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Form 10-Q for ANTEON INTERNATIONAL CORPORATION filed on May 6, 2004
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2004
--------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 001-31258
ANTEON INTERNATIONAL CORPORATION
---------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3880755
----------------------------- -----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3211 Jermantown Road, Fairfax, Virginia 22030-2801
- --------------------------------------------------------------------------------
(Address of principal executive office)
(Zip Code)
(703) 246-0200
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
------------------------------------------------------------
(Former name, former address, and former
fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ X ] No [ ]
As of the close of business on April 30, 2004, there were 35,558,712 outstanding
shares of the registrant's common stock, par value $0.01 per share.
CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS AS OF
MARCH 31, 2004 AND DECEMBER 31, 2003 1
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31,
2004 AND 2003 2
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31,
2004 AND 2003 3
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 21
ITEM 4. CONTROLS AND PROCEDURES 21
PART II. OTHER INFORMATION REQUIRED IN REPORT
ITEM 1. LEGAL PROCEEDINGS 22
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS, AND ISSUER
PURCHASES OF EQUITY SECURITIES 22
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS 22
ITEM 5. OTHER INFORMATION 22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 22
i
PART I. FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ANTEON INTERNATIONAL CORPORATION AND SUBSIDIARIES
(A Delaware Corporation)
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
March 31, 2004 December 31,
(Unaudited) 2003
------------------ -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,229 $ 2,088
Accounts receivable, net 243,997 222,937
Prepaid expenses and other current assets 15,657 17,925
Deferred tax assets, net 1,657 1,641
------------------ ----------------
Total current assets 263,540 244,591
Property and equipment, net 12,391 12,759
Goodwill 212,205 212,205
Intangible and other assets, net 9,005 9,725
------------------ ----------------
Total assets $ 497,141 $ 479,280
================== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Term Loan B, current portion $ 1,500 $ 1,500
Subordinated notes payable, current portion 2,500 2,500
Obligations under capital leases, current portion 341 341
Accounts payable 38,175 36,793
Accrued expenses 83,459 85,468
Deferred compensation obligation 457 --
Due to related party 47 48
Income tax payable 10,695 641
Other current liabilities 118 230
Deferred revenue 8,395 11,783
------------------ ----------------
Total current liabilities 145,687 139,304
Term Loan B, less current portion 148,125 148,500
Revolving facility 4,100 4,400
Senior subordinated notes payable, less current portion 1,876 1,876
Obligations under capital leases, less current portion 383 465
Noncurrent deferred tax liabilities, net 7,614 10,017
Other long term liabilities 62 16
------------------ ----------------
Total liabilities 307,847 304,578
Minority interest in subsidiaries 215 210
Stockholders' equity:
Preferred stock, $0.01 par value; 15,000,000 shares authorized, none issued
and outstanding as of March 31, 2004 and December 31, 2003 -- --
Common stock, $0.01 par value; 175,000,000 shares authorized, 35,520,113
and 35,354,996 shares issued and outstanding as of March 31, 2004 and
December 31, 2003, respectively. 355 354
Additional paid-in capital 117,019 115,863
Accumulated other comprehensive income (loss) 24 (72)
Retained earnings 71,681 58,347
------------------ ----------------
Total stockholders' equity 189,079 174,492
------------------ ----------------
Total liabilities and stockholders' equity $ 497,141 $ 479,280
================== ================
See accompanying notes to unaudited condensed consolidated financial statements.
1
ANTEON INTERNATIONAL CORPORATION AND SUBSIDIARIES
(A Delaware Corporation)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
For the three months ended
March 31,
---------------------------------------
2004 2003
------------------ ----------------
Revenues $ 288,150 $ 228,591
Costs of revenues 248,059 197,176
-------------- -------------
Gross profit 40,091 31,415
-------------- -------------
Operating expenses:
General and administrative expenses 15,875 12,972
Amortization of intangible assets 679 477
-------------- -------------
Total operating expenses 16,554 13,449
-------------- -------------
Operating income 23,537 17,966
Other income 2 --
Interest expense, net of interest income of $78 and $71,
respectively 1,794 3,191
Minority interest in earnings of subsidiaries (5) (12)
-------------- -------------
Income before provision for income taxes 21,740 14,763
Provision for income taxes 8,406 5,688
-------------- -------------
Net income $ 13,334 $ 9,075
============== =============
Basic earnings per common share: $ 0.38 $ 0.26
============== =============
Basic weighted average shares outstanding 35,448,152 34,459,738
Diluted earnings per common share: $ 0.36 $ 0.25
============== =============
Diluted weighted average shares outstanding 37,147,368 36,629,971
See accompanying notes to unaudited condensed consolidated financial statements.
