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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________ TO _____________
Commission File Number: 001-31258
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ANTEON INTERNATIONAL CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Delaware 13-3880755
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3211 Jermantown Road
Fairfax, VA 22030-2801
(Address of Principal Executive Offices)
(703) 246-0200
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.01 par value per share
Name of each exchange on which registered: New York Stock Exchange (NYSE)
Securities registered pursuant to Section 12(g) of the Act:
None
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No | |
Indicate by check mark whether the registrant (1) is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes |X| No | |
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of June 30, 2004 was $895,852,976 (based on the closing price
of $32.62 per share on June 30, 2004, as reported by the New York Stock
Exchange- Corporate Transactions). For this computation, the registrant excluded
the market value of all shares of its common stock reported as beneficially
owned by named executive officers and directors of the registrant; such
exclusion shall not be deemed to constitute an admission that any such person is
an "affiliate" of the registrant.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. | |
There were 36,279,355 shares of common stock outstanding as of March 2,
2005.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the 2005 Annual Meeting of
Shareholders Part III
FORWARD-LOOKING STATEMENTS
This Form 10-K includes and incorporates by reference forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Forward-looking statements relate to future events or our future financial
performance. These statements involve known and unknown risks, uncertainties and
other factors that may cause our or our industry's actual results, levels of
activity, performance or achievements to be materially different from any
results, levels of activity, performance or achievements expressed or implied by
these forward-looking statements.
These forward-looking statements are identified by their use of terms and
phrases such as "anticipate," "believe," "could," "estimate," "expect,"
"intend," "may," "plan," "predict," "project," "will" and similar terms and
phrases, and may also include references to assumptions. These statements are
contained in the sections entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business" and other sections of
this Form 10-K.
Such forward-looking statements include, but are not limited to:
o funded backlog;
o estimated remaining contract value;
o our expectations regarding the U.S. federal government's
procurement budgets and reliance on outsourcing of services; and
o our financial condition and liquidity, as well as future cash
flows and earnings.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of these statements.
These statements are only predictions. Actual events or results may differ
materially. In evaluating these statements, you should specifically consider
various factors, including the following:
o changes in U.S. federal government procurement laws, regulations,
policies and budgets;
o the number and type of contracts and task orders awarded to us;
o the integration of acquisitions without disruption to our other
business activities;
o changes in general economic and business conditions;
o technological changes;
o the ability to attract and retain qualified personnel;
o competition;
o our ability to retain our contracts during any rebidding process;
and
o the other factors outlined under "Risk Factors."
If one or more of these risks or uncertainties materialize, or if
underlying assumptions prove incorrect, actual results may vary materially from
those expected, estimated or projected. We do not undertake to update our
forward-looking statements or risk factors to reflect future events or
circumstances.
1
RISK FACTORS
Risks related to our business
U.S. Federal Government Contracting Risks--Our business could be adversely
affected by significant changes in the contracting or fiscal policies of
the U.S. federal government.
We derive substantially all of our revenues from contracts with the U.S.
federal government and subcontracts under U.S. federal government prime
contracts, and we believe that the success and development of our business will
continue to depend on our successful participation in U.S. federal government
programs. Accordingly, changes in U.S. federal government contracting policies
could directly affect our financial performance. Among the factors that could
materially adversely affect our U.S. federal government contracting business
are:
o budgetary constraints affecting U.S. federal government spending
generally, or specific departments or agencies in particular, and
changes in fiscal policies or available funding;
o changes in U.S. federal government programs or requirements;
o curtailment of the U.S. federal government's use of technology
services firms;
o the adoption of new laws or regulations;
o technological developments;
o U.S. federal governmental shutdowns and other potential delays in the
government appropriations process;
o delays in the payment of our invoices by government payment offices
due to problems with, or upgrades to, government information systems,
or for other reasons;
o competition and consolidation in the information technology industry;
and
o general economic conditions.
These or other factors could cause U.S. federal governmental agencies, or
prime contractors where we are acting as a subcontractor, to reduce their
purchases under contracts, to exercise their right to terminate contracts or not
to exercise options to renew contracts, any of which could have a material
adverse effect on our financial condition and operating results. Many of our
U.S. federal government customers are subject to stringent budgetary
constraints. We have substantial contracts in place with many U.S. federal
departments and agencies, and our continued performance under these contracts,
or award of additional contracts from these agencies, could be materially
adversely affected by spending reductions or budget cutbacks at these agencies.
Early Termination of Contracts-- Our U.S. federal government contracts may be
terminated by the government at any time prior to their completion, and if
we do not replace them, our operating results may be harmed.
We derive substantially all of our revenues from U.S. federal government
contracts and subcontracts under U.S. federal government prime contracts that
typically are awarded through competitive processes and span one or more base
years and one or more option years. The option periods typically cover more than
half of the contract's potential duration. U.S. federal government agencies
generally have the right not to exercise these option periods. In addition, our
contracts typically also contain provisions permitting a government customer to
terminate the contract on short notice, with or without cause. A decision not to
exercise option periods or to terminate contracts would reduce the profitability
of these contracts to us.
2
Upon contract expiration, if the customer requires further services of the
type provided by the contract, there is frequently a competitive rebidding
process and there can be no assurance that we will win any particular bid, or
that we will be able to replace business lost upon expiration or completion of a
contract. The unexpected termination of one or more of our significant contracts
could result in significant revenue shortfalls. The termination or nonrenewal of
any of our significant contracts, short-term revenue shortfalls, the imposition
of fines or damages or our suspension or debarment from bidding on additional
contracts could harm operating results for those periods.
Most U.S. federal government contract awards are subject to protest by
competitors. If specified legal requirements are satisfied, these protests
require the U.S. federal agency to suspend the contractor's performance of the
newly awarded contract pending the outcome of the protest. These protests could
also result in a requirement to resubmit bids for the contract or in the
termination, reduction or modification of the awarded contract.
Contracts Subject to Audit--Our business could be adversely affected by a
negative audit by the Defense Contract Audit Agency. We could be required
to reimburse the U.S. federal government for costs that we have expended
on our contracts and our ability to compete successfully for future
contracts could be materially impaired.
The Defense Contract Audit Agency, or the "DCAA," and other government
agencies routinely audit and investigate government contracts. These agencies
review a contractor's performance on its contract, cost structure and compliance
with applicable laws, regulations and standards. The DCAA also reviews the
adequacy of, and a contractor's compliance with, its internal control systems
and policies, including the contractor's purchasing, property, estimating,
compensation and management information systems. Any costs found to be
improperly allocated to a specific contract will not be reimbursed, while such
costs already reimbursed must be refunded. Therefore, a DCAA audit could
materially affect our competitive position and result in a substantial
adjustment to our revenues. If a government audit uncovers improper or illegal
activities, we may be subject to civil and criminal penalties and administrative
sanctions, including termination of contracts, forfeitures of profits,
suspension of payments, fines and suspension or debarment from doing business
with the U.S. federal government. In addition, we could suffer serious
reputational harm if allegations of impropriety were made against us. If we were
suspended or debarred from contracting with the U.S. federal government
generally, or any significant agency in the intelligence community or Department
of Defense, if our reputation or relationship with government agencies were
impaired, or if the government otherwise ceased doing business with us or
significantly decreased the amount of business it does with us, our operating
results would be materially harmed.
Contract Types and Risks--Our estimates of the time, resources and expenses
required to complete our contractual commitments may not be accurate.
We enter into three principal types of contracts with the U.S. federal
government: time and materials, cost-plus, and fixed price. For the year ended
December 31, 2004, approximately 39% were time and materials, 34% of our U.S.
federal contracts were cost-plus, and 27% were fixed price (a substantial
majority of which were fixed price level of effort contracts, which have lower
risk than other types of fixed price contracts). Under time and materials
contracts, we are paid for labor at negotiated hourly billing rates and for
certain expenses. There is financial risk to us should our costs to perform time
and materials contracts exceed the negotiated hourly billing rates. Under
cost-plus type contracts, which are subject to a contract ceiling amount, we are
reimbursed for allowable costs and paid a fee, which may be fixed or performance
based. However, if our costs exceed the contract ceiling, funding has not been
received or costs are not allowable under the provisions of the contract or
applicable regulations, we may not be able to obtain reimbursement for all such
costs. Under fixed price contracts, we are required to perform the contract
tasks at a fixed price irrespective of the actual costs we incur, and
consequently, any costs in excess of the fixed price are absorbed by us. Fixed
price contracts, in comparison to cost-plus contracts, typically offer higher
profit opportunities because we bear the risk of cost-overruns and receive the
benefit of cost savings. For all contract types, there is risk associated with
the assumptions we use to formulate our pricing of the proposed work. In
addition, when we serve as a subcontractor under our contracts, we are exposed
to the risks of delays in payment from the prime contractor for the services we
provide.
3
Risks under Multiple Award Indefinite Delivery/Indefinite Quantity Contracts,
GSA Schedule contracts and GWACs--Many of our U.S. federal government
customers spend their procurement budgets through multiple award
Indefinite Delivery/Indefinite Quantity Contracts, GSA Schedule contracts
and GWACs under which we are required to compete for post-award orders.
Budgetary pressures and reforms in the procurement process have caused many
U.S. federal government customers to increasingly purchase goods and services
through multiple award Indefinite Delivery/Indefinite Quantity, or "ID/IQ,"
contracts, General Services Administration, or "GSA," Schedule contracts and
other multiple award and/or Government Wide Acquisition Contracts, or "GWAC,"
vehicles. These contract vehicles have resulted in increased competition and
pricing pressure requiring that we make sustained post-award efforts to realize
revenues under the relevant contract. There can be no assurance that we will
continue to increase revenues or otherwise sell successfully under these
contract vehicles. Our failure to compete effectively in this procurement
environment could harm our operating results.
Government Regulations--We may be liable for penalties under various procurement
rules and regulations. Changes in government regulations could harm our
operating results.
Our defense and U.S. federal civil agency businesses must comply with and
are affected by various government regulations. Among the most significant
regulations are:
o the Federal Acquisition Regulations, and agency regulations
supplemental to the Federal Acquisition Regulations, which
comprehensively regulate the formation, administration and performance
of government contracts;
o the Truth in Negotiations Act, which requires certification and
disclosure of all cost and pricing data in connection with certain
contract negotiations;
o the Cost Accounting Standards, which impose accounting requirements
that govern our right to reimbursement under certain cost-based
government contracts; and
o laws, regulations and executive orders restricting the use and
dissemination of information classified for national security purposes
and the export of certain products and technical data.
These regulations affect how our customers and we can do business and, in
some instances, impose added costs on our businesses. In addition, we are
subject to industrial security regulations of the Department of Defense and
other U.S. federal agencies that are designed to safeguard against unauthorized
persons', including foreigners', access to classified information. If we were to
come under foreign ownership, control or influence, our U.S. federal government
customers could terminate or decide not to renew our contracts, which could
impair our ability to obtain new contracts. Any changes in applicable laws and
regulations could also harm our operating results. Any failure to comply with
applicable laws and regulations could result in contract termination, price or
fee reductions or suspension or debarment from contracting with the U.S. federal
government.
Risks Relating to Reductions or Changes in Military and Department of
Defense-related Intelligence Agency Expenditures--A decline in the U.S.
defense budget may adversely affect our operations.
Sales under contracts with the U.S. Department of Defense, including sales
under subcontracts having the Department of Defense as the ultimate purchaser,
represented approximately 89% and 88% of our sales for the year ended December
31, 2004 and for the year ended December 31, 2003, respectively. The U.S.
defense budget declined from time to time in the late 1980s and the early 1990s,
resulting in a slowing of new program starts, program delays and program
cancellations. These reductions caused most defense-related government
contractors to experience declining revenues, increased pressure on operating
margins and, in some cases, net losses. While spending authorizations for
defense-related programs by the government have increased in recent years, and
in particular after the September 11, 2001 terrorist attacks, these spending
levels may not be sustainable, and future levels of expenditures and
authorizations for those programs may decrease, remain constant or shift to
programs in areas where we currently provide limited or no services. A change in
the U.S. Presidential Administration or in the composition of Congress could
also materially affect levels of support for military expenditures. A general
significant decline in military expenditures could harm our operating results.
4
We are not able to guarantee that contract orders included in our estimated
remaining contract value will result in actual revenues in any particular
fiscal period or that the actual revenues from such contracts will equal
our estimated remaining contract value.
There can be no assurance that any contracts included in our estimated
remaining contract value presented in this filing will result in actual revenues
in any particular period or that the actual revenues from such contracts will
equal our estimated remaining contract value. Further, there can be no assurance
that any contract included in our estimated remaining contract value that
generates revenue will be profitable. Our estimated remaining contract value
consists of funded backlog, which is based upon amounts actually appropriated by
a customer for payment of goods and services, and unfunded contract value, which
is based upon management's estimate of the future potential of our existing
contracts (including contract options) to generate revenues. These estimates are
based on our experience under such contracts and similar contracts, and we
believe such estimates to be reasonable. However, there can be no assurances
that all of such estimated remaining contract value will be recognized as
revenue.
In addition, the U.S. federal government's ability to select multiple
winners under ID/IQ contracts and GWACs, as well as its right to compete
subsequent task orders among such multiple winners, means that there is no
assurance that certain of our existing contracts will result in actual orders.
Further, the U.S. federal government enjoys broad rights to unilaterally modify
or terminate such contracts and task orders, including the right not to exercise
options to extend multi-year contracts through the end of their potential terms.
Accordingly, most of our existing contracts and task orders are subject to
modification and termination at the U.S. federal government's discretion. In
addition, funding for orders from the U.S. federal government is subject to
approval on an annual basis by Congress pursuant to the appropriations process.
Government Intent to Replace Legacy Systems--Our business will be harmed if
government agencies are unwilling to replace or supplement expensive legacy
systems.
Government agencies have spent substantial resources over an extended
period of time to develop computer systems and to train their personnel to use
them. These agencies may be reluctant to abandon or supplement these legacy
systems with Internet and other advanced technology systems because of the cost
of developing them or the additional cost of re-training their personnel. Such
reluctance would make it more difficult to acquire new contracts, which would
harm our business prospects.
Reliance on Subcontractors--We regularly employ subcontractors to assist us in
satisfying our contractual obligations. If these subcontractors fail to
adequately perform their contractual obligations, our prime contract
performance and our ability to obtain future business could be materially
and adversely impacted.
Our performance of government contracts may involve the issuance of
subcontracts to other companies upon which we rely to perform all or a portion
of the work we are obligated to deliver to our customers. There is a risk that
we may have disputes with subcontractors concerning a number of issues including
the quality and timeliness of work performed by the subcontractor, customer
concerns about the subcontractor, our decision not to extend existing task
orders or issue new task orders under a subcontract, or our hiring of former
personnel of a subcontractor. A failure by one or more of our subcontractors to
satisfactorily deliver on a timely basis the agreed-upon supplies and/or perform
the agreed-upon services may materially and adversely impact our ability to
perform our obligations as a prime contractor. Further, there is a risk that a
subcontractor's technology solution on which certain of our contracts and task
orders are dependent could become obsolete or fall out of favor with customers.
In extreme cases, such subcontractor performance deficiencies could result in
the government terminating our contract for default. A default termination could
expose us to liability for excess costs of reprocurement by the government and
have a material adverse effect on our ability to compete for future contracts
and task orders.
5
Dependence on Key Personnel --If we lose our technical personnel or members of
senior management, our business may be adversely affected.
Our continued success depends in large part on our ability to recruit and
retain the technical personnel necessary to serve our customers effectively.
Competition for skilled personnel in the information technology and systems
engineering services industry is intense and technology service companies often
experience high attrition among their skilled employees. Excessive attrition
among our technical personnel could increase our costs of performing our
contractual obligations, reduce our ability to efficiently satisfy our
customers' needs and constrain our future growth. In addition, we must often
comply with provisions in U.S. federal government contracts that require
employment of persons with specified levels of education, work experience and
security clearances. The loss of any significant number of our existing key
technical personnel or the inability to attract and retain key technical
employees in the future could have a material adverse effect on our ability to
win new business and could harm our operating results. There is also a risk that
our efforts to hire personnel of our competitors or subcontractors or other
persons could lead to claims being asserted against us that our recruitment
efforts violate contractual arrangements or are otherwise wrongful.
In addition, we believe that the success of our business strategy and our
ability to operate profitably depends on the continued employment of our senior
management team, led by Joseph M. Kampf. None of our senior management team has
an employment contract with us. If Mr. Kampf or other members of our senior
management team become unable or unwilling to continue in their present
positions, our business and financial results could be materially adversely
affected.
Security Clearance--If we cannot obtain the necessary security clearances, we
may not be able to perform classified work for the government and our
revenues may suffer.
Certain government contracts require our facilities and some of our
employees to maintain security clearances. If we lose or are unable to obtain
required security clearances, the customer can terminate the contract or decide
not to renew it upon its expiration. As a result, to the extent we cannot obtain
the required security clearances for our employees working on a particular
contract, we may not derive the revenue anticipated from the contract, which, if
not replaced with revenue from other contracts, could seriously harm our
operating results.
Security Issues--Security breaches in sensitive government systems could result
in the loss of customers and negative publicity.
Many of the systems we develop involve managing and protecting information
involved in national security and other sensitive government functions. A
security breach in one of these systems could cause serious harm to our
business, could result in negative publicity and could prevent us from having
further access to such critically sensitive systems or other similarly sensitive
areas for other governmental customers.
Customer Expectations--We could lose revenues and customers and expose our
company to liability if we fail to meet customer expectations.
We create, implement and maintain technology solutions that are often
critical to our customers' operations. If our technology solutions or other
applications have significant defects or errors or fail to meet our customers'
expectations, we may:
o lose future contract opportunities due to receipt of poor past
performance evaluations from our customers;
o have contracts terminated for default and be liable to our customers
for reprocurement costs and other damages;
o receive negative publicity, which could damage our reputation and
adversely affect our ability to attract or retain customers; and
o suffer claims for substantial damages against us, regardless of our
responsibility for the failure.
6
While many of our contracts limit our liability for damages that may arise
from negligent acts, errors, mistakes or omissions in rendering services to our
customers, we cannot be sure that these contractual provisions will protect us
from liability for damages if we are sued. Furthermore, our general liability
insurance coverage may not continue to be available on reasonable terms or in
sufficient amounts to cover one or more large claims, or the insurer may
disclaim coverage as to any future claim. The successful assertion of any large
claim against us could seriously harm our business. Even if not successful, such
claims could result in significant legal and other costs and may be a
distraction to management.
Acquisition Strategy--We intend to pursue future acquisitions which may
adversely affect our business if we cannot effectively integrate these new
operations.
We have completed and integrated eight strategic acquisitions since 1997.
The U.S. federal government information technology solutions and systems
engineering services industry remains fragmented, and we believe that
acquisition and consolidation opportunities will continue to present themselves
periodically. We intend to continue to selectively review acquisition candidates
with a focus on companies with complementary skills or market focus. Our
continued success may depend upon our ability to integrate any businesses we may
acquire in the future. The integration of such businesses into our operations
may result in unforeseen operating difficulties, may absorb significant
management attention and may require significant financial resources that would
otherwise be available for the ongoing development or expansion of our business.
Such difficulties of integration may include the coordination of geographically
dispersed organizations, the integration of personnel with disparate business
backgrounds and the reconciliation of different corporate cultures. In addition,
in certain acquisitions, U.S. federal acquisition regulations may require us to
enter into contract novation agreements with the government, a routinely
time-consuming process. Government agencies may delay in recognizing us as the
successor contractor in these situations, thereby possibly preventing our
realization of some of the anticipated benefits of such acquisitions. There can
be no assurance that acquired entities will operate profitably, that we will
realize anticipated synergies or that these acquisitions will cause our
operating performance to improve.
Although management regularly engages in discussions with and submits
acquisition proposals to acquisition targets, there can be no assurance that
suitable acquisition targets will be available in the future on reasonable
terms. In addition, to the extent that we complete any additional acquisitions,
no assurance can be given that acquisition financing will be available on
reasonable terms or at all, that any new businesses will generate revenues or
net income comparable to our existing businesses or that such businesses will be
integrated successfully or operated profitably.
Potential Undisclosed Liabilities Associated with Acquisitions--We may be
subject to certain liabilities assumed in connection with our acquisitions
that could harm our operating results.
We conduct due diligence in connection with each of our acquisitions. In
connection with any of our acquisitions, there may be liabilities that we fail
to discover or that we inadequately assess in our due diligence efforts. In
particular, to the extent that prior owners of any acquired businesses or
properties failed to comply with or otherwise violated applicable laws or
regulations, or failed to fulfill their contractual obligations to the U.S.
federal government or other customers, we, as the successor owner, may be
financially responsible for these violations and failures and may suffer
reputational harm or otherwise be adversely affected. The discovery of any
material liabilities associated with our acquisitions could harm our operating
results.
Our Employees may Engage in Improper Activities with Adverse Consequences to
our Business.
7
As with other government contractors, we are faced with the possibility
that our employees may engage in misconduct, fraud or other improper activities
that may have adverse consequences to our prospects and results of operations.
Misconduct by employees could include failures to comply with U.S. federal
government procurement regulations, violation of federal requirements concerning
the protection of classified information, improper labor and cost charging to
contracts and misappropriation of government or third party property and
information. The occurrence of any such employee activities could result in our
suspension or debarment from contracting with the U.S. federal government, as
well as the imposition of fines and penalties, which would cause material harm
to our business.
Risks Associated with International Operations--Our international business
exposes us to additional risks including legal regulations and social,
political or economic instability that could harm our operating results.
In connection with our international operations (including international
operations under U.S. government contracts), we are subject to risks associated
with operating in and selling to foreign countries, including:
o compliance with the laws of the countries in which we operate;
o hyperinflation or political instability in foreign countries;
o potential personal injury to our personnel who may be exposed to
military conflict or other hostile situations in foreign countries;
o fluctuation in currency conversion to the U.S. dollar;
o imposition or increase of investment and other restrictions or
requirements by foreign governments; and
o compliance with U.S. arms export control regulations and policies,
which govern our ability to supply foreign affiliates and customers.
Although our international operations are not currently substantial, to the
extent we expand our international operations, these and other risks associated
with international operations are likely to increase. Although such risks have
not harmed our operating results in the past, no assurance can be given that
such risks will not harm our operating results in the future.
Risks related to our capital structure
Leverage--Our debt could adversely affect our financial health.
As of December 31, 2004, our debt which includes capital lease obligations
was $185.0 million. This level of debt could have important consequences. Below,
we have identified some of the material potential consequences resulting from
this amount of debt.
o We may be unable to obtain additional financing for working capital,
capital expenditures, acquisitions and general corporate purposes.
o Over time, a significant portion of our cash flow from operations must
be dedicated to the repayment of indebtedness, thereby reducing the
amount of cash we have available for other purposes.
o Our ability to adjust to changing market conditions may be hampered.
We may be more vulnerable in a volatile market.
Additional Borrowings Available--Despite current debt levels, we and our
subsidiaries may still be able to incur substantially more debt. This
could further increase the risks described above.
We and our subsidiaries may be able to incur additional indebtedness in the
future. The terms of our Amended and Restated Credit Agreement, as amended, or
"Credit Facility," limit, but do not prohibit us or our subsidiaries from doing
so. As of December 31, 2004, our Credit Facility would have permitted additional
borrowings of up to $292.1 million. If new debt is added by us or our
subsidiaries, the related risks that we and they now face could increase.
8
Ability to Service Debt--To service our debt, we will require a significant
amount of cash. Our ability to generate cash depends on many factors
beyond our control.
You should be aware that our ability to repay or refinance our debt depends
on our successful financial and operating performance. We cannot assure you that
our business strategy will succeed or that we will achieve our anticipated
financial results. Our financial and operational performance depends upon a
number of factors, many of which are beyond our control. These factors include:
o the current economic and competitive conditions in the information
technology industry;
o budgetary constraints affecting U.S. federal government spending, and
changes in fiscal policies or available funding;
o U.S. federal government shutdowns and other potential delays in the
government appropriations process;
o delays in the payment of our invoices by government payment offices
due to problems with, or upgrades to, government information systems,
or for other reasons;
o any operating difficulties, operating costs or pricing pressures we
may experience;
o the passage of legislation or other regulatory developments that
affect us adversely; and
o delays in implementing any strategic projects we may have.
If our financial performance declines and we are unable to pay our debts,
we will be required to pursue one or more alternative strategies, such as
selling assets, refinancing or restructuring our indebtedness or selling
additional equity capital. Also, certain alternative strategies would require
the consent of our senior secured lenders before we engage in any such strategy.
Restrictive Debt Covenants--The terms of our Credit Facility impose significant
restrictions on our ability and that of our subsidiaries to take certain
actions which may have an impact on our business, operating results and
financial condition.
Our Credit Facility imposes significant operating and financial
restrictions on us and our subsidiaries and requires us to meet certain
financial tests. These restrictions may significantly limit or prohibit us from
engaging in certain transactions, including the following:
o incurring or guaranteeing additional debt;
o paying dividends or other distributions to our stockholders or
redeeming, repurchasing or retiring our capital stock or subordinated
obligations;
o making investments, loans and advances;
o making capital expenditures;
o creating liens on our assets;
o issuing or selling capital stock of our subsidiaries;
o transforming or selling assets currently held by us, including sale
and lease-back transactions;
o modifying certain agreements, including those related to indebtedness;
o engaging in transactions with affiliates; and
o engaging in mergers, consolidations or acquisitions.
9
The failure to comply with any of these covenants would cause a default
under our Credit Facility. A default, if not waived, could result in
acceleration of our debt, in which case the debt would become immediately due
and payable. If this occurs, we may not be able to repay our debt or borrow
sufficient funds to refinance it. Even if new financing is available, it may not
be on terms that are acceptable to us.
Item 1. BUSINESS
General
We are a leading provider of information technology solutions and systems
engineering and integration services to government customers 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 customers
with the systems analysis, integration and program management skills necessary
to manage their mission systems development and operations. We have broad
service competencies that include strengths in intelligence systems, emergency
response management, logistics modernization, secure identification and access
management solutions, training, platform and weapons systems engineering
support, ballistic missile defense, healthcare services and government
enterprise solutions.
We currently serve over 1,000 U.S. federal government customers in more
than 50 government agencies, as well as state and foreign governments. For the
year ended December 31, 2004, approximately 89% of our revenues were derived
from the Department of Defense, or "DOD," and DOD-related intelligence agencies,
and approximately 10% from civilian agencies of the U.S. federal government, of
which approximately 37% is derived from the Department of Homeland Security, or
"DHS". For the year ended December 31, 2004, approximately 88% of our revenues
were from contracts where we were the lead, or "prime," contractor on our
projects. We provide our services under long-term contracts that have a weighted
average term of 6 years, assuming the exercise of all potential contract
options. Additionally, we had contracts with an estimated remaining contract
value of $6.3 billion as of December 31, 2004, of which approximately $830.9
million is funded backlog.
