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Form 10-Q for ANTEON INTERNATIONAL CORPORATION filed on August 4, 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 June 30, 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 July 30, 2004, there were 35,800,473 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
JUNE 30, 2004 AND DECEMBER 31, 2003 1
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2004 AND 2003 2
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 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 15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 22
ITEM 4. CONTROLS AND PROCEDURES 22
PART II. OTHER INFORMATION REQUIRED IN REPORT
ITEM 1. LEGAL PROCEEDINGS 23
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS, AND ISSUER
PURCHASES OF EQUITY SECURITIES 23
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 23
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS 23
ITEM 5. OTHER INFORMATION 23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 24
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)
June 30, 2004 December 31,
(Unaudited) 2003
---------------- ----------------
ASSETS
Current assets:
Cash and cash equivalents $ 26,335 $ 2,088
Accounts receivable, net 239,661 222,937
Prepaid expenses and other current assets 15,380 17,925
Deferred tax assets, net 1,456 1,641
---------------- -----------------
Total current assets 282,832 244,591
Property and equipment, net 12,833 12,759
Goodwill 211,936 212,205
Intangible and other assets, net 12,455 9,725
---------------- -----------------
Total assets $ 520,056 $ 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 349 341
Accounts payable 31,159 36,793
Accrued expenses 101,939 85,468
Deferred compensation obligation 557 --
Due to related party -- 48
Income tax payable 4,240 641
Other current liabilities -- 230
Deferred revenue 11,092 11,783
---------------- -----------------
Total current liabilities 153,336 139,304
Term Loan B, less current portion 147,750 148,500
Revolving facility -- 4,400
Senior subordinated notes payable, less current portion -- 1,876
Obligations under capital leases, less current portion 308 465
Noncurrent deferred tax liabilities, net 7,723 10,017
Other long term liabilities 4,327 16
---------------- -----------------
Total liabilities 313,444 304,578
Minority interest in subsidiaries 245 210
Stockholders' equity:
Preferred stock, $.01 par value; 15,000,000 shares authorized, none issued
and outstanding as of June 30, 2004 and December 31, 2003 -- --
Common stock, $.01 par value; 175,000,000 shares authorized, 35,751,354 and
35,354,996shares issued and outstanding as of June 30, 2004 and
December 31, 2003, respectively. 358 354
Additional paid-in capital 119,553 115,863
Accumulated other comprehensive income (loss) 110 (72)
Retained earnings 86,346 58,347
---------------- -----------------
Total stockholders' equity 206,367 174,492
---------------- -----------------
Total liabilities and stockholders' equity $ 520,056 $ 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 For the six months ended
June 30, June 30,
--------------------------------- ----------------------------------
2004 2003 2004 2003
--------------- --------------- ---------------- ---------------
Revenues $ 304,161 $ 254,093 $ 592,311 $ 482,684
Costs of revenues 262,195 218,830 510,254 416,006
------------- ------------- -------------- --------------
Gross profit 41,966 35,263 82,057 66,678
------------- ------------- -------------- --------------
Operating expenses:
General and administrative expenses 16,372 14,446 32,247 27,419
Amortization of intangible assets 680 563 1,359 1,040
------------- ------------- -------------- --------------
Total operating expenses 17,052 15,009 33,606 28,459
------------- ------------- -------------- --------------
Operating income 24,914 20,254 48,451 38,219
Other income 2 -- 4 --
Interest expense, net of interest income of $72,
$71, $150 and $141, respectively 1,950 3,363 3,744 6,553
Minority interest in earnings of subsidiaries (30) (20) (35) (32)
------------- ------------- -------------- --------------
Income before provision for income taxes 22,936 16,871 44,676 31,634
Provision for income taxes 8,271 6,562 16,677 12,250
------------- ------------- -------------- --------------
Net income $ 14,665 $ 10,309 $ 27,999 $ 19,384
============= ============= ============== ==============
Basic earnings per common share: 0.41 $ 0.30 $ 0.79 $ 0.56
============= ============= ============== ==============
Basic weighted average shares outstanding 35,623,968 34,693,543 35,536,060 34,577,286
Diluted earnings per common share: $ 0.39 $ 0.28 $ 0.75 $ 0.53
============= ============= ============== ==============
Diluted weighted average shares outstanding 37,204,172 36,729,783 37,175,770 36,680,559
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 six months ended June 30,
2004 2003
---------------------- --------------------
OPERATING ACTIVITIES:
Net income $ 27,999 $ 19,384
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization of property and equipment 1,986 1,828
Amortization of intangible assets 1,359 1,040
Amortization of deferred financing fees 368 708
