losses, $519,000
($330,000 net of tax) of gains and $772,000 ($463,000 net of tax) of
loss previously recorded as extraordinary items in 2002, 2001 and 1999,
respectively, to interest expense, net of interest income.
Additionally, the tax impact as a result of the reclassifications has
been adjusted in the tax provision amounts shown.
(b) "EBITDA", as defined, represents income before income taxes, plus
depreciation, amortization and net interest expense. EBITDA is a
supplemental financial measure but should not be construed as an
alternative to operating income or cash flows from operating activities
(as determined in accordance with accounting principles generally
accepted in the United States of America, "GAAP"). We believe that
EBITDA is a useful supplement to net income and other income statement
data because it is used by some investors in understanding and
measuring a company's cash flows generated from operations that are
available for taxes, debt service and capital expenditures. However,
all companies do not calculate EBITDA in the same manner, and as a
result, the EBITDA measures presented may not be comparable to
similarly titled measures of other companies. The computations of
EBITDA are as follows:
25
Year ended December 31,
1999 2000 2001 2002 2003
---- ---- ---- ---- ----
($ in thousands)
Net income (loss)............................. $ (1,527) $ (5,290) $ (82) $ 26,444 $ 36,190
Provision for (benefit from) income tax 401 (153) 4,602 16,723 22,773
Interest expense, net of interest income...... 19,002 26,513 26,353 21,626 24,244
Depreciation.................................. 3,753 7,024 7,110 4,294 4,440
Amortization.................................. 4,349 8,253 9,374 1,907 2,450
----------- ---------- ---------- ---------- ----------
EBITDA........................................ $ 25,978 $ 36,347 $ 47,357 $ 70,994 $ 90,097
Secondary offering expenses................... -- -- -- -- 852
----------- ---------- ----------- ---------- ----------
Adjusted EBITDA (e)........................... $ 25,978 $ 36,347 $ 47,357 $ 70,994 $ 90,949
=========== ========== =========== ========== ==========
Net income (loss)............................. (0.3%) (1.0%) (0.1%) 3.2% 3.5%
EBITDA margin (c)............................. 6.5% 6.7% 6.6% 8.6% 8.6%
Adjusted EBITDA margin (f).................... 6.5% 6.7% 6.6% 8.6% 8.7%
(c) EBITDA margin represents EBITDA calculated as a percentage of total
revenues.
(d) Working Capital is equal to current assets minus current liabilities.
(e) Adjusted EBITDA is presented herein because we believe it to also be
relevant and useful to our investors. Adjusted EBITDA represents EBITDA
plus the additional costs associated with the secondary offering.
(f) Adjusted EBITDA margin represents Adjusted EBITDA calculated as a
percentage of total revenues.
26
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 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 have a broad client and contract base and a diverse contract mix. We
currently serve over 1,000 U.S. federal government clients in more than 50
government agencies, as well as state and foreign governments. For the year
ended December 31, 2003, approximately 88% of our revenue was derived from
contracts with the DOD and intelligence agencies, and approximately 10% from
civilian agencies of the U.S. federal government. For the year ended December
31, 2003, approximately 89% of our revenue was from contracts where we were the
lead, or "prime," contractor. Our diverse contract base has approximately 500
active contracts and more than 3,600 active task orders. For the year ended
December 31, 2003, our largest contract or task order accounted for
approximately 7% of our revenues. We have a diverse mix of contract types, with
approximately 38%, 32%, and 30% of our revenues for the year ended December 31,
2003 derived from time and materials, cost-plus and fixed price contracts,
respectively. In addition, we generally do not pursue fixed price software
development contracts that may create financial risk. Additionally, we have
contracts with an estimated remaining contract value of $5.6 billion as of
December 31, 2003, of which $661.1 million is funded backlog. Our contracts have
a weighted-average term of approximately seven years. From December 31, 1999 to
December 31, 2003, our estimated remaining contract value increased at a 28%
compound annual growth rate.
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, 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 year ended December 31, 2003, 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). In addition, we evaluate
our contracts for multiple deliverables which may require the segmentation of
each deliverable into separate accounting units for proper revenue recognition.
27
We recognize revenues under our U.S. federal government contracts when
a contract is executed, the contract price is fixed and determinable, delivery
of the services or products has occurred, the contract is funded and
collectibility of the contract price is considered probable. Our contracts with
agencies of the U.S. federal government are subject to periodic funding by the
respective contracting agency. Funding for a contract may be provided in full at
inception of the contract or 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 U.S. federal government contracts based
on allowable contract costs, as mandated by the U.S. federal government's cost
accounting standards. The costs we incur under U.S. federal government contracts
are subject to regulation and audit by certain agencies of the U.S. federal
government. Historically, 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.
Contract revenue recognition inherently involves estimation. Examples
of such estimates include the level of effort needed to accomplish the tasks
under the contract, the cost of those efforts, and a continual assessment of our
progress toward the completion of the contract. From time to time, circumstances
may arise which require us to revise our estimated total revenue or costs.
Typically, these revisions relate to contractual changes involving our services.
To the extent that a revised estimate affects contract revenue or profit
previously recognized, we record the cumulative effect of the revision in the
period in which it becomes known. In addition, the full amount of an anticipated
loss on any type of contract is recognized in the period in which it becomes
known.
We generally do not pursue fixed price software development work that
may create material financial risk. We do, however, provide services under fixed
price labor hour and fixed price level of effort contracts, which represent
similar levels of risk as time and materials contracts. Our contract mix was
approximately 38% time and materials, 32% cost-plus and 30% fixed price (a
substantial majority of which are firm fixed price level of effort) during the
year ended December 31, 2003. The contract mix can change over time depending on
contract awards and acquisitions. For example, ISI has a higher proportion of
cost plus contracts which we believe provides us with an opportunity, over time,
to migrate those contracts to higher margin time and materials and fixed-price
labor work. Under cost-plus contracts with the U.S. federal government,
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 U.S. 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.
28
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. Costs
of revenues are considered to be a critical accounting policy because of the
direct relationship to revenue recognized.
Goodwill Impairment
- --------------------
Goodwill relating to our acquisitions represents the excess of cost
over the fair value of net tangible and separately identifiable intangible
assets acquired, and has a carrying amount of approximately $212.2 million and
$138.6 million as of December 31, 2003 and 2002, respectively. The majority of
the increase in goodwill is related to the acquisition of ISI in May 2003. For
acquisitions completed prior to July 1, 2001, and until the adoption of 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.
We completed our transition analysis under SFAS No. 142 as of June 30,
2002 and our annual impairment analyses as of September 30, 2002 and 2003,
noting no indications of impairment for any of our reporting units. As of
December 31, 2003, there have been no events or circumstances that would
indicate an impairment test should be performed sooner than our planned annual
test as of September 30, 2004.
Long-Lived Assets and Identifiable Intangible Asset Impairment
- --------------------------------------------------------------
The carrying amount of long-lived assets and identifiable intangible
assets was approximately $17.9 million and $12.7 million at December 31, 2003
and 2002, respectively. Of the $17.9 million at December 31, 2003, approximately
$7.3 million of the assets are related to our acquisition of ISI. 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 U.S. federal government appropriations or funding of
certain programs, or other similar events. None of these events occurred for the
year ended December 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 as the amount by which the carrying value 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. During the year ended December 31, 2003, we
recognized an impairment charge of approximately $135,000, included in general
and administrative expenses, in the accompanying consolidated statement of
operations, to write-down the carrying value of a building held for sale to its
estimated fair market value.
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.
29
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 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 probable business combinations are deferred.
On May 23, 2003, we purchased all of the outstanding stock of ISI, a
provider of credential card technologies and military logistics and training
systems, based in Annandale, Virginia, for a total purchase price of
approximately $91.6 million, excluding transaction costs of approximately
$737,000. The transaction was accounted for in accordance with SFAS No. 141,
Business Combinations, 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 identifiable intangible assets
consisted of $4.8 million of contracts and related customer relationships and
$500,000 for the value of a non-compete agreement. The value of the contracts
and related customer relationships is based, in part, on an independent
appraisal and other studies performed by us. At the time of the acquisition, the
contracts and related customer relationships had an expected useful life of
approximately 5.3 years. The non-compete agreement is being amortized
straight-line over the three year term of the agreement. In accordance with SFAS
No. 142, Goodwill and Other Intangible Assets, goodwill arising from the
transaction is not being amortized.
The total purchase price paid, including transaction and other deal
related costs, of $92.4 million was allocated to the assets acquired and
liabilities assumed as follows (in thousands):
Accounts receivable $ 22,792
Prepaid and other current assets 764
Property and equipment 3,312
Other assets 120
Current income tax receivable 655
Accounts payable and accrued expenses (11,186)
Deferred income tax, net (458)
Deferred revenue (2,645)
Other liabilities (558)
Contracts and customer relationships 4,751
Goodwill 74,335
Non-compete agreement 500
----------
Total consideration $ 92,382
==========
Statements of Operations
The following is a description of certain line items from our
consolidated statements of operations.
Revenues for the year ended December 31, 2003 include the operations of
ISI for the period beginning May 23, 2003, the date of the acquisition.
30
Costs of revenues include direct labor and fringe costs for program
personnel and direct expenses incurred to complete contracts and task orders.
Costs of revenues also include depreciation, overhead, and other direct contract
costs, which include subcontract work, consultant fees, and materials. Overhead
consists of indirect costs relating to operational managers, rent/facilities,
administration, travel and other expenses.
General and administrative expenses are primarily for corporate
functions such as management, legal, finance and accounting, contracts and
administration, human resources, company management information systems and
depreciation, and also include other unallowable costs such as marketing,
certain legal fees and reserves.
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, SIGCOM Training, and ISI. Amortization
expenses also include costs associated with certain non-compete agreements
related to the ISI acquisition.
Interest expense is primarily related to our Senior Subordinated Notes
due 2009, or the "12% Notes," our term loans and revolving Credit Facility, our
subordinated debt and subordinated convertible promissory notes held by our
stockholders prior to their repayment or conversion in connection with our IPO,
and other miscellaneous interest costs. In addition, approximately $1.9 million
of interest expense for the year ended December 31, 2002 relates to the
recognition of previously unrecognized losses from the termination of
approximately $30.0 million in interest rate swaps. During the year ended
December 31, 2003, in conjunction with our tender offer for our 12% Notes, we
incurred approximately $7.2 million of interest expense for the bond premium and
consent payment.
Other income is from non-core business items such as gains on the sales
and closures of businesses and investments.
Funded Backlog and Estimated Remaining 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
effective management of costs makes 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
estimated remaining contract value by approximately $1.3 billion, from $4.3
billion as of December 31, 2002, to $5.6 billion at December 31, 2003, of which
approximately $66.1 million was funded backlog as of December 31, 2003. Funded
backlog increased approximately $242.9 million to $661.1 million at December 31,
2003, from $418.2 million as of December 31, 2002.
Our estimated remaining contract value represents the aggregate
contract revenue we estimate will be earned 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 estimated remaining 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 U.S. federal government
operates under annual appropriations, agencies of the U.S. federal government
typically fund contracts on an incremental basis. Accordingly, the majority of
the estimated remaining contract value is not funded backlog. Our estimated
remaining contract value is based on our experience under contracts and we
believe our estimates are reasonable. However, there can be no assurance that
our existing contracts will result in actual revenues in any particular period
or at all. These amounts could vary depending upon government budgets and
appropriations.
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.
31
Acquisitions, Divestitures and Business Closures
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
ISI........................... Acquired May 2003 130,500
Name Status Divestiture/Closure Revenues for the twelve
months ended prior to
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
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 $40.4 million to Ogden, including transaction costs. The
acquisition was accounted for using the purchase method of accounting.
Vector Data Systems--On August 29, 1997, we acquired all of the
outstanding stock of 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 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.
32
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. 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 $11.4 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.
Information Spectrum, Inc. - On May 23, 2003, we purchased all of the
outstanding stock of ISI, a provider of secure identification and access
management solutions and military logistics and training systems, based in
Annandale, Virginia, for a total purchase price of approximately $92.4 million,
including transaction costs of approximately $737,000. 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 the Center
for Information Technology Education, or "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 year 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 year 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 year 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
Interactive Media Corp., or "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 year ended December 31, 2001, as compared to
$18.1 million for the year ended December 31, 2000. Operating loss was
approximately $41,000 for the year ended December 31, 2001, as compared to
operating income of $686,000 for the year ended December 31, 2000. The total
gain from the sale recorded for the year ended December 31, 2001, was
approximately $3.5 million.