From January 1996 to December 31, 2004, we increased revenues from $141.8
million to $1.268 billion, at a compound annual growth rate of approximately
32%. Our revenues grew organically by 14.2% from 2003 to 2004 and 16.2% from
2002 to 2003. We define organic growth as the increase in revenues excluding the
revenues associated with acquisitions, divestitures and closures of businesses
in comparable periods.
The U.S. Federal Government Technology Services Market
The U.S. federal government is the largest single customer for information
technology solutions and systems engineering services in the United States. It
is anticipated that technology services spending will grow in the areas
emphasized by the U.S. government's evolving military strategy, including
homeland security, missile defense, information security, logistics management,
systems modernization, weapon systems design improvements and military personnel
training. Defense spending is projected to exceed $400.1 billion in government
fiscal year 2005, a 6.5% increase over government fiscal year 2004. The
President's proposed budget for government fiscal year 2006 includes defense
spending of $419.3 million, a 4.8% increase over government fiscal year 2005, if
adopted, would be the largest Department of Defense budget in history in actual
dollars. The 2006 Department of Defense spending plan submitted to Congress
includes a 25.5% increase over the next six years.
Government Contracts and Contracting
The federal technology services procurement environment has evolved in
recent years due to statutory and regulatory changes resulting from procurement
reform initiatives. U.S. federal government agencies traditionally have procured
technology solutions and services through agency-specific contracts awarded to a
single contractor. However, the number of procurement contracting methods
available to U.S. federal government customers for services procurements has
increased substantially. Today, there are three predominant contracting methods
through which government agencies procure technology services: traditional
single award contracts, GSA Schedule contracts, and single and multiple award
ID/IQ contracts.
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Traditional single award contracts specify the scope of services that will
be delivered and the contractor that will provide the specified service. These
contracts have been the traditional method for procurement by the U.S. federal
government. When an agency has a requirement, interested contractors are
solicited, qualified, and then provided with a request for a proposal. The
process of qualification, request for proposals and evaluation of bids requires
the agency to maintain a large, professional procurement staff and can take a
year or more to complete.
GSA Schedule contracts are listings of services, products and prices of
contractors maintained by the GSA for use throughout the U.S. federal
government. In order for a company to provide services under a GSA Schedule
contract, the company must be pre-qualified and awarded a contract by GSA. When
an agency uses a GSA Schedule contract to meet its requirements, the agency, or
the GSA on behalf of the agency, conducts the procurement. The user agency, or
the GSA on its behalf, evaluates the user agency's services requirements and
initiates a competition limited to GSA Schedule qualified contractors. Use of
GSA Schedule contracts is expected to provide the user agency with reduced
procurement time and lower procurement costs.
Single and multiple award ID/IQ contracts are contract forms through which
the U.S. federal government creates preferred provider relationships with
contractors. These umbrella contracts outline the basic terms and conditions
under which the government may order services. An umbrella contract typically is
managed by one agency, the sponsoring agency, and is available for use by any
agency of the U.S. federal government. The umbrella contracts are competed
within the industry and one or more contractors are awarded contracts to be
qualified to perform the work. The competitive process for procurement of work
to be performed under the contract, called task orders, is limited to the
pre-selected contractor(s). If the ID/IQ contract has a single prime contractor,
the award of task orders is limited to that single party. If the contract has
multiple prime contractors, the award of the task order is competitively
determined. Multiple-contractor ID/IQ contracts that are open for any government
agency to use for the procurement of services are commonly referred to as GWACs.
Due to the lower cost, reduced procurement time, and increased flexibility of
GWACs, there has been greater use of GWACs among many agencies for large-scale
procurements of technology services.
Key Factors Driving Growth
There are several key factors which we believe will continue to drive the
growth of the U.S. federal technology services market and our business:
o Increased Outsourcing. The downsizing of the U.S. federal government
workforce, declining availability of information technology management
skills among government personnel, and a corresponding growth in the
backlog of software maintenance tasks at many government agencies are
contributing to an increase in technology outsourcing. According to
the Office of Management and Budget, spending on outsourced
information technology solutions is projected to grow at a rate
substantially faster than overall U.S. federal government information
technology expenditures. In government fiscal year 2004, 82.5% of the
U.S. federal government's total information technology solutions
spending flowed to contractors. By government fiscal year 2009, this
rate of outsourcing is projected to increase to 85.2% of total
information technology spending.
o Government Efficiency Initiatives. Political pressures and budgetary
constraints are forcing government agencies to improve their processes
and services and to operate in a manner more consistent with
commercial enterprises. To meet these challenges, government agencies
are investing heavily in information technology to improve
effectiveness, enhance productivity and deliver new services.
o Continued Dependence on Commercial Off-the-Shelf Hardware and
Software. The U.S. federal government has increased its use of lower
cost, open architecture systems using commercial off-the-shelf, or
"COTS," hardware and software, which are rapidly displacing the single
purpose, custom systems historically favored by the U.S. federal
government. The need for COTS products and COTS integration services
is expected to increase as the government seeks to ensure the future
compatibility of its systems across agencies. In addition, the
continued shortening of software upgrade cycles is expected to
increase the demand for the integration of new COTS products.
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o Increased Spending on National Defense. National defense spending is
projected to grow substantially over the next five years with the U.S.
federal government increasing its commitment to strengthen the
nation's security, defense and intelligence capabilities. The U.S.
federal government is investing in improved homeland security, greater
information systems security, more effective intelligence operations,
and new approaches to warfare simulation training. Defense spending is
projected to exceed $400.1 billion in government fiscal year 2005, an
increase of almost 6.5% over government fiscal year 2004. The
President's proposed budget for 2006 defense spending is $419.3
billion, a 4.8% increase over the government fiscal year 2005 budget
and, if adopted, would be the largest defense budget in history in
actual dollars.
o Emphasis on System Modernization. To balance the costs of new
initiatives like homeland security with the costs of ongoing military
operations, the Department of Defense is emphasizing upgrading
existing platforms to next generation technologies rather than
procuring completely new systems. For example, rather than replace an
entire generation of aircraft and ships, the U.S. Air Force and the
U.S. Navy have decided to invest in upgrades, using the latest
information technology and weapons systems. To accomplish this in an
environment of military personnel reductions, the armed services are
increasingly dependent on highly skilled contractors that can provide
the full spectrum of services needed to support modernization
activities.
o Continuing Impact of Procurement Reform. Recent changes in U.S.
federal procurement regulations have incorporated commercial buying
practices, including preferred supplier relationships in the form of
GWACs, into the government's procurement process. These changes have
produced lower acquisition costs, faster acquisition cycles, more
flexible contract terms, and more stable supplier/customer
relationships. U.S. federal expenditures through GWACs has grown
significantly over the past three years, and the GSA projects growth
in Schedule contracts will average 13.4% annually over the next four
years.
Our Capabilities and Services
We are a leading provider of information technology solutions to government
customers. We design, integrate, maintain and upgrade state-of-the art
information systems for national defense, intelligence, emergency response and
other high priority government missions. As a total solutions provider, we
maintain the comprehensive information technology skills necessary to support
the entire lifecycle of our customers' systems, from conceptual development
through operational support. We provide requirements definition and analysis,
process design or re-engineering, systems engineering and design, networking and
communications design, COTS hardware and software evaluation and procurement,
custom software and middleware development, system integration and testing, and
software maintenance and training services. Depending upon customer needs, we
may provide total system solutions employing our full set of skills on a single
project, or we may provide more targeted, or "bundled," services designed to
meet the customer's specific requirements. For example, we built, and
continuously maintain and upgrade, the National Emergency Management Information
System, or "NEMIS," an enterprise-wide management information system, for the
U.S. Federal Emergency Management Agency, or "FEMA." This system has been
procured in three phases: system definition and design, base system development
and deployment, and upgrades to incorporate current web technology.
We also are a leading provider of systems engineering and integration
services to government customers, primarily within the defense community. We
provide these defense customers with the systems analysis, integration and
program management skills necessary to manage the continuing development of
their mission systems, including ships, aircraft, weapons and communications
systems. As a solutions provider in this market, we also maintain the
comprehensive skills to manage the customer's system lifecycle. We provide
mission area and threat analyses, research and development management, systems
engineering and design acquisition management, systems integration and testing,
operations concept planning, systems maintenance and training. For example, we
provide threat analysis, operations concept planning and systems integration and
testing for certain U.S. Navy systems, including the radar, missile and command
and control systems, employed to protect its fleet from ballistic missile
attack. Like information technology solutions, these skills may be procured as a
comprehensive mission solution, or they may be procured as specially prescribed
tasks.
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Our Service Competencies and Contract Examples
The key to our success in both our information technology solutions and
systems engineering services businesses is a combination of in-depth customer
and mission knowledge, or domain expertise, and comprehensive technical skills.
We believe this combination provides long-term, sustainable competitive
advantage, performance excellence and customer satisfaction. Accordingly, we
have focused our growth strategy on several business areas where the mix of our
domain expertise and our end-to-end technical skills provides us with a strong
competitive advantage and the opportunity to cross-sell our solutions and
services.
The following paragraphs briefly describe our service competencies in our
information technology and systems engineering and integration services
businesses, and provide examples of selected programs in which we utilize these
competencies.
INFORMATION TECHNOLOGY SOLUTIONS
Intelligence Systems. We have more than ten years of experience in
designing, developing and operating information systems used for intelligence
missions. These missions focus on data and imagery collection, as well as
information analysis and dissemination of information to the battlefield. An
example of our working in this area includes:
o Coalition Enterprise Regional Information Exchange System CENTRIXS and
CENTRIXS N.A.T.O. Since 1993, through a series of contracts, we have
provided services to the U.S., N.A.T.O., and other allied military
forces with near-real-time correlated situation and order of battle
information for threat analysis, target recommendations, indications
and warnings. CENTRIXS is one of the most widely-used command,
control, computers, communication and intelligence systems within the
international intelligence community. We provide systems engineering
and technical assistance, software development, configuration
management, operational support and user training. This program
recently has been expanded to include the deployment of new systems to
Central Asia and additional system deployments to the coalition
countries in the war on terrorism and Operation Iraqi Freedom.
Emergency Response Management. We have unique experience in developing
information technology systems to support emergency response management
requirements. Our expertise includes large-scale system design, development,
testing, implementation, training and operational support. Our work in this area
includes:
o National Emergency Management Information System. Since early 1996, we
have supported the development of the NEMIS system for FEMA through a
series of contracts and task orders. We believe our support to FEMA
will continue to grow with FEMA's increased responsibility as a first
responder to disasters and terrorist attacks and as FEMA supports its
mission within DHS. NEMIS provides mission critical functionality for
FEMA's core mission of disaster response and recovery. This
enterprise-wide management information system connects several
thousand desktop and mobile terminals/handsets, providing FEMA with a
fully mobile, nationwide, rapid response disaster assessment and
mitigation system. We continue to provide enhancements to the current
system, and we are in the process of expanding our support to this
mission area to include an internet-based capability that will
integrate with the DHS technology infrastructure.
Logistics Modernization. We provide a wide range of logistics management
information technology solutions, including process design and re-engineering,
technology demonstrations, proof-of-concept systems development, new systems
development and existing systems upgrades. Our working logistics modernization
includes:
o Joint Logistics Warfighting Initiative or "JLWI." Since March 2000, we
have been providing process re-engineering system design, and database
integration as we conduct a variety of customer directed process and
technology experiments and demonstrations on the Joint Logistics
Warfighting Initiative contract. JLWI represents the DOD's efforts
focused on facilitating the military's logistics transformation and
improving military readiness through business process improvements and
the implementation of new and emerging technologies. We have developed
a proof-of-concept for web enabling the military's legacy logistics
systems in order to provide real-time visibility of logistics
information on the battlefield, or the "JLWI Shared Data Environment."
Third party independent validation and verification of the JLWI Shared
Data Environment reflects that it has already gained significant
support through its use by units in the U.S. and in overseas locations
like Afghanistan and Kuwait.
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Government Enterprise Solutions. Our supply chain management, software
engineering and integration experience allows us to develop large-scale
e-commerce applications tailored for the specific needs of the U.S. federal
government environment. These applications provide end-users with significantly
decreased transaction costs, increased accuracy, reduced cycle times, item price
savings, real-time order status and visibility of spending patterns.
o U.S. Postal Service E-Buy System. We have been providing lifecycle
information technology services to the U.S. Postal Service since 1983.
We have developed and implemented an electronic commerce application to
serve an estimated 80,000 to 100,000 U.S. Postal Service employees who
purchase a wide range of products on the U.S. Postal Service intranet
web site. Pre-negotiated supplier catalogs are hosted on an intranet
for security and performance. Web-based purchasing provides catalog
management capability, multi-catalog searching, self-service ordering,
workflow and approval processing and other status and receiving
functions. Fulfilling the U.S. Postal Service's requirement to serve up
to 100,000 employees required the development of a very robust
transaction processing application.
o Joint and Service Enterprise Information Technology Support. We have
been providing Enterprise Information Technology support for numerous
Joint and Service Commands, or the "Commands," for the past decade,
both in the U.S. and in numerous locations abroad. Our support
comprises all functions of the Enterprise, including
telecommunications engineering, planning and operation, network
development, administration and management, software life-cycle
support, and business process engineering. Our employees deploy with
the Commands during both peacetime operations and war and are making
vital contributions to the Commands' capabilities to accomplish their
missions. The supported Commands include U.S. Central Command and its
Army, Third U.S. Army/ARCENT, and the U.S. Air Force, 9th U.S. Air
Force/CENTAF, component commands, U.S. Army Forces Command, the U.S.
Army Reserve Command, and the U.S. Army Network Engineering and
Technology Command.
o Coalition, Joint and Service Training Exercise Support Commands. We
have been providing mission Exercise Program Support from the
individual unit to multi-national coalition level. We plan events that
prepare commanders and their staff to measure training proficiency,
correct deficiencies, and prepare for wartime missions. We are adept
at planning, implementing, and critiquing all aspects of these events
to include augmentation with senior mentor and subject matter experts.
We have planned every facet of the events to include logistical
support, communications system planning and provisioning, and other
support functions. These exercises have played a major part in
preparation of United States and Coalition Forces to meet the global
war on terrorism, and Operation Iraqi Freedom and DHS missions.
Modeling, Simulation and Training. We provide a comprehensive set of
information technology solutions and services to our customers, including
computer-based training, web-based training, distance learning, interactive
electronic technical manuals, performance support systems and organizational
assessment methods. We provide service to the following programs:
o Program Executive Office Simulation Training and Instrumentation, or
"PEO STRI." Since January 2000, we have provided life cycle support
for constructive training at fourteen U.S. Army Simulation and
Training Command Simulation centers worldwide. We have more than 1,000
personnel supporting this program at more than 50 sites throughout the
United States, Germany, Italy and South Korea. We provide exercise
support for computer-driven and manual battle simulations, including
planning, coordination, personnel support, instructional aid
development, simulation training, database and scenario development
and system integrity. We support a variety of mission specific
simulations, providing highly qualified professionals who are
certified in all aspects of simulation support, to each of the U.S.
Army's Battle Simulation Centers.
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o Military Operations on Urban Terrain, or "MOUT." We have supported the
U.S. Army's MOUT program since July 1997. Our support to MOUT
primarily focuses on the design and instrumentation of the most
advanced MOUT site in the world located at the Joint Readiness
Training Center, Fort Polk, LA, as well as other sites worldwide. The
site allows trainers to continuously observe, control, monitor and
record the conduct of training. The system captures every second of a
training exercise through the use of nearly 1,000 cameras tied
together via a fiber optic backbone and high-speed local area network
to the control room. The system is also designed to control targetry
and multiple battlefield effects and has the flexibility to support
both simulated fire and live fire exercises. We have also developed a
mobile version of MOUT to facilitate training in the theater of
operation. For example, two Mobile MOUT sites were ordered and
delivered for use in Kuwait and Afghanistan in early 2003 to support
operations in the global war on terrorism. During 2004, we delivered a
Mobile MOUT site to the U.S. National Guard.
Secure Identification and Access Management Solutions. Our position in this
market provides us with capabilities in optical memory card technology, which is
used primarily for high-capacity portable secure data storage and authentication
through multiple biometrics. This capability, combined with our expertise in
integrated circuit card technology, which is used primarily for access control
and related transaction processing, positions us to capitalize on the growing
demand in this market. Both of the secure identification and access control
technologies are gaining significant and increased support with U.S. federal
agencies, including the DOD, DHS and foreign governments.
o Integrated Card Production System. We are the prime contractor for
secure identification and border control card solutions for the DHS's
Bureau of Citizenship and Immigration Services, or "BCIS." Through a
contract with the BCIS, we provide the Permanent Resident Card
solution, as well as the Department of State Border Crossing
"LaserVisa" Card solution. To date, the U.S. federal government has
procured over 23 million secure identification cards through this
contract. We are positioned to grow from the expanding budget of DHS,
as secure identification and credential card technologies proliferate
within DHS and other U.S. federal government agencies.
Healthcare Services. We deliver information technology solutions in
healthcare programs for the Department of Defense, U.S. Army, U.S. Navy, U.S.
Air Force and U.S. Marine Corps. Our support for medical research includes
statistical analysis, data mining of complex medical databases and health
surveillance. Our solutions for patient care include diagnostics, image
processing, and medical records management.
o U.S. Army Medical Department We provide technical, scientific, and
administrative support to the Office of the Surgeon General, the U.S.
Army Medical Research and Material Command and the U.S. Army Medical
Command and its subordinate activities, laboratories and medical
facilities. We have been providing this support since 1989 under
several contracts. We support the research, development, acquisition
and/or fielding of medical equipment and supplies, drugs, vaccines,
diagnostics and advanced information technology. We assist with policy
development and implementation, strategic planning, decision-making,
information systems design and development, information management,
studies and analyses, logistics planning and medical research. These
services entered into areas of homeland security, domestic medical
preparedness and Chemical Biological Radiological Nuclear Defense
programs.
SYSTEMS ENGINEERING AND INTEGRATION SERVICES
Platform and Weapons Systems Engineering Support. We have more than 10
years experience in providing critical systems engineering and technology
management services in support of defense platform and weapon systems programs.
Our experience encompasses systems engineering and development, mission and
threat analysis and acquisition management for the majority of U.S. Navy and
U.S. Air Force weapon systems. We provide core systems engineering disciplines
in support of most major surface ship and submarine programs as well as
virtually all U.S. Air Force weapon systems.
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o Secretary of the Air Force Technical and Analytical Support, or
"SAFTAS." In December 2000, we entered into a 15-year contract with
the U.S. Air Force to provide technical and analytical support to the
Headquarters Air Force and Secretary of the Air Force organizations.
The contract includes support to the Assistant Secretary of the Air
Force for Acquisition, the Joint Strike Fighter Program Office, the
Under Secretary for Space, and all of the Program Executive Offices
which oversee all aircraft, munitions, space and Command, Control,
Computer, Communications, Intelligence, Surveillance and
Reconnaissance systems. We provide program, budgetary, policy and
legislative analysis, information technology services, systems
engineering and technical management services for all major U.S. Air
Force acquisition programs. We believe that this program, as well as
similar programs for the U.S. Navy, will continue to experience growth
as the Department of Defense plans for billions of dollars of system
upgrades over the next decade.
o Shipbuilding Engineering Support. For over twenty years, we have
provided acquisition management and engineering support to the U.S.
Navy's shipbuilding program offices. Today, this includes the AEGIS
shipbuilding program, aircraft carrier program, all submarine programs
and developmental programs such as the new DDX destroyer and the
Littoral Combatant Ship. We also develop software serving the global
ship design industry. In addition to support for customer acquisition
offices and industry, we provide support for the ships during the
in-service phase of their life cycle through multiple contracts. This
includes installation support, refurbishment of equipment and
provision of new software.
o Research, Development, Test and Evaluation Support. We support various
DOD laboratories and field activities in the provision of technology,
testing, operation of facilities and general research and development,
or "R&D," support. Our technologies range from the provision of
advanced algorithms for the Virginia class submarines, software for
decision support systems, video compression algorithms, advanced sonar
concepts and unique software for technology assessment. We operate the
U.S. Air Force Research Laboratory's Laser Facilities and conduct
material testing on their behalf.
Ballistic Missile Defense. We have more than a decade of experience in
ballistic missile defense programs. We provide long-range planning, threat
assessment, systems engineering and integration, acquisition support services
and program management services.
o Theater-Wide Ballistic Missile Defense or "TBMD." Since January 1999,
we have supported the U.S. Navy by providing management, systems
engineering and technical support to the TBMD program. We provide a
broad range of support to develop, test, evaluate, and produce the
U.S. Navy's future ballistic missile defense systems. Due to our U.S.
Navy TBMD System experience, we were selected to provide similar
support to the National Missile Defense program. We believe ballistic
missile programs will experience near-and-long-term growth as the DOD
moves forward to meet the U.S. federal government's mandate for a
national missile defense system.
Our Growth Strategy
Our goal is to become the first pure-play technology services company to be
included in the top tier of government technology service providers. Our
strategy to achieve this objective includes the following:
o Continue to Increase Market Penetration. The U.S. federal government's
continued movement towards using significantly larger, more
comprehensive contracts, such as GWACs, has favored companies with a
broad range of technical capabilities and proven track records. As a
prime contractor on three of the four largest GWACs for information
technology services based on overall contract ceiling value, we have
benefited from these changes. We will continue to expand our role with
current customers on existing programs while also pursuing new
opportunities only available through these larger contracts.
o Capitalize on Increased Emphasis on Information Security, Homeland
Security and Intelligence. Defense spending is projected to exceed
$400.1 billion in government fiscal year 2005, an increase of almost
6.5% over government fiscal year 2004, and is expected to reach $419.3
billion in government fiscal year 2006, a 4.8% increase over projected
government fiscal year 2005 spending. Defense budgets are expected to
grow by 25.5% over the next six years, based on the Department of
Defense spending plan submitted to Congress. We believe that many of
the key operational goals of the U.S. federal government correlate
with our expertise, including developing a national missile defense
system, increasing homeland security, protecting information systems
from attack, conducting effective intelligence homeland security,
protecting information systems from attack, conducting effective
intelligence operations, and training for new approaches to warfare
through simulation.
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o Capitalize on Growing Demand in the Secure Identification and Access
Management Solutions Market. The use of credential card technologies
for secure identification and access control solutions is rapidly
gaining momentum with U.S. federal agencies, the DOD and foreign
governments. These cards are used for cardholder authentication,
physical access control and logical access control. Our position in
this market provides us with a full range of capabilities to meet our
customers' requirements. We have extensive experience with optical
storage card technology, which is used primarily for authentication
using biometrics and physical access control. This capability,
combined with our expertise in integrated circuit card technology,
used primarily for logical access control, uniquely positions us to
capitalize on the growing demand in this market regardless of the
application or credential card technology selected by customers.
o Cross-Sell our Full Range of Services to Existing Customers. We plan
to continue expanding the scope of existing customer relationships by
marketing and delivering the full range of our capabilities to each
customer. Having developed a high level of customer satisfaction and
critical domain knowledge as the incumbent on many long-term
contracts, we have a unique advantage and opportunity to cross-sell
our services and capture additional contract opportunities. For
example, we believe our strong performance record and detailed
understanding of customer requirements developed on the U.S. Air Force
Cargo Movement Operations System led directly to our being awarded a
contract relating to the Joint Logistics Warfighting Initiative.
o Continue our Disciplined Acquisition Strategy. We employ a disciplined
methodology to evaluate and select acquisition candidates. We have
completed eight strategic acquisitions since 1997. Our industry
remains highly fragmented and we believe the changing government
procurement environment will continue to provide additional
opportunities for industry consolidation. We will continue to
selectively review acquisition candidates with complementary skills or
market focus.
History and Organization
In April 1996, we acquired all of the outstanding capital stock of our
predecessor corporation, Anteon International Corporation (then known as Ogden
Professional Services Corporation), a Virginia corporation, which we refer to in
this filing as "Anteon Virginia." In connection with the acquisition we changed
the name of Anteon Virginia to Anteon Corporation. Anteon Virginia then acquired
several companies and businesses, including Techmatics, Inc. On January 1, 2001,
Anteon Virginia was renamed Anteon International Corporation and transferred
most of its operations into Techmatics, which became its principal operating
subsidiary, and was in turn renamed Anteon Corporation. As a result, we then
owned approximately 99% of Anteon Virginia and Anteon Virginia owned 100% of
Anteon Corporation (formerly Techmatics).
On March 15, 2002, we entered into certain reorganization transactions in
connection with our initial public offering, including the merger of Anteon
Virginia into us. Following the merger, the name "Anteon International
Corporation" is borne solely by a single Delaware corporation, which is the
direct 100% parent company of Anteon Corporation (formerly Techmatics).
Acquisitions
We employ a highly disciplined methodology to evaluate acquisitions. Since
1997 we have evaluated several hundred targets and have successfully completed
and integrated eight strategic acquisitions. Each of these acquired businesses
has been accretive to earnings, added to our technical capabilities and expanded
our customer reach. The acquired businesses and their roles within our service
offerings are summarized in the table below.
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Revenues prior to
Year Acquired Business Business Description acquisition(1)
------ ------------------- -------------------------------------------------------------- ---------------------
($ in millions)
1997 Vector Data Intelligence collection, exploitation, and dissemination systems
Systems $ 35.6
1998 Techmatics Surface ship and combat systems and ballistic missile defense
program management 56.7
1999 Analysis & Undersea ship and combat systems, acoustical signal processing,
Technology modeling and simulation, information technology systems and
software design 170.4
2000 Sherikon Military healthcare services systems, networking and
communications systems 62.7
2001 SIGCOM Training Training simulation systems and services
12.5
2003 ISI Secure identification and access management solutions and military
logistics and training 130.5
2004 STI Modeling and simulation software solutions and services 20.7
2004 IMSI Information security and assurance, infrastructure security and
enterprise IT architecture 31.7
- --------------------------------------------------------
(1) Consolidated revenue of acquired business for its most recently completed
fiscal year ended prior to the acquisition date.
