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Form 10-Q for ANTEON INTERNATIONAL CORPORATION filed on May 16, 2005,
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005
--------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 001-31258
ANTEON INTERNATIONAL CORPORATION
---------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3880755
----------------------------- -----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3211 Jermantown Road, Fairfax, Virginia 22030-2801
- --------------------------------------------------------------------------------
(Address of principal executive office)
(Zip Code)
(703) 246-0200
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
- --------------------------------------------------------------------------------
(Former name, former address, and former
fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ X ] No [ ]
As of the close of business on May 12, 2005, there were 36,508,591 outstanding
shares of the registrant's common stock, par value $0.01 per share.
CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS AS OF
MARCH 31, 2005 AND DECEMBER 31, 2004 1
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS FOR THE THREE MONTHS ENDED
MARCH 31, 2005 AND 2004 2
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND
2004 3
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 21
ITEM 4. CONTROLS AND PROCEDURES 21
PART II. OTHER INFORMATION REQUIRED IN REPORT
ITEM 1. LEGAL PROCEEDINGS 22
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS, AND ISSUER
PURCHASES OF EQUITY SECURITIES 22
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS 22
ITEM 5. OTHER INFORMATION 22
ITEM 6. EXHIBITS 22
i
PART I. FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ANTEON INTERNATIONAL CORPORATION AND SUBSIDIARIES
(A Delaware Corporation)
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31,
March 31, 2005 2004
------------------ ---------------
ASSETS
Current assets:
Cash and cash equivalents $ 35,145 $ 4,103
Accounts receivable, net 299,133 317,296
Prepaid expenses and other current assets 15,509 17,205
------------------ ---------------
Total current assets 349,787 338,604
Property and equipment, net 13,367 12,920
Goodwill 241,951 242,066
Intangible and other assets, net 18,329 19,836
------------------ ---------------
Total assets $ 623,434 $ 613,426
================== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Term Loan B, current portion $ 1,650 $ 1,650
Obligations under capital leases, current portion 196 196
Accounts payable 34,936 46,430
Accrued expenses 107,156 102,593
Deferred tax liability 1,301 2,448
Income tax payable 11,891 1,556
Other current liabilities 1,530 808
Deferred revenue 22,024 13,764
------------------ ---------------
Total current liabilities 180,684 169,445
Term Loan B, less current portion 162,525 162,938
Revolving facility -- 19,800
Obligations under capital leases, less current portion 230 310
Noncurrent deferred tax liabilities, net 8,640 8,460
Other long term liabilities 4,397 4,915
------------------ ---------------
Total liabilities 356,476 365,868
Minority interest in subsidiaries 311 282
Stockholders' equity:
Preferred stock, $0.01 par value; 15,000,000 shares authorized, none issued
and outstanding as of March 31, 2005 and
December 31, 2004 -- --
Common stock, $0.01 par value; 175,000,000 shares authorized,
36,379,283 and 36,218,476 shares issued and outstanding as
of March 31, 2005 and December 31, 2004, respectively. 364 362
Additional paid-in capital 127,962 126,508
Accumulated other comprehensive income 145 254
Retained earnings 138,176 120,152
------------------ --------------
Total stockholders' equity 266,647 247,276
------------------ --------------
Total liabilities and stockholders' equity $ 623,434 $ 613,426
================== ==============
See accompanying notes to unaudited condensed consolidated financial statements.
ANTEON INTERNATIONAL CORPORATION AND SUBSIDIARIES
(A Delaware Corporation)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
For the three months ended
March 31,
-----------------------------------
2005 2004
-------------- ---------------
Revenues $ 349,982 $ 288,150
Costs of revenues 298,226 248,059
------------- -------------
Gross profit 51,756 40,091
------------- -------------
Operating expenses:
General and administrative expenses 20,270 15,875
Amortization of intangible assets 686 679
------------- -------------
Total operating expenses 20,956 16,554
------------- -------------
Operating income 30,800 23,537
Other income, net 873 2
Interest expense, net of interest income of $85 and
$78, respectively 2,214 1,794
Minority interest in earnings of subsidiaries (29) (5)
------------- -------------
Income before provision for income taxes 29,430 21,740
Provision for income taxes 11,406 8,406
------------- -------------
Net income $ 18,024 $ 13,334
============= =============
Basic earnings per common share: $ 0.50 $ 0.38
============= =============
Basic weighted average shares outstanding 36,286,772 35,448,152
Diluted earnings per common share: $ 0.48 $ 0.36
============= =============
Diluted weighted average shares outstanding 37,590,209 37,147,368
See accompanying notes to unaudited condensed consolidated financial statements.