33
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 year 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 year ended December 31, 2001, we
incurred operating losses of $2.1 million on revenues of $3.3 million. For the
year 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 of the incurrence of a number of
expenses as discussed below and the impact of the amortization principles of
SFAS No. 142.
34
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:
Years Ended
December 31,
-------------------------------------------------------------------------------------
2003 2002 (1) 2001 (1)
-------------------------------------------------------------------------------------
(in thousands, except percentages)
Revenues $ 1,042,474 100.0% $ 825,826 100.0% $ 715,023 100.0%
Costs of Revenues.......... 897,264 86.1 711,328 86.1 627,342 87.7
------------- ----------- ------------- ------------ ------------ ------------
Gross Profit............... 145,210 13.9 114,498 13.9 87,681 12.3
Costs and expenses..........
General and administrative. 58,647 5.6 48,197 5.8 51,442 7.2
Amortization(2)............ 2,450 0.2 1,907 0.3 9,374 1.3
------------- ----------- ------------- ------------ ------------ ------------
Total Operating Expenses......... 61,097 5.8 50,104 6.1 60,816 8.5
------------- ----------- ------------- ------------ ------------ ------------
Operating income.............. 84,113 8.1 64,394 7.8 26,865 3.8
Secondary offering expenses 852 0.1 -- -- -- --
Interest expense, net......... 24,244 2.3 21,626 2.6 26,353 3.7
Minority interest............. (54) -- (18) -- (38) --
Other (income) expense, net... -- -- (417) -- (4,046) (0.6)
------------- ----------- ------------- ------------ ------------ ------------
Income before provision for
income taxes............. 58,963 5.7 43,167 5.2 4,520 0.7
Provision for income taxes.... 22,773 2.2 16,723 2.0 4,602 0.7
------------- ----------- ------------- ------------ ------------ ------------
Net income (loss)............. $ 36,190 3.5% $ 26,444 3.2% $ (82) 0.0%
============= =========== ============ ============ ============ ============
(1) On January 1, 2003, we adopted SFAS No. 145, and as a result,
reclassified $4.2 million ($2.6 million net of tax) of losses and
$519,000 ($330,000 net of tax) of gains previously recorded as
extraordinary items in 2002 and 2001, respectively, to interest
expense, net of interest income. Additionally, the tax impact as a
result of these reclassifications has been adjusted in the tax
provision amounts shown.
(2) Includes amortization of non-compete agreements, amortization of
contract backlog intangibles and 2001, before the adoption of SFAS No.
142, goodwill amortization and amortization of employee workforce
intangibles.
2003 compared with 2002
Revenues
For the year ended December 31, 2003, revenues increased by $216.6
million, or 26.2%, to $1.0 billion from $825.8 million for the year ended
December 31, 2002. The increase in revenues, was attributable to organic growth
and the acquisition of ISI. We define organic growth as the increase in revenues
excluding the revenues associated with acquisitions, divestitures and closures
of businesses in comparable periods. We believe organic growth is a useful
supplemental measure to revenue. Management uses organic growth as part of its
evaluation of core operating results and underlying trends. For the year ended
December 31, 2003, our organic growth was 16.2%, or $134.2 million. The
acquisition of ISI accounted for approximately $82.5 million of the growth for
the year ended December 31, 2003. The increase in revenue was primarily driven
by growth in the following contracts: Secretary of the Air Force Technical and
Analytical Support, Battlefield Information Collection Exploitation Systems,
contracts with the U.S. Army for military operations on urban terrain, ANSWER,
our Professional Engineering Services schedule contract, our other GSA
contracts, and contracts with DHS. In 2003, approximately 3% of our revenues
were derived from DHS. In addition, our revenues derived from DOD increased from
approximately 78% in 2002 to 88% in 2003.
35
Costs of Revenues
For the year ended December 31, 2003, costs of revenues increased by
$186.0 million, or 26.1%, to $897.3 million from $711.3 million for year ended
December 31, 2002. The increase in costs of revenues was due in part to the
corresponding growth in the revenues resulting from organic growth and the
acquisition of ISI. The majority of the increase in costs of revenues for the
year ended December 31, 2003 was due to increases of $68.9 million, $20.7
million, and $86.9 million in direct labor, fringe costs, and other direct
contract costs, respectively. The increases in direct labor, fringe costs and
other direct contract costs were offset in part by reductions in certain
overhead expenses.
General and Administrative Expenses
For the year ended December 31, 2003, general and administrative
expenses increased $10.4 million, or 21.6%, to $58.6 million from $48.2 million
for the year ended December 31, 2002. General and administrative expenses for
the year ended December 31, 2003, as a percentage of revenues, decreased to 5.6%
from 5.8%. This decline in the percentage of revenues was driven primarily by
operational cost efficiencies achieved in connection with acquired operations
and their, successful integration. The dollar increase was primarily
attributable to the corresponding growth in revenues.
Amortization
For the year ended December 31, 2003, amortization expenses increased
$500,000, or 28.5 %, to $2.4 million from $1.9 million for the year ended
December 31, 2002. The increase in amortization expense is a result of
additional amortization related to intangible assets acquired in connection with
the purchase of ISI and a related non-compete agreement. As a result of the
increase in revenues, amortization expense as a percentage of revenues
decreased.
Operating Income
For the year ended December 31, 2003, operating income increased $19.7
million, or 30.6%, to $84.1 million from $64.4 million for the year ended
December 31, 2002. The increase in operating income is primarily a result of the
corresponding increase in revenues. Operating income as a percentage of revenues
increased to 8.1% for the year ended December 31, 2003 from 7.8% for the year
ended December 31, 2002. The increase in the percentage of revenues was driven
by the decline in the percentage of general and administrative expenses as a
percentage of revenues.
Interest Expense, Net
For the year ended December 31, 2003, interest expense, net of interest
income, increased $2.6 million, or 12.1%, to $24.2 million from $21.6 million
for the year ended December 31, 2002. The increase in interest expense is
primarily a result of a $7.2 million bond premium and consent payment we
incurred in connection with our tender offer in December 2003 for our 12% Notes.
Excluding the interest expense related to our refinancing including the $7.2
million bond premium and consent payment for our 12% Notes , the write off of
$2.6 million of deferred financing fees, and $300,000 of fees, interest expense
for the year ended December 31, 2003 would have been approximately $14.1
million, which would have represented a 35% decrease from 2002. Our debt balance
as of December 31, 2003 exceeds the debt balance as of December 31, 2002. The
debt balance increased due to $150.0 million in new term loan borrowings made
under the Amended and Restated Credit Agreement of December 19, 2003 offset, in
part, by the repayment of approximately $18.4 million in existing term loans and
$73.1 million in our 12% Notes. This amendment and restatement is discussed
further in "Liquidity and Capital Resources".
Secondary Offering Expenses
On September 22, 2003, certain of our stockholders sold 6,600,000
shares of our common stock in an underwritten offering pursuant to a
registration statement on Form S-3 filed with the SEC (Commission File Nos.
333-108147 and 333-108858). In the fourth quarter of 2003, the underwriters of
this offering partially exercised their over-allotment option with respect to
additional shares held by the selling stockholders. As a result, on October 16,
2003, certain of the selling stockholders sold an additional 297,229 shares of
our common stock in a second closing pursuant to the same underwritten offering.
In connection with this offering, we incurred approximately $852,000 of expenses
for the year ended December 31, 2003, which amounts were reimbursed by certain
of the selling stockholders and recorded by us as a contribution to additional
paid-in capital.
36
Other Income
We did not have any other income for the year ended December 31, 2003.
Other income for the year 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.
Provision For Income Taxes
As a result of certain non-deductible secondary offering expenses
referred to above, state legislative changes and other federal and state credits
and incentives, our effective tax rate for the year ended December 31, 2003 was
38.6%, compared with 38.8% for the year ended December 31, 2002.
2002 compared with 2001
Revenues
For the year ended December 31, 2002, revenues increased to $825.8
million, or 15.5%, from $715.0 million for the year 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, which contributed
revenues of approximately $23.1 million in 2002 and approximately $7.9 million
in 2001. This increase was offset in part by the sale of the commercial business
of Interactive Media Corp., or "IMC," on July 20, 2001, which contributed $11.7
million in revenue through the sale date and the sale or closure of other
businesses in 2001, which contributed revenues of approximately $6.7 million.
For the year ended December 31, 2002, our revenues grew organically by
approximately 16.5% to $802.7 million from $688.7 million for the year ended
December 31, 2001. We define organic growth as the increase in revenues
excluding the revenues associated with acquisitions, divestitures and closures
of businesses in comparable periods. We believe organic growth is a useful
supplemental measure to revenue. Management uses organic growth as part of its
evaluation of core operating results and underlying trends. 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.
Costs of Revenues
For the year 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 year
ended December 31, 2001. For the year ended December 31, 2002, costs of revenues
as a percentage of revenues decreased to 86.1% from 87.7% for the year 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
year ended December 31, 2001 to 13.9% for the year 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 year 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 year ended December 31, 2001. General and administrative expenses for
the year ended December 31, 2002, as a percentage of revenues, decreased to 5.8%
from 7.2%. Certain items totaling $6.6 million that were incurred in the year
ended December 31, 2001, but were not incurred in the year 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 building held-for-sale), 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 year 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.
37
Amortization
For the year ended December 31, 2002, amortization expenses decreased
$7.5 million, or 79.7%, to $1.9 million from $9.4 million for the year ended
December 31, 2001. Amortization as a percentage of revenues was 1.3% for the
year 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 year
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 prospectus.
Operating Income
For the year ended December 31, 2002, operating income increased $37.5
million, or 139.7%, to $64.4 million from $26.9 million for the year ended
December 31, 2001. Operating income as a percentage of revenues increased to
7.8% for the year ended December 31, 2002 from 3.8% for the year ended December
31, 2001.
Interest Expense, Net
For the year ended December 31, 2002, interest expense, net of interest
income, decreased $4.7 million, or 17.9%, to $21.6 million from $26.4 million
for the year 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.
Interest expense in 2002 includes $1.9 million of previously unrecognized losses
related to the termination of approximately $30.0 million in interest rate
swaps. Also included in the 2002 amount is $4.2 million related to prepayment
penalties and write-off of deferred financing costs
Other Income
For the year ended December 31, 2002, other income decreased $3.6
million to $417,000 from $4.0 million for the year ended December 31, 2001.
Other income for the year 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 year ended
December 31, 2001 was primarily comprised 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 year 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 year ended December 31, 2002 was 38.8%,
compared with 101.8% for the year ended December 31, 2001, primarily due to a
reduction in non-deductible goodwill amortization expense as a result of the
implementation of SFAS No. 142 as of January 1, 2002.
Liquidity and Capital Resources
Cash Flow for the Years Ended December 31, 2003 and 2002
We generated $37.4 million in cash from operations for the year ended
December 31, 2003. By comparison, we used $1.7 million in cash from operations
for the year ended December 31, 2002. Compared to the year ended December 31,
2002, the collection of contract receivables in 2003 improved seven days from 78
to 71 days sales outstanding, or "DSO." The improvement in total DSO from
December 31, 2002 to December 31, 2003 was attributable to our improved billing
and collection processes and an improvement in government payment cycles.
Contract receivables increased $33.8 million to $222.9 million for the year
ended December 31, 2003 as compared to $189.1 million in 2002. Accounts
receivable at December 31, 2003 represented 46.5% of total assets at that date.
As a result of our acquisition of ISI, accounts receivable increased by
approximately $22.8 million. The remaining increase is attributable to the
overall growth of our business. For the year ended December 31, 2003, net cash
used in investing activities was $95.4 million, which was attributable primarily
to our acquisition of ISI. Cash provided by financing activities was $55.8
million for the year ended December 31, 2003, due to additional borrowings under
the revolving portion of our Credit Facility to finance the acquisition of ISI.