In August 1997, we purchased Vector Data Systems, Inc., a supplier of
specialized information systems and services for the collection, analysis and
distribution of military intelligence data. In May 1998, we acquired Techmatics,
Inc., an established provider of systems engineering and program management
services for large-scale military system development, including the U.S. Navy's
surface ship fleet, on-ship combat systems and missile defense programs. With
the acquisition of Analysis & Technology, Inc., or "A&T," in June 1999, we
expanded our customer base for systems engineering and program management
services to the U.S. Navy's undersea systems and added important technical
expertise in computer-based training, modeling, simulation and advanced signal
processing. In October 2000, we purchased Sherikon, Inc., or "Sherikon,"
extending the reach of our information technology solutions to military
healthcare delivery systems. In July 2001, we acquired the training division of
SIGCOM, Inc. and increased the range of our information technology-enabled
training solutions to include the realistic simulation of urban environments for
the planning and preparation of overseas military operations. In May 2003, we
purchased ISI, a provider of secure identification and access management
solutions and military logistics and training to primarily the Department of
Defense. In July 2004, we purchased Simulation Technologies, Inc., or "STI", a
provider of modeling and simulation software solutions and services. In August
2004, we purchased Integrated Management Services, Inc., or "IMSI", a provider
of information security and assurance services, infrastructure security and
enterprise IT architecture.
Existing Contract Profiles
We currently have a portfolio of more than 800 active contracts. Our
contract mix for the year ended December 31, 2004 was 39% time and materials
contracts, 34% cost-plus contracts and 27% fixed price contracts (a substantial
majority of which were firm fixed price level of effort).
Under a time and materials contract, the contractor is paid a fixed hourly
rate for each direct labor hour expended and is reimbursed for direct costs. To
the extent that actual labor hour costs vary significantly from the negotiated
rates under a time and materials contract, we may generate more or less than the
targeted amount of profit.
Cost-plus contracts provide for reimbursement of allowable costs and the
payment of a fee which is the contractor's profit. Cost-plus fixed fee contracts
specify the contract fee in dollars or as a percentage of allowable costs.
Cost-plus incentive fee and cost-plus award fee contracts provide for increases
or decreases in the contract fee, within specified limits, based upon actual
results as compared to contractual targets for factors such as cost, quality,
schedule and performance.
18
Under a fixed price contract, the contractor agrees to perform the
specified work for a firm fixed price. To the extent that actual costs vary from
the price negotiated we may generate more or less than the targeted amount of
profit or even incur a loss. We generally do not pursue fixed price software
development work that may create material financial risk. We do, however,
execute some fixed price labor hour and fixed price level of effort contracts
which represent similar levels of risk as time and materials contracts. The
substantial majority of these fixed price contracts involve a defined number of
hours or a defined category of personnel. We refer to such contracts as "level
of effort" contracts. Fixed price percentages in the table below include
predominantly fixed price labor hour and fixed price level of effort contracts.
Our historical contract mix is summarized in the table below.
Contract Mix
Year End
- ------------------------------------------ ------------------------------------
Contract Type 2000 2001 2002 2003 2004
- ------------------------------------------ ------ ----- ------ ------ -------
Cost-Plus (CP)............................ 41% 37% 35% 32% 34%
Time and Materials (T&M).................. 31% 34% 37% 38% 39%
Fixed Price (FFP)......................... 28% 29% 28% 30% 27%
Our contract mix changes from year to year depending on the contract mix of
companies we acquire, as well as our efforts to obtain more time and materials
and fixed price work. As a result of recent acquisitions, our contract mix has
been more weighted towards cost-plus contracts.
In addition to a wide range of single award contracts with defense, civil,
state and local government customers, we also hold a number of multiple award
omnibus contracts and GWACs that currently support more than 4,000 separate task
orders. The broad distribution of contract work is demonstrated by the fact that
no single award contract or task order accounted for more than 8% of our total
2004 revenue.
Government Wide Acquisition Contracts. We are one of the leading suppliers
of information technology services under GWACs, and a prime contractor for three
of the four largest GWACs for information technology services as measured by
overall contract ceiling value. These contract vehicles are available to any
government customer and provide a faster, more-effective means of procuring
contract services. For example, in December 1998, we were awarded Applications
and Support for Widely-diverse End User Requirements, or "ANSWER", a 10-year
multiple award contract with the GSA to provide highly technical information
technology and systems engineering program support and infrastructure
management. We have been awarded over 477 task orders to date under ANSWER, with
an annualized revenue run rate as of the fourth quarter of fiscal 2004 of
approximately $189.6 million. Currently, our total estimated remaining contract
value for this contract is approximately $1.1 billion through December 2008.
Listed below are the four largest GWACs.
Owning Period of Contract
Contract Name Agency Performance Ceiling Value Role
- --------------------- -------- --------------- ----------------- -------------
ANSWER GSA 1998 - 2008 $25 billion Prime
Millenia GSA 1999 - 2009 $25 billion Subcontractor
Millenia Lite GSA 2000 - 2010 $20 billion Prime
CIO-SP II NIH 2000 - 2010 $20 billion Prime
19
Listed below are our top programs by 2004 revenue, including single award
and multiple award contracts. We are a prime contractor on each of these
programs.
Top Programs by 2004 Revenue
($ in millions)
Estimated
Period of Remaining
Programs Customer Performance 2004 Revenue Contract Value Contract Type
- -------------------- ------------------- -------------------------- ----------------- ------------------ -----------------
ANSWER
(Multiple
Award Contract) GSA 1/1/99-12/31/08 $ 189.6 $ 1,107.7 T&M/FFP
GSA SCHEDULE
& BPAs GSA 10/30/96-09/21/08 92.0 402.9 T&M/FFP
SAFTAS U.S. Air Force 01/01/01-12/31/15 48.0 388.1 CP
STOC U.S. Army 12/21/00-12/20/08 42.6 263.5 CP/FFP/T&M
GSA PES Contract GSA 01/06/00-01/26/08 40.9 315.3 T&M/FFP
GSA-MOBIS GSA 11/21/97-09/30/07 40.2 258.0 T&M/FFP
Engineering and
Technical Services U.S. Navy 07/16/02-01/15/08 28.6 77.0 CP
Naval Sea Systems
Command
(Multiple Award
Contract) U.S. Navy 04/02/01-03/31/16 28.3 478.2 CP
Foreign Military
Sales Logistic
Support U.S. Navy 03/25/98-03/24/08 27.3 21.8 CP
CENTRIX/LOCE Department of Defense 12/01/02-09/27/09 23.8 149.9 CP
Subcontractors
In fulfilling our contract obligations to customers, we may utilize the
services of one or more subcontractors. The use of subcontractors to support
bidding for and the subsequent performance of awarded contacts is a customary
aspect of U.S. federal government contracting. Subcontractors may be tasked by
us with performing work elements of the contract similar to or different from
those performed by us or other subcontractors. For the year ended December 31,
2004, approximately 26% of our total direct costs resulted from work performed
by subcontractors. As discussed further in "Risk Factors," if our subcontractors
fail to satisfy their contractual obligations, our prime contract performance
could be materially and adversely affected. To the extent subcontractor costs
increase or decrease in the future, our operating profit margin percentage on
contracts could be affected.
20
Estimated Remaining Contract Value and New Business Development
On December 31, 2004, our estimated remaining contract value was $6.3
billion, of which $830.9 million was funded backlog. In determining estimated
remaining contract value, we do not include any provision for an increased level
of work likely to be awarded under our GWACs. The estimated remaining contract
value is calculated as current revenue run rate over the remaining term of the
contract. Our estimated remaining contract value consists of funded backlog
which is based upon amounts actually appropriated by a customer for payment of
goods and services and unfunded contract value which is based upon management's
estimate of the future potential of our existing contracts to generate revenues
for us. These estimates are based on our experience under such contracts and
similar contracts, and we believe such estimates to be reasonable. However,
there can be no assurance that the unfunded contract value will be realized as
contract revenue or earnings. In addition, almost all of the contracts included
in estimated remaining contract value are subject to termination at the election
of the customer.
ESTIMATED REMAINING CONTRACT VALUE
Estimated
As of December 31, Funded Unfunded Contract Remaining
Backlog Value Contract Value
- -------------------- -------------- -------------------- ------------------
(in millions)
2004 .............. $ 831 $ 5,466 $ 6,297
2003 .............. 661 4,948 5,609
2002 .............. 418 3,868 4,286
2001 .............. 309 3,217 3,526
2000 .............. 308 2,560 2,868
From December 31, 1999 to December 31, 2004, our estimated remaining
contract value, including IMSI and STI, increased at a 24% compound annual
growth rate. We believe this growth demonstrates the effectiveness of our
two-tiered business development process that management has developed to respond
to the strategic and tactical opportunities arising from the evolving government
procurement environment. New task order contract vehicles and major high-profile
programs are designated strategic opportunities, and their pursuit and execution
are managed centrally. A core team comprised of senior management and our
strategic business unit heads makes all opportunity selection and resource
allocation decisions. Work that can be performed under our many existing task
order contract vehicles is designated a tactical opportunity, which is then
managed and performed at the business unit level with support as needed from
other company resources. All managers and senior technical personnel are
encouraged to source new work, and incentives are weighted to ensure corporate
objectives are given primary consideration.
Customers
We provide information technology and systems engineering solutions to a
highly diverse group of U.S. federal, state, local and international government
organizations worldwide. Domestically, we service more than 50 agencies, bureaus
and divisions of the U.S. federal government, including nearly all cabinet-level
agencies and all branches of the military. For the year ended December 31, 2004,
the U.S. federal government accounted for approximately 98% of our total
revenues. International and state and local governments provided the remaining
2%. The DOD accounted for approximately 89% of our total revenues and services
to U.S. federal civilian organizations were approximately 10%. Our largest
customer group is the U.S. Navy, which accounted for approximately 45% of
revenues during the year ended December 31, 2004, through 84 different U.S. Navy
organizations.
An account receivable from a U.S. federal government agency enjoys the
overall credit worthiness of the U.S. federal government, even though each such
agency has its own budget. Pursuant to the Prompt Payment Act, payments from
government agencies must be made within 30 days of final invoice acceptance or
interest must be paid.
21
Competition
The federal information technology and systems engineering services
industries are comprised of a large number of enterprises ranging from small,
niche-oriented companies to multi-billion dollar corporations with a major
presence throughout the U.S. federal government. Because of the diverse
requirements of U.S. federal government customers and the highly competitive
nature of large U.S. federal contracting initiatives, corporations frequently
form teams to pursue contract opportunities. Prime contractors leading large
proposal efforts select team members on the basis of their relevant capabilities
and experience particular to each opportunity. As a result of these
circumstances, companies that are competitors for one opportunity may be team
members for another opportunity.
We frequently compete against well-known firms in our industry as a prime
contractor. Obtaining a position as either a prime contractor or subcontractor
on government-wide contracting vehicles is only the first step to ensuring a
secure competitive position. Competition then takes place at the task order
level, where knowledge of the customer and its procurement requirements and
environment are keys to winning the business. We have been successful in
ensuring our presence on GWACs and GSA Schedule contracts, and in competing for
work under those contracts. Through the variety of contractual vehicles at our
disposal, as either a prime contractor or subcontractor, we have the ability to
market our services to any federal agency. Because of our extensive experience
in providing services to a diverse array of federal departments and agencies, we
have first-hand knowledge of our customers and their goals, problems and
challenges. We believe this knowledge gives us a competitive advantage in
competing for tasks and positions us well for future growth.
Employees
As of December 31, 2004, we employed approximately 8,800 employees, 88% of
whom were billable and 66% of whom held security clearances. Our workforce is
well educated and experienced in the defense and intelligence sectors.
Functional areas of expertise include systems engineering, computer science,
business process reengineering, logistics, transportation, materials
technologies, avionics and finance and acquisition management. None of our
employees are represented by collective bargaining agreements.
Available Information
Our internet address is www.anteon.com. We make available free of charge
through our internet site, via a hyperlink to the 10KWizard.com web site, our
annual reports on Form 10-K; quarterly reports on Form 10-Q; current reports on
Form 8-K; and any amendments to those reports filed or furnished pursuant to the
Securities Exchange Act of 1934, or the "Exchange Act," as soon as reasonably
practicable after such material is electronically filed with, or furnished to,
the SEC.
ITEM 2. PROPERTIES
Our headquarters are located in leased facilities in Fairfax, Virginia. In
total, we lease approximately 1.4 million square feet of office, shop and
warehouse space in over 100 facilities across the United States, Canada, the
United Kingdom and Australia. We own an office building in North Stonington,
Connecticut, which occupies 63,578 square feet of office space and which is
currently being held for sale. We also have employees working at customer sites
throughout the United States and in other countries.
ITEM 3. LEGAL PROCEEDINGS
We are involved in various legal proceedings in the ordinary course of
business.
We cannot predict the ultimate outcome of these matters, but do not believe
that they will have a material impact on our financial position or results of
operations.
22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 22, 2004, a special meeting of our stockholders was held. The sole
matter voted upon at the meeting was the approval and adoption of the Anteon
International Corporation Employee Stock Purchase Plan. The voting results were
as follows:
Votes For 29,384,892
Votes Against 230,050
Votes Abstaining 4,564
Part II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock has been publicly traded on the New York Stock Exchange,
or the "NYSE," since March 11, 2002.
The following table sets forth the high and low sale price per share of our
common stock during the year ended December 31, 2004 and 2003 as reported by the
NYSE.
2004
Quarter Ended High Low
--------------------- ---------- ------------
March 31 $ 37.00 $ 27.01
June 30 $ 33.62 $ 28.75
September 30 $ 37.29 $ 28.25
December 31 $ 43.16 $ 35.70
2003
Quarter Ended High Low
--------------------- ---------- ------------
March 31 $ 25.85 $ 20.00
June 30 $ 29.50 $ 21.86
September 30 $ 35.10 $ 27.30
December 31 $ 38.95 $ 30.71
We have not in the past paid, and do not expect for the foreseeable future
to pay, dividends on our common stock. Instead, we anticipate that all of our
future earnings, if any, will be used in the operation and expansion of our
business, for working capital, and other general corporate purposes. Our board
will determine whether to pay dividends in the future based on conditions then
existing, including our earnings, financial condition and capital requirements,
as well as economic and other conditions as the board may deem relevant. In
addition, our ability to declare and pay dividends on our common stock is
restricted by the provisions of Delaware law and covenants in our Credit
Facility.
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 Employee
Stock Purchase Plan ("ESPP"), which was implemented on April 1, 2004. The table
below details the shares purchased under the ESPP during certain periods:
Total Number of
Shares Purchased as Maximum Number of
Average Part of Publicly Shared that May Yet Be
Total Number of Prices Paid Announced Purchased
Period Shares Purchased per Share Plan Under the Plan
- ---------------- --------------------------------- ---------------------- --------------------------
July 1, 2004 14,668 $32.29 14,668 1,185,332
October 1, 2004 16,262 $37.20 16,262 1,169,070
----------- ----------- ---------------
2004 Total 30,930 30,930 1,169,070
=========== =========== ===============
23
As of March 2, 2005, the number of stockholders of record of our common
stock was approximately 371.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below have been derived
from our audited consolidated financial statements as of and for the years ended
December 31, 2004, 2003, 2002, 2001 and 2000. These results are not necessarily
indicative of the results that may be expected for any future period and are not
comparable between prior periods as a result of business acquisitions
consummated in 2000, 2001, 2003, and 2004. Results of operations of these
acquired businesses are included in our consolidated financial statements for
the periods subsequent to the respective dates of acquisition.
You should read the selected consolidated financial data presented below in
conjunction with Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations," Item 1. "Business" and our consolidated
financial statements and the related notes thereto appearing elsewhere in this
filing.
24
Year ended December 31,
2000 2001 2002 2003 2004
------ ------ ------ ------ ------
(in thousands, except per share data and percentages)
Statements of operations data:
Revenues.................................. $ 542,807 $ 715,023 $ 825,826 $ 1,042,474 $ 1,268,139
Costs of revenues......................... 474,924 627,342 711,328 897,264 1,093,470
-------------- -------------- ------------ ------------- --------------
Gross profit.............................. 67,883 87,681 114,498 145,210 174,669
General and administrative expenses,
including acquisition related costs..... 38,592 51,442 48,197 58,647 65,964
Amortization of non-compete agreements ... 866 349 -- 101 167
Goodwill amortization..................... 4,714 6,704 -- -- --
Other intangibles amortization............ 2,673 2,321 1,907 2,349 2,509
------------ ------------ ---------- ------------ -------------
Operating income ......................... 21,038 26,865 64,394 84,113 106,029
Other Income.............................. -- -- 417 -- 973
Gains on sales and closures of business... -- 4,046 -- -- --
Secondary offering expenses............... -- -- -- 852 240
Interest expense, net of interest
income.................................. 26,513 26,353 21,626 24,244 7,769
Minority interest in (earnings) losses of
subsidiaries.... ....................... 32 (38) (18) (54) (72)
-------------- -------------- ------------ ------------- --------------
Income (loss) before provision for (benefit
from) income taxes ..................... (5,443) 4,520 43,167 58,963 98,921
Provision for (benefit from) income
taxes................................... (153) 4,602 16,723 22,773 37,116
-------------- -------------- ------------ ------------- --------------
Net income (loss).................... $ (5,290) $ (82) $ 26,444 $ 36,190 $ 61,805
============== ============== ============ ============= ==============
Basic earnings (loss) per common share $ (0.22) $ (0.01) $ 0.82 $ 1.04 $ 1.73
============== ============== ============ ============= ==============
Weighted average shares outstanding.. 23,787 23,787 32,163 34,851 35,717
Diluted earnings (loss) per common share $ (0.22) $ (0.01) $ 0.78 $ 0.98 $ 1.66
============== ============== ============ ============= ==============
Weighted average shares outstanding.. 23,787 23,787 34,022 36,925 37,267
Other data:
EBITDA (a)................................ $ 36,347 $ 47,357 $ 70,994 $ 90,097 $ 113,382
EBITDA margin (b)......................... 6.7% 6.6% 8.6% 8.6% 8.9%
Cash flow from (used in) operating
activities.......... $ 17,101 $ 37,879 $ (1,722) $ 37,443 $ 18,244
Cash flow used in investing activities.... (28,912) (1,707) (1,423) (95,431) (47,878)
Cash flow from (used in) financing
activities.......... 12,036 (35,676) 5,481 55,810 31,649
Capital expenditures...................... 6,584 2,181 3,225 3,049 3,963
Balance sheet data (as of December 31):
Current assets............................ $ 148,420 $ 144,418 $ 208,396 $ 244,591 $ 338,604
Working capital (c)....................... 56,841 27,559 80,390 105,287 169,160
Total assets.............................. 324,423 306,651 364,692 479,280 613,426
Long-term debt, including current
portion............. 237,695 202,905 105,701 158,776 184,388
Stockholders' equity (deficit)............ (1,576) (3,442) 128,829 174,492 247,276
(a) "EBITDA", as defined, represents income before income taxes, depreciation, amortization and net interest expense. EBITDA is a
supplemental financial measure but should not be construed as an alternative to operating income or cash flows from operating
activities (as determined in accordance with U. S. generally accepted accounting principles "GAAP"). We believe that EBITDA is
a useful supplement to net income and other income statement data because it is used by some investors in understanding and
measuring a company's cash flows generated from operations that are available for taxes, debt service and capital expenditures.
However, all companies do not calculate EBITDA in the same manner, and as a result, the EBITDA measures presented may not be
comparable to similarly titled measures of other companies. The computations of EBITDA are as follows:
25
Year ended December 31,
2000 2001 2002 2003 2004
------ ------ ------ ------ ------
($ in thousands)
Net income (loss).......................... $ (5,290) $ (82) $ 26,444 $ 36,190 $ 61,805
Provision for (benefit from) income tax (153) 4,602 16,723 22,773 37,116
Interest expense, net of interest income... 26,513 26,353 21,626 24,244 7,769
Depreciation............................... 7,024 7,110 4,294 4,440 4,016
Amortization............................... 8,253 9,374 1,907 2,450 2,676
----------- ---------- ---------- ---------- ----------
EBITDA..................................... $ 36,347 $ 47,357 $ 70,994 $ 90,097 $ 113,382
=========== ========== =========== ========== ==========
Net income (loss) margin (d)............... (1.0%) (0.1%) 3.2% 3.5% 4.9%
EBITDA margin (b).......................... 6.7% 6.6% 8.6% 8.6% 8.9%
(b) EBITDA margin represents EBITDA calculated as a percentage of total revenues.
(c) Working Capital is equal to current assets minus current liabilities.
(d) Net income margin represents net income calculated as a percentage of total revenues.
26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
You should read the following discussion in conjunction with Item 6.
"Selected Consolidated Financial Data" and our consolidated financial statements
and related notes included elsewhere in this filing. Some of the statements in
the following discussion are forward-looking statements. See "Forward-Looking
Statements."
General
We are a leading provider of information technology solutions and systems
engineering and integration services to government customers 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 customers
with the systems analysis, integration and program management skills necessary
to manage their mission systems development and operations.
We have a broad customer and contract base and a diverse contract mix. We
currently serve over 1,000 U.S. federal government customers in more than 50
government agencies, as well as state and foreign governments. For the year
ended December 31, 2004, approximately 89% of our revenue was derived from
contracts with the DOD and intelligence agencies, and approximately 10% from
civilian agencies of the U.S. federal government. For the year ended December
31, 2004, approximately 88% of our revenue was from contracts where we were the
lead, or "prime," contractor. Our diverse contract base has approximately 800
active contracts and more than 4,000 active task orders. For the year ended
December 31, 2004, our largest contract or task order accounted for
approximately 8% of our revenues. We have a diverse mix of contract types, with
approximately 39%, 34%, and 27% of our revenues for the year ended December 31,
2004 derived from time and materials, cost-plus and fixed price contracts,
respectively. We generally do not pursue fixed price software development
contracts that may create financial risk. Additionally, we have contracts with
an estimated remaining contract value of $6.3 billion as of December 31, 2004,
of which $830.9 million is funded backlog. Our contracts have a weighted-average
term of approximately 6 years. From December 31, 1999 to December 31, 2004, our
estimated remaining contract value increased at a 25.2% compounded annual growth
rate, including the effect of acquisitions.
Description of Critical Accounting Policies
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these consolidated financial
statements requires management to make estimates and judgments that affect the
reported amount of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the consolidated financial statements and
the reported amounts of revenues and expenses during the reporting period. On an
ongoing basis, management evaluates its estimates including those related to
uncollected accounts receivable, contingent liabilities, revenue recognition,
goodwill and other intangible assets. Management bases its estimates on
historical experience and on various other factors that are believed to be
reasonable at the time the estimates are made. Actual results may differ from
these estimates under different assumptions or conditions. Management believes
that our critical accounting policies which require more significant judgments
and estimates in the preparation of our consolidated financial statements are
revenue recognition, costs of revenues, goodwill impairment, long-lived assets
and identifiable intangible asset impairment and business combinations.
Revenue Recognition
During the year ended December 31, 2004, we estimate that approximately 98%
of our revenues were derived from services and approximately 2% from product
sales. Services are performed under contracts that may be categorized into three
primary types: time and materials, cost-plus reimbursement and firm fixed price.
Revenue for time and materials contracts is recognized as time is spent at
hourly rates, which are negotiated with the customer plus the cost of any
allowable material costs and out-of-pocket expenses. Time and materials
contracts are typically more profitable than cost-plus contracts because of our
ability to negotiate rates and manage costs on those contracts. Revenue is
recognized under cost-plus contracts on the basis of direct and indirect costs
incurred plus a negotiated profit calculated as a percentage of costs or as
performance-based award fee. Cost-plus type contracts provide relatively less
risk than other contract types because we are reimbursed for all direct costs
and certain indirect costs, such as overhead and general and administrative
expenses, and are paid a fee for work performed. For certain cost plus type
contracts, which are referred to as 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, communications with the customer regarding our performance,
including any interim performance evaluations rendered by the customer or our
average historical award fee rate for the company. For the years ended December
31, 2004 and 2003, revenue for award fees accrued under cost-plus award fee type
contracts was $5.6 million and $2.5 million, respectively. Under substantially
all fixed price contracts, which are predominantly level of effort contracts,
revenues are recognized using the cost-to-cost method for all services provided.
For non-service related fixed price contracts, revenues are recognized as units
are delivered (the units-of-delivery method). In addition, we evaluate our
contracts for multiple deliverables which may require the segmentation of each
deliverable into separate accounting units for proper revenue recognition.
27
We recognize revenues under our U.S. federal government contracts when a
contract is executed, the contract price is fixed and determinable, delivery of
the services or products has occurred, the contract is funded and collectibility
of the contract price is considered probable. Our contracts with agencies of the
U.S. federal government are subject to periodic funding by the respective
contracting agency. Funding for a contract may be provided in full at inception
of the contract or ratably throughout the term of the contract as the services
are provided. From time to time, we may proceed with work on unfunded portions
of existing contracts 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 cost based U.S. federal government
contracts based on allowable contract costs, as mandated by the U.S. federal
government's cost accounting standards. The costs we incur under U.S. federal
government contracts are subject to regulation and audit by certain agencies of
the U.S. federal government. Historically, contract cost disallowances resulting
from government audits have not historically been significant. Our incurred
costs have been audited through 2002.
Contract revenue recognition inherently involves estimation. Examples of
such estimates include the level of effort needed to accomplish the tasks under
the contract, the cost of those efforts, and a continual assessment of our
progress toward the completion of the contract. From time to time, circumstances
may arise which require us to revise our estimated total revenue or costs.
Typically, these revisions relate to contractual changes. To the extent that a
revised estimate affects contract revenue or profit previously recognized, we
record the cumulative effect of the revision in the period in which it becomes
known. In addition, the full amount of an anticipated loss on any type of
contract is recognized in the period in which it becomes known. We may be
exposed to variations in profitability if we encounter variances from estimated
fees earned under award fee contracts and estimated costs under fixed price
contracts.
We generally do not pursue fixed price software development work that may
create material financial risk. We do, however, provide services under fixed
price labor hour and fixed price level of effort contracts, which represent
similar levels of risk as time and materials contracts. Our contract mix was
approximately 39% time and materials, 34% cost-plus and 27% fixed price (a
substantial majority of which are firm fixed price level of effort) during the
year ended December 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 10% but
typically range from 3% to 7%. Under fixed price and time and materials
contracts, margins are not subject to statutory limits. However, the U.S.
federal government's objective in negotiating such contracts is to seldom allow
for operating profits in excess of 15% and, due to competitive pressures,
operating profits on such contracts are often less than 10%.