ANTEON INTERNATIONAL CORPORATION AND SUBSIDIARIES
(A Delaware Corporation)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the three months ended March 31,
2005 2004
------------------ ----------------
OPERATING ACTIVITIES:
Net income $ 18,024 $ 13,334
Adjustments to reconcile net income to net cash provided by
operating activities:
Gain on the reversal of an acquisition reserve (900) --
Depreciation and amortization of property and equipment 1,091 1,053
Amortization of noncompete agreements 42 42
Other intangibles amortization 644 637
Amortization of deferred financing fees 163 184
Deferred income taxes (966) (877)
Minority interest in earnings of subsidiaries 29 5
Changes in assets and liabilities 33,586 (13,829)
------------- ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 51,713 549
------------- ------------
INVESTING ACTIVITIES:
Purchases of property, equipment and other assets (1,538) (685)
Refund of escrow related to acquisition of Integrated
Management Services, Inc. 115 --
------------- ------------
NET CASH USED FOR INVESTING ACTIVITIES (1,423) (685)
------------- ------------
FINANCING ACTIVITIES:
Principal payments on capital lease obligations (80) (82)
Deferred financing fees -- (75)
Principal payments on Term Loan B (413) (375)
Proceeds from revolving credit facility 228,800 254,900
Principal payments on revolving credit facility (248,600) (255,200)
Proceeds from issuance of common stock, net of expenses 1,045 1,109
------------- ------------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES (19,248) 277
------------- ------------
CASH AND CASH EQUIVALENTS:
Net increase in cash and cash equivalents 31,042 141
Cash and cash equivalents, beginning of period 4,103 2,088
------------- ------------
Cash and cash equivalents, end of period $ 35,145 $ 2,229
============= ============
Supplemental disclosure of cash flow information (in thousands):
Interest paid $ 2,136 $ 1,689
============= ============
Income taxes paid, net $ 1,622 $ 716
============= ============
See accompanying notes to unaudited condensed consolidated financial statements.
ANTEON INTERNATIONAL CORPORATION AND SUBSIDIARIES
(A Delaware Corporation)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
(1) Basis of Presentation
The information furnished in the accompanying Unaudited Condensed
Consolidated Balance Sheet, Unaudited Condensed Consolidated Statements of
Operations and Unaudited Condensed Consolidated Statements of Cash Flows have
been prepared in accordance with U.S. generally accepted accounting principles
for interim financial information. In the opinion of management, such
information contains all adjustments, consisting only of normal recurring
adjustments, considered necessary for a fair presentation of such information.
The operating results for the three months ended March 31, 2005 may not be
indicative of the results of operations for the year ending December 31, 2005,
or any future period. This financial information should be read in conjunction
with the Company's December 31, 2004 audited consolidated financial statements
and footnotes thereto, included in the Annual Report on Form 10-K filed with the
Securities and Exchange Commission by the Company on March 10, 2005.
(2) Organization and Business
Anteon International Corporation, a Delaware corporation, "Anteon" or the
"Company," and its subsidiaries provide professional information technology
solutions and systems engineering and integration services to government
clients. The Company designs, integrates, maintains and upgrades information
systems for national defense, intelligence, emergency response and other
government missions. The Company also provides many of its clients with the
systems analysis, integration and program management skills necessary to manage
their mission systems development and operations. The Company is subject to all
of the risks associated with conducting business with the U.S. federal
government, including the risk of contract termination at the convenience of the
government. In addition, government funding continues to be dependent on
congressional approval of program level funding and on contracting agency's
authorization of the Company's work. The extent to which the Company's existing
contracts will be funded in the future cannot be determined.
(3) Acquisition of Integrated Management Services, Inc.
On August 11, 2004, the Company purchased all of the outstanding stock of
Integrated Management Services, Inc. ("IMSI"), a provider of high end, mission
critical information and securities solutions, based in Arlington, Virginia, for
a total purchase price of $29.0 million including transaction costs. The Company
financed the acquisition through borrowings under its existing Credit Facility.