Loss on disposals of property and equipment -- 1
Deferred income taxes (613) (2,893)
Minority interest in earnings of subsidiaries 35 32
Changes in assets and liabilities (672) 3,672
-------------- --------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 30,462 23,772
-------------- --------------
INVESTING ACTIVITIES:
Purchases of property, equipment and other assets (2,044) (1,477)
Costs of acquisition, net of cash acquired -- (92,310)
Other 269 --
-------------- --------------
NET CASH USED FOR INVESTING ACTIVITIES (1,775) (93,787)
-------------- --------------
FINANCING ACTIVITIES:
Principal payments on bank and other notes payable -- (25)
Deferred financing fees (88) (249)
Principal payments on Term Loan A -- (1,899)
Principal payments on Term Loan B (750) --
Proceeds from revolving credit facility 540,100 484,800
Principal payments on revolving credit facility (544,500) (415,400)
Redemption of senior subordinated notes payable (1,876) --
Principal payments under capital lease obligations (167) --
Proceeds from issuance of common stock, net of expenses 2,841 2,351
-------------- --------------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES (4,440) 69,578
-------------- --------------
CASH AND CASH EQUIVALENTS:
Net increase (decrease) in cash and cash equivalents 24,247 (437)
Cash and cash equivalents, beginning of period 2,088 4,266
-------------- --------------
Cash and cash equivalents, end of period $ 26,335 $ 3,829
============== ==============
Supplemental disclosure of cash flow information (in thousands):
Interest paid $ 3,580 $ 6,084
============== ==============
Income taxes paid, net $ 14,372 $ 16,717
============== ==============
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
JUNE 30, 2004 AND 2003
(1) Basis of Presentation
The information furnished in the accompanying Unaudited Condensed
Consolidated Balance Sheets, Unaudited Condensed Consolidated Statements of
Operations and Unaudited Condensed Consolidated Statements of Cash Flows 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 and six months ended June 30,
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 with certainty.
(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 Statement of Financial Accounting Standards ("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 six
months ended
June 30, 2003
-----------------
Total revenues $ 536,362
Total expenses 516,392
----------------
Net income $ 19,970
================
Basic earnings per common share $ 0.58
================
Diluted earnings per common share $ 0.54
================
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 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. Compensation
expense related to stock options granted to non-employees is not significant.
The following table illustrates the effect on net income and earnings per
share for the three and six months ended June 30, 2004 and 2003 as if the
Company had applied the fair value recognition provisions of SFAS No. 123 to
stock-based employee compensation:
Three Months Ended Three Months Ended
June 30, 2004 June 30, 2003
-------------------- ------------------
(in thousands, except per share data)
Net income, as reported $ 14,665 $ 10,309
Add: stock-based compensation recorded 2 --
Deduct: total stock-based compensation expense determined
under the fair value method, net of tax 1,097 887
-------------- ------------
Pro forma net income $ 13,570 $ 9,422
Earnings Per Share:
Basic-as reported $ 0.41 $ 0.30
============= ============
Basic-Pro forma $ 0.38 $ 0.27
============= ============
Diluted-as reported $ 0.39 $ 0.28
============= ============
Diluted-Pro forma $ 0.36 $ 0.26
============= ============
Six Months Ended Six Months Ended
June 30, 2004 June 30, 2003
-------------------- ------------------
(in thousands, except per share data)
Net income, as reported $ 27,999 $ 19,384
Add: stock-based compensation recorded 3 --
Deduct: total stock-based compensation expense determined
under the fair value method, net of tax 2,169 1,705
-------------- ------------
Pro forma net income $ 25,833 $ 17,679
Earnings Per Share:
Basic-as reported $ 0.79 $ 0.56
============= ============
Basic-Pro forma $ 0.73 $ 0.51
============= ============
Diluted-as reported $ 0.75 $ 0.53
============= ============
Diluted-Pro forma $ 0.69 $ 0.48
============= ============
5
(5) Comprehensive Income
Comprehensive income for the three months ended June 30, 2004 and 2003 was
approximately $14.8 million and $10.5 million, respectively. Comprehensive
income for the six months ended June 30, 2004 and 2003 was approximately $28.2
million and $19.6 million, respectively. Other comprehensive income for the
three months ended June 30, 2004 and 2003 includes foreign currency translation
income of approximately $14,000 and $67,000, respectively, and increases in the
fair value of interest rate swaps of approximately $72,000 and $85,000, net of
tax. Other comprehensive income for the six months ended June 30, 2004 and 2003
includes foreign currency translation gains of approximately $41,000 and
$35,000, respectively, and increases in the fair value of interest rate swaps of
approximately $141,000 and $147,000, net of tax.