We maintain reserves for uncollectible accounts receivable which may arise
in the normal course of business. Historically, we have not had significant
write-offs of uncollectible accounts receivable. However, we do perform work on
many contracts and task orders, where on occasion issues may arise, which would
lead to accounts receivable not being fully collected.
28
Costs of Revenues
- -----------------
Our costs are categorized as either direct or indirect costs. Direct costs
are those that can be identified with and allocated to specific contracts and
tasks. They include labor, fringe (vacation time, medical/dental, 401K plan
matching contribution, tuition assistance, employee welfare, worker's
compensation and other benefits), subcontractor costs, consultant fees, travel
expenses and materials. Indirect costs are either overhead or general and
administrative expenses. Indirect costs cannot be identified with specific
contracts or tasks, and to the extent that they are allowable, they are
allocated to contracts and tasks using appropriate government-approved
methodologies. Costs determined to be unallowable under the Federal Acquisition
Regulations cannot be allocated to projects. Our principal unallowable costs are
interest expense, amortization expense for 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 $242.1 million and $212.2
million as of December 31, 2004 and 2003, respectively. The majority of the
increase in goodwill in 2004 was related to the acquisitions of STI and IMSI in
July and August 2004, respectively.
We completed our annual impairment analyses as of September 30, 2004 and
2003, noting no indications of impairment for any of our reporting units. As of
December 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, 2005.
Long-Lived Assets and Identifiable Intangible Asset Impairment
- --------------------------------------------------------------
The carrying amount of long-lived assets and identifiable intangible assets
was approximately $24.1 million and $17.9 million at December 31, 2004 and 2003,
respectively. Of the $24.1 million at December 31, 2004, approximately $8.0
million of the assets are related to our recent acquisitions of STI and IMSI.
Long-lived assets and identifiable intangible assets, excluding goodwill, are
evaluated for impairment when events occur that suggest that such assets may be
impaired. Such events could include, but are not limited to, the loss of a
significant customer or contract, decreases in U.S. federal government
appropriations or funding of certain programs, or other similar events. None of
these events occurred for the year ended December 31, 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 a discounted interest
rate based on our cost of capital and the related risks of recoverability.
During the year ended December 31, 2003, we recognized an impairment charge of
approximately $135,000, included in general and administrative expenses in the
accompanying consolidated statement of operations, to write-down the carrying
value of a building held for sale to its estimated fair market value.
In evaluating impairment, we consider, among other things, our ability to
sustain our current financial performance on contracts and tasks, our access to
and penetration of new markets and customers and the duration of, and estimated
amounts from, our contracts. Any uncertainty of future financial performance is
dependent on our ability to maintain our customers and the continued funding of
our contracts and tasks by the government. Over the past four years, we have
been able to win the majority of our contracts that have been recompeted. In
addition, we have been able to sustain financial performance through indirect
cost savings from our acquisitions, which have generally resulted in either
maintaining or improving margins on our contracts and tasks. If we are required
to record an impairment charge in the future, it would have an adverse impact on
our results of operations.
29
Business Combinations
- ---------------------
We apply the provisions of SFAS No. 141, Business Combinations, whereby the
net tangible and separately identifiable intangible assets acquired and
liabilities assumed are recognized at their estimated fair market values at the
acquisition date. The purchase price in excess of the estimated fair market
value of the net tangible and separately identifiable intangible assets acquired
represents goodwill. The allocation of the purchase price related to our
business combinations involves significant estimates and management judgement
that may be adjusted during the allocation period, but in no case beyond one
year from the acquisition date. Costs incurred related to successful business
combinations are capitalized as costs of business combinations, while costs
incurred by us for unsuccessful or terminated acquisition opportunities are
expensed when we determine that such opportunities will no longer be pursued.
Costs incurred related to probable business combinations are deferred.
Statements of Operations
- ------------------------
The following is a description of certain line items from our audited
consolidated statements of operations, which include the acquisitions of IMSI,
STI and ISI since the dates of the acquisitions.
Costs of revenues include direct labor and fringe costs for program
personnel and direct expenses incurred to complete contracts and task orders.
Costs of revenues also include depreciation, overhead, and other direct contract
costs, which include subcontract work, consultant fees, and materials. Overhead
consists of indirect costs relating to operational managers, rent/facilities,
administration, travel and other expenses.
General and administrative expenses are primarily for corporate functions
such as management, legal, finance and accounting, contracts and administration,
human resources, company management information systems and depreciation, and
also include other unallowable costs such as marketing, certain legal fees and
reserves.
Amortization expenses relate to the costs associated with intangible assets
from our acquisitions. These intangible assets represent the fair value assigned
to contract backlog and customer relationships as part of our acquisitions.
Amortization expenses also include costs associated with certain non-compete
agreements related to the ISI acquisition.
Other income is from non-core business items such as gains on the sales of
businesses, fair market value adjustments to the retirement savings plan and a
settlement agreement we entered into with the former owners of Sherikon, which
resulted in our paying a reduced amount of the subordinated note payable.
Secondary offering expenses relate to costs associated with the selling of
our common stock in underwritten offerings during the years ended December 31,
2003 and 2004. The Company sold no shares and received no proceeds in these
offerings. Therefore, we were required to classify the related costs as
expenses.
Interest expense is primarily related to our term loans and revolving
Credit Facility, our subordinated debt, our 12% senior subordinated notes which
were due in 2009, or the "12% Notes", interest rate swaps and amortization of
deferred financing costs. None of our 12% Notes remained outstanding after June
2004.
Funded Backlog and Estimated Remaining Contract Value
- -----------------------------------------------------
Each year a significant portion of our revenue is derived from existing
contracts with our government customers, and a portion of the revenue represents
work related to maintenance, upgrade or replacement of systems under contracts
or projects for which we are the incumbent provider. Proper management of
contracts is critical to our overall financial success and we believe that
effective management of costs makes us competitive on price. Historically, we
believe that our demonstrated performance record and service excellence have
enabled us to maintain our position as an incumbent service provider on more
than 90% of our contracts that have been recompeted. We have increased our
estimated remaining contract value by approximately $688 million, from $5.6
billion as of December 31, 2003, to $6.3 billion at December 31, 2004, of which
approximately $830.9 million was funded backlog as of December 31, 2004. Funded
backlog increased approximately $169.8 million to $830.9 million at December 31,
2004, from $661.1 million as of December 31, 2003.
30
Our estimated remaining contract value represents the aggregate contract
revenue we estimate will be earned over the remaining life of our contracts.
When more than one company is awarded a contract for a given work requirement,
we include in estimated remaining contract value only our estimate of the
contract revenue we expect to earn over the remaining term of the contract.
Funded backlog is based upon amounts actually appropriated by a customer for
payment for goods and services. Because the U.S. federal government operates
under annual appropriations, agencies of the U.S. federal government typically
fund contracts on an incremental basis. Accordingly, the majority of the
estimated remaining contract value is not funded backlog. Our estimated
remaining contract value is based on our experience under contracts and we
believe our estimates are reasonable. However, there can be no assurance that
our existing contracts will result in actual revenues in any particular period
or at all. These amounts could vary depending upon government budgets and
appropriations.
Acquisitions, Divestitures and Business Closures
The following table summarizes our acquisitions, divestitures and business
closures since January 2002.
Revenues for the most
recently completed twelve
month period ended prior
Name Status Acquisition Date to acquisition
- ------------------------------------------ ------------ --------------------------- --------------------------------
(in thousands)
ACQUISITIONS
ISI................................... Acquired May 2003 $ 130,500
STI................................... Acquired July 2004 $ 20,686
IMSI.................................. Acquired August 2004 $ 31,715
Revenues for the twelve
months ended prior to
Name Status Divestiture/Closure Date divestiture/closure
- ------------------------------------------ ------------ --------------------------- --------------------------------
(in thousands)
DIVESTITURES/CLOSURES
DisplayCheck.......................... Sold April 2002 $ 270
Acquisitions
We have completed and integrated eight strategic acquisitions since 1997.
Since January 2002, we have acquired three businesses: Information Spectrum,
Inc., Simulation Technologies Inc., and Integrated Management Services, Inc.
Information Spectrum, Inc. - On May 23, 2003, we purchased all of the
outstanding stock of ISI, a provider of credential card technologies and
military logistics and training systems, based in Annandale, Virginia, for a
total purchase price of approximately $92.4 million including transaction costs.
The transaction was accounted for in accordance with SFAS No. 141, Business
Combinations, whereby the net tangible and identifiable intangible assets
acquired and liabilities assumed were recognized at their estimated fair market
values at the date of acquisition. The identifiable intangible assets consisted
of $4.8 million of contracts and related customer relationships and $500,000 for
the value of a non-compete agreement. The value of the contracts and related
customer relationships is based, in part, on an independent appraisal and other
studies performed by us. Goodwill recognized from this acquisition was
approximately $74.3 million and was not deductible for tax purposes. At the time
of the acquisition, the contracts and related customer relationships had an
expected useful life of approximately 5.3 years. The non-compete agreement is
being amortized straight-line over the three year term of the agreement. In
accordance with SFAS No. 142, Goodwill and Other Intangible Assets, goodwill
arising from the transaction is not being amortized.
Simulation Technologies, Inc. - On July 27, 2004, we purchased all of the
outstanding stock of Simulation Technology Inc., or "STI", a provider of
modeling and simulation software solutions and services, based in San Antonio,
Texas, for a total purchase price of $15.1 million (net of cash acquired),
including transaction costs. We financed the acquisition through borrowings
under our existing Credit Facility. The transaction was accounted for in
accordance with SFAS No. 141, Business Combinations, whereby the net tangible
and identifiable intangible assets acquired and liabilities assumed were
recognized at their estimated fair market values at the date of acquisition. The
identifiable intangible assets consisted of $2.6 million of contracts and
related customer relationships with an expected weighted average useful life of
5 years. The value of the contracts and customer relationships is based, in
part, on an independent appraisal and other studies performed by us. Goodwill
recognized from this acquisition was approximately $9.5 million and is not
deductible for tax purposes. In accordance with SFAS No. 142, Goodwill and Other
Intangible Assets, goodwill arising from the transaction is not being amortized.
Pursuant to the requirements of SFAS No. 141, Business Combinations, the effect
of the acquisition did not meet the criteria of a significant acquisition, and
therefore, pro forma disclosures are not presented in the audited consolidated
financial statements.
31
Integrated Management Services, Inc. - On August 11, 2004, we purchased all
of the outstanding stock of Integrated Management Services, Inc., or "IMSI", a
provider of high end, mission critical information and securities solutions,
based in Arlington, Virginia, for a total purchase price of $29.1 million,
including transaction costs. We financed the acquisition through borrowings
under our existing Credit Facility. Under the terms of the stock purchase
agreement, we may be obligated to pay up to $2.0 million of additional
consideration if certain milestones are met by June 30, 2005. The transaction
was accounted for in accordance with SFAS No. 141, Business Combinations,
whereby the net tangible and identifiable intangible assets acquired and
liabilities assumed were recognized at their estimated fair market values at the
date of acquisition. The identifiable intangible assets consisted of $5.9
million of contracts and related customer relationships with an expected
weighted average useful life of 5 years. The value of the contracts and customer
relationships is based, in part, on an independent appraisal and other studies
performed by us. Goodwill recognized from this acquisition was approximately
$20.7 million and is deductible for tax purposes due to a tax code election made
at the time of the acquisition. In accordance with SFAS No. 142, Goodwill and
Other Intangible Assets, goodwill arising from the transaction is not being
amortized. Pursuant to the requirements of SFAS No. 141, Business Combinations,
the effect of the acquisition did not meet the criteria of a significant
acquisition, and therefore, pro forma disclosures are not presented in the
audited consolidated financial statements.
Divestitures/Closures
DisplayCheck--Through our acquisition of A&T in June 1999, we acquired
expertise in electronic testing of liquid crystal displays and other
microdisplay products that utilize liquid crystal on silicon technologies. This
newly emergent market was pursued to determine business feasibility. While we
were successful in generating a limited amount of revenue from our test
equipment products, we decided not to make any further investments in this
market. Operations ceased in August 2001. Operating losses of $407,000 on
revenues of $664,000 were incurred in the year ended December 31, 2001.
DisplayCheck generated an operating loss of $15,000 on revenue of $703,000 in
2000. On April 3, 2002, we sold all of the assets and transferred certain
liabilities of the business for an aggregate sale price of $200,000.
Results of Operations
Our historical consolidated financial statements do not reflect the
full-year impact of the operating results of a number of our acquisitions,
divestitures and closures, since their operating results are only included or
excluded from our results from the date of acquisition, divestiture or closure,
as applicable.
32
The following table sets forth our consolidated results of operations based
on the amounts and percentage relationship of the items listed to revenues
during the period shown:
Years Ended
------------------------------------------------------------------------------------
December 31,
2004 2003 2002
---------------------------- -------------------------- --------------------------
(in thousands, except percentages)
Revenues $ 1,268,139 100.0% $1,042,474 100.0% $ 825,826 100.0%
Costs of revenues............. 1,093,470 86.2 897,264 86.1 711,328 86.1
------------- ----------- ------------- ------------ ------------- ------------
Gross profit............... 174,669 13.8 145,210 13.9 114,498 13.9
Costs and expenses:..........
General and administrative. 65,964 5.2 58,647 5.6 48,197 5.8
Amortization............... 2,676 0.2 2,450 0.2 1,907 0.3
------------- ----------- ------------- ------------ ------------- ------------
Total operating expenses......... 68,639 5.4 61,097 5.8 50,104 6.1
------------- ----------- ------------- ------------ ------------- ------------
Operating income.............. 106,029 8.4 84,113 8.1 64,394 7.8
Other income, net............. 973 -- -- -- 417 --
Secondary offering expenses 240 -- 852 0.1 -- --
Interest expense, net......... 7,769 0.7 24,244 2.3 21,626 2.6
Minority interest............. (72) -- (54) -- (18) --
------------- ----------- ------------- ------------ ------------- ------------
Income before provision for
income taxes............. 98,921 7.8 58,963 5.7 43,167 5.2
Provision for income taxes.... 37,116 2.9 22,773 2.2 16,723 2.0
------------- ----------- ------------- ------------ ------------- ------------
Net income ................... $ 61,805 4.9% $ 36,190 3.5% $ 26,444 3.2%
============= =========== ============ ============ ============ ============
2004 COMPARED WITH 2003
Revenues
For the year ended December 31, 2004, revenues increased by $225.7 million,
or 21.6%, to $1.268 billion from $1.042 billion for the year ended December 31,
2003. The increase in revenues was attributable to organic growth and the
acquisitions of STI and IMSI. We define organic growth as the increase in
revenues excluding the revenues associated with acquisitions, divestitures and
closures of businesses in comparable periods. We believe organic growth is a
useful supplemental measure to revenue. Management uses organic growth as part
of its evaluation of core operating results and underlying trends. For the year
ended December 31, 2004, our organic growth was 14.2%, or $146.3 million. The
acquisitions of STI and IMSI accounted for approximately $20.8 million of the
revenue growth for the year ended December 31, 2004. The increase in revenues
attributable to organic growth was primarily driven by growth in the following
business areas: task orders in support of a wide range of federal government
agencies under our GSA ANSWER and Management and Business Services (MOBIS)
contracts; Engineering and Technical Services for Deploying Enabling
Technologies with the U.S. Navy; engineering and technical support to the U.S.
Army's "Program Executive Office for Simulation, Training and Instrumentation";
Foreign Military Sales Logistics support; and task orders under our Naval Sea
Systems Command (NAVSEA) Multiple Award Contract.
Costs of Revenues
For the year ended December 31, 2004, costs of revenues increased by $196.2
million, or 21.9%, to $1.093 billion from $897.3 million for year ended December
31, 2003. The increase in costs of revenues was due in part to the corresponding
growth in revenues resulting from organic growth and the acquisition of STI and
IMSI and the increase in employee headcount. The majority of the increase in
costs of revenues for the year ended December 31, 2004 was due to increases of
$78.1 million and $76.5 million in direct labor and other direct contract costs,
respectively.
33
Gross Profit
For the year ended December 31, 2004, gross profit increased by $29.5
million, or 20.3%, to $174.7 million from $145.2 million for the year ended
December 31, 2003. Gross profit for the year ended December 31, 2004, as a
percentage of revenues remained relatively consistent.
General and Administrative Expenses
For the year ended December 31, 2004, general and administrative expenses
increased $7.3 million, or 12.5%, to $66.0 million from $58.6 million for the
year ended December 31, 2003. General and administrative expenses for the year
ended December 31, 2004, as a percentage of revenues, decreased to 5.2% from
5.6%. This decline in the percentage of revenues was driven primarily by
operational cost efficiencies achieved in connection with acquisitions and their
successful integration. The dollar increase was primarily attributable to the
corresponding growth in revenues and additional expenses related to compliance
with provisions of, and rules promulgated in connection with, Section 404 of the
Sarbanes-Oxley Act of 2002.
Amortization
For the year ended December 31, 2004, amortization expenses increased
$226,000, or 9.2%, to $2.7 million from $2.5 million for the year ended December
31, 2003. The increase in amortization expense was a result of additional
amortization related to intangible assets acquired in connection with the
purchase of STI and IMSI.
Operating Income
For the year ended December 31, 2004, operating income increased $21.9
million, or 26.1%, to $106.0 million from $84.1 million for the year ended
December 31, 2003. The increase in operating income was primarily a result of
the corresponding increase in revenues. Operating income as a percentage of
revenues increased to 8.4% for the year ended December 31, 2004 from 8.1% for
the year ended December 31, 2003. The increase in the percentage of revenues was
driven by the decline in the general and administrative expenses as a percentage
of revenues.
Other Income
For the year ended December 31, 2004, other income was $973,000 as compared
to zero for the year ended December 31, 2003. The increase in other income was
primarily related to a settlement agreement we entered into in July 2004 with
the former owners of Sherikon, a company we acquired in October 2000. Under the
provisions of the settlement agreement, the principal amount of the subordinated
note payable was reduced from $2.5 million to $1.35 million, and we paid the
reduced note amount, without interest. This resulted in other income of
approximately $899,000, net of legal expenses.
Interest Expense, Net
For the year ended December 31, 2004, interest expense, net of interest
income, decreased $16.5 million, or 68.0%, to $7.7 million from $24.2 million
for the year ended December 31, 2003. The decrease in interest expense was
primarily due to the repurchase of our 12% Notes and the refinancing of our
Credit Facility. In December 2003, we reduced the balance on our 12% Notes to
approximately $1.9 million from $75.0 million by utilizing the proceeds from the
$150.0 million in Term Loan B borrowings made under the Credit Facility. In June
2004, we repurchased the remaining $1.9 million principal amount outstanding of
our 12% Notes. In conjunction with the repurchase in 2004, we paid a tender
premium of $113,000 which was included in interest for 2004. In 2003, we
incurred a $7.2 million bond premium and consent payment, $300,000 of fees and
wrote off $2.6 million of deferred financing fees to interest expense.
34
Secondary Offering Expenses
On October 29, 2004, affiliates of and companies managed by Caxton-Iseman
Capital, Inc., including Azimuth Technologies, L.P., Azimuth Tech II LLC and
Frederick J. Iseman, which we refer to collectively as the "Caxton-Iseman
Stockholders", sold 3,600,000 shares of our common stock in an underwritten
offering pursuant to a shelf registration statement on Form S-3 filed with the
SEC (Commission File No. 333-111249). Neither we nor any of our executive
officers participated in the sale of shares in this offering. In connection with
this offering, we incurred $240,000 of expenses for the year ended December 31,
2004, for which we were not reimbursed in accordance with the terms of our
registration rights agreement with certain of our stockholders, as amended.
On September 22, 2003, certain of our stockholders, including Caxton-Iseman
stockholders, sold 6,600,000 shares of our common stock in an underwritten
offering pursuant to a registration statement on Form S-3 filed with the SEC
(Commission File Nos. 333-108147 and 333-108858). In the fourth quarter of 2003,
the underwriters of this offering partially exercised their over-allotment
option with respect to additional shares held by the selling stockholders. As a
result, on October 16, 2003, certain of the selling stockholders sold an
additional 297,229 shares of our common stock in a second closing pursuant to
the same underwritten offering. In connection with this offering, we incurred
approximately $852,000 of expenses for the year ended December 31, 2003, which
amounts were reimbursed by certain of the selling stockholders and recorded by
us as an expense and a contribution to additional paid-in capital.
Provision For Income Taxes
Our effective tax rate for the year ended December 31, 2004 was 37.5%,
compared with 38.6% for the year ended December 31, 2003. The 2004 effective tax
rate reflects a benefit for federal research and experimentation credits from
amending prior years tax returns, state legislative changes and a non-recurring
benefit from nontaxable other income resulting from the settlement with the
former owners of Sherikon, which resulted in a stock basis difference, for which
a deferred tax liability was not required to be recorded.
2003 COMPARED WITH 2002
Revenues
For the year ended December 31, 2003, revenues increased by $216.6 million,
or 26.2%, to $1.0 billion from $825.8 million for the year ended December 31,
2002. The increase in revenues was attributable to organic growth and the
acquisition of ISI. For the year ended December 31, 2003, our organic growth was
16.2%, or $134.2 million. The acquisition of ISI accounted for approximately
$82.5 million of the growth for the year ended December 31, 2003. The increase
in revenue was primarily driven by growth in the following contracts: SAFTAS,
Battlefield Information Collection Exploitation Systems, contracts with the U.S.
Army for military operations on urban terrain, ANSWER, our Professional
Engineering Services schedule contract, our other GSA contracts, and contracts
with DHS. In 2003, approximately 3% of our revenues were derived from DHS. In
addition, our revenues derived from DOD increased from approximately 78% in 2002
to 88% in 2003.
Costs of Revenues
For the year ended December 31, 2003, costs of revenues increased by $186.0
million, or 26.1%, to $897.3 million from $711.3 million for year ended December
31, 2002. The increase in costs of revenues was due in part to the corresponding
growth in the revenues resulting from organic growth and the acquisition of ISI.
The majority of the increase in costs of revenues for the year ended December
31, 2003 was due to increases of $68.9 million, $20.7 million, and $86.9 million
in direct labor, fringe costs, and other direct contract costs, respectively.
The increases in direct labor, fringe costs and other direct contract costs were
offset in part by reductions in certain overhead expenses.
35
General and Administrative Expenses
For the year ended December 31, 2003, general and administrative expenses
increased $10.4 million, or 21.6%, to $58.6 million from $48.2 million for the
year ended December 31, 2002. General and administrative expenses for the year
ended December 31, 2003, as a percentage of revenues, decreased to 5.6% from
5.8%. This decline in the percentage of revenues was driven primarily by
operational cost efficiencies achieved in connection with the ISI acquisition
and its successful integration. The dollar increase was primarily attributable
to the corresponding growth in revenues.
Amortization
For the year ended December 31, 2003, amortization expenses increased
$500,000, or 28.5 %, to $2.4 million from $1.9 million for the year ended
December 31, 2002. The increase in amortization expense was a result of
additional amortization related to intangible assets acquired in connection with
the purchase of ISI and a related non-compete agreement. As a result of the
increase in revenues, amortization expense as a percentage of revenues
decreased.
Operating Income
For the year ended December 31, 2003, operating income increased $19.7
million, or 30.6%, to $84.1 million from $64.4 million for the year ended
December 31, 2002. The increase in operating income was primarily a result of
the corresponding increase in revenues. Operating income as a percentage of
revenues increased to 8.1% for the year ended December 31, 2003 from 7.8% for
the year ended December 31, 2002. The increase in the percentage of revenues was
driven by the decline in the percentage of general and administrative expenses
as a percentage of revenues.
Interest Expense, Net
For the year ended December 31, 2003, interest expense, net of interest
income, increased $2.6 million, or 12.1%, to $24.2 million from $21.6 million
for the year ended December 31, 2002. The increase in interest expense was
primarily a result of a $7.2 million bond premium and consent payment we
incurred in connection with our tender offer in December 2003 for our 12% Notes.
Excluding the interest expense related to our refinancing including the $7.2
million bond premium and consent payment for our 12% Notes, the write off of
$2.6 million of deferred financing fees, and $300,000 of fees, interest expense
for the year ended December 31, 2003 would have been approximately $14.1
million, which would have represented a 35% decrease from 2002. Our debt balance
as of December 31, 2003 exceeds the debt balance as of December 31, 2002. The
debt balance increased due to $150.0 million in new term loan borrowings made
under the Credit Facility offset, in part, by the repayment of approximately
$18.4 million in existing term loans and $73.1 million in our 12% Notes. This
amendment and restatement is discussed further in "Liquidity and Capital
Resources".
Secondary Offering Expenses
In connection with an underwritten offering of approximately 6,900,000
shares of our common stock by certain of our stock holders, we incurred
approximately $852,000 of expenses for the year ended December 31, 2003, which
amounts were reimbursed by certain of the selling stockholders and recorded by
us as a contribution to additional paid-in capital.
Other Income
We did not have any other income for the year ended December 31, 2003.
Other income for the year ended December 31, 2002 included a gain on the sale of
DisplayCheck assets and receipt of insurance proceeds for misappropriated
equipment previously recorded as a loss.
36
Provision For Income Taxes
As a result of certain non-deductible secondary offering expenses referred
to above, state legislative changes and other federal and state credits and
incentives, our effective tax rate for the year ended December 31, 2003 was
38.6%, compared with 38.8% for the year ended December 31, 2002.
Liquidity and Capital Resources
Cash Flow for the Years Ended December 31, 2004 and 2003
We generated $18.2 million in cash from operations for the year ended
December 31, 2004. By comparison, we generated $37.4 million in cash from
operations for the year ended December 31, 2003. Accounts receivable Days Sales
Outstanding, or "DSO", increased to 82 days for the year ended December 31, 2004
from 71 days for the year ended December 31, 2003. The 11 day increase in DSO is
largely the result of payment delays related to customer process changes.
Contract receivables increased $94.4 million to $317.3 million for the year
ended December 31, 2004 as compared to $222.9 million for the year ended
December 31, 2003. Accounts receivable at December 31, 2004 represented 51.7% of
total assets at that date. As a result of our acquisitions of STI and IMSI,
accounts receivable increased by approximately $10.9 million. The remaining
increase was attributable to the overall growth of our business and the increase
in DSO. For the year ended December 31, 2004, net cash used in investing
activities was $47.9 million, which was attributable primarily to our
acquisitions of STI and IMSI. Cash provided by financing activities was $31.7
million for the year ended December 31, 2004, primarily related to the
borrowings under our existing Credit Facility.