38
On December 19, 2003, we amended and restated our Credit Facility. This
amendment and restatement provided for, among other things, a new term loan of
$150.0 million, or "Term Loan B," with a maturity date of December 31, 2010, the
extension of the maturity date of the revolving loan portion of our Credit
Facility to December 31, 2008, a revolving loan commitment in the aggregate
principal amount of $200.0 million, the repayment of our existing term loan, or
the "Term Loan A," and the financing of our tender offer and consent
solicitation completed on December 23, 2003 in respect of our 12% Notes. In
addition, the Credit Facility permits us to raise up to $200.0 million of
additional debt in the form of additional term loans, subordinated debt or
revolving loans. All borrowings under our Credit Facility are subject to
financial covenants customary for such financings, including, but not limited
to: maximum ratio of net debt to EBITDA and maximum ratio of senior debt to
EBITDA, as defined in the Credit Facility. Additionally, as a result of changes
made in the amendment and restatement, revolving loans are now based upon an
asset test or maximum ratio of net eligible accounts receivable to revolving
loans.
The proceeds of the $150.0 million Term Loan B were used to repay the
balance of our Term Loan A, together with interest of approximately $18.5
million, finance the tender offer and consent solicitation for our 12% Notes, as
described below, in the amount of approximately $81.2 million, pay fees and
expenses incurred in connection with these transactions of approximately $1.5
million, and repay outstanding revolving loans together with interest of
approximately $38.2 million.
On December 23, 2003, we repurchased $73.1 million aggregate principal
amount, or approximately 97%, of our outstanding 12% Notes. As of the expiration
date of the tender offer and as of December 31, 2003, approximately $1.9 million
in aggregate principal amount of the 12% Notes remained outstanding. The
repurchase price for our 12% Notes was $1,110.95 per $1,000 principal amount of
the 12% Notes, which included accrued and unpaid interest of $12.67 per $1,000
in principal amount of the 12% Notes up to, but not including, December 23,
2003, the payment date, and a consent payment of $20.00 per $1,000 principal
amount of the 12% Notes tendered prior to December 5, 2003, the consent date.
The repurchase price for those 12% Notes tendered after the consent date was
$1,090.95 per $1,000 principal amount of 12% Notes, which excludes the consent
payment of $20.00 per $1,000 principal amount of the 12% Notes. The aggregate
repurchase price for all of the 12% Notes validly surrendered for repurchase and
not withdrawn was approximately $81.2 million, which includes a $7.2 million
bond premium and consent payment and approximately $900,000 of accrued interest.
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. The Credit Facility contains affirmative and negative covenants
customary for such financings. For the year ended December 31, 2003, we were not
in compliance with one of the financial covenants required by our Credit
Facility. We subsequently obtained a waiver for compliance with this covenant
for the year ended December 31, 2003. We were in compliance with all other
financial covenants required by our Credit Facility. At December 31, 2003, total
debt outstanding under our Credit Facility was approximately $154.4 million,
consisting of $150.0 million of Term Loan B, and $4.4 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,
2003 were $112.7 million. As of December 31, 2003, our Credit Facility would
have permitted additional borrowings of up to $203.7 million. Beginning with our
fiscal year 2004, we are required to prepay, in amounts specified in our Credit
Facility, borrowings under the Term Loan B under certain conditions related to
excess annual cash flow and the receipt of proceeds from certain asset sales and
debt or equity issuances. In addition, beginning on March 31, 2004, we are
scheduled to pay quarterly principal installments of approximately $375,000
against the Term Loan B until it matures on December 31, 2010 at which time the
remaining balance will be due. As of December 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 of our business. Our principal sources of
cash to fund our working capital needs are cash generated from operations and
borrowings under our Credit Facility.
39
We have relatively low capital investment requirements. Capital
expenditures were $3.0 million and $3.2 million for the years ended December 31,
2003 and 2002, respectively, primarily for leasehold improvements and office
equipment.
Our business acquisition expenditures relating to ISI were $92.4
million in 2003. The acquisition was financed through borrowings under our
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.
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.
Off-Balance Sheet Arrangements and Aggregate Contractual Obligation
We use off-balance sheet financing, primarily to finance certain
capital items. Operating leases are used primarily to finance computers,
servers, phone systems, and to a lesser extent, other fixed assets, such as
furnishings. As of December 31, 2003, we financed equipment with an original
cost of approximately $13.4 million through operating leases. Had we not used
operating leases, we would have used our existing Credit Facility to purchase
these assets. Other than the operating leases described above, and facilities
leases, we do not have any other off-balance sheet financing. The following
table provides information (in thousands) as of December 31, 2003 regarding our
off-balance sheet arrangements and contractual obligations.
Payments due by period
---------------------------------------------------------------------------
Less than More than
Contractual Obligations Total 1 year 1-3 year 3-5 years 5 years
- ------------------------------ -------- --------- ------------ ----------- ------------
Long-term debt $ 158,776 $ 4,000 $ 3,000 $ 7,400 $ 144,376
Capital lease obligations 977 421 343 213 --
Operating leases 151,573 29,991 44,585 31,693 45,304
Purchase obligations -- -- -- -- --
Other long-term liabilities -- -- -- -- --
----------- ----------- ------------ ---------- -----------
Total $ 311,326 $ 34,412 $ 47,928 $ 39,306 $ 189,680
=========== =========== ============ ========== ===========
40
Inflation
We do not believe that inflation has had a material effect on our
business in 2003, 2002, or 2001.
Recent Accounting Pronouncements
In December 2002, the Emerging Issue Task Force, or "EITF", issued a
consensus on Issue 00-21, or "EITF 00-21," Accounting for Revenue Arrangements
with Multiple Deliverables. EITF 00-21 addresses how to determine whether an
arrangement involving multiple deliverables contains more than one unit of
accounting. It also addresses how arrangement consideration should be measured
and allocated to the separate units of accounting in an arrangement. EITF 00-21
does not apply to deliverables in arrangements to the extent the accounting for
such deliverables is within the scope of other existing higher-level
authoritative accounting literature. The effective date of EITF 00-21 for the
Company was July 1, 2003. The adoption of EITF 00-21 did not have a significant
impact on our consolidated financial statements.
In April 2003, the FASB issued SFAS No. 149, Amendment to Statement 133
on Derivative Instruments and Hedging Activities. SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. SFAS No. 149 is effective for contracts entered into or modified after
June 30, 2003, and hedging relationships designated after June 30, 2003. The
adoption of SFAS No. 149 did not have a significant impact on our consolidated
financial statements.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity. SFAS
No. 150 establishes standards for how certain free standing financial
instruments with characteristics of both liabilities and equity are classified
and measured. Financial instruments within the scope of SFAS No. 150 are
required to be recorded as liabilities (or assets in certain circumstances)
which may require reclassification of amounts previously reported in equity.
SFAS No. 150 is effective for financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003. The cumulative effect of a change
in accounting principle should be reported for financial instruments created
before the issuance of this Statement and still existing at the beginning of the
period of adoption. The adoption of SFAS No. 150 did not have a significant
impact on our consolidated financial statements.
In December 2003, the FASB issued Interpretation No. 46(R), or
"Interpretation No. 46(R)," Consolidation of Variable Interest Entities, an
interpretation of ARB No. 51. Interpretation No. 46(R) provides guidance for
identifying a controlling interest in a Variable Interest Entity, or "VIE,"
established by means other than voting interests. Interpretation No. 46(R) also
requires consolidation of a VIE by an enterprise that holds such a controlling
interest. The effective date for interests qualifying as VIEs is December 31,
2003. We do not have any interests qualifying as VIEs, including residual value
guarantees or fixed purchase options under leases as of December 31, 2003. As a
result, Interpretation No. 46(R) does not have a significant impact 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. The remaining $1.9 million of our 12% Notes have a fixed interest
rate of 12%. The interest rates on both the Term Loan B and the revolving loan
portion of our Credit Facility are affected by changes in market interest rates.
We manage these fluctuations in part through interest rate swaps that are
currently in place. In addition, we have a cash flow management plan focusing on
billing and collecting receivables to pay down debt.
A 1% change in interest rates on variable rate debt would have resulted
in our interest expense fluctuating by $514,000 and $249,000 for the year ended
December 31, 2003 and 2002, respectively.
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, 2003, the fair value of our remaining interest rate swap agreements with a
notional amount of $10.0 million resulted in a net liability of $230,000 and has
been included in other current liabilities.
41
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.
Item 9A. Controls and Procedures
Our management, with the participation of our chief executive officer
and chief financial officer (our principal executive officer and principal
financial officer, respectively), evaluated the effectiveness of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act) as of December 31, 2003. Based on this evaluation, our chief
executive officer and chief financial officer concluded that, as of December 31,
2003, our disclosure controls and procedures were (1) designed to ensure that
material information relating to us, including our consolidated subsidiaries, is
made known to our chief executive officer and chief financial officer by others
within those entities, particularly during the period in which this report was
being prepared and (2) effective, in that they provide reasonable assurance that
information required to be disclosed by us in the reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the U.S. Securities and Exchange Commission's
rules and forms.
No change in our internal control over financial reporting (as defined
in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the
year ended December 31, 2003 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
42
PART III
Management
Item 10. Directors and Executive Officers of the Registrant
The information required by this item is incorporated by reference from
our definitive proxy statement to be filed not later than 120 days after the end
of the fiscal year covered by this Annual Report on Form 10-K pursuant to
Regulation 14A.
Item 11. Executive Compensation
The information required by this item is incorporated by reference from
our definitive proxy statement to be filed not later than 120 days after the end
of the fiscal year covered by this Annual Report on Form 10-K pursuant to
Regulation 14A.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated by reference from
our definitive proxy statement to be filed not later than 120 days after the end
of the fiscal year covered by this Annual Report on Form 10-K pursuant to
Regulation 14A.
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated by reference from
our definitive proxy statement to be filed not later than 120 days after the end
of the fiscal year covered by this Annual Report on Form 10-K pursuant to
Regulation 14A.
Item 14. Principal Accountants Fees and Services
The information required by this item is incorporated by reference from
our definitive proxy statement to be filed not later than 120 days after the end
of the fiscal year covered by this Annual Report on Form 10-K pursuant to
Regulation 14A.
43
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Page Number
in 2003
Annual Report
(a) 1. Financial Statements
Independent Auditors' Report F-1
Consolidated Balance Sheets as of December 31, 2003 and 2002 F-2
Consolidated Statements of Operations for Each of the Years in the
Three-Year Period Ended December 31, 2003 F-3
Consolidated Statements of Stockholders' Equity and
Comprehensive Income for Each of the Years in the Three-Year
Period Ended December 31, 2003 F-4
Consolidated Statements of Cash Flows for Each of the Years in
the Three-Year Period Ended December 31, 2003 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 46
(b)
Reports on Form 8-K On October 29, 2003, the Company furnished
in a Current Report on Form 8-K under Item 12 thereof a press
release and financial supplement relating to the Company's
financial results for the quarter ended September 30, 2003.
On November 20, 2003, the Company furnished in a Current Report
on Form 8-K under Item 9 thereof a press release relating to the
Company's commencement of a tender offer and consent
solicitation with respect to its outstanding 12% Senior
Subordinated Notes due 2009.
On December 23, 2003, the Company filed a Current Report on Form
8-K under Item 5 thereof a press release announcing the
completion of its tender offer and consent solicitation with
respect to its outstanding 12% Senior Subordinated Notes due
2009 and the closing of certain amendments to its existing
credit agreement.
44
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 4, 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 March 4, 2003
------------------------------------ -----------------
Joseph M. Kampf President and Chief Executive Officer
and Director (Principal Executive Officer)
/s/: Charles S. Ream March 4, 2003
------------------------------------ -----------------
Charles S. Ream Executive Vice President and Chief
Financial Officer (Principal Financial and
Accounting Officer)
/s/: Frederick J. Iseman
------------------------------------
Frederick J. Iseman Chairman of the Board and Director March 4, 2003
-----------------
/s/: Gilbert F. Decker
------------------------------------
Gilbert F. Decker Director March 4, 2003
-----------------
/s/: Robert A. Ferris
------------------------------------
Robert A. Ferris Director March 4, 2003
-----------------
/s/: Paul G. Kaminski
------------------------------------
Paul G. Kaminski Director March 4, 2003
-----------------
/s/: Steven M. Lefkowitz
------------------------------------
Steven M. Lefkowitz Director March 4, 2003
-----------------
/s/: Thomas J. Tisch
------------------------------------
Thomas J. Tisch Director March 4, 2003
-----------------
/s/: General Henry Hugh Shelton
------------------------------------
General Henry Hugh Shelton Director March 4, 2003
-----------------
/s/: William J. Perry
------------------------------------
William J. Perry Director March 4, 2003
-----------------
45
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).