(6) Computation of Earnings Per Share
For the three months ended
June 30, 2004
Income Weighted average shares Per Share
(Numerator) (Denominator) Amount
(in thousands, except share and per share data)
Basic earnings per share:
Net income $ 14,665 35,623,968 $ 0.41
=============== ==============
Stock options -- 1,580,204 --
Diluted earnings per share:
Net income $ 14,665 37,204,172 $ 0.39
=============== ==============
For the three months ended
June 30, 2003
Income Weighted average shares Per Share
(Numerator) (Denominator) Amount
(in thousands, except share and per share data)
Basic earnings per share:
Net income $ 10,309 34,693,543 $ 0.30
=============== ==============
Stock options -- 2,036,240 --
Diluted earnings per share:
Net income $ 10,309 36,729,783 $ 0.28
=============== ==============
6
For the six months ended
June 30, 2004
Income Weighted average shares Per Share
(Numerator) (Denominator) Amount
(in thousands,except share and per share data)
Basic earnings per share:
Net income $ 27,999 35,536,060 $ 0.79
=============== ==============
Stock options -- 1,639,710 --
Diluted earnings per share:
Net income $ 27,999 37,175,770 $ 0.75
=============== ==============
For the six months ended
June 30, 2003
Income Weighted average shares Per Share
(Numerator) (Denominator) Amount
(in thousands, except share and per share data)
Basic earnings per share:
Net income $ 19,384 34,577,286 $ 0.56
=============== ==============
Stock options -- 2,103,273 --
Diluted earnings per share:
Net income $ 19,384 36,680,559 $ 0.53
=============== ===============
(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 and joint and
several. Separate unaudited condensed financial statements of the Guarantor
Subsidiaries are not presented because the Company's management has determined
that they would not be material to investors. The non-guarantor subsidiaries are
the Company's foreign subsidiaries. The following supplemental financial
information sets forth, on a combined basis, unaudited condensed balance sheets,
statements of operations and statements of cash flows information for the
Guarantor Subsidiaries, the Company's non-guarantor subsidiaries and, on a
consolidated and unconsolidated basis, for the Company.
7
As of June 30, 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) $ 24,747 $ 1,597 $ -- $ 26,335
Accounts receivable, net -- 238,892 769 -- 239,661
Other current assets 397 26,116 451 (10,128) 16,836
Property and equipment, net 1,773 10,962 98 -- 12,833
Due from parent (183,506) 183,729 (223) -- --
Investments in and advances to subsidiaries 30,780 (28,744) -- (2,036) --
Goodwill 168,263 43,673 -- -- 211,936
Intangible and other assets, net 71,874 8,581 -- (68,000) 12,455
------------- -------------- ------------- ------------- ---------------
Total assets $ 89,572 $ 507,956 $ 2,692 $ (80,164) $ 520,056
============= ============== ============= ============= ===============
Indebtedness $ 2,500 $ 217,250 $ -- $ (68,000) $ 151,750
Accounts payable 489 30,511 159 -- 31,159
Accrued expenses and other current
liabilities 1,997 104,306 782 -- 107,085
Deferred revenue 10,128 10,571 521 (10,128) 11,092
Other long-term liabilities -- 12,358 -- -- 12,358
------------- -------------- ------------- ------------- ---------------
Total liabilities 15,114 374,996 1,462 (78,128) 313,444
Minority interest in subsidiaries -- -- 245 -- 245
Total stockholders' equity (deficit) 74,458 132,960 985 (2,036) 206,367
------------- -------------- ------------- ------------- ---------------
Total liabilities and stockholders' equity
(deficit) $ 89,572 $ 507,956 $ 2,692 $ (80,164) $ 520,056
============= ============== ============= ============= ===============
8
For the six months ended June 30, 2004
----------------------------------------------------------------------------------
Consolidated
Unaudited Condensed Consolidated Anteon Anteon
Statements of Operations International Guarantor Non-Guarantor Elimination International
Corporation Subsidiaries Subsidiaries Entries Corporation
------------- -------------- -------------- -------------- ---------------
(in thousands)
Revenues $ (1) $ 590,467 $ 2,810 $ (965) $ 592,311
Costs of revenues (1) 508,511 2,709 (965) 510,254
------------- -------------- -------------- -------------- ---------------
Gross profit -- 81,956 101 -- 82,057
Total operating expenses 2,183 50,762 35 (19,374) 33,606
------------- -------------- -------------- -------------- ---------------
Operating income (loss) (2,183) 31,194 66 19,374 48,451
Other income (loss) 6,368 13,010 -- (19,374) 4
Interest expense (income), net (700) 4,456 (12) -- 3,744
Minority interest in earnings of
subsidiaries -- -- (35) -- (35)
------------- -------------- -------------- -------------- ---------------
Income before provision for income taxes 4,885 39,748 43 -- 44,676
Provision for (benefit from) income taxes 1,904 14,804 (31) -- 16,677
------------- -------------- -------------- -------------- ---------------
Net income $ 2,981 $ 24,944 $ 74 $ -- $ 27,999
============= =============== ============== ============== ===============
9
For the six months ended June 30, 2004
----------------------------------------------------------------------
Unaudited Condensed Consolidated Statements of Cash
Flows
Consolidated
Anteon Anteon
International Guarantor Non-Guarantor International
Corporation Subsidiaries Subsidiaries Corporation
------------- ------------- ------------- ----------------
(in thousands)
Operating Activities:
Net income $ 2,981 $ 24,944 $ 74 $ 27,999
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation and amortization of property and