Prior to September 30, 2004, our Credit Facility provided, among other
things, a Term Loan B 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 Credit
Facility permits us to raise up to $200.0 million of additional debt in the form
of additional term loans, subordinated debt or revolving loans with certain
restrictions on the amount of revolving loans. All borrowings under our Credit
Facility are subject to financial covenants customary for such financings,
including, but not limited to: maximum ratio of net debt to EBITDA and maximum
ratio of senior debt to EBITDA, as defined in the Credit Facility. For the year
ended December 31, 2004, we complied with all of the financial covenants.
Additionally, as a result of changes made in the amendment and restatement,
revolving loans are now based upon an asset test or maximum ratio of net
eligible accounts receivable to revolving loans. 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.
On September 30, 2004, we entered into a second amendment to our Credit
Facility. This amendment provided an additional $16.1 million of borrowing by
increasing our Term Loan B to $165.0 million, and lowered the interest rates on
Term Loan B borrowings by 0.25%. The additional $16.1 million in borrowings did
not reduce the $200.0 million in potential additional borrowings described
below. As of December 31, 2004, total debt outstanding was $184.4 million,
consisting of $164.6 million of Term Loan B, and $19.8 million outstanding under
the revolving loan portion of our Credit Facility. The total funds available to
us under the revolving loan portion of our Credit Facility as of December 31,
2004 were $173.9 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.
Our principal working capital need is for funding accounts receivable,
which has increased with the growth of our business. For the year ended December
31, 2004, working capital increased by $63.9 million to $169.2 million from
$105.3 million for the year ended December 31, 2003. The increase in working
capital was primarily the result of the increase in DSO referenced above. Our
principal sources of cash to fund our working capital needs are cash generated
from operations and borrowings under our Credit Facility. In addition, we are
scheduled to pay quarterly installments of $412,500 under the Term Loan B until
the Credit Facility matures on December 31, 2010. As of December 31, 2004, we
did not have any capital commitments greater than $1.0 million.
37
We have relatively low capital investment requirements. Capital
expenditures were $4.0 million and $3.0 million for the years ended December 31,
2004 and 2003, respectively, primarily for leasehold improvements and office
equipment.
Our business acquisition expenditures relating to STI and IMSI were $44.2
million in 2004. The acquisitions were financed through borrowings under our
Credit Facility. In the past, we have engaged in acquisition activity, and we
intend to do so in the future. Historically, we have financed our acquisitions
through a combination of bank debt, subordinated debt, subordinated public and
private debt and equity investments. We expect to be able to finance any future
acquisitions either with cash provided from operations, borrowings under our
Credit Facility, bank loans, equity offerings, or some combination of the
foregoing.
We intend to, and expect over the next twelve months to be able to, fund
our operating cash, capital expenditure and debt service requirements through
cash flow from operations and borrowings under our Credit Facility. Over the
longer term, our ability to generate sufficient cash flow from operations to
make scheduled payments on our debt obligations will depend on our future
financial performance, which will be affected by a range of economic,
competitive and business factors, many of which are outside our control.
Off-Balance Sheet Arrangements and Aggregate Contractual Obligation
We use off-balance sheet financing, primarily to finance certain capital
items. Operating leases are used primarily to finance computers, servers, phone
systems, and to a lesser extent, other fixed assets, such as furnishings. As of
December 31, 2004, we financed equipment with an original cost of approximately
$17.8 million through operating leases. Had we not used operating leases, we
would have used our existing Credit Facility to purchase these assets. In
addition, our offices, warehouse and shop facilities are obtained through
operating leases. Other than the operating leases described above, we do not
have any other off-balance sheet financing. The following table provides
information (in thousands) as of December 31, 2004 regarding our off-balance
sheet arrangements and contractual obligations.
Payments due by period (in thousands)
-----------------------------------------------------------------------------
Less than More than
Contractual Obligations Total 1 year 1-3 year 3-5 years 5 years
------------------------------ ----- ------ -------- --------- -------
Long-term debt $ 184,388 $ 1,650 $ 3,300 $ 23,100 $ 156,338
Capital lease obligations 596 222 277 97 --
Operating leases 158,563 32,451 52,484 37,103 36,525
Other long-term liabilities 4,915 -- -- 1,930 2,985
------------- ----------- ------------ ----------- ------------
Total $ 348,462 $ 34,323 $ 56,061 $ 62,230 $ 195,848
============= =========== ============ =========== ============
Inflation
We do not believe that inflation has had a material effect on our business
in 2004, 2003, or 2002 as we are able to build escalation into our contract
rates each year.
38
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board (FASB)
issued SFAS No. 153, Exchanges of Nonmonetary Assets. This statement amends
Accounting Principles Board (APB) Opinion No. 29 to improve financial reporting
by eliminating certain narrow differences between the FASB's and the
International Accounting Standards Board's (IASB) existing accounting standards
for nonmonetary exchanges of similar productive assets. The provisions of this
statement shall be prospectively applied and are effective for nonmonetary asset
exchanges occurring in fiscal periods beginning after June 15, 2005. The
adoption of SFAS No. 153 is not expected to have a significant impact on our
consolidated financial statements.
In December 2004, the FASB issued SFAS No. 123 (Revised 2004), Share Based
Payment. (SFAS No. 123R), which amends SFAS No. 123, Accounting for Stock-Based
Compensation and SFAS No. 95, Statement of Cash Flows. SFAS 123R requires all
companies to measure compensation cost for all share-based payments at fair
value, and will be effective for public companies for interim and annual periods
beginning after June 15, 2005. This new standard may be adopted in one of two
ways - the modified prospective transition method or the modified retrospective
transition method. The Company is currently assessing the impact of SFAS No.
123R on its operating results and financial condition.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have interest rate exposure relating to certain of our long-term
obligations. 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 collecting our accounts receivable.
During the year ended December 31, 2004, the last of our interest rate swap
agreements, with a notional value of $10.0 million, matured. We are not
currently contemplating any future 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 $1.6 million and $514,000 for the year ended
December 31, 2004 and 2003, respectively.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements are provided in Part IV, Item 15 of
this filing.
39
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
We had no disagreements with our independent registered public accountants
on accounting principles, practices or financial statement disclosure during the
two years prior to the date of our most recent consolidated financial statements
included elsewhere in this report.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and
chief financial officer (our principal executive officer and principal financial
officer, respectively), evaluated the effectiveness of our disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange
Act) as of December 31, 2004. Based on this evaluation, our chief executive
officer and chief financial officer concluded that, as of December 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 U.S. Securities and Exchange Commission's
rules and forms.
Changes in Internal Control over Financial Reporting
No change in our internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the year
ended December 31, 2004 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
Management's Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting, as defined in Rule 13a-15(f) of the
Exchange. Our management, with the participation of our chief executive officer
and chief financial officer (our principal executive officer and principal
financial officer, respectively), assessed the effectiveness of our internal
control over financial reporting based on the framework in Internal Control -
Integrated Framework, issued by the Committee of Sponsoring Organizations of the
Treadway Commission ("COSO Framework"). Management excluded from its assessment
of the effectiveness of the Company's internal control over financial reporting
as of December 31, 2004, STI's and IMSI's internal control over financial
reporting associated with total assets of $4.4 million and $7.9 million,
respectively, and total revenues of $9.4 million and $11.4 million,
respectively, included in the consolidated financial statements of the Company
as of and for the year ended December 31, 2004. Based on our assessment under
the COSO Framework, our management concluded that our internal control over
financial reporting was effective as of December 31, 2004. It should be noted
that any system of controls, however well designed and operated, can provide
only reasonable, and not absolute, assurance that the objectives of the system
will be met. In addition, the design of any control system is based in part upon
certain assumptions about the likelihood of certain events. Because of these and
other inherent limitations of control systems, there is only reasonable
assurance that our controls will succeed in achieving their goals under all
potential future conditions.
Our independent registered public accounting firm, KPMG LLP, issued an
attestation report on our management's assessment of the effectiveness of our
internal control over financial reporting as of December 31, 2004, which appears
below.
40
Report of Independent Registered Public Accounting Firm
- -------------------------------------------------------
The Board of Directors and Stockholders
Anteon International Corporation:
We have audited management's assessment, included in the accompanying
Management's Report on Internal Controls over Financial Reporting that Anteon
International Corporation and subsidiaries (the "Company") maintained effective
internal control over financial reporting as of December 31, 2004, based on the
criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO)". The
Company's management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the Company's
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with U.S. generally accepted accounting principles. A company's internal control
over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with U.S. generally
accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition
of the company's assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that the Company maintained effective
internal control over financial reporting as of December 31, 2004, is fairly
stated, in all material respects, based on the criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Also, in our opinion, the
Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2004, based on the criteria established
in Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
The Company acquired Simulation Technologies, Inc. ("STI") and Integrated
Management Services, Inc. ("IMSI") during 2004, and management excluded from its
assessment of the effectiveness of the Company's internal control over financial
reporting as of December 31, 2004, STI's and IMSI's internal control over
financial reporting associated with total assets of $4.4 million and $7.9
million, respectively, and total revenues of $9.4 million and $11.4 million,
respectively, included in the consolidated financial statements of the Company
as of and for the year ended December 31, 2004. Our audit of internal control
over financial reporting of the Company also excluded an evaluation of the
internal control over financial reporting of STI and IMSI
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
the Company as of December 31, 2004 and 2003, and the related consolidated
statements of operations, stockholders' equity and comprehensive income, and
cash flows for each of the years in the three-year period ended December 31,
2004, and our report dated March 4, 2005 expressed an unqualified opinion on
those consolidated financial statements.
KPMG LLP
McLean, Virginia
March 4, 2005
41
PART III
MANAGEMENT
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference from our
definitive proxy statement to be filed not later than 120 days after the end of
the fiscal year covered by this Annual Report on Form 10-K pursuant to
Regulation 14A.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from our
definitive proxy statement to be filed not later than 120 days after the end of
the fiscal year covered by this Annual Report on Form 10-K pursuant to
Regulation 14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from our
definitive proxy statement to be filed not later than 120 days after the end of
the fiscal year covered by this Annual Report on Form 10-K pursuant to
Regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from our
definitive proxy statement to be filed not later than 120 days after the end of
the fiscal year covered by this Annual Report on Form 10-K pursuant to
Regulation 14A.
ITEM 14. PRINCIPAL ACCOUNTANTS FEES AND SERVICES
The information required by this item is incorporated by reference from our
definitive proxy statement to be filed not later than 120 days after the end of
the fiscal year covered by this Annual Report on Form 10-K pursuant to
Regulation 14A.
42
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Page Number
in 2004
Annual Report
(a) 1. Financial Statements
Report of Independent Registered Public Accounting Firm F-1
Consolidated Balance Sheets as of December 31, 2004 and 2003 F-2
Consolidated Statements of Operations for Each of the Years in the
Three-Year Period Ended December 31, 2004 F-3
Consolidated Statements of Stockholders' Equity and
Comprehensive Income for Each of the Years in the Three-Year
Period Ended December 31, 2004 F-4
Consolidated Statements of Cash Flows for Each of the Years in
the Three-Year Period Ended December 31, 2004 F-5 - F-6
Notes to Consolidated Financial Statements F-7 - F-37
(a) 2. Financial Statement Schedules
Valuation and Qualifying Accounts S-2
(a) 3. Exhibits
See Exhibit Index beginning on page 46
43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ANTEON INTERNATIONAL CORPORATION
Date: February 25, 2005 By: /s/: Joseph M. Kampf
- ----------------------- ----------------------
Joseph M. Kampf
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
Name Title Date
/s/: JOSEPH M. KAMPF February 25, 2005
- --------------------------------- -----------------
Joseph M. Kampf President and Chief Executive Officer
and Director (Principal Executive Officer)
/s/: CHARLES S. REAM February 25, 2005
- --------------------------------- -----------------
Charles S. Ream Executive Vice President and Chief
Financial Officer (Principal Financial and
Accounting Officer)
/s/: FREDERICK J. ISEMAN February 25, 2005
- --------------------------------- -----------------
Frederick J. Iseman Chairman of the Board and Director
/s/: GILBERT F. DECKER February 25, 2005
- --------------------------------- -----------------
Gilbert F. Decker Director
/s/:
- ---------------------------------
Robert A. Ferris Director
/s/: PAUL G. KAMINSKI February 25, 2005
- --------------------------------- -----------------
Paul G. Kaminski Director
/s/: STEVEN M. LEFKOWITZ February 25, 2005
- --------------------------------- -----------------
Steven M. Lefkowitz Director
/s/: THOMAS J. TISCH February 25, 2005
- --------------------------------- -----------------
Thomas J. Tisch Director
/s/: GENERAL HENRY HUGH SHELTON February 25, 2005
- --------------------------------- -----------------
General Henry Hugh Shelton Director
/s/: WILLIAM J. PERRY February 25, 2005
- --------------------------------- -----------------
William J. Perry Director
/s/: PAUL DAVID MILLER February 25, 2005
- --------------------------------- -----------------
Paul David Miller Director
/s/: PAUL J. KERN February 25, 2005
- --------------------------------- -----------------
Paul J. Kern Director
44
EXHIBIT INDEX
2.1 Agreement and Plan of Merger, dated as of March 7, 1999, by and
among Anteon Corporation, Buffalo Acquisition Corporation and
Analysis & Technology, Inc. (incorporated by reference to Exhibit
Z to Analysis & Technologies, Inc.'s Current Report on Form 8-K
filed on March 9, 1999).
2.2 Agreement and Plan of Merger between Anteon International
Corporation, a Virginia corporation, and the Registrant
(incorporated by reference to Exhibit 2.2 to Anteon International
Corporation's Amendment No. 1 to Form S-1 Registration Statement,
filed on February 5, 2002 (Commission File No. 333-75884)).
3.1 Amended and Restated Certificate of Incorporation of Anteon
International Corporation (incorporated by reference to Exhibit
3.1 of Anteon International Corporation's Quarterly Report on
Form 10-Q filed on May 14, 2002).
3.2 Certificate of Designations of Series A Preferred Stock of Anteon
International Corporation (incorporated by reference to Exhibit
3.2 of Anteon International Corporation's Quarterly Report on
Form 10-Q filed on May 14, 2002).
3.3 Amended and Restated By-laws of Anteon International Corporation
(incorporated by reference to Exhibit 3.3 of Anteon International
Corporation's Quarterly Report on Form 10-Q filed on May 14,
2002).
4.1 Indenture, dated as of May 11, 1999, by and among Anteon
Corporation, Vector Data Systems, Inc., Techmatics, Inc. and IBJ
Whitehall Bank & Trust Company, as trustee (incorporated by
reference to Exhibit 4.1 to Anteon International Corporation's
Registration Statement on Form S-4 filed on August 9, 1999
(Commission File No. 333-84835)).
4.2 First Supplemental Indenture, effective as of June 23, 1999,
among Anteon Corporation, Analysis & Technology, Inc.,
Interactive Media Corp. and IBJ Whitehall Bank & Trust Company,
as trustee (incorporated by reference to Exhibit 4.2 to Anteon
International Corporation's Annual Report on Form 10-K for the
fiscal year ended December 31, 2000).
4.3 Second Supplemental Indenture, effective as of October 14, 1999,
among Anteon Corporation, Anteon-CITI LLC and IBJ Whitehall Bank
& Trust Company, as trustee (incorporated by reference to Exhibit
4.3 to Anteon International Corporation's Annual Report on Form
10-K for the fiscal year ended December 31, 2000).
4.4 Third Supplemental Indenture, dated as of October 20, 2000, among
Anteon Corporation, Sherikon, Inc. and The Bank of New York, as
trustee (incorporated by reference to Exhibit 4.4 to Anteon
International Corporation's Annual Report on Form 10-K for the
fiscal year ended December 31, 2000).
4.5 Fourth Supplemental Indenture, dated January 1, 2001, among
Anteon International Corporation (formerly Anteon Corporation),
Anteon Corporation (formerly Techmatics, Inc.) and The Bank of
New York, as successor trustee of IBJ Whitehall Bank & Trust
Company (incorporated by reference to Exhibit 4.5 to Anteon
International Corporation's Annual Report on Form 10-K for the
fiscal year ended December 31, 2000).
4.6 Fifth Supplemental Indenture between the Registrant and The Bank
of New York, as trustee (incorporated by reference to Exhibit 4.1
of Anteon International Corporation's Quarterly Report on Form
10-Q filed on May 14, 2002).
4.7 Sixth Supplemental Indenture, dated as of March 15, 2002, among
Anteon International Corporation (formerly Azimuth Technologies,
Inc.), a Delaware corporation, Anteon International Corporation
(formerly Anteon Corporation), a Virginia corporation, and The
Bank of New York, as trustee (incorporated by reference to
Exhibit 4.2 of Anteon International Corporation's Quarterly
Report on Form 10-Q filed on May 14, 2002).
45
4.8 Seventh Supplemental Indenture, dated as of May 23, 2003, among
Anteon International Corporation (formerly Azimuth Technologies,
Inc.) and The Bank of New York, as trustee. (incorporated by
reference to Exhibit 4.8 to Anteon International Corporation's
Annual Report on Form 10-K for the fiscal year ended December 31,
2003 filed on March 8, 2004).
4.9 Eighth Supplemental Indenture, dated as of December 5, 2003,
among Anteon International Corporation, Anteon Corporation,
Information Spectrum, Inc. and The Bank of New York, as trustee.
(incorporated by reference to Exhibit 4.9 to Anteon International
Corporation's Annual Report on Form 10-K for the fiscal year
ended December 31, 2003 filed on March 8, 2004).
4.10 Registration Rights Agreement dated March 11, 2002, among the
Registrant, Azimuth Technologies, L.P., Azimuth Tech. II LLC,
Frederick J. Iseman, Joseph M. Kampf and the other parties named
therein (incorporated by reference to Exhibit 4.8 to Anteon
International Corporation's Amendment No. 1 to Form S-1
Registration Statement filed on February 5, 2002 (Commission File
No. 333-75884)).
4.11 Amendment No. 1, dated as of September 3, 2003, to the
Registration Rights Agreement, dated March 11, 2002, among the
Registrant, Azimuth Technologies, L.P., Azimuth Tech. II LLC,
Frederick J. Iseman, Joseph M. Kampf and the other parties named
therein (incorporated by reference to Exhibit 4.5 to Anteon
International Corporation's Form S-3 Registration Statement filed
on December 17, 2003 (Commission File No. 333-111249)).
4.12 Rights Agreement, dated March 15, 2002 (incorporated by reference
to Exhibit 4.1 to Anteon International Corporation's Current
Report on Form 8-K, filed on April 5, 2002).
10.1 Second Amendment, dated as of September 30, 2004, to the Amended
and Restated Credit Agreement, dated as of December 19, 2003
among Anteon International Corporation, Bank of America, N.A.,
and Citizens Bank of Pennsylvania (incorporated by reference to
Exhibit 10.1 to Anteon International Corporation's Quarterly
Report on Form 10-Q filed on November 3, 2004).
10.11 Amended and Restated Credit Agreement, dated as of October 21,
2002, to the Credit Agreement, dated as of June 23, 1999, among
Anteon International Corporation, Credit Suisse First Boston,
Mellon Bank, N.A., Duetsche Bank AG and the lenders named therein
(incorporated by reference to Exhibit 10.11 to Anteon
International Corporation's Annual Report on Form 10-K for the
fiscal year ended December 31, 2002 filed on March 11, 2003).
10.12 Amendment Agreement, dated as of December 19, 2003 to the Amended
and Restated Credit Agreement, dated as of October 21, 2002,
among Anteon International Corporation, Anteon Corporation,
Credit Suisse First Boston and Citizens Bank of Pennsylvania.
(incorporated by reference to Exhibit 10.12 to Anteon
International Corporation's Annual Report on Form 10-K for the
fiscal year ended December 31, 2003 filed on March 8, 2004).
10.15 Security Agreement, dated as of June 23, 1999, among Anteon
Corporation, Analysis & Technology, Inc., Interactive Media
Corp., Techmatics, Inc., Vector Data Systems, Inc. and Mellon
Bank, N.A. (incorporated by reference to Exhibit 10.8 to Anteon
International Corporation's Registration Statement on Form S-4
filed on August 9, 1999 (Commission File No. 333-84835)).
10.16 Amended and Restated Omnibus Stock Plan (incorporated by
reference to Exhibit 10.2 to Anteon International Corporation's
Quarterly Report on Form 10-Q filed May 14, 2002).
10.17 Stock Option Agreement (incorporated by reference to Exhibit
10.17 to Anteon International Corporation's Amendment No. 2 to
Form S-1 Registration Statement filed on February 19, 2002
(Commission File No. 333-75884)).
10.22 Retention Agreement (incorporated by reference to Exhibit 10.22
to Anteon International Corporation's Amendment No. 1 to Form S-1
Registration Statement filed on February 5, 2002 (Commission File
No. 333-75884)).
21.1 Subsidiaries of the Registrant.
23.1 Consent of KPMG LLP.
46
31.1 Certification of the Chief Executive Officer pursuant to Rule
13a-14 of the Exchange Act, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 (filed herewith).
31.2 Certification of the Chief Financial Officer pursuant to Rule
13a-14 of the Exchange Act, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 (filed herewith).
32.1 Certification of the Chief Executive Officer pursuant to Rule
13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(furnished herewith).
32.2 Certification of the Chief Financial Officer pursuant to Rule
13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(furnished herewith).
47
Report of Independent Registered Public Accounting Firm
-------------------------------------------------------
The Board of Directors and Stockholders
Anteon International Corporation:
We have audited the accompanying consolidated balance sheets of Anteon
International Corporation and subsidiaries (the "Company") as of December 31,
2004 and 2003, and the related consolidated statements of operations,
stockholders' equity and comprehensive income, and cash flows for each of the
years in the three-year period ended December 31, 2004. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 2004 and 2003, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 2004, in
conformity with U.S. generally accepted accounting principles.
Our audits were performed for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The supplementary
information included in Schedule II is presented for purposes of additional
analysis and is not a required part of the basic consolidated financial
statements. Such information has been subjected to the auditing procedures
applied in the audits of the basic consolidated financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
consolidated financial statements taken as a whole
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Company's
internal control over financial reporting as of December 31, 2004, based on the
criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our
report dated March 4, 2005, expressed an unqualified opinion on management's
assessment of, and the effective operation of, internal control over financial
reporting.
KPMG LLP
McLean, Virginia
March 4, 2005
F-1
ANTEON INTERNATIONAL CORPORATION AND SUBSIDIARIES
(a Delaware Corporation)
Consolidated Balance Sheets
December 31, 2004 and 2003
(in thousands, except share and per share data)
Assets 2004 2003
----------------- ---------------
Current assets:
Cash and cash equivalents $ 4,103 $ 2,088
Accounts receivable, net 317,296 222,937
Prepaid expenses and other current assets 17,205 17,925
Deferred tax assets, net -- 1,641
----------------- ---------------
Total current assets 338,604 244,591
Property and equipment 12,920 12,759
Goodwill 242,066 212,205
Intangible and other assets, net of accumulated amortization of
$10,902 and $8,226, respectively 19,836 9,725
----------------- ---------------
Total assets $ 613,426 $ 479,280
================= ===============
Liabilities and Stockholders' Equity
Current liabilities:
Term Loan B, current portion 1,650 1,500
Subordinated notes payable, current portion -- 2,500
Obligations under capital leases, current portion 196 341
Accounts payable 46,430 36,793
Due to related party -- 48
Accrued expenses 102,593 85,468
Income tax payable 1,556 641
Other current liabilities 808 230
Deferred tax liability 2,448 --
Deferred revenue 13,764 11,783
----------------- ---------------
Total current liabilities 169,445 139,304
Term Loan B, less current portion 162,938 148,500
Revolving credit facility 19,800 4,400
Senior subordinated notes payable -- 1,876
Obligations under capital leases, less current portion 310 465
Noncurrent deferred tax liabilities, net 8,460 10,017
Other long term liabilities 4,915 16
----------------- ---------------
Total liabilities 365,868 304,578
----------------- ---------------
Minority interest in subsidiaries 282 210
Stockholders' equity:
Preferred stock, $0.01 par value, 15,000,000 shares authorized, zero
issued and outstanding as of December 31, 2004 and 2003 -- --
Common stock, $0.01 par value, 175,000,000 shares authorized and
36,218,476 and 35,354,996 shares issued and outstanding as of
December 31, 2004 and 2003, respectively 362 354
Additional paid-in capital 126,508 115,863
Accumulated other comprehensive income (loss) 254 (72)
Retained earnings 120,152 58,347
----------------- ---------------
Total stockholders' equity 247,276 174,492
----------------- ---------------
Commitments and contingencies
Total liabilities and stockholders' equity $ 613,426 $ 479,280
================= ===============
See accompanying notes to consolidated financial statements.
F-2
ANTEON INTERNATIONAL CORPORATION AND SUBSIDIARIES
(a Delaware Corporation)
Consolidated Statements of Operations
Years ended December 31, 2004, 2003 and 2002
(in thousands, except share and per share data)
2004 2003 2002
----------------- -------------- --------------
Revenues $ 1,268,139 $ 1,042,474 $ 825,826
Costs of revenues 1,093,470 897,264 711,328
----------------- -------------- --------------
Gross profit 174,669 145,210 114,498
----------------- -------------- --------------
Operating Expenses:
General and administrative expenses 65,964 58,647 48,197
Amortization of noncompete agreements 167 101 --
Other intangibles amortization 2,509 2,349 1,907
----------------- -------------- --------------
Total operating expenses 68,640 61,097 50,104
----------------- -------------- --------------
Operating income 106,029 84,113 64,394
Other income 973 -- 417
Secondary offering expenses 240 852 --
Interest expense, net of interest income of $277,
$239, and $289, respectively 7,769 24,244 21,626
Minority interest in earnings of subsidiaries (72) (54) (18)
----------------- -------------- --------------
Income before provision for income taxes 98,921 58,963 43,167
Provision for income taxes 37,116 22,773 16,723
----------------- -------------- --------------
Net income $ 61,805 $ 36,190 $ 26,444
================= ============== ==============
Basic earnings per common share $ 1.73 $ 1.04 $ 0.82
================= ============== ==============
Basic weighted average shares outstanding 35,716,669 34,851,281 32,163,150
Diluted earnings per common share $ 1.66 $ 0.98 $ 0.78
================= ============== ==============
Diluted weighted average shares outstanding 37,267,375 36,925,488 34,021,597
See accompanying notes to consolidated financial statements.