2
ANTEON INTERNATIONAL CORPORATION AND SUBSIDIARIES
(A Delaware Corporation)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the three months ended March 31,
---------------------------------------
2004 2003
--------------- -----------------
OPERATING ACTIVITIES:
Net income $ 13,334 $ 9,075
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization of property and equipment 1,053 892
Amortization of noncompete agreement 42 --
Other intangibles amortization 637 477
Amortization of deferred financing fees 184 348
Loss on disposals of property and equipment -- 1
Deferred income taxes (877) (1,156)
Minority interest in earnings of subsidiaries 5 12
Changes in assets and liabilities (13,829) 3,712
------------- ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 549 13,361
------------- ------------
NET CASH USED FOR INVESTING ACTIVITIES:
Purchases of property, equipment and other assets (685) (653)
------------- ------------
FINANCING ACTIVITIES:
Principal payments on bank and other notes payable -- (12)
Deferred financing fees (75) (64)
Principal payments on Term Loan A -- (950)
Principal payments on Term Loan B (375) --
Proceeds from revolving facility 254,900 152,100
Principal payments on revolving facility (255,200) (159,100)
Principal payments under capital lease obligations (82) --
Proceeds from issuance of common stock 1,109 460
------------- ------------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 277 (7,566)
------------- ------------
CASH AND CASH EQUIVALENTS:
Net increase in cash and cash equivalents 141 5,142
Cash and cash equivalents, beginning of period 2,088 4,266
------------- ------------
Cash and cash equivalents, end of period $ 2,229 $ 9,408
============= ============
Supplemental disclosure of cash flow information:
Interest paid $ 1,689 $ 566
============= ============
Income taxes paid $ 716 $ 2,396
============= ============
See accompanying notes to unaudited condensed consolidated financial statements.
3
ANTEON INTERNATIONAL CORPORATION AND SUBSIDIARIES
(A Delaware Corporation)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004 AND 2003
(1) Basis of Presentation
The information furnished in the accompanying Unaudited Condensed
Consolidated Balance Sheets, Condensed Consolidated Statements of Operations and
Unaudited Condensed Consolidated Statements of Cash Flows have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information. In the opinion of management, such
information contains all adjustments, consisting only of normal recurring
adjustments, considered necessary for a fair presentation of such information.
The operating results for the three months ended March 31, 2004 may not be
indicative of the results of operations for the year ending December 31, 2004,
or any future period. This financial information should be read in conjunction
with the Company's December 31, 2003 audited consolidated financial statements
and footnotes thereto, included in the Annual Report on Form 10-K filed with the
Securities and Exchange Commission by the Company on March 8, 2004 and Amendment
No. 1 to the Annual Report on Form 10-K/A filed on March 11, 2004.
(2) Organization and Business
Anteon International Corporation, a Delaware Corporation, "Anteon" or the
"Company," and its subsidiaries provide professional information technology
solutions and systems engineering and integration 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.
(3) Acquisition of 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.
The following unaudited pro forma summary presents consolidated information
as if the acquisition of ISI had occurred as of January 1, 2003. This pro forma
summary is provided for information 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 for share data):
For the three
months ended
March 31, 2003
-------------------
Total revenues $ 261,012
Total expenses 251,410
-------------
Net income $ 9,602
=============
Basic earnings per common share $ 0.28
=============
Diluted earnings per common share $ 0.26
=============
4
(4) Accounting for Stock-Based Compensation
The Company accounts for employee stock-based compensation plans using the
intrinsic value based method of accounting prescribed by APB Opinion No. 25, or
"APB No. 25," Accounting for Stock Issued to Employees. The Company has an
employee stock option plan. Compensation expense for stock options granted to
employees is recognized based on the difference, if any, between the fair value
of the Company's common stock and the exercise price of the option at the date
of grant. The Company discloses the pro forma effect on net income (loss) as if
the fair value based method of accounting as defined in Financial Accounting
Standards No. 123, or "SFAS No. 123," Accounting for Stock-based Compensation
had been applied.
The Company accounts for stock options granted to non-employees using the
fair value method of accounting as prescribed by SFAS No. 123. Stock options and
related compensation expense on stock options granted to non-employees are not
significant.
The following table illustrates the effect on net income and earnings per
share for the three months ended March 31, 2004 and 2003 as if the Company had
applied the fair value recognition provisions of SFAS No. 123 to stock-based
employee compensation:
2004 2003
------------ -----------
(in thousands, except per share data)
Net income, as reported $ 13,334 $ 9,075
Add: stock-based compensation recorded 1 --
Deduct: total stock-based compensation expense
determined under the fair value method, net of tax 1,073 818
------------ -----------
Pro forma net income $ 12,262 $ 8,257
Earnings per share:
Basic-as reported $ 0.38 $ 0.26
============ ===========
Basic-pro forma $ 0.35 $ 0.24
============ ===========
Diluted-as reported $ 0.36 $ 0.25
============ ===========
Diluted-pro forma $ 0.33 $ 0.23
============ ===========
(5) Comprehensive Income (Loss)
Comprehensive income (loss) for the three months ended March 31, 2004 and
2003 was approximately $13.4 million and $9.1 million, respectively. Other
comprehensive income (loss) for the three months ended March 31, 2004 and 2003
includes foreign currency translation gains (losses) of $27,000 and ($32,000),
respectively, and increases in the fair value of interest rate swaps of $69,000
and $62,000, net of tax.