equipment 357 1,606 23 1,986
Amortization of intangible assets 1,275 84 -- 1,359
Amortization of deferred financing fees 62 306 -- 368
Deferred income taxes -- (613) -- (613)
Minority interest in earnings of subsidiaries -- -- 35 35
Changes in assets and liabilities (5,823) 5,381 (230) (672)
------------- --------------- ------------- ---------------
Net cash provided by (used for) operating
activities (1,148) 31,708 (98) 30,462
------------- --------------- ------------- ---------------
Investing activities:
Purchases of property, equipment and other assets (106) (1,906) (32) (2,044)
Other 269 -- -- 269
------------- --------------- ------------- ---------------
Net cash provided by (used for) investing
activities 163 (1,906) (32) (1,775)
------------- --------------- ------------- ---------------
Financing activities:
Deferred financing fee 87 (175) -- (88)
Principal payments on Term Loan B -- (750) -- (750)
Proceeds from revolving credit facility -- 540,100 -- 540,100
Principal payments on revolving credit facility -- (544,500) -- (544,500)
Redemption of senior subordinated notes payable (1,876) -- -- (1,876)
Principal payments under capital lease obligations -- (167) -- (167)
Proceeds from issuance of common stock, net of
expenses 2,774 -- 67 2,841
------------- --------------- ------------- ---------------
Net cash provided by (used for) financing activities 985 (5,492) 67 (4,440)
------------- --------------- ------------- ---------------
Net increase (decrease) in cash and cash equivalents -- 24,310 (63) 24,247
Cash and cash equivalents, beginning of period (9) 437 1,660 2,088
------------- --------------- ------------- ---------------
Cash and cash equivalents, end of period $ (9) $ 24,747 $ 1,597 $ 26,335
============= =============== ============= ===============
10
For the six months ended June 30, 2003
----------------------------------------------------------------------------------
Consolidated
Unaudited Condensed Consolidated Anteon Anteon
Statements of Operations International Guarantor Non-Guarantor Elimination International
Corporation Subsidiaries Subsidiaries Entries Corporation
------------- -------------- -------------- -------------- ---------------
(in thousands)
Revenues $ -- $ 477,360 $ 5,450 $ (126) $ 482,684
Costs of revenues -- 411,311 4,821 (126) 416,006
------------- -------------- -------------- -------------- ---------------
Gross profit -- 66,049 629 -- 66,678
Total operating expenses 1,513 41,579 408 (15,041) 28,459
------------- -------------- -------------- -------------- ---------------
Operating income (loss) (1,513) 24,470 221 15,041 38,219
Other income (loss) 4,797 10,244 -- (15,041) --
Interest expense (income), net 2,520 4,040 (7) -- 6,553
Minority interest in earnings of
subsidiaries -- -- (32) -- (32)
------------- -------------- -------------- -------------- ---------------
Income before provision for income taxes 764 30,674 196 -- 31,634
Provision for income taxes 290 11,890 70 -- 12,250
------------- -------------- ------------- -------------- ---------------
Net income $ 474 $ 18,784 $ 126 $ -- $ 19,384
============= ============== ============== ============== ===============
11
For the six months ended June 30, 2003
Unaudited Condensed Consolidated Statements of Cash
Flows
Consolidated
Anteon Anteon
International Guarantor Non-Guarantor International
Corporation Subsidiaries Subsidiar Corporation
------------- --------------- ------------- ----------------
(in thousands)
Operating Activities:
Net income $ 474 $ 18,784 $ 126 $ 19,384
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation and amortization of property and
equipment 376 1,420 32 1,828
Amortization of intangible assets 913 127 -- 1,040
Amortization of deferred financing fees 657 51 -- 708
Loss on disposals of property and equipment -- 1 -- 1
Deferred income taxes -- (2,893) -- (2,893)
Minority interest in earnings of subsidiaries -- -- 32 32
Changes in assets and liabilities 89,575 (88,335) 2,432 3,672
------------- --------------- ------------- ---------------
Net cash provided by (used for) operating
activities 91,995 (70,845) 2,622 23,772
------------- --------------- ------------- ----------------
Investing activities:
Purchases of property, equipment and other assets (362) (1,070) (45) (1,477)
Costs of acquisition, net of cash acquired (92,091) (219) -- (92,310)
------------- --------------- ------------- ---------------
Net cash used for investing activities (92,453) (1,289) (45) (93,787)
------------- --------------- ------------- ---------------
Financing activities:
Principal payments on bank and other notes payable -- (25) -- (25)
Deferred financing fee -- (249) -- (249)
Principal payments on Term Loan A (1,899) -- -- (1,899)
Proceeds from revolving credit facility -- 484,800 -- 484,800
Principal payments on revolving credit facility -- (415,400) -- (415,400)
Proceeds from issuance of common stock, net of
expenses 2,351 -- -- 2,351
------------- --------------- ------------- ---------------
Net cash provided by financing activities 452 69,126 -- 69,578
------------- --------------- ------------- ---------------
Net increase (decrease) in cash and cash equivalents (6) (3,008) 2,577 (437)
Cash and cash equivalents, beginning of period (17) 3,659 624 4,266
------------- --------------- ------------- ---------------
Cash and cash equivalents, end of period $ (23) $ 651 $ 3,201 $ 3,829
============= =============== ============= ===============
12
(8) Segment Information
Although the Company is organized by strategic business units, 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 all of the Company's government contracting units.