4.7 Sixth Supplemental Indenture, dated as of March 15, 2002,
among Anteon International Corporation (formerly Azimuth
Technologies, Inc.), a Delaware corporation, Anteon
International Corporation (formerly Anteon Corporation), a
Virginia corporation, and The Bank of New York, as trustee
(incorporated by reference to Exhibit 4.2 of Anteon
International Corporation's Quarterly Report on Form 10-Q
filed on May 14, 2002).
46
4.8 Seventh Supplemental Indenture, dated as of May 23, 2003,
among Anteon International Corporation (formerly Azimuth
Technologies, Inc.) and The Bank of New York, as trustee.
4.9 Eighth Supplemental Indenture, dated as of December 5, 2003,
among Anteon International Corporation, Anteon Corporation,
Information Spectrum, Inc. and The Bank of New York, as
trustee.
4.10 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)).
4.11 Amendment No. 1, dated as of September 3, 2003, to the
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 4.5 to
Anteon International Corporation's Form S-3 Registration
Statement filed on December 17, 2003 (Commission File No.
333-111249)).
4.12 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)).
47
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
(incorporated by reference to Exhibit 10.11 to Anteon
International Corporation's Annual Report on Form 10-K for the
fiscal year ended December 31, 2002 filed on March 11, 2003).
10.12 Amendment Agreement, dated as of December 19, 2003 to the
Amended and Restated Credit Agreement, dated as of October 21,
2002, among Anteon International Corporation, Anteon
Corporation, Credit Suisse First Boston and Citizens Bank of
Pennsylvania.
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 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).
10.17 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)).
10.18 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).
10.19 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).
10.20 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).
10.21 Stock Purchase Agreement, dated as of April 22, 2003, by and
among Anteon International Corporation, Information Spectrum,
Inc., the Shareholders of Information Spectrum, Inc. and Mark
Green as Shareholder's Representative (incorporated by
reference to Exhibit 2.1 to Anteon International Corporation's
Current Report on Form 8-K filed on May 29, 2003).
10.22 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.
31.1 Certification of the Chief Executive Officer pursuant to Rule
13a-14 of the Exchange Act, as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 (filed herewith).
31.2 Certification of the Chief Financial Officer pursuant to Rule
13a-14 of the Exchange Act, as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 (filed herewith).
32.1 Certification of the Chief Executive Officer pursuant to Rule
13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (furnished herewith).
32.2 Certification of the Chief Financial Officer pursuant to Rule
13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (furnished herewith).
48
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, 2003 and 2002, and the related consolidated statements of
operations, stockholders' equity (deficit) and comprehensive income (loss), and
cash flows for each of the years in the three-year period ended December 31,
2003. 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, 2003 and 2002 and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2003, in conformity with accounting principles
generally accepted in the United States of America.
Our audits were performed for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The supplementary
information included in Schedule II is presented for purposes of additional
analysis and is not a required part of the basic consolidated financial
statements. Such information has been subjected to the auditing procedures
applied in the audits of the basic consolidated financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
consolidated financial statements taken as a whole.
As discussed in note 2(f) to the consolidated financial statements, effective
January 1, 2002, the Company adopted the provisions of Statements of Financial
Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets.
As discussed in note 2(r) to the consolidated financial statements, effective
January 1, 2003, the Company adopted SFAS No. 145, Rescission of FASB Statements
No. 4, 44, and 64, Amendment to FASB Statement 13 and Technical Corrections.
McLean, Virginia KPMG LLP
February 17, 2004
F-1
ANTEON INTERNATIONAL CORPORATION AND SUBSIDIARIES
(a Delaware Corporation)
Consolidated Balance Sheets
December 31, 2003 and 2002
(in thousands, except share and per share data)
Assets 2003 2002
------------------ -----------------
Current assets:
Cash and cash equivalents $ 2,088 $ 4,266
Accounts receivable, net 222,937 189,059
Prepaid expenses and other current assets 17,925 15,071
Deferred tax assets, net 1,641 --
------------------ -----------------
Total current assets 244,591 208,396
Property and equipment, at cost, net of accumulated depreciation and amortization
of $22,489 and $18,971, respectively 12,759 9,992
Goodwill, net of accumulated amortization of $17,376 and $17,376, respectively 212,205 138,619
Intangible and other assets, net of accumulated amortization of $11,729 and
$9,279, respectively 9,725 7,685
------------------ -----------------
Total assets $ 479,280 $ 364,692
================== =================
Liabilities and Stockholders' Equity
Current liabilities:
Term Loan A, current portion $ -- $ 3,798
Term Loan B, current portion 1,500 --
Subordinated notes payable, current portion 2,500 2,500
Obligations under capital leases, current portion 341 --
Accounts payable 36,793 47,630
Due to related party 48 --
Accrued expenses 85,468 57,603
Income tax payable 641 7,738
Other current liabilities 230 806
Deferred tax liability -- 2,230
Deferred revenue 11,783 5,701
------------------ -----------------
Total current liabilities 139,304 128,006
Term Loan A, less current portion -- 17,403
Term Loan B, less current portion 148,500 --
Revolving credit facility 4,400 7,000
Senior subordinated notes payable 1,876 75,000
Obligations under capital leases, less current portion 465 --
Noncurrent deferred tax liabilities, net 10,017 7,808
Other long term liabilities 16 490
------------------ -----------------
Total liabilities 304,578 235,707
------------------ -----------------
Minority interest in subsidiaries 210 156
Stockholders' equity:
Preferred stock, $0.01 par value, 15,000,000 shares authorized, zero issued and
outstanding as of December 31, 2003 and 2002 -- --
Common stock, $0.01 par value, 175,000,000 shares authorized and 35,354,996 and
34,419,049 shares issued and outstanding as of December 31, 2003 and 2002,
respectively 354 344
Common stock, Class B, voting, $0.01 par value, 3,000 shares authorized, zero
issued and outstanding as of December 31, 2003 and 2002 -- --
Common stock, Class A, voting, $0.01 par value, 30,000,000 shares authorized, zero
issued and outstanding as of December 31, 2003 and 2002 -- --
Common stock, non voting, $0.01 par value, 7,500,000 shares authorized, zero
issued and outstanding as of December 31, 2003 and 2002 -- --
Stock subscription receivable -- (12)
Additional paid-in capital 115,863 106,849
Accumulated other comprehensive loss (72) (509)
Retained earnings 58,347 22,157
------------------ -----------------
Total stockholders' equity 174,492 128,829
------------------ -----------------
Commitments and contingencies
Total liabilities and stockholders' equity $ 479,280 $ 364,692
================== =================
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, 2003, 2002 and 2001
(in thousands, except share and per share data)
2003 2002 2001
----------------- -------------- --------------
(reclassified-see note 2(r))
Revenues $ 1,042,474 $ 825,826 $ 715,023
Costs of revenues 897,264 711,328 627,342
----------------- -------------- --------------
Gross profit 145,210 114,498 87,681
----------------- -------------- --------------
Operating Expenses:
General and administrative expenses 58,647 48,197 51,442
Amortization of noncompete agreements 101 -- 349
Goodwill amortization -- -- 6,704
Other intangibles amortization 2,349 1,907 2,321
----------------- -------------- --------------
Total operating expenses 61,097 50,104 60,816
----------------- -------------- --------------
Operating income 84,113 64,394 26,865
Other income -- 417 --
Gains on sales and closures of businesses -- -- 4,046
Secondary offering expenses 852 -- --
Interest expense, net of interest income of $239,
$289, and $344, respectively 24,244 21,626 26,353
Minority interest in (earnings) losses of
subsidiaries (54) (18) (38)
----------------- -------------- --------------
Income before provision for income taxes 58,963 43,167 4,520
Provision for income taxes 22,773 16,723 4,602
----------------- -------------- --------------
Net income (loss) $ 36,190 $ 26,444 $ (82)
================= ============== ==============
Basic earnings (loss) per common share $ 1.04 $ 0.82 $ (0.01)
================= ============== ==============
Basic weighted average shares outstanding 34,851,281 32,163,150 23,786,565
Diluted earnings (loss) per common share $ 0.98 $ 0.78 $ (0.01)
================= ============== ==============
Diluted weighted average shares outstanding 36,925,488 34,021,597 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) and Comprehensive Income (Loss)
Years ended December 31, 2003, 2002 and 2001
(in thousands, except share data)
Accumulated Retained Total
Stock Additional other earnings stockholders'
All series subscription paid-in comprehensive (accumulated equity
common stock receivable capital income (loss) deficit) (deficit)
Shares Amount
---------- ---------- ----------- ---------- ------------ ------------- ----------
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 $717) -- -- -- -- (1,075) -- (1,075)
Freign 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 $838) -- -- -- -- 1,239 -- 1,239
Foreign currency translation -- -- -- -- (1) -- (1)
Net income -- -- -- -- -- 26,444 26,444
---------- ------- ----------- ---------- ------------ ------------ -----------
Comprehensive income -- -- -- -- 1,238 26,444 27,682
---------- ------- ----------- ---------- ------------ ------------ -----------
Balance, December 31, 2002 34,419,049 344 (12) 106,849 (509) 22,157 128,829
Exercise of stock options 935,947 10 -- 4,878 -- -- 4,888
Tax benefit from exercise of stock options -- -- -- 3,281 -- -- 3,281
Stock based compensation expense -- -- -- 3 -- -- 3
Proceeds from certain stockholder related
to secondary offering -- -- -- 852 -- -- 852
Write-off uncollectible stock subscription -- -- 12 -- -- -- 12
Comprehensive income :
Interest rate swaps (net of tax of $209) -- -- -- -- 324 -- 324
Foreign currency translation -- -- -- -- 113 -- 113
Net income -- -- -- -- -- 36,190 36,190
---------- ------- ----------- ---------- ------------ ------------ -----------
Comprehensive income: -- -- -- -- 437 36,190 36,627
---------- ------- ----------- ---------- ------------ ------------ -----------
Balance, December 31, 2003 35,354,996 $ 354 $ -- $115,863 $ (72) $ 58,347 $ 174,492
---------- ------- ----------- ---------- ------------ ------------ -----------
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, 2003, 2002 and 2001
(in thousands)
2003 2002 2001
--------------- ---------------- ---------------
Cash flows from operating activities:
Net income (loss) $ 36,190 $ 26,444 $ (82)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Gains on sales and closures of businesses -- -- (4,046)
Interest rate swap termination -- (1,903) --
Depreciation and amortization of property and equipment 4,440 4,294 7,110
Goodwill amortization -- -- 6,704
Amortization of noncompete agreements 101 -- 349
Other intangibles amortization 2,349 1,907 2,321
Amortization of deferred financing costs 4,014 2,442 697
Loss on disposals of property and equipment 190 25 791
Deferred income taxes (1,742) 4,090 3,512
Minority interest in earnings (losses) of subsidiaries 54 18 38
Changes in assets and liabilities, net of acquired assets
and liabilities:
(Increase) decrease in accounts receivable (12,477) (57,715) 1,268
Decrease in prepaid expenses and other current assets (1,245) (8,059) 727
(Increase) decrease in other assets 142 105 178
Increase in accounts payable and accrued expenses 5,592 22,601 15,744
Increase (decrease) in income tax payable (2,998) 7,229 (22)
(Decrease) increase in deferred revenue 3,306 (3,042) 2,254
(Decrease) increase in other liabilities (473) (158) 336
--------------- ---------------- ---------------
Net cash provided (used in) by operating activities 37,443 (1,722) 37,879
--------------- ---------------- ---------------
Cash flows from investing activities:
Purchases of property and equipment and other assets (3,049) (3,225) (2,181)
Acquisition of Sherikon, Inc., net of cash acquired -- -- (21)
Acquisition of SIGCOM, net of cash acquired -- -- (10,975)
Acquisition of Information Spectrum, Inc., net of cash acquired (92,382) -- --
Proceeds from sales of businesses, net -- -- 11,464
Proceeds from sale of building -- 1,802 --
Other, net -- -- 6
--------------- ---------------- ---------------
Net cash used in investing activities (95,431) (1,423) (1,707)
--------------- ---------------- ---------------
Cash flows from financing activities:
Principal payments on bank and other notes payable (43) (47) (185)
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 (2,728) (1,292) --
Principal payments on Term Loan A (21,202) (25,853) (12,946)
Proceeds from Term Loan B 150,000 -- --
Proceeds from certain stockholders related to secondary offering 852 -- --
Proceeds from revolving credit facility 1,009,500 862,600 771,200
Principal payments on revolving credit facility (1,012,100) (874,300) (784,500)
Redemption of senior subordinated notes payable (73,124) (25,000) --
Proceeds from issuance of common stock, net of expenses 4,902 81,808 --
Principal payments under capital lease obligations (247) -- --
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
--------------- ---------------- ---------------
Net cash provided by (used in) financing activities 55,810 5,481 (35,676)
--------------- ---------------- ---------------
Net increase (decrease) in cash and cash equivalents (2,178) 2,336 496
Cash and cash equivalents, beginning of year 4,266 1,930 1,434
--------------- ---------------- ---------------
Cash and cash equivalents, end of year $ 2,088 $ 4,266 $ 1,930
=============== ================ ===============
(continued)
F-5
ANTEON INTERNATIONAL CORPORATION AND SUBSIDIARIES
(a Delaware Corporation)
Consolidated Statements of Cash Flows, continued
Years Ended December 31, 2003, 2002 and 2001
2003 2002 2001
------------- ---------------- ---------------
Supplemental disclosure of cash flow information (in thousands): Interest paid:
Tender offer of senior subordinated notes payable $ 7,177 $ -- $ --
Other 14,199 18,971 23,396
----------- ------------ -------------
Total interest paid $ 21,376 $ 18,971 $ 23,396
=========== ============ =============
Income taxes paid (refunds received), net $ 27,410 $ 2,634 $ (52)
=========== ============ =============
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 4(a)).