5
(6) Computation of Earnings Per Share
Three months ended
March 31, 2004
--------------------------------------------------------------------------------
Income Weighted average shares Per Share
(Numerator) (Denominator) Amount
(in thousands,except share and per share data)
Basic earnings per share:
Net income $ 13,334 35,448,152 $ 0.38
=========== ===========
Dilutive earnings per share:
Stock options -- 1,699,216 --
Diluted earnings per share:
Net income $ 13,334 37,147,368 $ 0.36
=========== ===========
Three months ended
March 31, 2003
--------------------------------------------------------------------------------
Income Weighted average shares Per Share
(Numerator) (Denominator) Amount
(in thousands, except share and per share data)
Basic earnings per share:
Net income $ 9,075 34,459,738 $ 0.26
=========== ===========
Dilutive earnings per share:
Stock options -- 2,170,233 --
Diluted earnings per share:
Net income $ 9,075 36,629,971 $ 0.25
=========== ===========
6
(7) 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. The non-guarantor subsidiaries are
the Company's foreign subsidiaries. The following supplemental financial
information sets forth, on a combined basis, unaudited condensed consolidated
balance sheets, statements of operations and statements of cash flows
information for the Guarantor Subsidiaries, the Company's non-guarantor
subsidiaries and for the Company.
For the three months ended March 31, 2004
-----------------------------------------------------------------------------------------
Consolidated
Unaudited Condensed Consolidated Anteon Anteon
Balance Sheets International Guarantor Non-Guarantor Elimination International
Corporation Subsidiaries Subsidiaries Entries Corporation
----------- ------------ ------------ --------- ------------
(in thousands)
Cash and cash equivalents $ (9) $ 1,048 $ 1,190 $ -- $ 2,229
Accounts receivable, net -- 243,221 776 -- 243,997
Other current assets 439 26,771 242 (10,138) 17,314
Property and equipment, net 1,871 10,417 103 -- 12,391
Due from parent (184,478) 184,503 (25) -- --
Investment in and advances to subsidiaries 30,780 (24,544) -- (6,236) --
Goodwill 168,532 43,673 -- -- 212,205
Intangible and other assets, net 72,512 4,493 -- (68,000) 9,005
-------------- ------------- ---------- ----------- -----------
Total assets $ 89,647 $ 489,582 $ 2,286 $ (84,374) $ 497,141
============== ============= ========== =========== ===========
Indebtedness $ 4,376 $ 221,725 $ -- $ (68,000) $ 158,101
Accounts payable 664 37,009 502 -- 38,175
Accrued expenses and other current
liabilities 3,191 91,557 369 -- 95,117
Deferred revenue 10,138 8,045 350 (10,138) 8,395
Other long-term liabilities -- 8,059 -- -- 8,059
-------------- ------------- ---------- ----------- -----------
Total liabilities 18,369 366,395 1,221 (78,138) 307,847
Minority interest in subsidiaries -- -- 215 -- 215
Total stockholders' equity (deficit) 71,278 123,187 850 (6,236) 189,079
-------------- ------------- ---------- ----------- -----------
Total liabilities and stockholders' equity $ 89,647 $ 489,582 $ 2,286 $ (84,374) $ 497,141
============== ============= ========== =========== ===========
(deficit)
7
For the three months ended March 31, 2004
-----------------------------------------------------------------------------------------
Consolidated
Unaudited Condensed Consolidated Anteon Anteon
Statements of Operations International Guarantor Non-Guarantor Elimination International
Corporation Subsidiaries Subsidiaries Entries Corporation
---------------- --------------- ---------------- --------------- ----------------
(in thousands)
Revenues $ (2) $ 287,102 $ 1,164 $ (114) $ 288,150
Costs of revenues (1) 247,057 1,117 (114) 248,059
------------ ------------ ----------- ------------ -------------
Gross profit (1) 40,045 47 -- 40,091
Total operating expenses 956 25,086 18 (9,506) 16,554
------------ ------------ ----------- ------------ -------------
Operating income (loss) (957) 14,959 29 9,506 23,537
Other income (expense), net 3,163 6,345 -- (9,506) 2
Interest expense (income), net (405) 2,207 (8) -- 1,794
Minority interest in earnings of -- -- (5) -- (5)
subsidiaries
------------ ------------ ----------- ------------ -------------
Income before provision for income taxes 2,611 19,097 32 -- 21,740
Provision for income taxes 271 8,123 12 -- 8,406
------------ ------------ ----------- ------------ -------------
Net income $ 2,340 $ 10,974 $ 20 $ -- $ 13,334
============ ============ =========== ============ =============
8
For the three months ended March 31, 2004
---------------------------------------------------------------------------
Unaudited Condensed Consolidated Consolidated
Statements of Cash Flows Anteon Anteon
International Guarantor Non-Guarantor International
Corporation Subsidiaries Subsidiaries Corporation
---------------- ---------------- ----------------- ----------------
(in thousands)
Cash flows from operating activities:
Net income $ 2,340 $ 10,974 $ 20 $ 13,334
Adjustments to reconcile in net income to net cash
provided by (used for) operating activities
Depreciation and amortization of property and
equipment 168 875 10 1,053
Amortization of noncompete agreement -- 42 -- 42