Under the terms of the stock purchase agreement, the Company 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 Statement
of Financial Accounting Standards ("SFAS") No. 141, Business Combinations,
whereby the net tangible and identifiable intangible assets acquired and
liabilities assumed were recognized at their estimated fair market values at the
date of acquisition, based on preliminary estimates made by management. 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 the Company.
Goodwill recognized from this acquisition was approximately $20.5 million and is
deductible for tax purposes. Pursuant to the requirements of SFAS No. 141,
Business Combinations, the effect of the acquisition did not meet the criteria
of a material and significant acquisition and, therefore, pro forma disclosures
are not presented in the unaudited condensed consolidated financial statements.
(4) Acquisition of Simulation Technologies, Inc.
On July 27, 2004, the Company purchased all of the outstanding stock of
Simulation Technologies, Inc. ("STI"), a provider of modeling and simulation
software solutions and services, headquartered in San Antonio, Texas, for a
total purchase price of $15.1 million (net of cash acquired), including
transaction costs. The Company financed the acquisition through borrowings under
its 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. Goodwill recognized from this acquisition was approximately $9.5
million and is not deductible for tax purposes. Pursuant to the requirements of
SFAS No. 141, Business Combinations, the effect of the acquisition did not meet
the criteria of a material and significant acquisition and, therefore, pro forma
disclosures are not presented in the unaudited condensed consolidated financial
statements.
(5) Accounting for Stock-Based Compensation
The Company accounts for employee stock-based compensation plans using the
intrinsic value based method of accounting prescribed by APB Opinion No. 25, or
"APB No. 25," Accounting for Stock Issued to Employees. The Company has an
employee stock option plan. Compensation expense for stock options granted to
employees is recognized based on the difference, if any, between the fair value
of the Company's common stock and the exercise price of the option at the date
of grant. No stock-based compensation expense for options granted to employees
has been recorded in the accompanying condensed consolidated financial
statements. The Company discloses the pro forma effect on net income as if the
fair value based method of accounting as defined in SFAS No. 123, Accounting for
Stock-based Compensation, had been applied.
The Company accounts for stock options granted to non-employees using the
fair value method of accounting as prescribed by SFAS No. 123. Compensation
expense related to stock options granted to non-employees is not significant.
The following table illustrates the effect on net income and earnings per
share for the three months ended March 31, 2005 and 2004 as if the Company had
applied the fair value recognition provisions of SFAS No. 123 to stock-based
employee compensation:
Three Months Ended Three Months Ended
March 31, 2005 March 31, 2004
-------------------- --------------------
(in thousands, except per share data)
Net income, as reported $ 18,024 $ 13,334
Deduct: total stock-based compensation expense
determined under the fair value method, net of tax 989 960
------------- ------------
Pro forma net income $ 17,035 $ 12,374
Earnings per share:
Basic-as reported $ 0.50 $ 0.38
============= ============
Basic-pro forma $ 0.47 $ 0.35
============= ============
Diluted-as reported $ 0.48 $ 0.36
============= ============
Diluted-pro forma $ 0.45 $ 0.33
============= ============
(6) Comprehensive Income
Comprehensive income for the three months ended March 31, 2005 and 2004 was
approximately $17.9 million and $13.4 million, respectively. Other comprehensive
income (loss) for the three months ended March 31, 2005 and 2004 includes
foreign currency translation gain (loss), of approximately ($109,000) and
$27,000, respectively, and increases in the fair value of interest rate swaps of
zero and approximately $69,000, net of tax, respectively.
(7) Computation of Earnings Per Share
For the three months ended
March 31, 2005
Income Weighted average Per Share
(Numerator) shares (Denominator) Amount
(in thousands, except share and per share data)
Basic earnings per share:
Net income $ 18,024 36,286,772 $ 0.50
============== ============
Stock options -- 1,303,437 --
Diluted earnings per share:
Net income $ 18,024 37,590,209 $ 0.48
============== ============
For the three months ended
March 31, 2004
Income Weighted average Per Share
(Numerator) shares (Denominator) Amount
(in thousands, except share and per share data)
Basic earnings per share:
Net income $ 13,334 35,448,152 $ 0.38
============== ============
Stock options -- 1,699,216 --
Diluted earnings per share:
Net income $ 13,334 37,147,368 $ 0.36
============== =============
(8) Domestic Subsidiaries Summarized Financial Information
Under the terms of the Company's Credit Facility, the Company's wholly
owned domestic subsidiaries (the "Guarantor Subsidiaries") are guarantors of the
Company's Credit Facility. Such guarantees are full, unconditional and joint and
several. Separate unaudited condensed financial statements of the Guarantor
Subsidiaries are not presented because the Company's management has determined
that they would not be material to investors. The results of the non-guarantor
subsidiaries are from the Company's foreign subsidiaries. The following
supplemental financial information sets forth, on a combined basis, unaudited
condensed balance sheets, statements of operations and statements of cash flows
information for the Guarantor Subsidiaries, the Company's non-guarantor
subsidiaries and, on a consolidated and unconsolidated basis, for the Company.