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 years ended December 31, 2003 and 2002,
the change in the fair value of the interest rate swaps generated a
deferred tax liability of $209,000 and $838,000, respectively.
During 2003, the Company recorded approximately $1.0 million of
equipment utilizing capitalized leases.
See accompanying notes to consolidated financial statements.
F-6
ANTEON INTERNATIONAL CORPORATION AND SUBSIDIARIES
(a Delaware Corporation)
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
(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.
The Company provides professional information technology solutions and
advanced systems engineering services to government clients. The
Company designs, integrates, maintains and upgrades information systems
for national defense, intelligence, emergency response and other
government missions. The Company also provides many of its clients with
the systems analysis, integration and program management skills
necessary to manage their mission systems development and operations.
The Company is subject to all of the risks associated with conducting
business with the U.S. federal government, including the risk of
contract termination for the convenience of the government. In
addition, government funding continues to be dependent on congressional
approval of program level funding and on contracting agency approval
for the Company's work. The extent to which the Company's existing
contracts will be funded in the future cannot be determined.
(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.
Property and equipment under capital leases are stated at the present
value of minimum lease payments. 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
Property and equipment under
capital leases shorter of estimated
useful life or lease term
(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.
F-7
(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
undiscounted 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 2003 and 2001, the Company recognized an impairment charge of
approximately $135,000 and $750,000, respectively, included in general
and administrative expenses in the accompanying consolidated statement
of operations, to write-down the carrying value of a building
held-for-sale 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.
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.
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.
In connection with SFAS No. 142's 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 impairment test. 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. 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, 2003 and 2002, the Company performed its annual
goodwill impairment analysis required under SFAS No. 142. The Company
applied the same methodology described above in 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-8
Had the amortization provisions of SFAS No. 142 been applied as of
January 1, 2001, for all of the Company's acquisitions, the Company's
loss, net income and earnings per common share would have been as
follows (unaudited) (in thousands, except per share data):
Year ended
December 31,
2001
-----------------
Loss $ (82)
Add back: Goodwill amortization 5,663
Add back: Workforce amortization 545
-----------------
Adjusted net income $ 6,126
=================
Basic earnings per share:
Loss $ (0.01)
Goodwill amortization 0.24
Workforce amortization 0.02
-----------------
Adjusted net income $ 0.25
=================
Diluted earnings per share:
Loss $ (0.01)
Goodwill amortization 0.24
Workforce amortization 0.02
-----------------
Adjusted net income $ 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 (prior to the adoption of SFAS No.
142) and acquired contracts are amortized straight-line based upon
expected employment and contract periods, respectively.
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. As of December 31, 2003, the Company has approximately
$13.3 million of intangible assets ($5.2 million net of accumulated
amortization) related to contracts and related customer relationships
intangible assets, which are being amortized straight-line over periods
of up to 5.3 years
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.
There were no capitalized software costs after 2001 due to the
curtailment of operations of CITI-SIUSS.
F-9
(h) Revenue Recognition
For each of the years ended December 31, 2003, 2002 and 2001, in excess
of 95% of the Company's 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 ended December 31, 2003, approximately 38% of the Company's
contracts were time and material, 32% cost-plus and 30% 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, the expected fee to be awarded by the
customer is recognized at the time such fee can be reasonably
estimated, based on factors such as our prior award experience and
communications with the customer regarding the Company's 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). In addition, the Company evaluates its
contracts for multiple deliverables which may require the segmentation
of each deliverable into separate accounting units for proper revenue
recognition.
The Company recognizes revenues under its 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 the Company
may proceed with work based on customer direction pending finalization
and signing of formal funding documents. The Company has an internal
process for approving any such work. 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 the Company's 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 its 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.
Contract revenue recognition inherently involves estimation. Examples
of such estimates include the level of effort needed to accomplish the
tasks under the contract, the cost of those efforts, and a continual
assessment of our progress toward the completion of the contract. From
time to time, circumstances may arise which require us to revise the
Company's estimated total revenue or costs. Typically, these revisions
relate to contractual changes involving its services. To the extent
that a revised estimate affects contract revenue or profit previously
recognized, the Company records the cumulative effect of the revision
in the period in which it becomes known. In addition, the full amount
of an anticipated loss on any type of contract is recognized in the
period in which it becomes known.
F-10
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 including maintenance
and consulting services are recognized at their fair values when all
other recognition criteria are met. Service revenues consists of
maintenance and technical support and is recognized ratably over the
service period. Other service revenues 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. There
were no CITI-SIUSS software revenues in 2003.
Amounts collected in advance of being earned are recognized as deferred
revenues.
(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 probable 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, 2003,
2002 and 2001.
(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, and Related Interpretations. 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. Through 2001, the
Company recognized an insignificant amount of compensation expense
associated with the stock appreciation rights equal to the excess 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-11
The Company accounts for stock options granted to non-employees using
the fair value method of accounting as prescribed by SFAS No. 123.
Compensation expense related to stock options granted to non-employees
is not significant.
The following table illustrates the effect on net income (loss) and
earnings (loss) per share if the Company had applied the fair value
recognition provisions of SFAS No. 123, to stock-based employee
compensation:
2003 2002 2001
------------ ------------ ------------
(in thousands, except per share data)
Net income (loss), as reported $ 36,190 $ 26,444 $ (82)
Add: Stock based compensation recorded 3 -- --
Deduct: Total stock-based compensation expense
determined under fair value method, net of tax (3,749) (3,477) (1,206)
----------- ---------- -----------
Pro forma net income (loss) $ 32,444 $ 22,967 $ (1,288)
Earnings (loss) per share:
Basic-as reported $ 1.04 $ 0.82 $ (0.01)
=========== ========= ===========
Basic-pro forma $ 0.93 $ 0.71 $ (0.05)
=========== ========== ===========
Diluted-as reported $ 0.98 $ 0.78 $ (0.01)
=========== ========== ===========
Diluted-pro forma $ 0.88 $ 0.68 $ (0.05)
=========== ========== ===========
(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,
2003 and 2002, 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,
2003 and 2002, as they bear interest rates that approximate the market.
The fair value of the senior subordinated notes payable on principal
amounts of $1.9 million and $75.0 million, based on quoted market
value, was approximately $2.1 million and $81.0 million as of December
31, 2003 and 2002, respectively.
(n) Derivative Instruments and Hedging Activities
The Company accounts for derivatives and hedging activities in
accordance with Statement of Financial Accounting Standards No. 133
("SFAS No. 133"), Accounting for Derivative Instruments and Hedging
Activities, as amended, which requires that derivative instruments be
recognized at fair value in the balance sheet. The Company has entered
into certain interest rate swap agreements, which are accounted for
under SFAS No. 133. 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.
F-12
(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.
(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 carrying amounts of reported assets and liabilities,
including property, plant, and equipment, intangible assets and
goodwill, valuations for income taxes and accounts receivable, and the
valuation of derivative instruments 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.
(r) Reclassification Pursuant to SFAS 145
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 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 were 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 $4.2 million ($2.6
million net of tax) of losses and $519,000 ($330,000 net of tax) of
gains previously recorded as extraordinary items for the year ended
December 31, 2002 and 2001, respectively, to interest expense.
Additionally, the tax impact as a result of these reclassifications has
been adjusted in the tax provision amounts shown.
(s) Recently Issued Accounting Pronouncements
In December 2002, the Emerging Issue Task Force, or ("EITF"), issued a
consensus on Issue 00-21, Accounting for Revenue Arrangements with
Multiple Deliverables. EITF 00-21 addresses how to determine whether an
arrangement involving multiple deliverables contains more than one unit
of accounting. It also addresses how arrangement consideration should
be measured and allocated to the separate units of accounting in an
arrangement. EITF 00-21 does not apply to deliverables in arrangements
to the extent the accounting for such deliverables is within the scope
of other existing higher-level authoritative accounting literature. The
effective date of EITF 00-21 for the Company is July 1, 2003. The
adoption of EITF 00-21 did not have a significant impact on the
Company's consolidated financial statements.
F-13
In April 2003, the FASB issued SFAS No. 149, Amendment to Statement 133
on Derivative Instruments and Hedging Activities. SFAS No. 149 amends
and clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities under SFAS No. 133. SFAS No. 149 is effective for contracts
entered into or modified after June 30, 2003, and hedging relationships
designated after June 30, 2003. The adoption of SFAS No. 149 did not
have a material impact on the financial condition or the operating
results of the Company.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity. SFAS No. 150 establishes standards for how certain free
standing financial instruments with characteristics of both liabilities
and equity are classified and measured. Financial instruments within
the scope of SFAS No. 150 are required to be recorded as liabilities
(or assets in certain circumstances) which may require reclassification
of amounts previously reported in equity. SFAS No. 150 is effective for
financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The cumulative effect of a change in
accounting principle should be reported for financial instruments
created before the issuance of this Statement and still existing at the
beginning of the period of adoption. The adoption of SFAS No. 150 did
not have an impact on the financial condition or the operating results
of the Company.
In December 2003, the FASB issued Interpretation No. 46(R),
("Interpretation No. 46(R)"), Consolidation of Variable Interest
Entities, an interpretation of ARB No. 51. Interpretation No. 46(R)
provides guidance for identifying a controlling interest in a Variable
Interest Entity, or "VIE," established by means other than voting
interests. Interpretation No. 46(R) also requires consolidation of a
VIE by an enterprise that holds such a controlling interest. The
effective date for interests qualifying as VIEs is December 31, 2003.
The Company does not have any interests qualifying as VIEs, including
residual value guarantees or fixed purchase options under leases as of
December 31, 2003. As a result, Interpretation No. 46(R) does not have
an impact on its consolidated financial statements.
(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 for the year
ended December 31, 2001. 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.
F-14
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 for
the year ended December 31, 2001. Operating losses were
approximately $2.6 million for the year December 31, 2001. 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.