Other intangibles amortization 637 -- -- 637
Amortization of deferred financing fees 33 151 -- 184
Deferred income taxes -- (877) -- (877)
Minority interest in earnings of subsidiaries -- -- 5 5
Changes in assets and liabilities (4,373) (8,975) (481) (13,829)
----------- ----------- ------------ -----------
Net cash provided by (used for) operating activities (1,195) 2,190 (446) 549
----------- ----------- ------------ -----------
Net cash used for investing activities:
Purchases of property and equipment (15) (646) (24) (685)
----------- ----------- ------------ -----------
Cash flow from financing activities:
Deferred financing fees 101 (176) -- (75)
Principal payments on Term Loan B -- (375) -- (375)
Proceeds from revolving facility -- 254,900 -- 254,900
Principal payments on revolving facility -- (255,200) -- (255,200)
Principal payments under capital lease obligations -- (82) -- (82)
Proceeds from issuance of common stock 1,109 -- -- 1,109
----------- ----------- ------------ -----------
Net cash provided by (used for) financing activities 1,210 (933) -- 277
----------- ----------- ------------ -----------
Net increase in cash and cash equivalents -- 611 (470) 141
Cash and cash equivalents, beginning of period (9) 437 1,660 2,088
----------- ----------- ----------- -----------
Cash and cash equivalents, end of period $ (9) $ 1,048 $ 1,190 $ 2,229
=========== =========== ============ ===========
9
For the three months ended March 31, 2003
--------------------------------------------------------------------------------------
Consolidated
Anteon Anteon
Unaudited Condensed Consolidated International Guarantor Non-Guarantor Elimination International
Statements of Operations Corporation Subsidiaries Subsidiaries Entries Corporation
---------------- --------------- ---------------- ------------ ---------------
(in thousands)
Revenues $ -- $ 226,622 $ 2,043 $ (74) $ 228,591
Costs of revenues 4 195,482 1,764 (74) 197,176
---------- ---------- --------- -------- -----------
Gross profit (4) 31,140 279 -- 31,415
Total operating expenses 780 19,849 196 (7,376) 13,449
---------- ---------- --------- -------- -----------
Operating income (loss) (784) 11,291 83 7,376 17,966
Other income (expenses), net 2,354 5,022 -- (7,376) --
Interest expense (income), net 1,247 1,948 (4) -- 3,191
Minority interest in earnings of subsidiaries -- -- (12) -- (12)
---------- ---------- --------- -------- -----------
Income before provision for income taxes 323 14,365 75 -- 14,763
Provision for (benefit from) income taxes (782) 6,443 27 -- 5,688
---------- ---------- --------- -------- -----------
Net income $ 1,105 $ 7,922 $ 48 $ -- $ 9,075
========== ========== ========= ======== ===========
10
For the three months ended March 31, 2003
---------------------------------------------------------------------------
Unaudited Condensed Consolidated Consolidated
Statements of Cash Flows Anteon Anteon
International Guarantor Non-Guarantor International
Corporation Subsidiaries Subsidiaries Corporation
----------------- ---------------- ------------------- ----------------
(in thousands)
Cash flows from operating activities:
Net income $ 1,105 $ 7,922 $ 48 $ 9,075
Adjustments to reconcile change in net income to net
cash provided by operating activities:
Depreciation and amortization of property and
equipment 208 674 10 892
Other intangibles amortization 422 55 -- 477
Amortization of deferred financing fees 318 30 -- 348
Loss on disposals of property and equipment -- 1 -- 1
Deferred income taxes -- (1,156) -- (1,156)
Minority interest in earnings of subsidiaries -- -- 12 12
Changes in assets and liabilities (1,162) 4,797 77 3,712
----------- ----------- ------------- -----------
Net cash provided by operating activities 891 12,323 147 13,361
----------- ----------- ------------- -----------
Net cash used for investing activities:
Purchases of property and equipment (401) (240) (12) (653)
----------- ----------- ------------- -----------
Cash flow from financing activities:
Principal payments on bank and other notes payable -- (12) -- (12)
Payment of credit facility amendment fee -- (64) -- (64)
Principal payments on Term Loan A (950) -- -- (950)
Proceeds from revolving facility -- 152,100 -- 152,100
Principal payments on revolving facility -- (159,100) -- (159,100)
Proceeds from issuance of common stock 460 -- -- 460
----------- ----------- ------------- -----------
Net cash used for financing activities (490) (7,076) -- (7,566)
----------- ----------- ------------- -----------
Net increase in cash and cash equivalents -- 5,007 135 5,142
Cash and cash equivalents, beginning of period (17) 3,659 624 4,266
----------- ----------- ------------- -----------
Cash and cash equivalents, end of period $ (17) $ 8,666 $ 759 $ 9,408
=========== =========== ============= ===========
11
(8) Segment Information
Although the Company is organized by strategic business unit, the Company
considers each of its business units to have similar economic characteristics,
provide similar types of services and have a similar customer base. Accordingly,
the Company's reportable segment aggregates the operations of all of the
Company's strategic business units.