(9) Interest Rate Swap Agreements
During the six months ended June 30, 2004, the last of the Company's
interest rate swap agreements, with a notional value of $10.0 million, matured.
(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 has directed the trustee of the Plan to invest the assets
to correspond to the 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 June 30, 2004, the deferred compensation obligation was approximately
$557,000. For the three and six months ended June 30, 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
(13) Subsequent Events
On July 26, 2004, the Company entered into a settlement agreement with the
former shareholders of Sherikon, Inc. resolving, among other items, the
Company's indemnification claim submitted in October 2002. The indemnification
claim amount exceeded the $2.5 million promissory note otherwise due to the
Sherikon shareholders. Under the provisions of the settlement agreement, the
principal amount of the note was reduced from $2.5 million to $1.35 million, and
the Company paid the reduced note amount, without interest. In the third quarter
of 2004, the Company will recognize other income of approximately $1.3 million
consisting of a $1.15 million reduction in the promissory note amount and
previously accrued interest.
On July 27, 2004, the Company acquired 100% of the stock of Simulation
Technologies, Inc. ("STI"), a provider of modeling and simulation software
solutions and services, headquartered in San Antonio, Texas, for a total
purchase price of $15.0 million. The Company financed the acquisition through
cash-on-hand and its existing credit facility. The transaction will be accounted
for under the purchase method of accounting.
14
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 the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of these statements. We
are under no duty to update any of the forward-looking statements after the date
of this quarterly report to conform these statements to actual results and do
not intend to do so. These statements are only predictions. Actual events or
results may differ materially. In evaluating these statements, you should
specifically consider various factors, including the following:
o changes in the 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
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 six
months ended June 30, 2004, approximately 88% 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 10% from
civilian agencies of the U.S. federal government. For the six months ended June
30, 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 six months
ended June 30, 2004, our largest contract or task order accounted for
approximately 8% of our revenue.
15
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
- -------------------
For the six months ended June 30, 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 a
performance-based award fee. Cost-plus type contracts provide relatively less
risk than other contract types because we are reimbursed for all direct costs
and certain indirect costs, such as overhead and general and administrative
expenses, and are paid a fee for work performed. For cost-plus award fee type
contracts, we recognize the expected fee to be awarded by the customer at the
time such fee can be reasonably estimated, based on factors such as our prior
award experience and communications with the customer regarding our performance,
including any interim performance evaluations rendered by the customer. Revenues
are recognized under substantially all fixed price contracts based on the
percentage-of-completion basis, using the cost-to-cost method for all services
provided. For non-service-related fixed price contracts, revenues are recognized
as units are delivered (the units-of-delivery method). 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 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.
16
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 40% time and materials, 34% cost-plus and 26% fixed price (a
substantial majority of which were firm fixed price level of effort) during the
six months ended June 30, 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.
We maintain reserves for uncollectible accounts receivable which may arise
in the normal course of business. Historically, we have not had significant
write-offs of uncollectible accounts receivable. However, we do perform work on
many contracts and task orders, where on occasion, issues may arise, which could
lead to accounts receivable not being fully collected.
Costs of Revenues
- -----------------
Our costs are categorized as either direct or indirect costs. Direct costs
are those that can be identified with and allocated to specific contracts and
tasks. They include labor, fringe (vacation time, medical/dental, 401K plan
matching contribution, tuition assistance, employee welfare, worker's
compensation and other benefits), subcontractor costs, consultant fees, travel
expenses and materials. Indirect costs are either overhead or general and
administrative expenses. Indirect costs cannot be identified with specific
contracts or tasks, and to the extent that they are allowable, they are
allocated to contracts and tasks using appropriate government-approved
methodologies. Costs determined to be unallowable under the Federal Acquisition
Regulations cannot be allocated to projects. Our principal unallowable costs are
interest expense, amortization expense for separately identified intangibles
from acquisitions 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 $211.9 million and $212.2
million as of June 30, 2004 and December 31, 2003, respectively. Effective
January 1, 2002, we adopted SFAS No. 142, and no longer amortize goodwill, but
rather test our goodwill for impairment at least annually using a fair value
approach. We completed our annual impairment analysis as of September 30, 2003,
noting no indications of impairment for any of our reporting units. As of June
30, 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 $16.7 million and $17.9 million at June 30, 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 federal
government appropriations or funding of certain programs, or other similar
events. None of these events occurred during the six months ended June 30, 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 by the
amount by which the carrying amount of the assets exceeds their estimated fair
value, as determined by an analysis of discounted cash flows using a discounted
interest rate based on our cost of capital and the related risks of
recoverability.