As of March 31, 2005
----------------------------------------------------------------------------------
Unaudited Condensed Consolidated Consolidated
Balance Sheets Anteon Anteon
International Guarantor Non-Guarantor Elimination International
Corporation Subsidiaries Subsidiaries Entries Corporation
-------------- -------------- -------------- ------------ ----------------
(in thousands)
Cash and cash equivalents $ -- $ 33,395 $ 1,750 $ -- $ 35,145
Accounts receivable, net -- 298,270 863 -- 299,133
Other current assets 1,188 24,705 561 (10,945) 15,509
Property and equipment, net 1,415 11,785 167 -- 13,367
Due from parent (182,087) 181,701 386 -- --
Investments in and advances to
subsidiaries 33,222 (40,893) -- 7,671 --
Goodwill 177,732 64,219 -- -- 241,951
Intangible and other assets, net 73,318 13,011 -- (68,000) 18,329
------------- -------------- ------------ ----------- -------------
Total assets $ 104,788 $ 586,193 $ 3,727 $ (71,274) $ 623,434
============= ============== ============ =========== =============
Indebtedness $ -- $ 232,175 $ -- $ (68,000) $ 164,175
Accounts payable 1,241 33,232 463 -- 34,936
Accrued expenses and other current
liabilities 3,975 117,505 594 -- 122,074
Deferred revenue 10,945 21,018 1,006 (10,945) 22,024
Other long-term liabilities -- 13,267 -- -- 13,267
------------- -------------- ------------ ----------- -------------
Total liabilities 16,161 417,197 2,063 (78,945) 356,476
Minority interest in subsidiaries -- -- 311 -- 311
Total stockholders' equity 88,627 168,996 1,353 7,671 266,647
------------- -------------- ------------ ----------- -------------
Total liabilities and stockholders'
equity (deficit) $ 104,788 $ 586,193 $ 3,727 $ (71,274) $ 623,434
============= ============== ============ =========== =============
For the three months ended March 31, 2005
-----------------------------------------------------------------------------------
Unaudited Condensed Consolidated Consolidated
Statements of Operations Anteon Anteon
International Guarantor Non-Guarantor Elimination International
Corporation Subsidiaries Subsidiaries Entries Corporation
--------------- ------------- ------------ ----------- --------------
(in thousands)
Revenues $ -- $ 348,747 $ 4,376 $ (3,141) $ 349,982
Costs of revenues -- 297,091 4,276 (3,141) 298,226
----------- ------------ -------------- ----------- -------------
Gross profit -- 51,656 100 -- 51,756
Total operating expenses 626 31,568 32 (11,270) 20,956
----------- ------------ -------------- ----------- -------------
Operating income (loss) (626) 20,088 68 11,270 30,800
Other income (loss), net 3,630 8,513 -- (11,270) 873
Interest expense (income), net (668) 2,888 (6) -- 2,214
Minority interest in earnings of
subsidiaries -- -- (29) -- (29)
----------- ------------ -------------- ----------- -------------
Income before provision for income
taxes 3,672 25,713 45 -- 29,430
Provision for income taxes 1,569 9,793 44 -- 11,406
----------- ------------ -------------- ----------- -------------
Net income $ 2,103 $ 15,920 $ 1 $ -- $ 18,024
=========== ============ ============== =========== =============
For the three months ended March 31, 2005
------------------------------------------------------------------
Unaudited Condensed Consolidated Statements of Consolidated
Cash Flows Anteon Anteon
International Guarantor Non-Guarantor International
Corporation Subsidiaries Subsidiaries Corporation
------------- ------------ ------------ -----------
(in thousands)
Operating Activities:
Net income $ 2,103 $ 15,920 $ 1 $ 18,024
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Gain on reversal of an acquisition reserve -- (900) -- (900)
Depreciation and amortization of property and
equipment 217 860 14 1,091
Amortization of intangible assets 351 335 -- 686
Amortization of deferred financing fees -- 163 -- 163
Deferred income taxes -- (966) -- (966)
Minority interest in earnings of subsidiaries -- -- 29 29
Changes in assets and liabilities (3,615) 37,915 (714) 33,586
------------- ------------ ------------ ------------
Net cash provided by (used for) operating
activities (944) 53,327 (670) 51,713