F-3
ANTEON INTERNATIONAL CORPORATION AND SUBSIDIARIES
(a Delaware Corporation)
Consolidated Statements of Stockholders' Equity (Deficit) and Comprehensive Income (Loss)
Years ended December 31, 2004, 2003 and 2002
(in thousands, except share data)
Accumulated Retained Total
All series Stock Additiona Other Earnings Stockholders
ommon stock Subscription Paid-In Comprehensive (Accumulated Equity
Shares Amount Receivable Capital Income (Loss) Deficit) (Deficit)
------ ------ ----------- ---------- ------------- ------------- ------------
Balance, December 31, 2001 23,786,565 238 (12) 2,366 (1,747) (4,287) (3,442)
Issuance of common stock, net 4,687,500 47 -- 75,130 -- -- 75,177
Conversion of minority interest to
common stock 180,120 2 -- 279 -- -- 281
Exercise of stock options 1,135,632 11 -- 3,954 -- -- 3,965
Conversion of subordinated promissory
note 4,629,232 46 -- 22,454 -- -- 22,500
Tax benefit from exercise of
stock options -- -- -- 2,666 -- -- 2,666
Comprehensive income (loss):
Interest rate swaps (net of tax of
$838) -- -- -- -- 1,239 -- 1,239
Foreign currency translation -- -- -- -- (1) -- (1)
Net income -- -- -- -- -- 26,444 26,444
---------- ------ ---------- ---------- ------------ ----------- ----------
Comprehensive income -- -- -- -- 1,238 26,444 27,682
---------- ------ ---------- ---------- ------------ ----------- ----------
Balance, December 31, 2002 34,419,049 344 (12) 106,849 (509) 22,157 128,829
Exercise of stock options 935,947 10 -- 4,878 -- -- 4,888
Tax benefit from exercise of stock
options -- -- -- 3,281 -- -- 3,281
Stock based compensation expense -- -- -- 3 -- -- 3
Proceeds from certain stockholders
related to secondary offering -- -- -- 852 -- -- 852
Write-off uncollectible stock
subscription -- -- 12 -- -- -- 12
Comprehensive income :
Interest rate swaps (net of tax
of $209) -- -- -- -- 324 -- 324
Foreign currency translation -- -- -- -- 113 -- 113
Net income -- -- -- -- -- 36,190 36,190
---------- ------ ---------- ---------- ------------ ---------- ---------
Comprehensive income -- -- -- -- 437 36,190 36,627
---------- ------ ---------- ---------- ------------ ---------- ---------
Balance, December 31, 2003 35,354,996 354 $ -- $115,863 $ (72) $ 58,347 $ 174,492
---------- ------ ---------- ---------- ------------ ---------- ---------
Exercise of stock options 863,480 8 -- 5,571 -- -- 5,579
Tax benefit from exercise of stock
options -- -- -- 5,127 -- -- 5,127
Stock based compensation expense -- -- -- 5 -- -- 5
Purchase of treasury stock
under ESPP -- -- -- (1,079) -- -- (1,079)
Reissuance of treasury stock
under ESPP -- -- -- 1,021 -- -- 1,021
Comprehensive income :
Interest rate swaps (net of tax
of $89) -- -- -- -- 141 -- 141
Foreign currency translation -- -- -- -- 185 -- 185
Net income -- -- -- -- -- 61,805 61,805
---------- ------ ---------- ---------- ------------ ---------- ---------
Comprehensive income -- -- -- -- 326 61,805 62,131
---------- ------ ---------- ---------- ------------ ---------- ---------
Balance, December 31, 2004 36,218,476 362 $ -- $126,508 $ 254 $ 120,152 $ 247,276
---------- ------- ---------- ---------- ------------ ---------- ---------
F-4
ANTEON INTERNATIONAL CORPORATION AND SUBSIDIARIES
(a Delaware Corporation)
Consolidated Statements of Cash Flows
Years ended December 31, 2004, 2003 and 2002
(in thousands)
2004 2003 2002
-------------- -------------- -------------
Cash flows from operating activities:
Net income $ 61,805 $ 36,190 $ 26,444
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Gain on settlement of subordinated notes payable (1,327) -- --
Interest rate swap termination -- -- (1,903)
Depreciation and amortization of property and equipment 4,016 4,440 4,294
Amortization of noncompete agreements 167 101 --
Other intangibles amortization 2,509 2,349 1,907
Amortization of deferred financing costs 685 4,014 2,442
Loss on disposals of property and equipment 8 190 25
Deferred income taxes 3,102 (1,742) 4,090
Minority interest in earnings of subsidiaries 72 54 18
Changes in assets and liabilities, net of acquired assets
and liabilities:
Increase in accounts receivable (84,343) (12,477) (57,715)
(Increase) decrease in prepaid expenses and other 1,014 (1,245) (8,059)
current assets
Decrease in other assets 254 142 105
Increase in accounts payable and accrued expenses 23,745 5,592 22,601
Increase (decrease) in income tax payable 4,650 (2,998) 7,229
(Decrease) increase in deferred revenue 1,916 3,306 (3,042)
Decrease in other liabilities (29) (473) (158)
----------- ------------ ------------
Net cash provided (used in) by operating activities 18,244 37,443 (1,722)
----------- ------------ ------------
Cash flows from investing activities:
Purchases of property and equipment and other assets (3,963) (3,049) (3,225)
Acquisition of Information Spectrum, Inc., net of cash acquired -- (92,382) --
Acquisition of Simulated Technologies Inc., net of cash acquired (15,063) -- 1,802
Acquisition of Integrated Management Services Inc., net of cash
acquired (29,119) -- --
Other, net 267 -- --
----------- ------------ ------------
Net cash used in investing activities (47,878) (95,431) (1,423)
----------- ------------ ------------
Cash flows from financing activities:
Principal payments on bank and other notes payable -- (43) (47)
Payment on subordinated notes payable (1,350) -- (567)
Deferred financing costs (297) (2,728) (1,292)
Principal payments on Term Loan A -- (21,202) (25,853)
Proceeds from Term Loan B 16,125 150,000 --
Principal payments on Term Loan B (1,538) -- --
Proceeds from certain stockholders related to secondary offering -- 852 --
Proceeds from revolving credit facility 1,224,000 1,009,500 862,600
Principal payments on revolving credit facility (1,208,600) (1,012,100) (874,300)
Redemption of senior subordinated notes payable (1,876) (73,124) (25,000)
Proceeds from issuance of common stock, net of expenses 5,526 4,902 81,808
Principal payments under capital lease obligations (341) (247) --
Principal payments on subordinated notes payable to stockholders -- -- (7,499)
Payment of subordinated notes payable-related party -- -- (4,369)
----------- ------------ ------------
Net cash provided by financing activities 31,649 55,810 5,481
----------- ------------ ------------
Net increase (decrease) in cash and cash equivalents 2,015 (2,178) 2,336
Cash and cash equivalents, beginning of year 2,088 4,266 1,930
----------- ------------ ------------
Cash and cash equivalents, end of year $ 4,103 $ 2,088 $ 4,266
=========== ============ ============
(continued)
F-5
ANTEON INTERNATIONAL CORPORATION AND SUBSIDIARIES
(a Delaware Corporation)
Consolidated Statements of Cash Flows, continued
Years Ended December 31, 2004, 2003 and 2002
2004 2003 2002
---------------- ------------- --------------
Supplemental disclosure of cash flow information (in thousands):
Interest paid:
Tender offer of senior subordinated notes payable $ -- $ 7,177 $ --
Credit Facility, 12% Notes and other 7,448 14,199 18,971
-------------- ------------ -------------
Total interest paid $ 7,448 $ 21,376 $ 18,971
============== ============ =============
Income taxes paid, net $ 28,515 $ 27,410 $ 2,634
============== ============ =============
Supplemental disclosure of noncash investing and financing activities:
In March 2002, in connection with the Company's initial public offering
("IPO") of shares of its common stock, a $22.5 million principal amount
subordinated convertible promissory note of the Company held by Azimuth
Tech. II LLC, one of the Company's principal stockholders, was converted
pursuant to its terms into 4,629,232 shares of the Company's common stock
at a conversion price of $4.86 per share.
In March 2002, the Company exchanged approximately 90,060 shares held by
minority interest holders in Anteon Virginia at December 31, 2001 into
180,120 shares of the Company.
The changes in the fair value of the interest rate swaps are reported, net
of tax, in accumulated other comprehensive income. During the year ended
December 31, 2004, the last of the Company's interest rate swap
agreements, with a notional value of $10.0 million, matured. For the years
ended December 31, 2004 and 2003, the change in the fair value of the
interest rate swaps generated a deferred tax liability of zero and
$209,000, respectively.
For the years ended December 31, 2004 and 2003, the Company recorded
approximately $134,000 and $1.0 million of equipment utilizing capitalized
leases, respectively.
See accompanying notes to consolidated financial statements.
F-6
(1) Organization and Business
Anteon International Corporation, a Delaware Corporation ("Anteon" or
the "Company") (formerly Azimuth Technologies, Inc.), was incorporated
on March 15, 1996 for the purpose of acquiring all of the outstanding
stock of Ogden Professional Services Corporation, a wholly owned
subsidiary of Ogden Technology Services Corporation and an indirectly
wholly owned subsidiary of Ogden Corporation (collectively "Ogden").
Upon completion of the acquisition effective April 22, 1996, Ogden
Professional Services Corporation was renamed Anteon Corporation, a
Virginia corporation, and later renamed Anteon International
Corporation, a Virginia corporation.
The Company provides professional information technology solutions and
systems engineering and integration services to government customers.
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
government customers with the systems analysis, integration and program
management skills necessary to manage their mission systems development
and operations. The Company is subject to all of the risks associated
with conducting business with the U.S. federal government, including
the risk of contract termination for the convenience of the government.
In addition, government funding continues to be dependent on
congressional approval of program level funding and on contracting
agency approval for the Company's work. The extent to which the
Company's existing contracts will be funded in the future cannot be
determined.
(2) Summary of Significant Accounting Policies
(a) Basis of Presentation and Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its directly and indirectly, majority-owned subsidiaries.
All material intercompany transactions and accounts have been
eliminated in consolidation.
(b) Cash and Cash Equivalents
Cash and cash equivalents include all cash balances and highly liquid
investments that have original maturities of three months or less.
(c) Property and Equipment
Property and equipment is stated at cost, or fair value at the date of
acquisition if acquired through a purchase business combination.
Property and equipment under capital leases are stated at the present
value of minimum lease payments. For financial reporting purposes,
depreciation and amortization is recorded using the straight-line
method over the estimated useful lives of the assets as follows:
Computer hardware and software 3 to 7 years
Furniture and equipment 5 to 12 years
Leasehold and building improvements shorter of estimated useful life or lease term
Buildings 31.5 years
Property and equipment under capital leases shorter of estimated useful life or lease term
(d) Deferred Financing Costs
Costs associated with obtaining the Company's financing arrangements
are deferred and amortized over the term of the financing arrangements
using a method that approximates the effective interest method, and
are included in intangible and other assets in the accompanying
Consolidated Balance Sheets.
F-7
(e) Impairment or Disposal of Long Lived Assets
The Company reviews its long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable from its undiscounted cash flows
and measure an impairment loss as the difference between the carrying
amount and fair value of the asset
During 2003, the Company recognized an impairment charge of
approximately $135,000 included in general and administrative expenses
in the accompanying Consolidated Statement of Operations, to write
down the carrying value of a building held for sale to its fair market
value.
(f) Goodwill
The Company uses the purchase method of accounting for all business
combinations. Intangible assets acquired in a business combination are
recognized and reported separately from goodwill. Goodwill and
intangible assets with indefinite useful lives are not amortized, but
instead tested for impairment at least annually. Intangible assets
with estimable useful lives are amortized over their respective
estimated useful lives to their estimated residual values, and
reviewed for impairment.
In connection with the Company's goodwill impairment evaluation, the
Company identifies its reporting units and determines the carrying
value of each reporting unit by assigning the assets and liabilities,
including the existing goodwill and intangible assets, to these
reporting units. The Company determines the estimated fair value of
each reporting unit and compares it to the carrying amount of the
reporting unit. As a result of this comparison, no indication that the
reporting units' fair values were less than their carrying values was
noted. In the future, to the extent the carrying amount of a reporting
unit exceeds the fair value of a reporting unit, an indication would
exist that a reporting unit's goodwill may be impaired, and the
Company would be required to perform the second step of the impairment
test. In the second step, the Company must compare the implied fair
value of the reporting unit goodwill with the carrying amount of the
reporting unit goodwill. The implied fair value of goodwill is
determined by allocating the fair value of the reporting unit to all
of the assets (recognized and unrecognized) and liabilities of the
reporting unit in a manner similar to a purchase price allocation, in
accordance with SFAS No. 141. The residual fair value after this
allocation is the implied fair value of the reporting unit goodwill.
As of September 30, 2004 and 2003, the Company performed its annual
goodwill impairment analysis. The Company applied the methodology
described above and did not identify any indication of goodwill
impairment for any reporting unit. The Company will perform the annual
impairment test as of September 30 each year unless circumstances or
events indicate that an impairment test should be performed sooner.
(g) Other Intangible Assets
The Company amortizes the allocated cost of noncompete agreements
entered into in connection with business combinations on a
straight-line basis over the terms of the agreements
Intangible assets acquired in a business combination are recognized
only if such assets arise from a contractual or other legal right and
are separable, that is, capable of being sold, transferred, licensed,
rented, or exchanged. Intangible assets acquired in a business
combination that do not meet this criteria are considered a component
of goodwill. As of December 31, 2004, the Company has approximately
$11.1 million of intangible assets, net of accumulated amortization,
related to contracts and related customer relationships intangible
assets, which are being amortized straight-line over periods of up to
5.3 years
F-8
(h) Revenue Recognition
For each of the years ended December 31, 2004, 2003 and 2002, in
excess of 98% of the Company's revenues were derived from services
performed under contracts that may be categorized into three primary
types: time and materials, cost-plus and fixed price. For the year
ended December 31, 2004, approximately 39% of the Company's contracts
were time and material, 34% cost-plus and 27% fixed price (a
substantial majority of which are fixed price level of effort
contracts). Revenue for time and materials contracts is recognized as
time is spent at hourly rates, which are negotiated with the customer
plus the cost of any allowable material costs and out-of-pocket
expenses. Revenue is recognized under cost-plus contracts on the basis
of direct and indirect costs incurred plus a negotiated profit
calculated as a percentage of costs or as performance-based award fee.
For certain cost-plus contracts, which are referred to as cost-plus
award fee type contracts, the expected fee to be awarded by the
customer is recognized at the time such fee can be reasonably
estimated, based on factors such as the Company's prior award
experience and communications with the customer regarding the
Company's performance, including any interim performance evaluations
rendered by the customer and the Company's average historical award
fee rate. Revenues are recognized under substantially all fixed price
contracts, which are predominantly level of effort contracts, using
the cost-to-cost method for all services provided. For non-service
related fixed price contracts, revenues are recognized as units are
delivered (the units-of-delivery method). In addition, the Company
evaluates its contracts for multiple deliverables which may require
the segmentation of each deliverable into separate accounting units
for proper revenue recognition.
The Company recognizes revenues under the U.S. federal government
contracts when a contract is executed, the contract price is fixed and
determinable, funding has been received, delivery of the services or
products has occurred and collectibility of the contract price is
considered probable. The Company's contracts with agencies of the
federal government are subject to periodic funding by the respective
contracting agency. Funding for a contract may be provided in full at
inception of the contract or ratably throughout the term of the
contract as the services are provided. From time to time the Company
may proceed with work on unfunded portions of existing contracts based
on customer direction pending finalization and signing of formal
funding documents. The Company has an internal process for approving
any such work. All revenue recognition is deferred during periods in
which funding is not received. Allowable contract costs incurred
during such periods are deferred if the receipt of funding is assessed
as probable. In evaluating the probability of funding being received,
the Company considers its previous experience with the customer,
communications with the customer regarding funding status, and the
Company's knowledge of available funding for the contract or program.
If funding is not assessed as probable, costs are expensed as
incurred.
The Company recognizes revenues under its cost based U.S. federal
government contracts based on allowable contract costs, as mandated by
the federal government's cost accounting standards. The costs the
Company incurs under federal government contracts are subject to
regulation and audit by certain agencies of the federal government.
Contract cost disallowances, resulting from government audits, have
not historically been significant.
Contract revenue recognition inherently involves estimation. Examples
of such estimates include the level of effort needed to accomplish the
tasks under the contract, the cost of those efforts, and a continual
assessment of the Company's progress toward the completion of the
contract. From time to time, circumstances may arise which require us
to revise its estimated total revenue or costs. Typically, these
revisions relate to contractual changes. To the extent that a revised
estimate affects contract revenue or profit previously recognized, the
Company records the cumulative effect of the revision in the period in
which it becomes known. In addition, the full amount of an anticipated
loss on any type of contract is recognized in the period in which it
becomes known. The Company may be exposed to variations in
profitability if the Company encounters variances from estimated fees
earned under award fee contracts and estimated costs under fixed price
contracts.
F-9
Software revenue is generated from licensing software and providing
services, including maintenance and technical support, and consulting.
The Company recognizes the revenue when the license agreement is
signed, the license fee is fixed and determinable, delivery of the
software has occurred, and collectibility of the fee is considered
probable. The Company's software license sales including maintenance
and consulting services are recognized at their fair values when all
other recognition criteria are met. Service revenues consists of
maintenance and technical support and is recognized ratably over the
service period. Other service revenues are recognized as the related
services are provided. Revenues from sales of products are generally
recognized upon acceptance by the customer, which is typically within
thirty days of shipment.
Amounts collected in advance of being earned are recognized as
deferred revenues.
(i) Costs of Acquisitions
Costs incurred on probable acquisitions are deferred. Costs incurred
on successful acquisitions are capitalized as a cost of the
acquisition, while costs incurred by the Company for unsuccessful or
terminated acquisition opportunities are expensed when the Company
determines that the opportunity will no longer be pursued.
(j) Income Taxes
The Company calculates its income tax provision using the asset and
liability method. Under the asset and liability method, deferred
income taxes are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts and the tax bases of existing assets and liabilities. Deferred
tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The
effect on deferred taxes of a change in tax rates are recognized in
income in the period that includes the enactment date.
The Company has not recognized a deferred tax liability of
approximately $423,000 for undistributed earnings of its foreign
operations that arose in 2004 and prior years because the Company does
not expect those unremitted earnings to reverse and become taxable to
the Company in the foreseeable future. A deferred tax liability will
be recognized when the Company is no longer able to demonstrate that
it plans to permanently reinvest undistributed earnings. For the years
ended December 31, 2004 and 2003 the undistributed earnings of these
subsidiaries was approximately $1,128,000 and $718,000, respectively.
(k) Foreign Currency Translation and Transactions
The balance sheets of the Company's foreign subsidiaries are
translated to U.S. dollars for consolidated financial statement
purposes using the current exchange rates in effect as of the balance
sheet date. The revenue and expense accounts of foreign subsidiaries
are converted using the weighted average exchange rate during the
period. Gains or losses resulting from such translations are included
in accumulated comprehensive income in stockholders' equity. Gains and
losses from transactions denominated in foreign currencies are
included in current period income. Foreign currency transaction gains
and losses were not significant for the years ended December 31, 2004,
2003 and 2002.
(l) Accounting for Stock-Based Compensation
The Company accounts for employee stock-based compensation plans using
the intrinsic value based method of accounting prescribed by APB
Opinion No. 25 ("APB No. 25"). Accounting for Stock Issued to
Employees, and Related Interpretations. The Company has an employee
stock option plan. Compensation expense for stock options granted to
employees is recognized based on the difference, if any, between the
fair value of the Company's common stock and the exercise price of the
option at the date of grant. The Company has also granted stock
appreciation rights to certain of its directors. The Company discloses
the pro forma effect on net income as if the fair value based method
of accounting as defined in Statement of Financial Accounting
Standards No. 123 ("SFAS No. 123"), Accounting for Stock Based
Compensation had been applied.
F-10
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 if the Company had applied the fair value recognition
provisions of SFAS No. 123, to stock-based employee compensation:
2004 2003 (1) 2002 (1)
----------- ----------- -----------
(in thousands, except per share data)
Net income, as reported $ 61,805 $ 36,190 $ 26,444
Add: Stock based compensation recorded, net of tax 3 2 --
Deduct: Total stock-based compensation expense
determined under fair value method, net of tax (3,776) (3,240) (2,232)
----------- ----------- -----------
Pro forma net income $ 58,032 $ 32,952 $ 24,212
Earnings per share:
Basic-as reported $ 1.73 $ 1.04 $ 0.82
=========== =========== ===========
Basic-pro forma $ 1.62 $ 0.95 $ 0.75
=========== =========== ===========
Diluted-as reported $ 1.66 $ 0.98 $ 0.78
=========== =========== ===========
Diluted-pro forma $ 1.56 $ 0.89 $ 0.71
=========== =========== ===========
(1) The pro forma data and stock based compensation expense for 2003
and 2002 have been adjusted to reflect a correction from amounts
previously reported. The stock based compensation expense determined
under the fair value, net of tax, for 2003 and 2002 was overstated by
approximately $509,000 and $1.2 million, respectively.
(m) Fair Value of Financial Instruments
The carrying amounts of accounts receivable, accounts payable and
accrued liabilities approximate their fair values as of December 31,
2004 and 2003, due to the relatively short duration of these financial
instruments. Except for the senior subordinated notes payable and the
subordinated notes payable to stockholders, the carrying amounts of
the Company's indebtedness approximate their fair values as of
December 31, 2004 and 2003, as they bear interest rates that
approximate market rates. In June 2004, the Company repurchased the
remaining $1.9 million principal amount of the senior subordinated
notes payable. The fair value of the senior subordinated notes payable
on principal amounts $75.0 million, based on quoted market value, was
approximately $81.0 million as of December 31, 2003.
(n) Derivative Instruments and Hedging Activities
Derivative instruments are recognized at fair value in the balance
sheet. Changes in the fair value of derivative instruments that
qualify as effective hedges of cash flows are recognized as a
component of other comprehensive income (loss). Changes in the fair
value of derivative instruments for all other hedging activities,
including the ineffective portion of cash flow hedges, are recognized
in current period earnings.
F-11
(o) Earnings Per Common Share
Basic earnings per common share is computed by dividing the net
earnings available to common stockholders for the period by the
weighted average number of common shares outstanding during the
period. Diluted earnings per common share is computed by dividing net
earnings for the period by the weighted average number of common and
dilutive common equivalent shares outstanding during the period.
Potentially dilutive common equivalent shares are comprised of the
Company's employee stock options.
(p) Use of Estimates
The preparation of consolidated financial statements in conformity
with U.S. generally accepted accounting principles requires management
to make estimates and assumptions that affect the carrying amounts of
reported assets and liabilities, including the recoverability of
property, plant, and equipment, intangible assets and goodwill,
valuation allowances for income taxes and accounts receivable, and the
valuation of derivative instruments and disclosure of contingent
assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
(q) Recently Issued Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board (FASB)
issued SFAS No. 153, Exchanges of Nonmonetary Assets. This statement
amends Accounting Principles Board (APB) Opinion No. 29 to improve
financial reporting by eliminating certain narrow differences between
the FASB's and the International Accounting Standards Board's (IASB)
existing accounting standards for nonmonetary exchanges of similar
productive assets. The provisions of this statement shall be
prospectively applied and are effective for nonmonetary asset
exchanges occurring after July 1, 2005. The adoption of SFAS No. 153
is not expected to have a significant impact on the Company's
consolidated financial statements.
In December 2004, the FASB issued SFAS No. 123 (Revised 2004), Share
Based Payment. (SFAS No. 123R), which amends SFAS No. 123, Accounting
for Stock-Based Compensation and SFAS No. 95, Statement of Cash Flows.
SFAS 123R requires all companies to measure compensation cost for all
share-based payments at fair value, and will be effective July 1,
2005. This new standard may be adopted in one of two ways - the
modified prospective transition method or the modified retrospective
transition method. The Company is currently assessing the impact of
SFAS No. 123R.
(3) Sale of DisplayCheck
On April 3, 2002, the Company sold all of the assets and transferred
certain liabilities of the business for an aggregate sale price of
$200,000.
F-12
(4) Acquisitions
(a) Information Spectrum, Inc.
On May 23, 2003, the Company purchased all of the outstanding stock of
Information Spectrum, Inc., or "ISI", a provider of credential card
technologies and military logistics and training systems, based in
Annandale, Virginia, for a total purchase price of approximately $92.4
million including transactions costs. The net tangible and
identifiable intangible assets acquired and liabilities assumed were
recognized at their estimated fair market values at the date of
acquisition, based on estimates made by management. The identifiable
intangible assets consisted of $4.8 million of contracts and related
customer relationships and $500,000 for the value of a non-compete
agreement. The value of the contracts and related customer
relationships is based, in part, on an independent appraisal and other
studies performed by the Company. Goodwill recognized from this
acquisition was approximately $74.3 million and not deductible for tax
purposes. The contracts and related customer relationships are being
amortized straight-line over its expected useful life of approximately
5.3 years. The non-compete agreement value was based on the
consideration paid for the agreement and is being amortized
straight-line over the three year term of the agreement.
Unaudited Pro Forma Data
The following unaudited pro forma summary presents consolidated
information as if the acquisition of ISI had occurred as of January 1,
2003. The pro forma summary is provided for informational purposes
only and is based on historical information that does not necessarily
reflect actual results that would have occurred nor is it necessarily
indicative of future results of operations of the combined entities
(in thousands, except per share data):
2003
---------------
Total revenues $ 1,096,152
Total expenses 1,059,467
---------------
Net income $ 36,685
===============
Basic earnings per common share $ 1.05
===============
Diluted earning per common share $ 0.99
===============
(b) Simulation Technologies, Inc
On July 27, 2004, the Company purchased all of the outstanding stock
of Simulation Technology Inc., or "STI", a provider of modeling and
simulation software solutions and services, based in San Antonio,
Texas, for a total purchase price of $15.1 million (net of cash
acquired), including transaction costs. The Company financed the
acquisition through borrowings under its existing Credit Facility. The
net tangible and identifiable intangible assets acquired and
liabilities assumed were recognized at their estimated fair market
values at the date of acquisition. The identifiable intangible assets
consisted of $2.6 million of contracts and related customer
relationships with an expected weighted average useful life of 5
years. The value of the contracts and customer relationships is based,
in part, on an independent appraisal and other studies performed by
us. Goodwill recognized from this acquisition was approximately $9.5
million and is not deductible for tax purpose. The acquisition did not
meet the criteria of a material and significant acquisition, and
therefore, pro forma disclosures are not presented in the audited
consolidated financial statements.
(c) Integrated Management Services, Inc.