(9) Interest Rate Swap Agreements
Approximately $118,000 of losses related to the interest rate swaps are
expected to be reclassified into remaining interest expense as a yield
adjustment of the hedged debt obligation through maturity of June 30, 2004. As
of March 31, 2004, the fair value of the Company's interest swap agreements,
with a notional value of $10.0 million, resulted in a liability of approximately
$118,000, which has been included in other current liabilities in the
accompanying unaudited condensed consolidated balance sheet.
(10) Supplemental Retirement Savings Plan
Effective January 1, 2004, the Company implemented a Supplemental
Retirement Savings Plan (the "Plan") that permits eligible employees and
directors to defer all or a portion of their annual cash compensation. The
Company also filed a Registration Statement on Form S-8 with the Securities and
Exchange Commission ("SEC") to register the participation interests under the
Plan. The assets of the Plan are held in a trust to which contributions are made
by the Company based on amounts elected to be deferred by the Plan participants.
The Plan is treated as unfunded for tax purposes and its assets are subject to
the general claims of the Company's creditors. In order to provide for an
accumulation of assets comparable to the contractual liabilities accruing under
the Plan, the Company may direct the trustee of the Plan to invest the assets to
correspond to the hypothetical investment choices made by the Plan participants.
The Company records both the assets and obligations related to amounts
deferred under the Plan. Each reporting period, the assets, which have been
classified as trading securities, and obligations, are adjusted to fair market
value, with gains (losses) on the assets included in other income (expense) and
corresponding adjustments to the obligations recorded as compensation expense.
As of March 31, 2004, the deferred compensation obligation was approximately
$457,000. For the quarter ended March 31, 2004, the adjustments to fair market
value were not significant.
(11) Employee Stock Purchase Plan
Effective April 1, 2004, the Company implemented an Employee Stock Purchase
Plan ("ESPP") to offer eligible employees the opportunity to purchase the
Company's common stock at a discount from the market price as reported on the
New York Stock Exchange. Eligible employees may authorize the Company to deduct
a specified portion of their compensation each payroll period for each quarterly
offering period. The accumulated payroll deductions will be used by the Company
to provide for the purchase by the ESPP administrator of Company common stock on
the open market for delivery to ESPP participants. The ESPP provides that the
per share purchase price discount established by the Compensation Committee of
the Board may be no greater than 15% of the fair market value of a share of
Company common stock on the last day of each quarterly offering period. The
Compensation Committee has initially set the purchase price discount at 5% of
the Company stock's fair market value. Under the ESPP, employees are limited to
the purchase of shares of the Company's common stock having a fair market value
no greater than $25,000 during any calendar year, as determined on the date of
purchase. The Company has filed a Registration Statement on Form S-8 with the
SEC to register 1.2 million shares of the Company's common stock under the ESPP.
(12) Legal Proceedings
The Company is involved in various legal proceedings in the ordinary course
of business.
The Company cannot predict the ultimate outcome of these matters, but does
not believe that they will have a material impact on its financial position or
results of operations.
(13) New Accounting Pronouncements
In December 2003, the FASB issued SFAS No. 132 (revised 2003), Employers'
Disclosures about Pensions and Other Postretirement Benefits, an amendment of
FASB Statements No. 87, 88, and 106". SFAS No. 132 (revised 2003) required
additional disclosures about assets, obligations, cash flows, and net periodic
benefit cost of defined benefit pension plans and other defined benefit
postretirement plans. SFAS No. 132 is effective for fiscal years ending after
December 15, 2003. The adoption of SFAS no. 132 did not have an impact on the
Company's consolidated financial statements.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Forward-looking statements
relate to future events or our future performance. These statements involve
known and unknown risks, uncertainties and other factors that may cause our and
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. In some
cases, you can identify forward-looking statements by terminology like "may",
"will", "should", "expects", "plans", "projects", anticipates", "believes",
"estimates", "predicts", "potential" or "continue" or the negative of these
terms or other comparable terminology. Such forward-looking statements include,
but are not limited to:
o total 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 our forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of these statements. We
are under no duty to update any of the forward-looking statements after the date
of this quarterly report to conform these statements to actual results and do
not intend to do so. These statements are only predictions. Actual events or
results may differ materially. 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 and our ability to retain our contracts during any rebidding
process.
GENERAL
General
We are a leading provider of information technology solutions and systems
engineering and integration services to U.S. federal 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 three
months ended March 31, 2004, approximately 90% of our revenue was derived from
contracts with the Department of Defense, or "DOD," Department of Homeland
Security, or "DHS," and intelligence agencies, and approximately 7% from
civilian agencies of the U.S. federal government. For the three months ended
March 31, 2004, approximately 88% 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 4,000 active task orders. For
the three months ended March 31, 2004, our largest contract or task order
accounted for approximately 8% of our revenues.