(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 for the year ended December 31,
2001. Operating loss was approximately $(41,000) for the year
ended December 31, 2001. 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 in 2001 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 operating
loss was $(2.1) million for the year ended December 31, 2001.
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 $169,000 have been accrued as of
December 31, 2003.
F-15
(4) Acquisitions
(a) 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 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 to an
intangible asset related to contract backlog, which was
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. 142, is not being amortized (see note
2(f)).
(b) Information Spectrum, Inc.
On May 23, 2003, the Company purchased all of the outstanding
stock of Information Spectrum, Inc. ("ISI"), a provider of
credential card technologies, military logistics and training
systems, based in Annandale, Virginia, for a total purchase
price of approximately $91.6 million, excluding transactions
costs of approximately $737,000. The transaction was accounted
for in accordance with SFAS No. 141, Business Combinations,
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 estimates made by management. The identifiable intangible
assets consisted of $4.8 million of contracts and related
customer relationships and $500,000 for the value of a
non-compete agreement. The value of the contracts and related
customer relationships is based, in part, on an independent
appraisal and other studies performed by the Company. The
contracts and related customer relationships are being
amortized straight-line over its expected useful life of
approximately 5.3 years. The non-compete agreement value was
based on the consideration paid for the agreement and is being
amortized straight-line over the three year term of the
agreement. In accordance with SFAS No. 142, Goodwill and Other
Intangible Assets, goodwill arising from the transaction is
not being amortized.
F-16
The total purchase price paid, including transaction costs, of
$92.4 million was allocated to the assets acquired and
liabilities assumed as follows (in thousands):
Accounts receivable $ 22,792
Prepaid and other current assets 764
Property and equipment 3,312
Other assets 120
Current income tax receivable 655
Accounts payable and accrued expenses (11,186)
Deferred income tax, net (458)
Deferred revenue (2,645)
Other liabilities (558)
Contracts and customer relationships 4,751
Goodwill 74,335
Non-compete agreement 500
-----------
Total consideration $ 92,382
===========
Unaudited Pro Forma Data
The following unaudited pro forma summary presents
consolidated information as if the acquisition of ISI and
SIGCOM had occurred as of January 1, 2001. The pro forma
summary is provided for informational purposes only and is
based on historical information that does not necessarily
reflect actual results that would have occurred nor is it
necessarily indicative of future results of operations of the
combined entities (in thousands, except per share data):
2003 2002 2001
---------------- ------------- ----------------
Total revenues $ 1,096,152 $ 955,590 $ 826,298
Total expenses 1,059,467 927,976 823,395
---------------- ------------- ----------------
Net income $ 36,685 $ 27,614 $ 2,903
================ ============= ================
Basic earnings per common share $ 1.05 $ 0.86 $ 0.12
================ ============= ================
Diluted earning per common share $ 0.99 $ 0.81 $ 0.12
================ ============= ================
(5) Accounts Receivable
The components of accounts receivable as of December 31, 2003 and 2002,
are as follows (in thousands):
2003 2002
------------- -------------
Billed and billable $ 198,144 $ 179,216
Unbilled 22,210 8,929
Retainages due upon contract completion 6,705 5,162
Allowance for doubtful accounts (4,122) (4,248)
------------ ------------
Total $ 222,937 $ 189,059
============ ============
In excess of 95% of the Company's revenues for each of 2003, 2002 and
2001 have been earned, and accounts receivable as of December 31, 2003
and 2002 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.
F-17
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 2001. 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.
(6) Property and Equipment
Property and equipment consists of the following as of December 31,
2003 and 2002 (in thousands):
2003 2002
------------ ------------
Land $ 393 $ 393
Buildings 1,581 1,717
Computer hardware and software 19,686 13,348
Furniture and equipment 6,732 8,697
Leasehold improvements 6,856 4,808
------------ -----------
35,248 28,963
Less - accumulated depreciation and amortization 22,489) (18,971)
------------ -----------
Total $ 12,759 $ 9,992
============ ===========
(7) Accrued Expenses
The components of accrued expenses as of December 31, 2003 and 2002 are
as follows (in thousands):
2003 2002
------------ ------------
Accrued payroll and related benefits $ 52,602 $ 38,819
Accrued subcontractor costs 25,987 13,396
Accrued interest 153 1,138
Other accrued expenses 6,726 4,250
------------ ------------
Total $ 85,468 $ 57,603
============ ============
(8) 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 in the Credit Facility, 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 was 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.
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 $304,000 has been reflected as interest
expense in the accompanying Consolidated Statement of
Operations for the year ended December 31, 2002. Effective
October 21, 2002, this Credit Facility was replaced by an
Amended and Restated Credit Agreement, as discussed below.
F-18
Under the Credit Facility, the interest rate on both the
Revolving Facility and the Term Loan was 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 on the
Company's ratio of net debt to EBITDA. Interest was payable on
the last day of each quarter. During the years ended December
31, 2002 and 2001, the interest rates on the Revolving
Facility and Term Loan ranged from 3.53 percent to 6.00
percent and 4.61 percent to 11.75 percent, respectively.
(b) Amended and Restated Credit Agreement of October 21, 2002
On October 21, 2002, the Company entered into an amendment and
restatement of its existing Credit Agreement (the "2002
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"); 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 was determined based on a
portion of eligible accounts receivable. In general, the
Company's borrowing availability under the Revolving Credit
Facility was subject to its 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 Revolving Credit Facility.
Borrowings under the Term Loan Facility and the Revolving
Credit Facility would have matured on June 30, 2005.
Borrowings under the Revolving Credit Facility and Term Loan
Facility bore interest at a floating rate based upon, at the
Company's option, LIBOR, or the ABR, which is the higher of
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). In certain cases, the Company was required to make
excess cash payments (as defined in the Amended and Restated
Credit Agreement) to the extent certain conditions and ratios
are met. From January 1, 2003 through December 18, 2003 and
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 3.35 percent to 5.25 and 3.63
percent to 5.75 percent, respectively. Effective December 19,
2003, this credit facility was replaced by an additional
Amended and Restated Credit Agreement, as discussed below.
(c) Amended and Restated Credit Agreement of December 19, 2003 On
December 19, 2003, the Company entered into an amended and
restated credit agreement (the "2003 Amended and Restated
Credit Agreement") related to our Credit Facility. This
current amendment and restatement, among other things,
provides for the following: (1) a new Term Loan B under the
Term Loan Facility in the amount of $150.0 million with a
maturity date of December 31, 2010; (2) the extension of
Revolving Credit Facility's maturity date to December 31,
2008; (3) the repayment of the outstanding balance of
approximately $18.4 million of the Term Loan A; and (4) the
financing of the tender offer and consent solicitation made on
November 23, 2003, related to the outstanding Senior
Subordinated Notes (see below). In addition, the 2003 Amended
and Restated Credit Agreement permits the Company to raise up
to $200.0 million of additional debt in the form of additional
term loans, subordinated debt or revolving loans, with certain
restrictions on the amount of revolving loans. All borrowings
under the 2003 Amended and Restated Credit Agreement are
subject to financial covenants customary for such financings,
including, but not limited to: maximum ratio of net debt to
EBITDA (as defined in the 2003 Amended and Restated Credit
Agreement) and maximum ratio of senior debt to EBITDA. For the
year ended December 31, 2003, the Company was not in
compliance with one of the financial covenants required by its
2003 Amended and Restated Credit Agreement. The Company
subsequently obtained a waiver for compliance with this
covenant for the year ended December 31, 2003. The Company was
in compliance with all other financial covenants required by
its 2003 Amended and Restated Credit Agreement. Additionally,
as a result of the changes made in this amendment and
restatement, revolving loans are based upon an asset test or
maximum ratio of net eligible accounts receivable to revolving
loans. From the date of the amendment through December 31,
2003, the interest rates for the Term Loan Facility and the
Revolving Credit Facility ranged from 3.16 percent to 5.00
percent.
F-19
In connection with the repayment of the Term A Loan, the
Company wrote off the related unamortized deferred financing
fees. The write-off of $485,000 has been reflected as interest
expense in the accompanying Consolidated Statement of
Operations for the year ended December 31, 2003.
All of the Company's existing and future domestic subsidiaries
unconditionally guarantee the repayment of amounts borrowed
under the 2003 Amended and Restated Credit Agreement. The 2003
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 2003 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 2003 Amended and Restated Credit Agreement); and (ii)
repurchase certain amounts of its subordinated debt from it
share of net cash proceeds of issuances of equity securities.
The 2003 Amended and Restated Credit Agreement contains
customary events of default, certain of which allow for grace
periods.
As of December 31, 2003 and 2002, the outstanding amounts
under the 2002 and 2003 Amended and Restated Credit Agreement
were as follows (in thousands):
2003 2002
------------ -----------
Revolving Credit Facility $ 4,400 $ 7,000
Term Loan A -- 21,201
Term Loan B 50,000 --
------------ -----------
Total debt 154,400 28,201
Less current installments (1,500) (3,798)
------------ -----------
Long-term debt, excluding current installments $ 152,900 $ 24,403
============ ===========
The remaining available borrowings under the Revolving Credit
Facility as of December 31, 2003 were $112.7 million. As of
December 31, 2003, the 2003 Amended and Restated Credit
Agreement would have permitted additional borrowings of up to
$203.7 million.
For the years ended December 31, 2003, 2002 and 2001, total
interest expense incurred on the Revolving Credit Facility was
approximately $1.9 million, $1.1 million, and $2.7 million,
respectively. For the years ended December 31, 2003, 2002 and
2001, total interest expense incurred on the Term Loan A was
approximately $700,000, $1.2 million, and $4.1 million,
respectively. For the year ended December 31, 2003, total
interest expense incurred on the Term Loan B was approximately
$156,000.
F-20
(d) Senior Subordinated Notes Payable
On May 11, 1999, the Company sold $100.0 million, in aggregate
principal amount of 12% senior subordinated notes due 2009, or
"12% Notes." The proceeds of the issuance of the 12% Notes
were principally used to purchase Analysis & Technology, Inc.
The 12% Notes are subordinate to the Company's 2003 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 used net proceeds from its initial public
offering ("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 $928,000 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 for both the term loan and the 12% Notes totaling $4.2
million, have been reflected as interest expense in the
accompanying Consolidated Statement of Operations for the year
ended December 31, 2002.
On December 23, 2003, the Company repurchased $73.1 million in
aggregate principal amount, or approximately 97% of the
outstanding 12% Notes. As of the expiration date of the tender
offer and December 31, 2003, approximately $1.9 million in
aggregate principal amount remained outstanding, which is
callable on May 15, 2004. The repurchase price for the 12%
Notes was $1,110.95 per $1,000 principal amount of Notes
tendered prior to December 5, 2003, the Consent Date. The
repurchase price for those Notes tendered after December 5,
2003 was $1,090.95 per $1,000 principal amount of the 12%
Notes, which excludes the consent payment of $20.0 per $1,000
principal amount. The aggregate repurchase price for all of
the 12% Notes validly surrendered for repurchase and not
withdrawn was approximately $81.2 million. In addition, as a
result of the tender offer, the Company incurred a $7.2
million bond premium and consent payment and wrote-off
approximately $2.1 million of the unamortized deferred
financing fees related to the portion of the 12% Notes that
were repurchased. The tender premium, consent payment and
write-off of deferred financing fees have been reflected as
interest expense in the accompanying Consolidated Statement of
Operations for the year ended December 31, 2003.
Total interest expense for the 12% Notes incurred during 2003,
2002 and 2001was approximately $8.8 million, $9.9 million, and
$12.0 million, respectively.
(e) Subordinated Notes Payable
In connection with the purchase of Sherikon, Inc. in 2000, the
Company entered into subordinated promissory notes with the
Sherikon, Inc. 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; however, $124,000 of interest has been
accrued and outstanding as of December 31, 2003. During the
year ended December 31, 2003, 2002 and 2001, total interest
expense on the subordinated promissory notes with the
Sherikon, Inc. shareholders was approximately $124,000,
$232,000, and $665,000, respectively.
F-21
(f) 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% 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 interest income of
$519,000, on the retirement of the subordinated note payable
to Ogden, which is included in interest expense, net of
interest income, on the accompanying Consolidated Statement of
Operations for the year ended December 31, 2001.