On August 11, 2004, the Company purchased all of the outstanding stock
of Integrated Management Services, Inc., or "IMSI", a provider of high
end, mission critical information and securities solutions, based in
Arlington, Virginia, for a total purchase price of $29.1 million,
including transaction costs. The Company financed the acquisition
through borrowings under its existing Credit Facility. Under the terms
of the stock purchase agreement, consideration of up to $2.0 million
of additional purchase price may be paid if certain milestones are met
by June 30, 2005. The net tangible and identifiable intangible assets
acquired and liabilities assumed were recognized at their estimated
fair market values at the date of acquisition. The identifiable
intangible assets consisted of $5.9 million of contracts and related
customer relationships with an expected weighted average useful life
of 5 years. The value of the contracts and customer relationships is
based, in part, on an independent appraisal and other studies
performed by us. Goodwill recognized from this acquisition was
approximately $20.7 million and is deductible for tax purposes due to
the tax code election made at the time of the acquisition. The
acquisition did not meet the criteria of a material and significant
acquisition, and therefore, pro forma disclosures are not presented in
the audited consolidated financial statements.
F-13
(5) Accounts Receivable
The components of accounts receivable as of December 31, 2004 and
2003, are as follows (in thousands):
2004 2003
-------------- --------------
Billed and billable $ 265,359 $ 198,144
Unbilled 48,103 22,210
Retainages due upon contract completion 8,369 6,705
Allowance for doubtful accounts (4,535) (4,122)
-------------- --------------
Total $ 317,296 $ 222,937
============== ==============
In excess of 98% of the Company's revenues for each of 2004, 2003 and
2002 have been earned, and accounts receivable as of December 31, 2004
and 2003 are due, from agencies of the U.S. federal government.
Unbilled costs and fees and retainages billable upon completion of
contracts are amounts due generally within one year and will be billed
on the basis of contract terms and delivery schedules.
The accuracy and appropriateness of the Company's direct and indirect
costs and expenses under its government contracts and, therefore, its
accounts receivable recorded pursuant to such contracts, are subject to
extensive regulation and audit, including by the U.S. Defense Contract
Audit Agency ("DCAA") or by other appropriate agencies of the U.S.
government. Such agencies have the right to challenge the Company's
cost estimates or allocations with respect to any government contract.
Additionally, a substantial portion of the payments to the Company
under government contracts are provisional payments that are subject to
potential adjustment upon audit by such agencies. Incurred cost audits
have been completed by DCAA through 2002. Historically, such audits
have not resulted in any significant disallowed costs. Although the
Company can give no assurances, in the opinion of management, any
adjustments likely to result from inquiries or audits of its contracts
will not have a material adverse impact on the Company's financial
condition or results of operations.
F-14
(6) Property and Equipment
Property and equipment consists of the following as of December 31,
2004 and 2003 (in thousands):
2004 2003
-------------- --------------
Land $ 393 $ 393
Buildings 1,581 1,581
Computer hardware and software 20,605 19,686
Furniture and equipment 8,487 6,732
Leasehold improvements 8,384 6,856
------------ ------------
39,450 35,248
Less - accumulated depreciation and amortization (26,530) (22,489)
------------ ------------
Total $ 12,920 $ 12,759
============ ============
(7) Accrued Expenses
The components of accrued expenses as of December 31, 2004 and 2003
are as follows (in thousands):
2004 2003
-------------- --------------
Accrued payroll and related benefits $ 48,791 $ 52,602
Accrued subcontractor costs 47,446 25,987
Accrued interest 22 153
Other accrued expenses 6,334 6,726
-------------- --------------
Total $ 102,593 $ 85,468
============== ==============
(8) Indebtedness
(a) Credit Agreement
On June 23, 1999, the Company entered into a Credit Agreement ("Credit
Facility") with a syndicate of nine commercial banks. Under the terms
of the Credit Facility, the Company entered into promissory notes with
aggregate available financing facilities of $180.0 million. The Credit
Facility was comprised of a revolving credit facility for aggregate
borrowings of up to $120.0 million ("Revolving Facility"), as
determined based on a portion of eligible billed accounts receivable
and a portion of eligible unbilled accounts receivable and the ratio
of net debt to earnings before interest, taxes, depreciation and
amortization ("EBITDA"), as defined in the Credit Facility, and
maturing on June 23, 2005; and a $60.0 million note ("Term Loan A")
with principal payments due quarterly commencing June 30, 2001, and
$15.0 million at maturity on June 23, 2005. Effective October 21,
2002, this Credit Facility was replaced by an Amended and Restated
Credit Agreement, as discussed below.
Under the Credit Facility, the interest rate on both the Revolving
Facility and the Term Loan was at a floating rate based upon, at the
Company's option, LIBOR, or the Alternate Base Rate ("ABR"), which was
the higher of Credit Suisse First Boston's ("CSFB") prime rate (less
one quarter of one percent) and the Federal Funds Effective Rate, plus
one half of one percent, in each case plus a margin determined based
on the Company's ratio of net debt to EBITDA.
F-15
(b) Amended and Restated Credit Agreement of October 21, 2002
On October 21, 2002, the Company entered into an amendment and
restatement of its existing Credit Agreement (the "2002 Amended and
Restated Credit Agreement"). Pursuant to the terms of the Amended and
Restated Credit Agreement, the Credit Facility was amended to allow
for the following: (1) a $200.0 million senior secured revolving
credit facility (the "Revolving Credit Facility"); and (2) a $22.3
million three-year senior secured term loan facility (the "Term Loan
Facility"). The aggregate amount available for borrowing under the
Revolving Credit Facility was determined based on a portion of
eligible accounts receivable. In general, the Company's borrowing
availability under the Revolving Credit Facility was subject to its
borrowing base (defined as portions of eligible billed and unbilled
accounts receivable) and the Company's ratio of net debt to EBITDA and
net senior debt to EBITDA, as defined in the Amended and Restated
Credit Agreement.
Borrowings under the Term Loan Facility and the Revolving Credit
Facility would have matured on June 30, 2005. Borrowings under the
Revolving Credit Facility and Term Loan Facility bore interest at a
floating rate based upon, at the Company's option, LIBOR, or the ABR,
which is the higher of CSFB prime rate (less one quarter of one
percent) and the Federal Funds Effective Rate, plus one half of one
percent, in each case plus a margin determined based upon the
Company's ratio of net debt to EBITDA (as defined in the Amended and
Restated Credit Agreement). Effective December 19, 2003, this credit
facility was replaced by a further Amended and Restated Credit
Agreement, as discussed below.
(c) Amended and Restated Credit Agreement of December 19, 2003
On December 19, 2003, the Company entered into an amended and restated
credit agreement (the "2003 Amended and Restated Credit Agreement")
related to its Credit Facility. This amendment and restatement, among
other things, provided for the following: (1) a new Term Loan B under
the Term Loan Facility in the amount of $150.0 million with a maturity
date of December 31, 2010; (2) the extension of the Revolving Credit
Facility's maturity date to December 31, 2008; (3) the repayment of
the outstanding balance of approximately $18.4 million of the Term
Loan A; and (4) the financing of the tender offer and consent
solicitation made on November 23, 2003, related to the outstanding
Senior Subordinated Notes (see below). In addition, the 2003 Amended
and Restated Credit Agreement permitted 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 were subject to financial
covenants customary for such financings, including, but not limited
to: maximum ratio of net debt to EBITDA (as defined in the 2003
Amended and Restated Credit Agreement) and maximum ratio of senior
debt to EBITDA. For the year ended December 31, 2003, the aggregate
fees the Company paid to non-officer directors exceeded the ceiling
limitation set forth in its 2003 Amended and Restated Credit Agreement
by approximately $20,000, principally because of the timing of such
payments. The Company's lenders determined that this limit on
aggregate annual non-officer director fees, which originated several
years before the Company completed its initial public offering of
common stock in March 2002, was not typical for a publicly traded
company. Consequently, the Company's lenders granted a waiver for its
compliance with this covenant provision for the year ended December
31, 2003 and eliminated this limitation for the remaining term of the
2003 Amended and Restated Credit Agreement. For the year ended
December 31, 2003, the Company was in compliance with all other
covenants required by its 2003 Amended and Restated Credit Agreement.
Additionally, as a result of the changes made in this amendment and
restatement, revolving loans were based upon an asset test or maximum
ratio of net eligible accounts receivable to revolving loans. From the
date of the amendment through December 31, 2003, the interest rates
for the Term Loan Facility and the Revolving Credit Facility ranged
from 3.16 percent to 5.00 percent.
F-16
In connection with the repayment of the Term A Loan, the Company wrote
off the related unamortized deferred financing fees. The write-off of
$485,000 is reflected as interest expense in the accompanying
Consolidated Statement of Operations for the year ended December 31,
2003.
All of the Company's existing and future domestic subsidiaries
unconditionally guaranteed the repayment of amounts borrowed under the
2003 Amended and Restated Credit Agreement. The 2003 Amended and
Restated Credit Agreement was secured by substantially all of the
Company's and its domestic subsidiaries' tangible and intangible
assets, including substantially all of the capital stock of the
Company's subsidiaries.
The 2003 Amended and Restated Credit Agreement also permitted the
Company to elect from time to time to (i) repurchase certain amounts
of its subordinated debt and outstanding common stock from its share
of excess cash flow (as defined in the 2003 Amended and Restated
Credit Agreement); and (ii) repurchase certain amounts of its
subordinated debt from its share of net cash proceeds of issuances of
equity securities.
The 2003 Amended and Restated Credit Agreement contained customary
events of default, certain of which allow for grace periods. Effective
September 30, 2004, this credit facility was amended, as discussed
below.
(d) Amended Credit Agreement of September 30, 2004
On September 30, 2004, the Company entered into a second amendment to
the 2003 Amended and Restated Credit Agreement. This amendment
provided an additional $16.1 million of borrowings by increasing the
Term Loan B to $165.0 million, and lowered the interest rates on Term
B borrowings by 0.25 percent. Under certain conditions related to
excess annual cash flow, as defined in its Credit Facility, and the
receipt of proceeds from certain asset sales and debt or equity
issuances, the Company is required to prepay, in amounts specified in
the Credit Facility, borrowings under the Term Loan B. In addition,
the Company is scheduled to pay quarterly installments of $412,500
under the Term Loan B until the Credit Facility matures on December
31, 2010. From January 1, 2004 through December 31, 2004, the interest
rates for the Term Loan B Facility and the Revolving Credit Facility
ranged from 3.11 percent to 4.31 percent and 4.75 percent to 6.00
percent, respectively.
As of December 31, 2004 and 2003, the outstanding amounts under the
Credit Facility were as follows (in thousands):
2004 2003
-------------- --------------
Revolving Credit Facility $ 19,800 $ 4,400
Term Loan B 164,588 150,000
-------------- --------------
Total debt 184,388 154,400
Less current installments (1,650) (1,500)
-------------- --------------
Long-term debt, excluding current installments $ 182,738 $ 152,900
============== ==============
The remaining available borrowings under the Revolving Credit Facility
as of December 31, 2004 were $173.9 million. As of December 31, 2004,
the Credit Facility would have permitted additional borrowings of up
to $292.1 million.
For the years ended December 31, 2004, 2003 and 2002, total interest
expense incurred on the Revolving Credit Facility was approximately
$1.1 million, $1.9 million, and $1.1 million, respectively. For the
years ended December 31, 2003 and 2002, total interest expense
incurred on the Term Loan A was approximately $700,000, and $1.2
million, respectively. For the year ended December 31, 2004, total
interest expense incurred on the Term Loan B was approximately $5.3
million.
F-17
(e) Senior Subordinated Notes Payable
On May 11, 1999, the Company sold $100.0 million in aggregate
principal amount of 12% senior subordinated notes due 2009, or "12%
Notes." The proceeds of the issuance of the 12% Notes were principally
used to purchase Analysis & Technology, Inc. The 12% Notes were
subordinate to the Company's Credit Facility but ranked senior to any
other subordinated indebtedness. The 12% Notes were scheduled to
mature May 15, 2009 and interest was payable semi-annually on May 15
and November 15. The Company used net proceeds from its initial public
offering ("IPO") to redeem $25.0 million principal amount of its 12%
Notes on April 15, 2002. In addition, as a result of the redemption of
the $25.0 million principal amount of the Company's 12% Notes, the
Company incurred a $3.0 million prepayment premium and wrote-off a
proportionate amount of approximately $928,000 of the unamortized
deferred financing fees related to the portion of the 12% Notes that
were repaid. The prepayment premium and write-off of deferred
financing fees for both the term loan and the 12% Notes totaling $4.2
million, has been reflected as interest expense in the accompanying
Consolidated Statement of Operations for the year ended December 31,
2002.
On December 23, 2003, the Company repurchased $73.1 million in
aggregate principal amount, or approximately 97% of the then
outstanding 12% Notes. As of the expiration date of the tender offer
and December 31, 2003, approximately $1.9 million in aggregate
principal amount remained outstanding, which was callable on May 15,
2004. The repurchase price for the 12% Notes was $1,110.95 per $1,000
principal amount of Notes tendered prior to December 5, 2003, the
Consent Date. The repurchase price for those Notes tendered after
December 5, 2003 was $1,090.95 per $1,000 principal amount of the 12%
Notes, which excludes the consent payment of $20.0 per $1,000
principal amount. The aggregate repurchase price for all of the 12%
Notes validly surrendered for repurchase and not withdrawn was
approximately $81.2 million. In addition, as a result of the tender
offer, the Company incurred a $7.2 million bond premium and consent
payment and wrote-off approximately $2.1 million of the unamortized
deferred financing fees related to the portion of the 12% Notes that
were repurchased. The tender premium, consent payment and write-off of
deferred financing fees has been reflected as interest expense in the
accompanying Consolidated Statement of Operations for the year ended
December 31, 2003.
In June 2004, the Company repurchased the remaining $1.9 million
principal amount of the outstanding 12% Notes. In conjunction with the
repurchase, the Company paid a tender premium of approximately
$113,000 which was included in interest expense.
Total interest expense for the 12% Notes incurred during 2004, 2003
and 2002 was approximately $113,000, $8.8 million, and $9.9 million,
respectively.
(f) Subordinated Notes Payable
In connection with the purchase of Sherikon, Inc. in 2000, the Company
entered into subordinated promissory notes with the Sherikon, Inc.
shareholders as of the date of acquisition in the aggregate principal
amount of $7.5 million, discounted to approximately $6.5 million.
During 2001, $5.0 million of the subordinated promissory notes were
repaid. The remaining $2.5 million of subordinated promissory notes
were due on October 20, 2002. On October 18, 2002, the Company
asserted an indemnification claim against the former owners of
Sherikon, Inc. in an aggregate amount exceeding the $2.5 million
promissory note. The Company had not made this $2.5 million scheduled
payment pending resolution of the indemnification claim; however,
$124,000 of interest was accrued and outstanding as of December 31,
2003. On July 26, 2004, the Company entered into a settlement
agreement with the former owners of Sherikon, Inc. resolving, among
other items, the Company's indemnification claim submitted in October
2002. 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. The
Company recognized $899,000 in other income consisting of the $1.15
million reduction in the promissory note amount plus previously
accrued interest net of legal expenses.
During the years ended December 31, 2003 and 2002, total interest
expense on the subordinated promissory notes with the Sherikon, Inc.
shareholders was approximately $124,000 and $232,000, respectively.
F-18
(g) Future Maturities
Scheduled future maturities under the Company's indebtedness are as
follows (in thousands):
Year Ending December
31,
2005 $ 1,650
2006 1,650
2007 1,650
2008 21,450
2009 1,650
Thereafter 156,338
---------------
$ 184,388
===============
(h) Interest Rate Swap Agreements
OBJECTIVES AND CONTEXT
The Company used variable-rate debt to finance its operations through
its Revolving Facility and Term Loan B. These debt obligations expose
the Company to variability in interest payments due to changes in
interest rates. If interest rates increase, interest expense
increases. Conversely, if interest rates decrease, interest expense
also decreases.
Management believes it is prudent to limit the variability of a
portion of its interest payments. It was the Company's objective to
hedge a portion of its longer-term variable interest payments for the
2003 Amended and Restated Credit Agreement.
STRATEGIES
To meet this objective, management enters into various interest rate
swap derivative contracts to manage fluctuations in cash flow
resulting from fluctuations in interest rates.
The interest rate swaps change the variable-rate cash flow exposure on
the Company's long-term debt obligations to fixed-rate cash flows by
entering into receive-variable, pay-fixed interest rate swaps. Under
the interest rate swaps, the Company receives variable interest rate
payments and makes fixed interest rate payments, thereby creating
fixed-rate long-term debt.
The Company does not enter into derivative instruments for any purpose
other than cash flow hedging purposes. That is, the Company does not
speculate using derivative instruments.
RISK MANAGEMENT POLICIES
The Company assesses interest rate cash flow risk by continually
identifying and monitoring changes in interest rate exposures that may
adversely impact expected future cash flows and by evaluating hedging
opportunities.
F-19
The Company monitors interest rate cash flow risk attributable to both
the Company's outstanding or forecasted debt obligations as well as
the Company's offsetting hedge positions and estimates the expected
impact of changes in interest rates on the Company's future cash
flows. All interest rate swaps were qualifying cash-flow hedges under
SFAS No. 133.
Changes subsequent to January 1, 2001 in the fair value of interest
rate swaps designed as hedging instruments of the variability of cash
flows associated with floating-rate, long-term debt obligations are
reported in accumulated other comprehensive income (loss). These
amounts subsequently are reclassified into interest expense as a yield
adjustment in the same period in which the related interest on the
floating-rate debt obligations affects earnings.
During the year ended December 31, 2002, the Company exercised its
cancellation rights under certain interest rate swap agreements and
cancelled $30.0 million notional amount of such agreements. These
interest rate swap agreements related primarily to term loan
obligations that had been permanently reduced. Interest expense for
the year ended December 31, 2002 included losses of $1.9 million
associated with these cancellations.
As of December 31, 2003, the fair value of the Company's interest swap
agreements resulted in a net liability of $230,000 and has been
included in other current liabilities with an offsetting, net of tax
amount of $141,000, which is included in accumulated other
comprehensive income.
During the year ended December 31, 2004, the last of the Company's
interest rate swap agreements, with a notional value of $10.0 million,
matured. The Company recognized $230,000 of losses related to interest
rate swaps which was reflected in interest expense for the year ended
December 31, 2004.
(9) Capital Stock
The Company's authorized capital stock currently consists of
175,000,000 shares of common stock and 15,000,000 shares of preferred
stock.
The holders of the Company's common stock are entitled to one vote per
share on all matters submitted to a vote of stockholders, including
the election of directors. The common stock does not have cumulative
voting rights, which means that the holders of a majority of the
outstanding common stock voting for the election of directors can
elect all directors then being elected. The holders of the Company's
common stock are entitled to receive dividends, when, and if declared
by the Company's board out of legally available funds. Upon the
Company's liquidation or dissolution, the holders of common stock will
be entitled to share ratably in the Company's assets legally available
for distribution to stockholders after payment of liabilities and
subject to the prior rights of any holders of preferred stock then
outstanding. The rights, preferences and privileges of holders of
common stock are subject to the rights of the holders of shares of any
series of preferred stock, which may be issued in the future.
On December 17, 2003, the Company registered approximately 11.1
million shares of its common stock for sale in an underwritten
offering pursuant to a shelf registration statement on Form S-3 filed
with the SEC which was declared effective. These securities may be
offered on a delayed or continuous basis pursuant to Rule 415 under
the Securities Act of 1933, as amended.
Preferred Stock
The Company's preferred stock may be issued from time to time in one
or more series. The Company's board is authorized to fix the dividend
rights, dividend rates, any conversion rights or right of exchange,
any voting rights, rights and terms of redemption, the redemption
price or prices, the payments in the event of liquidation, and any
other rights, preferences, privileges, and restrictions of any series
of preferred stock and the number of shares constituting such series
and their designation. The Company has no present plans to issue any
shares of preferred stock.
F-20
Rights Agreement
In connection with the Company's IPO, the Company distributed one
preferred share purchase right for each outstanding share of common
stock to the stockholders of record on that date (the "Rights
Agreement"). Under the Company's Rights Agreement, each right entitles
the registered holder to purchase from the Company one one-thousandth
of a share of Series A Preferred Stock, par value $0.01 per share, at
a price of $76.50 per one one-thousandth of a share, under certain
circumstances provided for in the Rights Agreement.
Until a "separation date" (as defined in the Rights Agreement) occurs,
the rights will: o Not be exercisable; o Be evidenced by certificates
that represent shares of the Company's common stock; and o Trade with
the Company's common stock.
The rights will expire at the close of business on the ten-year
anniversary of the Rights Agreement, unless earlier redeemed or
exchanged by the Company.
(10) Income Taxes
The provisions for income taxes for the years ended December 31, 2004,
2003 and 2002, consist of the following (in thousands), respectively:
Years ended December 31,
----------------------------------------------
2004 2003 2002
------------- ------------ ------------
Current provision:
Federal $ 29,320 $ 21,718 $ 10,245
State 4,653 2,305 1,431
Foreign 66 121 119
------------- ------------ ------------
Total current provision 34,039 24,144 11,795
------------- ------------ ------------
Deferred provision:
Federal 2,823 (1,145) 4,331
State 254 (226) 597
Foreign -- -- --
------------- ------------ ------------
Total deferred provision 3,077 (1,371) 4,928
------------- ------------ ------------
Total income tax provision $ 37,116 $ 22,773 $ 16,723
============= ============ ============
F-21
The income tax provisions for the years ended December 31, 2004, 2003
and 2002, respectively, are different from those computed using the
statutory U.S. federal income tax rate of 35% as set forth below (in
thousands):
Years ended December 31,
--------------------------------------------
2004 2003 2002
------------ ------------ ------------
Expected tax expense, computed at statutory rate $ 34,623 $ 20,637 $ 15,108
State taxes, net of federal expense 3,190 1,501 1,259
Non-deductible expenses 511 332 330
Secondary offering expenses 84 265 --
Sherikon settlement (403) -- --
Federal and state credits (855) -- --
Foreign rate differences (34) (15) 53
Other -- 53 (27)
------------ ------------ ------------
$ 37,116 $ 22,773 $ 16,723
============ ============ ============
The tax effect of temporary differences that give rise to the deferred
tax assets and deferred tax liabilities as of December 31, 2004 and
2003 is presented below (in thousands):
2004 2003
------------- --------------
Deferred tax assets:
Accrued expenses $ 9,728 $ 8,505
Intangible assets, due to differences in amortization 2,346 2,399
Interest rate swaps -- 89
Accounts receivable allowances 1,786 1,607
Property and equipment, due to differences in 1,313 1,334
depreciation
Net operating loss and credit carryforwards 641 540
------------- --------------
Total gross deferred tax assets 15,814 14,474
------------- --------------
Less: valuation allowance (295) (295)
------------- --------------
Net deferred tax assets 15,519 14,179
------------- --------------
Deferred tax liabilities:
Deductible goodwill, due to differences in amortization 10,690 9,087
Revenue recognition differences 10,140 5,536
Prepaid expenses 4,044 6,630
Property and equipment, due to differences in depreciation 1,553 1,302
------------- --------------
Total deferred tax liabilities 26,427 22,555
------------- --------------
Deferred tax liabilities, net $ (10,908) $ (8,376)
============= ==============
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all
of the deferred tax asset will be realized. The ultimate realization
of the deferred tax asset is dependent upon the generation of future
taxable income during the periods in which temporary differences
become deductible. Management considers scheduled reversals of
deferred tax liabilities, projected future taxable income, and tax
planning strategies that can be implemented by the Company in making
this assessment. Management presently believes that it is more likely
than not that the Company will realize the portion of the benefits of
these deductible differences related to federal income taxes. The 2004
effective tax rate reflects a benefit for federal research and
experimentation credits from amending prior years tax returns, state
legislative changes and a non-recurring benefit from nontaxable other
income resulting from the settlement with the former owners of
Sherikon, Inc., which resulted in a stock basis difference, for which
a deferred tax liability was not required to be recorded. The Company
has established a valuation allowance as of December 31, 2004 and 2003
of $295,000 against certain state net operating loss carryforwards. At
December 31, 2004, the Company had federal and state net operating
loss carryforwards of approximately $45,000 and $5,323,000,
respectively. Carryforwards have various expiration dates beginning in
2005. The Company also has various state tax credit carryforwards of
approximately $300,000 and $151,000 as of December 31, 2004 and 2003,
respectively, which are available to reduce future state income taxes
through 2014.
F-22
(11) Employee Benefit Plans
Employees of the Company may participate in a 401(k) retirement
savings plan, whereby employees may elect to make contributions
pursuant to a salary reduction agreement upon meeting eligibility
requirements. Participants may contribute up to 100% percent of salary
in any calendar year to this plan, provided that amounts in total do
not exceed certain statutory limits. The Company matches up to 50
percent of the first 6 percent of a participant's contributions,
subject to certain limitations, and participants immediately vest in
the Company's contributions. The Company made contributions to this
plan of approximately $11.7 million, $8.3 million, and $7.1 million
for the years ended December 31, 2004, 2003, and 2002 respectively.
(12) Stock Option and Other Compensation Plans
(a) Stock Option Plan
In January 1997, the Company's Board of Directors approved the
adoption of the Anteon Virginia Corporation Omnibus Stock Plan (the
"Stock Option Plan"). At the discretion of the Board of Directors, the
stock option plan permits the granting of stock options, stock
appreciation rights, restricted or unrestricted stock awards, and/or
phantom stock to employees or directors of the Company. As of December
31, 2004, an aggregate of 1,529,340 shares of the Company's common
stock were reserved for issuance under the stock option plan.
The exercise price of stock options granted is the market value of the
common stock at the grant date. Prior to the Company's IPO, the
exercise price of stock options granted was determined by the
Company's Board of Directors but was not to be less than the fair
value of the underlying shares of common stock at the grant date.
For stock options granted to employees, 20% of the shares subject to
the options vest on the first anniversary of the grant date and an
additional 20% vest on each succeeding anniversary of the grant date.
For options granted from the date of the adoption of the Company's
stock option plan until September 21, 2000, employees have a period of
three years from the vesting date to exercise the option to purchase
shares of the Company's common stock. In 1997, the Company's Board of
Directors approved that 20 percent of the options issued on the August
1, 1997 grant date vested immediately. On September 21, 2000, the
Company's Board of Directors approved that, with respect to stock
options granted from that date forward, each grantee has a period of 8
years from the date of grant in which to exercise options which vest.
On March 11, 2002, the Company's Board of Directors approved that,
with respect to stock options granted from that date forward, each
grantee has a period of 10 years from the date of grant in which to
exercise options which vest.