In evaluating impairment, we consider, among other things, our ability to
sustain our current financial performance on contracts and tasks, our access to
and penetration of new markets and customers and the duration of, and estimated
amounts from, our contracts. Any uncertainty of future financial performance is
dependent on the ability to maintain our customers and the continued funding of
our contracts and tasks by the government. Over the past four years, we have
been able to win more than 90% 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.
17
Business Combinations
- ---------------------
We apply the provisions of SFAS No. 141, Business Combinations, whereby the
net tangible and separately identifiable intangible assets acquired and
liabilities assumed are recognized at their estimated fair market values at the
acquisition date. The purchase price in excess of the estimated fair market
value of the net tangible and separately identifiable intangible assets acquired
represents goodwill. The allocation of the purchase price related to our
business combinations involves significant estimates and management judgment
that may be adjusted during the allocation period, but in no case beyond one
year from the acquisition date. Costs incurred related to successful business
combinations are capitalized as costs of business combinations, while costs
incurred by us for unsuccessful or terminated acquisition opportunities are
expensed when we determine that such opportunities will no longer be pursued.
Costs incurred related to anticipated business combinations are deferred.
On May 23, 2003, we 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 transaction 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 statement of
operations, which include the operations of ISI for the five week period
beginning May 23, 2003, the date of the acquisition.
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 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
acquisition.
Interest expense is primarily related to our term loans and revolving
facility, our Senior Subordinated Notes due 2009, or the "12% Notes", and other
miscellaneous interest costs.
Other income is from non-core business items such as gains on the sales and
closures of businesses and investments.
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. We believe that our
demonstrated performance record and service excellence have enabled us to
maintain our position as an incumbent service provider on more than 90% of our
contracts that have been recompeted over the past four years. We have increased
our total remaining estimated contract value by approximately $300.0 million,
from $5.6 billion at December 31, 2003, to $5.9 billion at June 30, 2004. Funded
backlog decreased approximately $2.6 million to $658.5 million at June 30, 2004,
from $661.1 million as of December 31, 2003.
Our total estimated remaining contract value, excluding indefinite
delivery, indefinite quantity, or "IDIQ," and multiple award contracts,
represents the aggregate contract revenue we estimate will be earned over the
remaining life of our contracts including all option years. For IDIQ and
multiple award contracts, we compute the total estimated remaining contract
value by calculating the three month rolling average run rate on each of these
contracts and extrapolating it over the life of the contract. Funded backlog is
based upon amounts actually appropriated by a customer for payment for goods and
services. Because the U.S federal government operates under annual
appropriations, agencies of the U.S. federal government typically fund contracts
on an incremental basis. Accordingly, the majority of the total estimated
remaining contract value is not funded backlog. Our total estimated remaining
contract value is based on our experience under contracts and we believe our
estimates are reasonable. However, there can be no assurance that our existing
contracts will result in actual revenues in any particular period or at all.
These amounts could vary depending upon government budgets and appropriations.
18
RESULTS OF OPERATIONS
The following table sets forth our results of operations based on the
amounts and percentage relationship of the items listed to contract revenues
during the period shown:
For the Three Months Ended June 30,
2004 2003
---- ----
($ in thousands)
Revenues $ 304,161 100.0% $ 254,093 100.0%
Costs of revenues 262,195 86.2 218,830 86.1
--------------- ---------- -------------- -----------
Gross profit 41,966 13.8 35,263 13.9
--------------- ---------- -------------- -----------
Operating expenses:
General and administrative expenses 16,372 5.4 14,446 5.7
Amortization of intangible assets 680 0.2 563 0.2
--------------- ---------- -------------- -----------
Total operating expenses 17,052 5.6 15,009 5.9
--------------- ---------- -------------- -----------
Operating income 24,914 8.2 20,254 8.0
Other income, net 2 -- -- --
Interest expense, net 1,950 0.7 3,363 1.3
Minority interest in (earnings) losses of subsidiaries (30) -- (20) --
--------------- ---------- -------------- -----------
Income before income taxes 22,936 7.5 16,871 6.7
Provision for income taxes 8,271 2.7 6,562 2.6
--------------- ---------- -------------- -----------
Net income $ 14,665 4.8% $ 10,309 4.1%
=============== ========== ============== ===========
For the Six Months Ended June 30,
2004 2003
---- ----
($ in thousands)
Revenues $ 592,311 100.0% $ 482,684 100.0%
Costs of revenues 510,254 86.1 416,006 86.2
--------------- ---------- -------------- -----------