13
Description of Critical Accounting Policies
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses our unaudited condensed consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of these unaudited
condensed 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 unaudited condensed 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, 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 unaudited
condensed 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 three months ended March 31, 2004, we estimate that
approximately 99% of our revenues were derived from services and approximately
1% from product sales. Services are performed under contracts that may be
categorized into three primary types: time and materials, cost-plus
reimbursement and firm fixed price. Revenues for time and materials contracts
are 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. Revenues are 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.
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. Historically, we have not recorded any significant write-offs because
funding was not ultimately received.
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 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 the 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 revenues 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.
14
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 39% time and materials, 33% cost-plus and 28% fixed price (a
substantial majority of which are firm fixed price level of effort) during the
three months ended March 31, 2004. The contract mix can change over time
depending on contract awards and acquisitions. 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.
Costs of Revenues
Our costs are categorized as either direct or indirect costs. Direct costs
are those that can be identified with and allocated to specific contracts and
tasks. They include labor, fringe (vacation time, medical/dental, 401K plan
matching contribution, tuition assistance, employee welfare, worker's
compensation and other benefits), subcontractor costs, consultant fees, travel
expenses and materials. Indirect costs are either overhead or general and
administrative expenses. Indirect costs cannot be identified with specific
contracts or tasks, and to the extent that they are allowable, they are
allocated to contracts and tasks using appropriate government-approved
methodologies. Costs determined to be unallowable under the Federal Acquisition
Regulations cannot be allocated to projects. Our principal unallowable costs are
interest expense, amortization expense for separately identified intangibles
from acquisitions, and certain general and administrative expenses. A key
element to our success has been our ability to control indirect and unallowable
costs, enabling us to profitably execute our existing contracts and successfully
bid for new contracts. In addition, with the acquisition of new companies, we
have been able to manage our indirect costs and improve operating margins by
integrating the indirect cost structures and realizing opportunities for cost
synergies. 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 as of March
31, 2004 and December 31, 2003. 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 annual
impairment analysis as of September 30, 2003, noting no indications of
impairment for any of our reporting units. As of March 31, 2004, 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 net carrying amount of long-lived assets and identifiable intangible
assets was approximately $16.9 million and $17.9 million at March 31, 2004 and
December 31, 2003, respectively. Long-lived assets and identifiable intangible
assets, excluding goodwill, are evaluated for impairment when events occur that
suggest that such assets may be impaired. Such events could include, but are not
limited to, the loss of a significant customer or contract, decreases in U.S.
federal government appropriations or funding of certain programs, or other
similar events. None of these events occurred for the three months ended March
31, 2004. 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 an interest rate based on our cost of capital and the related risks of
recoverability.
In evaluating impairment, we consider, among other things, our ability to
sustain our current financial performance on contracts and tasks, our access to
and penetration of new markets and customers and the duration of, and estimated
amounts from, our contracts. Any uncertainty of future financial performance is
dependent on the ability to maintain our customers and the continued funding of
our contracts and tasks by the U.S. federal 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.
15
Business Combinations
We apply the provisions of SFAS No. 141, Business Combinations, whereby the
net tangible and separately identifiable intangible assets acquired and
liabilities assumed are recognized at their estimated fair market values at the
acquisition date. The purchase price in excess of the estimated fair market
value of the net tangible and separately identifiable intangible assets acquired
represents goodwill. The allocation of the purchase price related to our
business combinations involves significant estimates and management judgment
that may be adjusted during the allocation period, but in no case beyond one
year from the acquisition date. Costs incurred related to successful business
combinations are capitalized as costs of business combinations, while costs
incurred by us for unsuccessful or terminated acquisition opportunities are
expensed when we determine that such opportunities will no longer be pursued.
Costs incurred related to probable business combinations are deferred.
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.
Statements of Operations
The following is a description of certain line items from our consolidated
statements of operations.
Revenues for the three months ended March 31, 2003 do not include ISI.
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 expense relates to intangible assets from our acquisitions.
These intangible assets consist of a noncompete agreement, contract backlog and
contracts and related customer relationships acquired as part of our
acquisitions.
Interest expense is primarily related to our Senior Subordinated Notes due
2009, or the "12% Notes," our term loans and Revolving Credit Facility, and
other miscellaneous interest costs.
Other income represents the gains earned on the assets held under our
Supplemental Retirement Savings Plan.
Funded Backlog and Total 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 increased our total
estimated remaining contract value by approximately $200.0 million, from $5.6
billion as of December 31, 2003, to $5.8 billion at March 31, 2004. Funded
backlog increased approximately $10.4 million to $671.5 million at March 31,
2004, from $661.1 million as of December 31, 2003. Our contracts have a
weighted-average term of approximately eight years.