Total interest expense incurred on the subordinated note
payable to Ogden for the year ended December 31, 2001 was
approximately $86,000, respectively.
(g) Subordinated Notes Payable to Stockholders
Concurrent with the acquisition of Anteon Virginia, the
Company and its majority stockholder at that time, 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. In March 2002, the
Company used a portion of the net proceeds from its IPO to
repay in full this subordinated promissory note.
Total interest expense incurred on the subordinated notes
payable for the years ended December 31, 2002 and 2001 was
approximately $90,000 and $450,000, respectively.
(h) 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 at that time, and Caxton-Iseman Capital,
Inc., entered into a subordinated convertible promissory note
agreement for $22.5 million. The note bore interest at 12%,
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.
During the years ended December 31, 2002 and 2001, the Company
incurred approximately $667,000, and $3.2 million,
respectively, of interest expense on these notes.
F-22
(i) 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,
2004 $ 1,500
2005 1,500
2006 1,500
2007 1,500
2008 5,900
Thereafter 144,376
--------------
$ 156,276
==============
(j) Interest Rate Swap Agreements
OBJECTIVES AND CONTEXT
The Company uses variable-rate debt to finance its operations
through its Revolving Facility and Term Loan B. 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 2003 Amended and Restated Credit
Agreement.
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.
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.
F-23
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 notional amount of such
agreements. These interest rate swap agreements related
primarily to term loan obligations that had been permanently
reduced. Interest expense for the year ended December 31, 2002
included losses of $1.9 million associated with these
cancellations.
Over the next twelve months, approximately $230,000 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, 2003, the fair value of the
Company's interest swap agreements resulted in a net liability
of $230,000 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, 2003, to the
following fixed rates:
Fair Value as
Effective of
Date of Swap Notional Maturity of Fixed Rate December 31,
Agreement Amount Swap Agreement of Interest (in thousands)
--------------- ------------ --------------- ------------ -------------
June 2001 $10 million June 30, 2004 5.78% $(230)
--------------- ------------ --------------- ------------ -------------
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,
2003.
(9) Capital 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 the Company's common stock
are entitled to receive dividends, when, and if declared by the
Company's board out of legally available funds. Upon the Company's
liquidation or dissolution, the holders of common stock will be
entitled to share ratably in the Company's 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.
On December 17, 2003, the Company registered approximately 11.1 million
shares of its common stock for sale in an underwritten offering
pursuant to a registration statement on Form S-3 filed with the SEC.
These securities may be offered on a delayed or continuous basis
pursuant to Rule 415 under the Securities Act of 1933, as amended.
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.
F-24
Depending upon the rights of such preferred stock, the issuance of
preferred stock could have an adverse effect on holders of the
Company's 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.
(10) Income Taxes
The provisions for income taxes for the years ended December 31, 2003,
2002 and 2001, consist of the following (in thousands), respectively:
Years ended December 31,
-----------------------------------------------
2003 2002 2001
----------- ------------ -------------
Current provision:
Federal $ 21,718 10,245 1,321
State 2,305 1,431 810
Foreign 121 119 62
----------- ------------ -------------
Total current provision 24,144 11,795 2,193
----------- ------------ -------------
Deferred provision:
Federal (1,145) 4,331 1,501
State (226) 597 853
Foreign -- -- 55
----------- ------------ -------------
Total deferred provision (1,371) 4,928 2,409
----------- ------------ -------------
Total income tax provision $ 22,773 16,723 4,602
=========== ============ =============
F-25
The income tax provisions for the years ended December 31, 2003, 2002
and 2001, respectively, are different from those computed using the
statutory U.S. federal income tax rate of 35% as set forth below (in
thousands):
Years ended December 31,
-----------------------------------------------
2003 2002 2001
----------- ------------ -------------
Expected tax expense, computed at statutory rate $ 20,637 15,108 1,582
State taxes, net of federal expense 1,501 1,259 1,259
Nondeductible expenses 332 330 304
Goodwill amortization -- -- 1,804
Secondary offering expenses 265 -- --
Increase in marginal federal rate -- -- 200
Stock basis difference on sale of subsidiary -- -- (790)
Foreign rate differences (15) 53 (21)
Other 53 (27) 264
----------- ------------ -------------
$ 22,773 16,723 4,602
=========== ============ =============
The tax effect of temporary differences that give rise to the deferred
tax assets and deferred tax liabilities as of December 31, 2003 and
2002 is presented below (in thousands):
2003 2002
-------------- -------------
Deferred tax assets:
Accrued expenses $ 8,505 $ 6,244
Intangible assets, due to differences in amortization 2,399 2,492
Interest rate swaps 89 298
Accounts receivable allowances 1,607 706
Property and equipment, due to differences in depreciation 1,334 831
Net operating loss and credit carryforwards 540 356
-------------- -------------
Total gross deferred tax assets 14,474 10,927
Less: valuation allowance (295) (295)
-------------- -------------
Net deferred tax assets 14,179 10,632
-------------- -------------
Deferred tax liabilities:
Deductible goodwill, due to differences in amortization 9,087 7,502
Revenue recognition differences 5,536 6,616
Accrued expenses 6,630 5,741
Property and equipment, due to differences in depreciation 1,302 811
-------------- -------------
Total deferred tax liabilities 22,555 20,670
-------------- -------------
Deferred tax liabilities, net $ (8,376) $ (10,038)
============== =============
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, 2003 and 2002 of
$295,000 and $295,000, respectively against certain state net operating
loss carryforwards. At December 31, 2003, the Company had federal and
state net operating loss carryforwards of approximately $69,000 and
$6.8 million, respectively. Carryforwards have various expiration dates
beginning in 2004.
F-26
(11) 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 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, and participants immediately vest in the Company's
contributions. The Company made contributions to these plans of
approximately $8.3 million, $7.1 million, and $5.6 million for the
years ended December 31, 2003, 2002, and 2001 respectively. Employees
vest immediately in the Company's contributions.
ISI had a 401(k) and a profit-sharing plan ("ISI Plan") in effect
covering all employees at least 18 years of age. The ISI Plan provided
for both employee and employer contributions. Employees vested
immediately in their own contributions. The Company's contributions are
discretionary as determined by management. Employees become 100 percent
vested in these contributions after five years of service. The Company
did not contribute to the ISI plan in 2003. Profit-sharing expense for
the year ended December 31, 2003 was $1.8 million. As of January 1,
2004, the ISI Plan terminated and the ISI Plan assets were transferred
to the Company's 401(k) Plan.
(12) 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, 2003, an aggregate of
383,540 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
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, 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 at December 31, 2002 4,123,208 $ 0.84-27.25 $ 8.98 1,647,368
Granted 641,500 23.30-33.75 28.53
Exercised (935,947) 0.84-27.25 5.23
Cancelled or expired (221,600) 4.66-27.25 14.39
------------ -------------- -------------
Outstanding as of December 31, 2003 3,607,161 $ 0.84-33.75 $ 13.59 1,520,301
============ ============== =============
Option and weighted average price information by price group
is as follows:
Shares outstanding Exercisable shares
------------------------------------------- ------------------------------
Number Weighted Weighted Number of Weighted
average average
exercise remaining average
of shares price life shares exercise price
------------ -------------- ------------- ------------- ---------------
December 31, 2003:
$0.84 411,618 $ 0.84 0.8 411,618 $ 0.84
$2.30 to $3.36 14,400 $ 2.53 1.8 14,400 $ 2.53
$4.02 to $4.66 336,000 $ 4.61 2.7 336,000 $ 4.61
$4.86 to $5.25 457,266 $ 5.20 3.6 281,706 $ 5.20
$6.25 to $6.49 531,600 $ 6.30 3.5 257,200 $ 6.30
$8.10 19,800 $ 8.10 5.3 1,200 $ 8.10
$18.00 to $27.25 1,194,977 $ 19.18 5.8 218,177 $ 19.18
$23.30 to $33.75 641,500 $ 28.54 7.5 --
------------ -------------
3,607,161 1,520,301
============ =============
(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 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, 2003,
2002 and 2001 would approximate $32.4 million, $23.0 million,
and $(1.3 million), respectively, using an expected option
life of 5, 5, and 7 years, respectively, dividend yield rate
of 0% and volatility rates of 43.3%, 47.8%, and 70%,
respectively, and risk-free interest rates of 3.28%, 2.78%,
and 4.84% for 2003, 2002 and 2001, respectively (see note
2(l)). The effects of applying SFAS No. 123 in this pro forma
disclosure are not indicative of future amounts.
(13) Comprehensive Income (Loss)
Comprehensive income (loss) includes 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 $69,000, $(44,000) and $(43,000), as of
December 31, 2003, 2002 and 2001, respectively. The amount of
accumulated other comprehensive income related to interest rate swaps
was $230,000 ($141,000 net of tax) and $763,000 ($465,000 net of tax)
as of December 31, 2003 and December 31, 2002, respectively.
(14) Earnings (Loss) Per Common Share
The computations of basic and diluted income (loss) per common share
are as follows:
For the year ended
December 31, 2003
Weighted average
Income shares Per Share
(Numerator) (Denominator) Amount
-------------- ----------------- ---------
(in thousands, except share and per share data)
Basic earnings per share $ 36,190 34,851,281 $ 1.04
============== ===========
Stock options 2,074,207
Diluted earnings per share $ 36,190 36,925,488 $ 0.98
============== ===========
For the year ended
December 31, 2002
Weighted average
Income shares Per Share
(Numerator) (Denominator) Amount
-------------- ----------------- -----------
(in thousands, except share and per share data)
Basic earnings per share $ 26,444 32,163,150 $ 0.82
============== ===========
Stock options 1,858,447
Diluted earnings per share $ 26,444 34,021,597 $ 0.78
============== ===========
F-29
For the year ended
December 31, 2001
Weighted average
Income shares Per Share
(Numerator) (Denominator) Amount
-------------- --------------- -----------
(in thousands, except share and per share data)
Basic losses per share $ (82) 23,786,565 $ (0.01)
============== ===========
Stock options --
Diluted losses per share $ (82) 23,786,565 $ (0.01)
============== ===========
(15) Commitments and Contingencies
(a) Leases
The Company is obligated under capital leases covering certain
property and equipment that expire at various dates during the
next five years. At December 31, 2003 and 2002, the gross
amount of property and equipment and related accumulated
amortization recorded under capital leases were as follows:
2003 2002
------------- -------------
Property and equipment $ 1,037 $ --
Less accumulated amortization (265) --
------------- -------------
$ 772 $ --
============= =============
Amortization of assets held under capital leases is included
in depreciation expense in the accompanying Consolidated
Statements of Operations.
The Company also leases facilities and certain equipment under
operating lease agreements expiring at various dates through
2010. These leases generally contain renewal options for
periods ranging from 3 to 5 years, and require the Company to
pay all executory costs such as maintenance, taxes, and
insurance. As of December 31, 2003, the aggregate minimum
annual rental commitments under noncancelable operating leases
are as follows (in thousands):
Year ending December 31 Capital Operating
-----------------------
Leases Leases
------------ ----------------
2004 $ 421 $ 29,991
2005 212 23,785
2006 132 20,800
2007 121 17,173
2008 91 14,520
Thereafter -- 45,304
----------- ----------------
Total minimum lease payments $ 977 $ 151,573
================
Less estimated executory costs (at 7.25%) (71)
-----------
Net minimum lease payments 906
Less amount representing interest
(at rates ranging from 5.88% to 10.50%) 100
-----------
Present value of net minimum capital 806
lease payments
Less current installments of obligations
under capital leases 341
-----------
Obligations under capital leases,
excluding current installments $ 465
===========
F-30
Rent expense under all operating leases for the years ended
December 31, 2003, 2002 and 2001 was approximately $25.4
million, $24.2 million, and $23.1 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 Company was required to
pay $1.0 million to Caxton-Iseman Capital, Inc. as a
management fee.
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.
During the year ended December 31, 2001, the Company incurred
$1.0 million of management fees with Caxton-Iseman Capital,
Inc.
(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.