F-23
The following tables summarize information regarding options under the
Company's stock option plan:
Weighted
Average Outstanding
Number Option Price Exercise and
of Shares Per Share Price Exercisable
------------ -------------- -------------- --------------
Outstanding at December 31, 2001 4,016,840 $ 0.84-8.10 $ 4.21 2,178,960
Granted 1,417,000 18.00-27.25 19.04
Exercised (1,135,632) 0.84-8.10 3.49
Cancelled or expired (175,000) 2.30-18.00 6.24
------------ -------------- --------------
Outstanding at December 31, 2002 4,123,208 $ 0.84-27.25 $ 8.98 1,647,368
Granted 641,500 23.30-33.75 28.53
Exercised (935,947) 0.84-27.25 5.23
Cancelled or expired (221,600) 4.66-27.25 14.39
------------ -------------- --------------
Outstanding at December 31, 2003 3,607,161 $ 0.84-33.75 $ 13.59 1,520,301
Granted 554,000 29.25-41.42 35.74
Exercised (863,480) 0.84-32.80 6.46
Cancelled or expired (212,999) 4.66-31.88 18.41
------------ -------------- --------------
Outstanding as of December 31, 2004 3,084,682 $ 0.84-41.42 $ 19.22 1,337,282
============ ============== ==============
Option and weighted average price information by price group is as
follows:
Shares Outstanding Exercisable Shares
------------------------------------------- ------------------------------
Weighted Weighted
Average Average Weighted
Number Exercise Remaining Number of Average
of Shares Price Life Shares Exercise price
------------ -------------- -------------- ------------- ---------------
December 31, 2004:
$0.84 to 8.10 991,489 $ 4.42 2.2 855,489 $ 4.09
$18.00 to $25.25 1,146,744 $ 19.77 7.5 393,444 $ 19.59
$27.25 to $33.75 661,449 $ 30.94 8.9 88,349 $ 31.05
$41.26 to $41.42 285,000 $ 41.27 9.8 -- $ --
------------ -------------
3,084,682 1,337,282
============ =============
(b) 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.
F-24
Total Number of
Shares Purchased as Maximum Number of
Total Number Part of Publicly Shared that May Yet
of Shares Average Prices Announced Plans for Be Purchased
Period Purchased Paid per Share Programs Under the Plans
------ --------- -------------- -------------------- --------------------
July 1, 2004 14,668 $32.29 14,668 1,185,332
October 1, 2004 16,262 $37.20 16,262 1,169,070
------------ ----------------- --------------------
Total 30,930 30,930 1,169,070
============ ================= ====================
(c) 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 December 31, 2004,
the deferred compensation obligation was approximately $808,000. For
year ended December 31, 2004, the adjustments to fair market value
were not significant.
(d) Pro Forma Disclosure
The Company applies APB No. 25 and related interpretations in
accounting for the Company stock option plan. Adoption of the fair
market value provisions prescribed in SFAS No. 123 is optional with
respect to stock-based compensation to employees; however, pro forma
disclosures are required as if the Company adopted the fair value
recognition requirements under SFAS No. 123.
Had compensation cost for the grants under the Company stock option
plan been determined consistent with the fair market value provisions
prescribed in SFAS No. 123, the Company's pro forma net income (loss)
for the years ended December 31, 2004, 2003 and 2002 would approximate
$58.0 million, $32.9 million, and $24.2 million, respectively, using
an expected option life of 5, 5, and 5 years, respectively, dividend
yield rate of 0% and weighted average volatility rates of 33.8%,
45.8%, and 47.8%, respectively, and weighted average risk-free
interest rates of 3.33%, 3.03%, and 2.78% for 2004, 2003 and 2002,
respectively (see note 2(l)). The effects of applying SFAS No. 123 in
this pro forma disclosure are not indicative of future amounts.
(13) Comprehensive Income
Comprehensive income includes the accumulated foreign currency
translation adjustment and changes in the fair values of interest rate
swaps. The Company presents comprehensive income as a component of the
accompanying Consolidated Statements of Stockholders' Equity
(Deficit). The amount of accumulated foreign currency translation
adjustment was approximately, $254,000 and $69,000 as of December 31,
2004, 2003, respectively. The amount of accumulated other
comprehensive income related to interest rate swaps was zero and
$230,000 ($141,000 net of tax) as of December 31, 2004 and December
31, 2003, respectively.
F-25
(14) Earnings Per Common Share
The computations of basic and diluted income per common share are as
follows:
For the Year Ended
December 31, 2004
Weighted Average
Income Shares Per Share
(Numerator) (Denominator) Amount
------------------ ---------------- -------------
(in thousands, except share and per share data)
Basic earnings per share $ 61,805 35,716,669 $ 1.73
================== =============
Stock options 1,550,706
Diluted earnings per share $ 61,805 37,267,375 $ 1.66
================== =============
For the year ended
December 31, 2003
Weighted Average
Income Shares Per Share
(Numerator) (Denominator) Amount
------------------ ---------------- -------------
(in thousands, except share and per share data)
Basic earnings per share $ 36,190 34,851,281 $ 1.04
================== =============
Stock options 2,074,207
Diluted earnings per share $ 36,190 36,925,488 $ 0.98
================== =============
For the year ended
December 31, 2002
Weighted Average
Income Shares Per Share
(Numerator) (Denominator) Amount
------------------ ---------------- -------------
(in thousands, except share and per share data)
Basic earnings per share $ 26,444 32,163,150 $ 0.82
================== =============
Stock options 1,858,447
Diluted earnings per share $ 26,444 34,021,597 $ 0.78
================== =============
F-26
(15) Commitments and Contingencies
(a) Leases
The Company is obligated under capital leases covering certain
property and equipment that expire at various dates during the next
five years. At December 31, 2004 and 2003, the gross amount of
property and equipment and related accumulated amortization recorded
under capital leases were as follows (in thousands):
2004 2003
-------------- ------------
Property and equipment $ 1,044 $ 1,037
Less Accumulated amortization (580) (265)
-------------- ------------
$ 464 $ 772
============== ============
Amortization of assets held under capital leases is included in
general and administrative expenses in the accompanying Consolidated
Statements of Operations.
The Company also leases facilities and certain equipment under
operating lease agreements expiring at various dates through 2013.
These leases generally contain renewal options for periods ranging
from 3 to 5 years, and require the Company to pay all executory costs
such as maintenance, taxes, and insurance. As of December 31, 2004,
the aggregate minimum annual rental commitments under noncancelable
operating leases are as follows (in thousands):
Year ending December 31 Capital Operating
------------------------
Leases Leases
--------------- -------------
2005 $ 222 $ 32,451
2006 153 28,941
2007 124 23,543
2008 82 19,996
2009 15 17,107
Thereafter -- 36,525
--------------- -------------
Total minimum lease payments $ 596 $ 158,563
=============
Less estimated executory costs (at 7.25%) (31)
---------------
Net minimum lease payments 565
Less amount representing interest
(at rates ranging from 1.79% to 10.50%) (59)
---------------
Present value of net minimum capital lease payments 506
Less current installments of obligations under capital
leases 196
---------------
Obligations under capital leases, excluding current $ 310
installments ===============
Rent expense under all operating leases for the years ended December
31, 2004, 2003 and 2002 was approximately $33.1 million, $25.4
million, and $24.2 million, respectively.
(b) Legal Proceedings
The Company is involved in various legal proceedings in the ordinary
course of business. Management of the Company and its legal counsel
cannot currently predict the ultimate outcome of these matters, but do
not believe that they will have a material impact on the Company's
financial position or results of operations.
F-27
(16) Secondary Offering Expenses
On October 29, 2004, affiliates of and companies managed by
Caxton-Iseman Capital, Inc. including Azimuth Technologies, L.P.
Azimuth Tech. II LLC and Frederick J. Iseman, which we refer to
collectively as the "Caxton-Iseman Stockholders", sold 3,600,000
shares of the Company's common stock in an underwritten offering
pursuant to a shelf registration statement on Form S-3 filed with the
SEC (Commission File No. 333-111249). Neither the Company nor any of
its executive officers participated in the sale of shares in this
offering. In connection with this offering, the Company incurred
$240,000 of expenses for the year ended December 31, 2004, for which
the Company was not reimbursed in accordance with the terms of the
registrations rights agreement with certain of its stockholders, as
amended.
On September 22, 2003, certain of the Company's stockholders,
including Caxton-Iseman stockholders, sold 6,600,000 shares of the
Company's common stock in an underwritten offering pursuant to a
registration statement on Form S-3 filed with the SEC (Commission File
No.s 333-108147 and 333-108858). In the fourth quarter of 2003, the
underwriters of this offering partially exercised their over-allotment
option with respect to additional shares held by the selling
stockholders. As a result, on October 16, 2003, certain of the selling
stockholders sold an additional 297,229 shares of the Company's common
stock in a second closing pursuant to the same underwritten offering.
In connection with this offering, the Company incurred approximately
$852,000 of expenses for the year ended December 31, 2003. These
expenses were reimbursed by certain of the selling stockholders and
the reimbursement was recorded by the Company as an expense and as a
contribution to additional paid-in-capital.
(17) Domestic Subsidiaries Summarized Financial Information
Under the terms of the Company's Credit Facility, the Company's wholly
owned domestic subsidiaries (the "Guarantor Subsidiaries") are
guarantors of the Company's Credit Facility. Such guarantees are full,
unconditional, joint and several. Separate unaudited condensed
financial statements of the Guarantor Subsidiaries are not presented
because the Company's management has determined that they would not be
material to investors. Non-guarantor subsidiaries include the
Company's foreign subsidiaries. The following supplemental financial
information sets forth, on a combined basis, condensed balance sheets,
statements of operations and statements of cash flows information for
the Guarantor Subsidiaries, the Company's non-guarantor subsidiaries
and for the Company.
F-28
As of December 31, 2004
------------------------------------------------------------------------
Consolidated
Anteon Non- Anteon
Condensed Consolidated International Guarantor Guarantor Elimination International
Balance Sheets Corporation Subsidiaries Subsidiaries Entries Corporation
-----------------------------------------------------------------------------------------------------------------
(in thousands)
Cash and cash equivalents $ (9) $ 1,695 $ 2,417 $ -- $ 4,103
Accounts receivable, net -- 316,909 387 -- 317,296
Prepaid expenses and other current
assets 669 25,484 2,328 (11,276) 17,205
Property and equipment, net 1,540 11,196 184 -- 12,920
Due from parent (185,388) 186,403 (1,015) -- --
Investment in and advances to
subsidiaries 33,222 (36,696) -- 3,474 --
Goodwill, net 177,732 64,334 -- -- 242,066
Intangible and other assets, net 73,669 14,167 -- (68,000) 19,836
------------- ------------ ------------- ----------- ------------
Total assets $ 101,435 $ 583,492 $ 4,301 $(75,802) $ 613,426
------------- ------------ ------------- ----------- ------------
Indebtedness $ -- $ 252,388 $ -- $ (68,000) $ 184,388
Accounts payable 450 44,522 1,458 -- 46,430
Accrued expenses and other current
liabilities 4,639 102,549 412 -- 107,600
Deferred revenue 11,276 13,074 690 (11,276) 13,764
Other long-term liabilities -- 13,686 -- -- 13,686
------------- ------------ ------------- ----------- ------------
Total liabilities 16,365 426,219 2,560 (79,276) 365,868
Minority interest in subsidiaries -- -- 282 -- 282
Total stockholders' equity (deficit) 85,070 157,273 1,459 3,474 247,276
------------- ------------ ------------- ----------- ------------
Total liabilities and stockholders'
equity (deficit) $ 101,435 $ 583,492 $ 4,301 $(75,802) $ 613,426
============= ============ ============= =========== ============
F-29
For the Year Ended December 31, 2004
------------------------------------------------------------------------------
Consolidated
Anteon Non- Anteon
Condensed Consolidated International Guarantor Guarantor Elimination International
Statements of Operations Corporation Subsidiaries Subsidiaries Entries Corporation
-----------------------------------------------------------------------------------------------------------------------
(in thousands)
Revenues $ (2) $ 1,262,847 $ 9,263 $ (3,969) $ 1,268,139
Costs of revenues (2) 1,088,672 8,769 (3,969) 1,093,470
------------ -------------- -------------- ------------ --------------
Gross profit -- 174,175 494 -- 174,669
Total operating expenses 4,621 104,189 87 (40,257) 68,640
------------- -------------- -------------- ------------ --------------
Operating income (4,621) 69,986 407 40,257 106,029
Other income 13,887 27,344 -- (40,257) 973
Secondary offering expenses 240 -- -- -- 240
Interest expense, net of interest income (2,074) 9,873 (29) -- 7,769
Minority interests in earnings of
subsidiaries -- -- (72) -- (72)
------------- -------------- -------------- ------------ --------------
Income before provision for income taxes 11,100 87,457 364 -- 98,921
Provision for income taxes 4,358 32,692 66 -- 37,116
------------- -------------- -------------- ------------ --------------
Net income $ 6,742 $ 54,765 $ 298 $ -- $ 61,805
============= ============== ============== ============ ==============
F-30
For the Year Ended December 31, 2004
--------------------------------------------------------
Consolidated
Anteon Non- Anteon
Condensed Consolidated International Guarantor Guarantor International
Statements of Cash Flows Corporation Subsidiaries Subsidiaries Corporation
-------------------------------------------------------------------------------------------------------------
(in thousands)
Cash flows from operating activities:
Net income $ 6,739 $ 54,769 $ 297 $ 61,805
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Gain on settlement of subordinated notes payable (1,327) -- -- (1,327)
Depreciation and amortization of property and
equipment 881 3,085 50 4,016
Amortization of noncompete agreements 167 -- -- 167
Other intangibles amortization 1,884 625 -- 2,509
Amortization of deferred financing costs 62 623 -- 685
Loss on disposals of property and equipment -- 8 -- 8
Deferred income taxes 3,102 -- 3,102
Minority interest in earnings of subsidiaries -- -- 72 72
Changes in assets and liabilities, net of
acquired assets and liabilities 4,537 (57,813) 483 (52,793)
----------- ------------ ----------- --------------
Net cash provided by operating activities 12,943 4,399 902 18,244
----------- ------------ ----------- --------------
Cash flows from investing activities:
Purchases of property and equipment and other
assets (397) (3,421) (145) (3,963)
Acquisition of Simulated Technologies Inc., net
of cash acquired (15,201) 138 -- (15,063)
Acquisition of Integrated Management Services
Inc., net of cash acquired -- (29,119) -- (29,119)
Other 267 -- -- 267
----------- ------------ ----------- --------------
Net cash used in investing activities (15,331) (32,402) (145) (47,878)
----------- ------------ ----------- --------------
Cash flows from financing activities:
Payment on subordinated notes payable (1,350) -- -- (1,350)
Deferred financing costs 88 (385) -- (297)
Proceeds from Term Loan B -- 16,125 -- 16,125
Payments on Term Loan B -- (1,537) -- (1,538)
Proceeds from revolving credit facility -- 1,224,000 -- 1,224,000
Principal payments on revolving credit facility -- (1,208,600) -- (1,208,600)
Redemption of senior subordinated notes payable (1,876) -- -- (1,876)
Proceeds from issuance of common stock, net of
expenses 5,526 -- -- 5,526
Principal payments under capital lease
obligations -- (341) -- (341)
----------- ------------ ----------- --------------
Net cash provided by financing activities 2,388 29,261 -- 31,649
----------- ------------ ----------- --------------
Net increase in cash and cash equivalents -- 1,258 757 2,015
Cash and cash equivalents, beginning of year (9) 437 1,660 2,088
----------- ------------ ----------- --------------
Cash and cash equivalents, end of year $ (9) $ 1,695 $ 2,417 $ 4,103
=========== ============ =========== ==============
F-31
As of December 31, 2003
----------------------------------------------------------------------------
Consolidated
Anteon Non- Anteon
Condensed Consolidated International Guarantor Guarantor Elimination International
Balance Sheets Corporation Subsidiaries Subsidiaries Entries Corporation
--------------------------------------------------------------------------------------------------------------------
(in thousands)
Cash and cash equivalents $ (9) $ 437 $ 1,660 $ -- $ 2,088
Accounts receivable, net -- 222,511 426 -- 222,937
Prepaid expenses and other current
assets 303 29,484 115 (10,336) 19,566
Property and equipment, net 2,024 10,646 89 -- 12,759
Due from parent (188,718) 188,911 (193) -- --
Investment in and advances to
subsidiaries 30,780 (21,730) -- (9,050) --
Goodwill, net 168,532 43,673 -- -- 212,205
Intangible and other assets, net 73,230 4,495 -- (68,000) 9,725
------------ ------------ ------------- ----------- --------------
Total assets $ 86,142 $ 478,427 $ 2,097 $ (87,386) $ 479,280
============ ============ ============= =========== ==============
Indebtedness $ 4,376 $ 222,400 $ -- $ (68,000) $ 158,776
Accounts payable 405 36,212 176 -- 36,793
Due to related party 48 -- -- -- 48
Accrued expenses and other liabilities 3,267 82,917 496 -- 86,680
Deferred revenue 10,336 11,372 411 (10,336) 11,783
Other long-term liabilities -- 10,498 -- -- 10,498
-------------- ------------ ------------- ----------- --------------
Total liabilities 18,432 363,399 1,083 (78,336) 304,578
Minority interest in subsidiaries -- -- 210 -- 210
Total stockholders' equity (deficit) 67,710 115,028 804 (9,050) 174,492
------------ ------------ ------------- ----------- --------------
Total liabilities and stockholders'
equity (deficit) $ 86,142 $ 478,427 $ 2,097 $ (87,386) $ 479,280
============ ============ ============= =========== ==============
F-32
For the Year Ended December 31, 2003
---------------------------------------------------------------------------
Consolidated
Anteon Non- Anteon
Condensed Consolidated International Guarantor Guarantor Elimination International
Statements of Operations Corporation Subsidiaries Subsidiaries Entries Corporation
---------------------------------------------------------------------------------------------------------------------
(in thousands)
Revenues $ 2 $ 1,033,596 $ 9,521 $ (645) $ 1,042,474
Costs of revenues -- 889,424 8,485 (645) 897,264
------------- ------------ ------------- ----------- --------------
Gross profit 2 144,172 1,036 -- 145,210
Total operating expenses 3,418 87,412 744 (30,477) 61,097
------------- ------------ ------------- ----------- --------------
Operating income (3,416) 56,760 292 30,477 84,113
Other income 9,595 20,882 -- (30,477) --
Secondary offering expenses 852 -- -- -- 852
Interest expense, net of interest income 14,461 9,805 (22) -- 24,244
Minority interest in earnings of
subsidiaries -- -- (54) -- (54)
------------- ------------ ------------- ----------- --------------
Income (loss) before provision for
income taxes (9,134) 67,837 260 -- 58,963
Provision (benefit) for income taxes (3,589) 26,241 121 -- 22,773
------------- ------------ ------------- ----------- --------------
Net income (loss) $ (5,545) $ 41,596 $ 139 $ -- $ 36,190
============= ============ ============= =========== ==============
F-33
For the Year Ended December 31, 2003
---------------------------------------------------------------
Consolidated
Anteon Non- Anteon
Condensed Consolidated International Guarantor Guarantor International
Statements of Cash Flows Corporation Subsidiaries Subsidiaries Corporation
-------------------------------------------------------------------------------------------------------------------
(in thousands)
Cash flows from operating activities:
Net income (loss) $ (5,545) $ 41,596 $ 139 $ (36,190)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Loss on disposals of property and equipment -- 170 20 190
Depreciation and amortization of property and
equipment 782 3,589 69 4,440
Amortization of noncompete agreements -- 101 -- 101
Other intangibles amortization 2,227 122 -- 2,349
Amortization of deferred financing costs 3,896 118 -- 4,014
Deferred income taxes -- (1,742) -- (1,742)
Minority interest in earnings (losses) of
subsidiaries -- -- 54 54
Changes in assets and liabilities, net of
acquired assets and liabilities 179,518 (188,480) 809 (8,153)
------------- ------------- ------------- -------------
Net cash provided by (used in) operating
activities 180,878 (144,526) 1,091 37,443
------------- ------------- ------------- -------------
Cash flows from investing activities:
Purchases of property and equipment and other
assets (442) (2,552) (55) (3,049)
Acquisition of ISI, net of cash acquired (92,164) (218)) -- (92,382)
------------- ------------- ------------- -------------
Net cash used in investing activities (92,606) (2,770) (55) (95,431)
------------- ------------- ------------- -------------
Cash flows from financing activities:
Principal payments on bank and other notes
payable -- (43) -- (43)
Deferred financing costs 308 (3,036) -- (2,728)
Principal payments on Term Loan A (21,202) -- -- (21,202)
Proceeds from Term Loan B -- 150,000 -- 150,000
Proceeds from certain selling stockholders
related to our secondary offering 852 -- -- 852
Proceeds from revolving credit facility -- 1,009,500 -- 1,009,500
Principal payments on revolving credit facility -- (1,012,100) -- (1,012,100)
Redemption of senior subordinated notes payable (73,124) -- -- (73,124)
Proceeds from issuance of common stock, net of
expenses 4,902 -- -- 4,902
Principal payments under capital lease
obligation -- (247) -- (247)
------------- ------------- ------------- -------------
Net cash provided by (used in) financing
activities (88,264) 144,074 -- 55,810
------------- ------------- ------------- -------------
Net increase (decrease) in cash and cash
equivalents 8 (3,222) 1,036 (2,178)
Cash and cash equivalents, beginning of year (17) 3,659 624 4,266
------------- ------------- ------------- -------------
Cash and cash equivalents, end of year $ (9) $ 437 $ 1,660 $ 2,088
============= ============= ============= =============
F- 34
For the Year Ended December 31, 2002
--------------------------------------------------------------------------
Consolidated
Anteon Non- Anteon
Condensed Consolidated International Guarantor Guarantor Elimination International
Statements of Operations Corporation Subsidiaries Subsidiaries Entries Corporation
------------------------------------------------------------------------------------------------------------------------
(in thousands)
Revenues $ -- $ 826,640 $ 5,252 $ (6,066) $ 825,826
Costs of revenues 2 712,725 4,667 (6,066) 711,328
------------ ----------- ----------- ----------- -----------
Gross profit (2) 113,915 585 -- 114,498
Total operating expenses 1,699 63,136 368 (15,099) 50,104
------------ ----------- ----------- ----------- -----------
Operating income (1,701) 50,779 217 15,099 64,394
Other income 7,181 8.335 -- (15,099) 417
Interest expense, net of interest income 13,791 7,850 (15) -- 21,626
Minority interest in earnings of subsidiaries -- -- (18) -- (18)
------------ ----------- ----------- ----------- -----------
Income (loss) before provision for income
taxes (8,311) 51,264 214 -- 43,167
Provision (benefit) for income taxes (3,232) 19,835 120 -- 16,723
------------ ----------- ----------- ----------- -----------
Net income (loss) $ (5,079) $ 31,429 $ 94 $ -- $ 26,444
============ =========== =========== =========== ============
F-35
For the Year Ended December 31, 2002
Consolidated
Anteon Non- Anteon
Condensed Consolidated International Guarantor Guarantor International
Statements of Cash Flows Corporation Subsidiaries Subsidiaries Corporation
-------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $ (5,079) $ 31,429 $ 94 $ 26,444
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Loss on disposals of property and equipment -- 24 1 25
Interest rate swap termination (1,903) -- -- (1,903)
Depreciation and amortization of property and 632
equipment 3,613 49 4,294
Other intangibles amortization 1,687 220 -- 1,907
Amortization of deferred financing costs 2,442 -- -- 2,442
Deferred income taxes 2,537 1,553 -- 4,090
Minority interest in earnings of subsidiaries -- -- 18 18
Changes in assets and liabilities, net of acquired
assets and liabilities (2,256) (37,041) 258 (39,039)
------------- ----------- ----------- -------------
Net cash provided by (used in) operating activities (1,940) (202) 420 (1,722)
------------- ----------- ----------- -------------
Cash flows from investing activities:
Purchases of property and equipment and other
assets (1,169) (2,009) (47) (3,225)
Proceeds from sales of businesses -- 1,802 -- 1,802
------------- ----------- ----------- -------------
Net cash used in investing activities (1,169) (207) (47) (1,423)
------------- ----------- ----------- -------------
Cash flows from financing activities:
Principal payments on bank and other notes payable -- (47) -- (47)
Deferred financing costs (642) (650) -- (1,292)
Payments on subordinated notes payable -- (567) -- (567)
Principal payments on Term Loan A (25,853) -- -- (25,853)
Proceeds from revolving credit facility -- 862,600 -- 862,600
Principal payments on revolving credit facility (18,700) (855,600) -- (874,300)
Redemption of senior subordinated notes payable (25,000) -- -- (25,000)
Proceeds from issuance of common stock, net of
expenses 81,808) -- -- 81,808
Principal payments on subordinated notes payable
to stockholders (7,499) -- -- (7,499)
Payment of subordinated notes payable-related party (4,369) -- (4,369)
------------- ----------- ----------- -------------
Net cash provided by (used in) financing activities (255) 5,736 -- 5,481
------------- ----------- ----------- -------------
Net increase (decrease) in cash and cash equivalents (3,364) 5,327 373 2,336
Cash and cash equivalents, beginning of year 3,347 (1,668) 251 1,930
------------- ----------- ----------- -------------
Cash and cash equivalents, end of year $ (17) $ 3,659 $ 624 $ 4,266
============= =========== =========== =============
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(18) Quarterly Results of Operations (Unaudited)
The following summarizes the unaudited quarterly results of operations
for the years ended December 31, 2004 and 2003 (in thousands, except
per share data):
Quarter ended: March 31 June 30 September 30 December 31 Total
------------- ------------ ---------------- --------------- -----------
2004
Revenues $ 288,150 304,161 325,581 350,247 1,268,139
Operating income 23,537 24,914 27,668 29,910 106,029
Net income 13,334 14,665 16,849 16,957 61,805
Basic earnings per common share 0.38 0.41 0.47 0.47 1.73
Diluted earnings per common
share 0.36 0.39 0.45 0.45 1.66
2003
Revenues $ 228,591 254,093 279,080 280,710 1,042,474
Operating income 17,966 20,254 22,699 23,194 84,113
Net income 9,075 10,309 10,943 5,863 36,190
Basic earnings per common share 0.26 0.30 0.31 0.17 1.04
Diluted earnings per common
share 0.25 0.28 0.30 0.16 0.98
(19) Segment Reporting
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.
F-37