Our total estimated remaining contract value represents the aggregate
contract revenue we estimate will be earned over the remaining life of our
contracts. We compute the total estimated remaining contract value, including
for indefinite delivery, indefinite quantity , or "IDIQ," and multiple award
contracts, by calculating the three month rolling average run rate on each of
these contracts and extrapolating it over the life of the contract. Funded
backlog is based upon amounts actually appropriated by a customer for payment
for goods and services. Because the U.S. federal government operates under
annual appropriations, agencies of the U.S. federal government typically fund
contracts on an incremental basis. Accordingly, the majority of the total
estimated remaining contract value is not funded backlog. Our total estimated
remaining contract value is based on our experience under contracts and we
believe our estimates are reasonable. However, there can be no assurance that
our existing contracts will result in actual revenues in any particular period
or at all. These amounts could vary depending upon U.S. federal government
budgets and appropriations.
16
RESULTS OF OPERATIONS
The following table sets forth our results of operations based on the
amounts and percentage relationship of the items listed to contract revenues
during the period shown:
For the Three Months Ended March 31,
2004 2003
-------------------------- --------------------------
($ in thousands)
Revenues $ 288,150 100.0% $ 228,591 100.0%
Costs of revenues 248,059 86.1 197,176 86.2
----------------- ----------- ---------------- ----------
Gross profit 40,091 13.9 31,415 13.7
----------------- ----------- ---------------- ----------
Operating expenses:
General and administrative expenses 15,875 5.5 12,972 5.7
Amortization of intangible assets 679 0.2 477 0.2
----------------- ----------- ---------------- ----------
Total operating expenses 16,554 5.7 13,449 5.9
----------------- ----------- ---------------- ----------
Operating income 23,537 8.2 17,966 7.9
Other income 2 -- -- --
Interest expense, net 1,794 0.7 3,191 1.4
Minority interest in earnings of subsidiaries (5) -- (12) --
----------------- ----------- ---------------- ----------
Income before income taxes 21,740 7.5 14,763 6.4
Provision for income taxes 8,406 2.9 5,688 2.5
----------------- ----------- ---------------- ----------
Net income $ 13,334 4.6% $ 9,075 3.9%
================= ============= ================ ============
REVENUES
For the three months ended March 31, 2004, revenues increased by $59.6
million, or 26.1%, to $288.2 million from $228.6 million for the three months
ended March 31, 2003. 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 that 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 three
months ended March 31, 2004, our organic growth was 11.5%, or $26.3 million. The
acquisition of ISI accounted for approximately $33.2 million of the growth for
the three months ended March 31, 2004. The increase in revenue was primarily
driven by an increase in employee headcount and growth in the following
contracts: ANSWER, Engineering and Technical Services for Deploying Enabling
Technologies, Stricom Omnibus Contract, Management Organizational and Business
Services, Millenia Lite and Professional Engineering Services contract.
COSTS OF REVENUES
For the three months ended March 31, 2004, costs of revenues increased by
$50.9 million, or 25.8%, to $248.1 million from $197.2 million for the three
months ended March 31, 2003. The increase in costs of revenues was due to the
corresponding growth in revenues resulting from organic growth, the acquisition
of ISI and the increase in employee headcount.
GENERAL AND ADMINISTRATIVE EXPENSES
For the three months ended March 31, 2004, general and administrative
expenses increased $2.9 million, or 22.3%, to $15.9 million from $13.0 million
for the three months ended March 31, 2003. General and administrative expenses
for the three months ended March 31, 2004, as a percentage of revenues,
decreased to 5.5% from 5.7%. This decrease as a percentage of revenues was
driven primarily by continued 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.
17
AMORTIZATION
For the three months ended March 31, 2004, amortization expense increased
by $202,000, or 42.3%, to $679,000 from $477,000 for the three months ended
March 31, 2003. 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 noncompete agreement.
OPERATING INCOME
For the three months ended March 31, 2004, operating income increased $5.5
million, or 31.0%, to $23.5 million from $18.0 million for the three months
ended March 31, 2003. The increase in operating income is primarily a result of
the corresponding increase in revenues. Operating income as a percentage of
revenues increased to 8.2% for the three months ended March 31, 2004 from 7.9%
for the three months ended March 31, 2003. The increase in the percentage of
revenues was driven by the decline in the percentage of costs of revenues and
general and administrative as a percentage of revenues.
INTEREST EXPENSE, NET
For the three months ended March 31, 2004, interest expense, net of
interest income, decreased $1.4 million, or 43.8% to $1.8 million from $3.2
million for the three months ended March 31, 2003. The decrease in interest
expense was due primarily to the repurchase of our 12% Notes and the refinancing
of our Credit Facility. In December 2003, we reduced the balance of our 12%
Notes to approximately $1.9 million from $75.0 million by utilizing the proceeds
from the $150.0 million in the Term Loan B borrowings made under the Amended and
Restated Credit Agreement of December 19, 2003, or the "2003 Amended and
Restated Credit Agreement". During the three months ended March 31, 2004, the
interest rate on the Term Loan B borrowings ranged from 3.11% to 3.16% compared
to a range of 3.59% to 3.66% on the previous term loan for the same period in
the prior year.