Gross profit 82,057 13.9 66,678 13.8
--------------- ---------- -------------- -----------
Operating expenses:
General and administrative expenses 32,247 5.5 27,419 5.7
Amortization of intangible assets 1,359 0.2 1,040 0.2
--------------- ---------- -------------- -----------
Total operating expenses 33,606 5.7 28,459 5.9
--------------- ---------- -------------- -----------
Operating income 48,451 8.2 38,219 7.9
Other income, net 4 -- -- --
Interest expense, net 3,744 0.7 6,553 1.4
Minority interest in (earnings) losses of subsidiaries (35) -- (32) --
--------------- ---------- -------------- -----------
Income before income taxes 44,676 7.5 31,634 6.5
Provision for income taxes 16,677 2.8 12,250 2.5
--------------- ---------- -------------- -----------
Net income $ 27,999 4.7% $ 19,384 4.0%
=============== ========== ============== ===========
REVENUES
For the three months ended June 30, 2004, revenues increased by $50.1
million, or 19.7%, to $304.2 million from $254.1 million for the three months
ended June 30, 2003. For the six months ended June 30, 2004, revenues increased
by $109.6 million, or 22.7%, to $592.3 million from $482.7 million for the six
months ended June 30, 2004. 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
and six months ended June 30, 2004, our organic growth was 10.2% and 10.8%, or
$24.7 million and $51.0 million, respectively. The acquisition of ISI accounted
for approximately $37.0 and $70.2 of the growth for the three and six months
ended June 30, 2004, respectively. The increase in revenues was primarily driven
by an increase in employee headcount and growth in the GSA task order business,
the Stricom Omnibus Contract including Military Operations on Urban Terrain and
the Department of the Navy's Technical Services for Deploying Enabling
Technologies contract.
19
COSTS OF REVENUES
For the three months ended June 30, 2004, costs of revenues increased by
$43.4 million, or 19.8%, to $262.2 million from $218.8 million for the three
months ended June 30, 2003. For the six months ended June 30, 2004, costs of
revenues increased by $94.2 million, or 22.7%, to $510.3 million from $416.0
million for the six months ended June 30, 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 June 30, 2004, general and administrative
expenses increased $1.9 million, or 13.3%, to $16.4 million from $14.4 million
for the three months ended June 30, 2003. General and administrative expenses
for the three months ended June 30, 2004, as a percentage of revenues, decreased
from 5.7% to 5.4%. For the six month period ended June 30, 2004, general and
administrative expenses increased $4.8 million, or 17.6%, to $32.2 million from
$27.4 million for the six months ended June 30, 2003. General and administrative
expenses for the six months ended June 30, 2004, as a percentage of revenues,
decreased from 5.7% to 5.5%. 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 overall growth in the
business.
AMORTIZATION
For the three months ended June 30, 2004, amortization expenses increased
$117,000, or 20.8%, to $680,000 from $563,000 for the comparable period in 2003.
For the six months ended June 30, 2004, amortization expenses increased
$319,000, or 30.7%, to $1,359,000 from $1,040,000 for the six months ended June
30, 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 noncompete agreement entered into in connection with the
purchase. Amortization as a percentage of revenues for the three and six months
ended June 30, 2004 remained constant at 0.2%.
OPERATING INCOME
For the three months ended June 30, 2004, operating income increased $4.7
million, or 23.0%, to $24.9 million from $20.3 million for the three months
ended June 30, 2003. Operating income as a percentage of revenues increased to
8.2% for the three months ended June 30, 2004 from 8.0% for the same period in
2003. For the six month period ended June 30, 2004, operating income increased
$10.2 million, or 26.8%, to $48.5 million from $38.2 million for the six month
period ended June 30, 2003. Operating income as a percentage of revenues
increased to 8.2% for the six month period ended June 30, 2004 from 7.9% for the
same period in 2003, primarily as a result of an increase in revenues and gross
profit and the decrease of general and administrative expenses as a percentage
of revenues.
INTEREST EXPENSE, NET
For the three month period ended June 30, 2004, interest expense, net of
interest income, decreased $1.4 million, or 42.0%, to $2.0 million from $3.4
million for the three months ended June 30, 2003. For the six months ended June
30, 2004, interest expense, net of interest income, decreased $2.8 million, or
42.9%, to $3.7 million from $6.6 million for the six months ended June 30, 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". In June 2004, we repurchased
the remaining balance of $1.9 million of our 12% Notes. In conjunction with the
repurchase, we paid a tender premium of approximately $113,000 which is included
in interest expense. During the six months ended June 30, 2004, the interest
rate on the Term Loan B borrowings ranged from 3.11% to 3.59% compared to a
range of 3.35% 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 June 30, 2004 was 36.1%
compared to an effective tax rate of 38.9% for the three months ending June 30,
2003. Our effective tax rate for the six months ended June 30, 2004 was 37.3%
compared to an effective tax rate of 38.7% for the six months ended June 30,
2003. The effective tax rate reflects a benefit for federal and state credits
from prior years as well as state legislative changes.