(16) Secondary Offering Expenses
On September 22, 2003, certain of the Company's stockholders sold
6,600,000 shares of the Company's common stock in an underwritten
offering pursuant to a registration statement on Form S-3 filed with
the SEC. In the fourth quarter of 2003, the underwriters of this
offering partially exercised their over-allotment option with respect
to additional shares held by the selling stockholders. As a result, on
October 16, 2003, certain of the selling stockholders sold an
additional 297,229 shares of the Company's common stock in a second
closing pursuant to the same underwritten offering. In connection with
this offering, the Company incurred approximately $852,000 of expenses
for the year ended December 31, 2003. These expenses were reimbursed by
certain of the selling stockholders and the reimbursement was recorded
by the Company as a contribution to paid-in-capital.
(17) Domestic Subsidiaries Summarized Financial Information
Under the terms of the Company's Credit Facility, the Company's wholly
owned domestic subsidiaries (the "Guarantor Subsidiaries") are
guarantors of the Company's Credit Facility. Such guarantees are full,
unconditional, 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. Non-guarantor subsidiaries include the Company's
foreign subsidiaries. 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.
F-31
As of December 31, 2003
---------------------------------------------------------------------------
Consolidated
Anteon Non- Anteon
Condensed Consolidated International Guarantor Guarantor Elimination International
Balance Sheets Corporation Subsidiaries Subsidiaries Entries Corporation
--------------------------------------------------------------------------------------------------------------------
(in thousands)
Cash and cash equivalents $ (9) $ 437 $ 1,660 $ -- $ 2,088
Accounts receivable, net -- 222,511 426 -- 222,937
Prepaid expenses and other current 303 29,484 115 (10,336) 19,566
assets
Property and equipment, net 2,024 10,646 89 -- 12,759
Due from parent (188,718) 188,911 (193) -- --
Investment in and advances to
subsidiaries 30,780 (21,730) -- (9,050) --
Goodwill, net 168,532 43,673 -- -- 212,205
Intangible and other assets, net 73,230 4,495 -- (68,000) 9,725
------------- ------------ ------------- ----------- ----------
Total assets $ 86,142 $ 478,427 $ 2,097 $ (87,386) $ 479,280
------------- ------------ ------------- ----------- ----------
Indebtedness $ 4,376 $ 222,400 $ -- $ (68,000) $ 158,776
Accounts payable 405 36,212 176 -- 36,793
Due to related party 48 -- -- -- 48
Accrued expenses and other current
liabilities 3,267 82,917 496 -- 86,680
Deferred revenue 10,336 11,372 411 (10,336) 11,783
Other long-term liabilities -- 10,498 -- -- 10,498
------------- ------------ ------------- ----------- ----------
Total liabilities 18,432 363,399 1,083 (78,336) 304,578
Minority interest in subsidiaries -- -- 210 -- 210
Total stockholders' equity (deficit) 67,710 115,028 804 (9,050) 174,492
------------- ------------ ------------- ----------- ----------
Total liabilities and stockholders'
equity (deficit) $ 86,142 $ 478,427 $ 2,097 $ (87,386) $ 479,280
============= ============ ============= =========== ==========
F-32
For the Year Ended December 31, 2003
------------------------------------------------------------------------------
Consolidated
Anteon Non- Anteon
Condensed Consolidated International Guarantor Guarantor Elimination International
Statements of Operations Corporation Subsidiaries Subsidiaries Entries Corporation
-----------------------------------------------------------------------------------------------------------------------
(in thousands)
Revenues $ 2 $ 1,033,596 $ 9,521 $ (645) $ 1,042,474
Costs of revenues -- 889,424 8,485 (645) 897,264
------------- ------------- ------------- ----------- -------------
Gross profit 2 144,172 1,036 -- 145,210
Total operating expenses 3,418 87,412 744 (30,477) 61,097
------------- ------------- ------------- ----------- -------------
Operating income (3,416) 56,760 292 30,477 84,113
Other income 9,595 20,882 -- (30,477) --
Secondary offering expenses 852 -- -- -- 852
Interest and other expense (income), net 14,461 9,805 (22) -- 24,244
Minority interests in (earnings) losses
of subsidiaries -- -- (54) -- (54)
------------- ------------- ------------- ----------- -------------
Income (loss) before provision for
income taxes (9,134) 67,837 260 -- 58,963
Provision (benefit) for income taxes (3,589) 26,241 121 -- 22,773
------------- ------------- ------------- ----------- -------------
Net income (loss) $ (5,545) $ 41,596 $ 139 $ -- $ 36,190
============= ============= ============= =========== =============
F-33
For the Year Ended December 31, 2003
--------------------------------------------------------------
Consolidated
Anteon Non- Anteon
Condensed Consolidated International Guarantor Guarantor International
Statements of Cash Flows Corporation Subsidiaries Subsidiaries Corporation
-------------------------------------------------------------------------------------------------------------
(in thousands)
Net income (loss) $ (5,545) $ 41,596 $ 139 $ 36,190
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization of property
and equipment 782 3,589 69 4,440
Amortization of noncompete agreements -- 101 -- 101
Other intangibles amortization 2,227 122 -- 2,349
Amortization of deferred financing costs 3,896 118 -- 4,014
Loss on disposals of property and
equipment -- 170 20 190
Deferred income taxes -- (1,742) -- (1,742)
Minority interest in earnings (losses) of
subsidiaries -- -- 54 54
Changes in assets and liabilities, net of
acquired assets and liabilities 179,518 (188,480) 809 (8,153)
------------- ------------ ----------- -----------
Net cash provided by (used in) operating
activities 180,878 (144,526) 1,091 37,443
------------- ------------ ----------- -----------
Cash flows from investing activities:
Purchases of property and equipment and
other assets (442) (2,552) (55) (3,049)
Acquisition of ISI, net of cash acquired (92,164) (218) -- (92,382)
------------- ------------ ----------- -----------
Net cash used in investing activities (92,606) (2,770) (55) (95,431)
------------- ------------ ----------- -----------
Cash flows from financing activities:
Principal payments on bank and other
notes payable -- (43) -- (43)
Deferred financing costs 308 (3,036) -- (2,728)
Principal payments on Term Loan A (21,202) -- -- (21,202)
Proceeds from Term Loan B -- 150,000 -- 150,000
Proceeds from certain selling
stockholders related to our secondary offering 852 -- -- 852
Proceeds from revolving credit facility -- 1,009,500 -- 1,009,500
Principal payments on revolving credit
facility -- (1,012,100) -- (1,012,100)
Redemption of senior subordinated notes
payable (73,124) -- -- (73,124)
Proceeds from issuance of common stock,
net of expenses 4,902 -- -- 4,902
Principal payments under capital lease
obligations -- (247) -- (247)
------------- ------------ ----------- -----------
Net cash provided by (used in) financing
activities (88,264) 144,074 -- 55,810
------------- ------------ ----------- -----------
Net increase (decrease) in cash and cash
equivalents 8 (3,222) 1,036 (2,178)
Cash and cash equivalents, beginning of year (17) 3,659 624 4,266
------------- ------------ ----------- -----------
Cash and cash equivalents, end of year $ (9) $ 437 $ 1,660 $ 2,088
============= ============ =========== ===========
F-34
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 65,401 394 -- 68,377
liabilities
Deferred revenue 5,512 189 -- 5,701
--
Other long-term liabilities 8,069 229 -- 8,298
------------- ---------- ------------ ------------ -----------
Total liabilities 101,809 192,786 1,112 (60,000) 235,707
Minority interest in subsidiaries -- -- 156 -- 156
Total stockholders' equity
(deficit) 63,926 85,619 552 (21,268) 128,829
------------- ---------- ------------ ----------- -----------
Total liabilities and
stockholders' equity (deficit) $ 165,735 $ 278,405 $ 1,820 $ (81,268) $ 364,692
============= ========== ============ ============ ===========
F-35
For the Year Ended December 31, 2002
----------------------------------------------------------------------------
(reclassified-see note 2(r))
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 13,791 7,850 (15) -- 21,626
Minority interest in (earnings) losses
of subsidiaries -- -- (18) -- (18)
------------ ------------ ------------- ----------- -------------
Income (loss) before provision for
income taxes (8,311) 51,264 214 -- 43,167
Provision (benefit) for income taxes (3,232) 19,835 120 -- 16,723
------------- ------------ ------------- ----------- -------------
Net income (loss) $ (5,079) $ 31,429 $ 94 $ -- $ 26,444
============= ============ ============= =========== =============
F-36
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
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 2,442 -- -- 2,442
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 (1,940) (202) 420 (1,722)
------------- ------------ ------------ -------------
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 A (25,853) -- -- (25,853)
Proceeds from revolving credit facility -- 862,600 -- 862,600
Principal payments on revolving credit facility (18,700) (855,600) -- (874,300)
Redemption of senior subordinated notes payable (25,000) -- -- (25,000)
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 (255) 5,736 -- 5,481
------------- ------------ ------------ -------------
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-37
For the Year Ended December 31, 2001
--------------------------------------------------------------------------
(reclassified-see note 2(r))
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 16,863 9,507 (17) -- 26,353
Minority interest in (earnings) losses
of subsidiaries (14) 32 (56) -- (38)
-------------- ------------- ------------- ----------- -----------
Income (loss) before provision for
income taxes (21,000) 25,196 324 -- 4,520
Provision (benefit) for income taxes (8,070) 12,555 117 -- 4,602
-------------- ------------- ------------- ----------- -----------
Net income (loss) $ (12,930) $ 12,641 $ 207 $ -- $ (82)
============== ============= ============= =========== ===========
F-38
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:
Gain on sales and closures of business -- (4,046) -- -- (4,046)
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 697 -- -- -- 697
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 assets and liabilities 43,401 (20,973) (278) (1,665) 20,485
------------- ----------- ------------- ----------- -----------
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 Inc., net of
cash acquired (21) -- -- -- (21)
Acquisition of SIGCOM, net of cash
acquired -- (10,975) -- -- (10,975)
Proceeds from sales of businesses -- 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 Ogden (3,212) -- -- -- (3,212)
Principal payments on Term Loan A (12,946) -- -- -- (12,946)
Proceeds from revolving credit facility 771,200 -- -- -- 771,200
Principal payments on revolving credit
facility (784,500) -- -- -- (784,500)
Distribution to parent for debt service (1,665) -- -- 1,665 --
Proceeds from minority interest, net 152 -- -- -- 152
------------- ----------- ------------- ----------- -----------
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-39
(18) Quarterly Results of Operations (Unaudited)
The following summarizes the unaudited quarterly results of operations
for the years ended December 31, 2003 and 2002 (in thousands, except
per share data):
Quarter ended: March 31 June 30 September 30 December 31 Total
-------------- ------------ --------------- --------------- -----------
2003
Revenues $ 228,591 254,093 279,080 280,710 1,042,474
Operating income 17,966 20,254 22,699 23,194 84,113
Net income 9,075 10,309 10,943 5,863 36,190
Basic earnings per common
share 0.26 0.30 0.31 0.17 1.04
Diluted earnings per common
share: 0.25 0.28 0.30 0.16 0.98
2002
Revenues $ 192,629 201,938 214,314 216,945 825,826
Operating income 14,517 16,021 16,549 17,307 64,394
Net income 4,134 5,509 8,166 8,635 26,444
Basic earnings per common
share 0.16 0.16 0.24 0.25 0.82
Diluted earnings per common
share: 0.14 0.15 0.22 0.24 0.78
During the second quarter of 2003, the Company acquired Information
Spectrum, Inc. (note 4(b)).
(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, Inc.,
Techmatics, Inc., Analysis & Technology, Inc., Sherikon, Inc., SIGCOM,
and ISI. These prior acquisitions were consolidated and merged into
Anteon Corporation, a wholly owned subsidiary of the Company. 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.
The Company's chief operating decision maker utilized 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 were allocated to the segments. Allocation of overhead costs
to segments was based on measures such as revenue and employee
headcount. General and administrative costs was allocated to segments
based on the government-required three-factor formula, which used
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 was not allocated to the Company's segments.
F-40
The following tables present information about the Company's segments
as of and for the year ended December 31, 2001 (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 26,353
Minority interest in earnings of (38)
subsidiaries
--------------
Income before provision for income taxes 4,520
Provision for income taxes 4,602
--------------
Net loss $ (82)
==============
F-41