PROVISION FOR INCOME TAXES
Our effective tax rate for the three months ended March 31, 2004 was 38.7%
compared with an effective tax rate of 38.5% for the three months ended March
31, 2003. The effective tax rate reflects federal and state legislative changes.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows for the Three months Ended March 31, 2004
We generated $549,000 and $13.4 million in cash from operations for the
three months ended March 31, 2004 and 2003, respectively. The decrease in cash
flow from operations was primarily attributable to an increase in days sales
outstanding, or "DSO". Total DSO increased from 71 days as of December 31, 2003
to 76 days as of March 31, 2004. DSO increased due to the conversion of ISI's
accounting system into the Company's accounting system, which was completed
during the quarter. In addition, the Company experienced some delays in the
receipt and processing of subcontractor and vendor invoices which affected the
billing and collection of these costs. Contract receivables increased $21.1
million for the three months ended March 31, 2004. Accounts receivable totaled
$244.0 million at March 31, 2004 and represented 49.1% of total assets at that
date. For the three months ended March 31, 2004, net cash used in investing
activities was $685,000, which was attributable to purchases of property, plant
and equipment. Cash provided by financing activities was $277,000 for the three
months ended March 31, 2004.
On December 19, 2003, the Company entered into an amended and restated
credit agreement related to our Credit Facility. This current amendment and
restatement, among other things, provides for a new Term Loan B under the Credit
Facility in the amount of $150.0 million with a maturity date of December 31,
2010 and the extension of the maturity date of the revolving loan portion of our
Credit Facility to December 31, 2008. 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 period ended
March 31, 2004, we complied with all of our financial covenants. 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.
At March 31, 2004, total debt outstanding under our Credit Facility was
approximately $153.7 million, consisting of $149.6 million of Term Loan B, and
$4.1 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 March 31, 2004 were $129.0 million. Under certain
conditions related to excess annual cash flow, as defined in our Credit
Facility, and the receipt of proceeds from certain asset sales and debt or
equity issuances, we are required to prepay, in amounts specified in our Credit
Facility, borrowings under the Term Loan B. In addition, we are scheduled to pay
quarterly installments of approximately $375,000 under the Term Loan B until the
Credit Facility matures on December 31, 2010. As of March 31, 2004, we did not
have any capital commitments greater than $1.0 million.
18
Our principal working capital need is for funding accounts receivable,
which has increased with the growth in our business, and the delays in
government funding. Our principal sources of cash to fund our working capital
needs are cash generated from operating activities and borrowings under our
revolving Credit Facility.
We have relatively low capital investment requirements. Capital
expenditures were $685,000 and $653,000 for the three months ended March 31,
2004 and 2003, respectively, primarily for leasehold improvements and office
equipment.
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 OBLIGATIONS
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
March 31, 2004, we financed equipment with an original cost of approximately
$18.3 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.
INFLATION
We do not believe that inflation has had a material effect on our business
in the three months ended March 31, 2004.
19
ITEM 3. 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% and are callable on or after May 15, 2004. 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 and by focusing on reducing the amount of
outstanding debt through cash flow. In addition, we have implemented a cash flow
management plan focusing on billing and collecting receivables to manage our
debt.
A 1% change in interest rates on variable rate debt would have resulted in
our interest expense fluctuating by approximately $368,000 and $43,000 for the
three months ended March 31, 2004 and 2003, respectively.
As of March 31, 2004, the fair value of our interest swap agreements with a
notional amount of $10.0 million resulted in a liability of approximately
$118,000 and has been included in other current liabilities in the accompanying
unaudited condensed consolidated balance sheet.
ITEM 4. 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), 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 March
31, 2004. Based on this evaluation, our chief executive officer and chief
financial officer concluded that, as of March 31, 2004, 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 SEC'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 three
months ended March 31, 2004 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting. .
20
PART II. OTHER INFORMATION REQUIRED IN REPORT
ITEM 1. 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 2. CHANGES IN SECURITIES, USE OF PROCEEDS, AND ISSUER PURCHASES
OF EQUITY SECURITIES
NONE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
ITEM 5. OTHER INFORMATION
NONE.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
4.1 Anteon International Corporation Supplemental Retirement Savings Plan
(incorporated by reference to Exhibit 4.1 to Anteon International
Corporation's Registration Statement on Form S-8 filed December 30,
2003 (Commission File No. 333-111631)).
4.2 Anteon International Corporation Employee Stock Purchase Plan
(incorporated by reference to Exhibit 4.1 to Anteon International
Corporation's Registration Statement on Form S-8 filed March 8, 2004
(Commission File No. 333-113401)).
31.1 Certification of the Chief Executive Officer pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934, as amended
31.2 Certification of the Chief Financial Officer pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934, as amended 32.1
Certification by Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
32.2 Certification by Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
B. REPORTS ON FORM 8-K
On February 19, 2004, 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 and year ended December 31,
2003.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ANTEON INTERNATIONAL CORPORATION
Date: May 6, 2004 By: /s/: Joseph M. Kampf
----------------- ----------------------------------------------
Joseph M. Kampf - President and
Chief Executive Officer
Date: May 6, 2004 By: /s/: Charles S. Ream
----------------- -----------------------------------------------
Charles S. Ream - Executive Vice President
and Chief Financial Officer
22