20
LIQUIDITY AND CAPITAL RESOURCES
Cash flows for the Six Months Ended June 30, 2004 and 2003
We generated $30.5 million and $23.8 million in cash from operations for
the six months ended June 30, 2004 and 2003, respectively. This increase in cash
flows was primarily attributable to an increase in net income, offset by an
increase of approximately $600,000 and $2.9 million in deferred income taxes for
the six months ended June 30, 2004 and 2003, respectively. Total days sales
outstanding, or "DSO," at June 30, 2004 was 71 days, which was the same DSO as
June 30, 2003. Accounts receivable totaled $239.7 million at June 30, 2004 and
represented 46.1% of total assets at that date. For the six months ended June
30, 2004, net cash used for investing activities was $1.8 million, which was
primarily attributable to purchases of property, plant and equipment. For the
six months ended June 30, 2003, net cash used for investing activities was $93.8
million, of which approximately $92.3 million was used for the acquisition of
ISI. Cash used in financing activities was $4.4 million for the six months ended
June 30, 2004 due primarily to payments on our Credit Facility and the
redemption of our 12% Notes. Cash provided by financing activities was $69.6
million for the six months ended June 30, 2003 primarily due to the additional
borrowings under the revolving loan portion of our Credit Facility for the
acquisition of ISI.
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 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 June
30, 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 June 30, 2004, total debt outstanding under our Credit Facility was
approximately $149.3 million, consisting of $149.3 million Term Loan B, and zero
outstanding under the revolving loan portion of our Credit Facility. The total
funds available to us under the revolving loan portion of our Credit Facility as
of June 30, 2004 was $172.6 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 June 30, 2004, we did not have any capital
commitments greater than $1.0 million.
Our principal working capital need is for funding accounts receivable,
which has increased with the growth in our business, and the delays in
government funding. Our principal sources of cash to fund our working capital
needs are cash generated from operating activities and borrowings under the
revolving portion of our credit facility.
We have relatively low capital investment requirements. Capital
expenditures were $2.0 million and $1.5 million for the six months ended June
30, 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
June 30, 2004, we financed equipment with an original cost of approximately
$17.7 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 June 30, 2004.
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ITEM 3. QUANTITATIVE and QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have interest rate exposure relating to certain of our long-term
obligations. In June 2004, we repurchased the remaining $1.9 million balance of
our 12% Notes, which had 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 by
reducing the amount of outstanding debt through cash flow by focusing on billing
and collection.
During the six months ended June 30, 2004, the last of our interest rate
swap agreements, with a notional value of $10.0 million, matured. We are not
currently contemplating any further interest rate swap agreements. However, as
market conditions change, we will reevaluate our position.
A 1% change in interest rates on variable rate debt would have resulted in
our interest expense fluctuating by approximately $437,000 and $144,000 for the
six months ended June 30, 2004 and 2003 respectively.
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 15-d-15(e) under the Exchange Act) as of June
30, 2004. Based on this evaluation, our chief executive officer and chief
financial officer concluded that, as of June 30, 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 June 30, 2004 that has materially affected, or is reasonably likely
to materially affect, our internal control over financial reporting.
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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
Our Annual Meeting of Stockholders was held on May 27, 2004. The stockholders
(1) re-elected directors Joseph M. Kampf, Dr. Paul G. Kaminski and Steven M.
Lefkowitz to terms of office expiring at the 2007 Annual Meeting of
Stockholders; (2) approved an amendment to the Amended and Restated Anteon
International Corporation Omnibus Stock Plan; and (3) ratified the selection of
KPMG LLP as the Company's independent auditors for the fiscal year ending
December 31, 2004.
The following directors were not required to stand for re-election at the
meeting (the year in which each director's term expires is indicated in
parenthesis): Frederick J. Iseman (2005), Gilbert F. Decker (2005), Robert A.
Ferris (2006), William J. Perry (2006), Gen. Henry Hugh Shelton, USA (ret.)
(2006), and Thomas J. Tisch (2006).
The following table sets forth the votes cast with respect to each of these
matters:
MATTER FOR AGAINST WITHHELD ABSTAIN
Re-election of Joseph M. Kampf 32,667,708 340,736
Re-election of Dr. Paul G. Kaminski 31,749,492 1,258,952
Re-election of Steven M. Lefkowitz 31,291,291 3,316,841
Approval of an amendment to the Amended and Restated Anteon
International Corporation Omnibus Stock Plan 19,980,396 9,255,996 34,476
Ratification of selection of KPMG LLP as independent auditors 32,651,927 345,267 11,250
ITEM 5. OTHER INFORMATION
NONE
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
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 of the 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 of the 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 April 28, 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 first quarter ended March 31, 2004.
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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: August 4, 2004 /s/ Joseph M. Kampf
---------------- ----------------------------------------------
Joseph M. Kampf - President and
Chief Executive Officer
Date: August 4, 2004 /s/ Charles S. Ream
---------------- -------------------------------------------
Charles S. Ream - Executive Vice President and
Chief Financial Officer
25