------------- ------------ ------------ ------------
Investing activities:
Purchases of property, equipment and other assets (92) (1,449) 3 (1,538)
Refund of escrow related to acquisition of
Integrated Management Services, Inc. -- 115 -- 115
------------- ------------ ------------ ------------
Net cash provided by (used for) investing
activities (92) (1,334) 3 (1,423)
------------- ------------ ------------ ------------
Financing activities:
Principal payments on capital lease obligations -- (80) -- (80)
Principal payments on Term Loan B -- (413) -- (413)
Proceeds from revolving credit facility -- 228,800 -- 228,800
Principal payments on revolving credit facility -- (248,600) -- (248,600)
Proceeds from issuance of common stock, net of
expenses 1,045 -- -- 1,045
------------- ------------ ------------ ------------
Net cash provided by (used for) financing
activities 1,045 (20,293) -- (19,248)
------------- ------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents 9 31,700 (667) 31,042
Cash and cash equivalents, beginning of period (9) 1,695 2,417 4,103
------------- ------------ ------------ ------------
Cash and cash equivalents, end of period $ -- $ 33,395 $ 1,750 $ 35,145
============= ============ ============ ============
For the three months ended March 31, 2004
------------------------------------------------------------------
Consolidated
Anteon Anteon
Unaudited Condensed Consolidated International Guarantor Non-Guarantor Elimination International
Statements of Operations Corporation Subsidiaries Subsidiaries Entries Corporation
-------------- -------------- -------------- ------------ -----------------
(in thousands)
Revenues $ (2) $ 287,102 $ 1,164 $ (114) $ 288,150
Costs of revenues (1) 247,057 1,117 (114) 248,059
------------- ------------ ------------ ------------ --------------
Gross profit (1) 40,045 47 -- 40,091
Total operating expenses 956 25,086 18 (9,506) 16,554
------------- ------------ ------------ ------------ --------------
Operating income (loss) (957) 14,959 29 9,506 23,537
Other income (expense) 3,163 6,345 -- (9,506) 2
Interest expense (income), net (405) 2,207 (8) -- 1,794
Minority interest in earnings of
subsidiaries -- -- (5) -- (5)
------------- ------------ ------------ ------------ --------------
Income before provision for income
taxes 2,611 19,097 32 -- 21,740
Provision for income taxes 271 8,123 12 -- 8,406
------------- ------------ ------------ ------------ --------------
Net income $ 2,340 $ 10,974 $ 20 $ -- $ 13,334
============= ============ ============ ============ ==============
For the three months ended March 31, 2004
Consolidated
Anteon Anteon
Unaudited Condensed Consolidated Statements of International Guarantor Non-Guarantor International
Cash Flows Corporation Subsidiaries Subsidiaries Corporation
--------------- ------------ ------------- --------------
(in thousands)
Operating Activities:
Net income $ 2,340 $ 10,974 $ 20 $ 13,334
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation and amortization of property and
equipment 168 875 10 1,053
Amortization of noncompete agreements -- 42 -- 42
Other intangibles amortization 637 -- -- 637
Amortization of deferred financing fees 33 151 -- 184
Deferred income taxes -- (877) -- (877)
Minority interest in earnings of subsidiaries -- -- 5 5
Changes in assets and liabilities (4,373) (8,975) (481) (13,829)
--------------- ------------ ------------- --------------
Net cash provided by (used for) operating
activities (1,195) 2,190 (446) 549
--------------- ------------ ------------- --------------
Investing activities:
Purchases of property, equipment and other
assets (15) (646) (24) (685)
--------------- ------------ ------------- --------------
Financing activities:
Deferred financing fee 101 (176) -- (75)
Principal payments on Term Loan B -- (375) -- (375)
Proceeds from revolving credit facility -- 254,900 -- 254,900
Principal payments on revolving credit facility -- (255,200) -- (255,200)
Principal payments under capital lease obligations -- (82) -- (82)
Proceeds from issuance of common stock, net
of expenses 1,109 -- -- 1,109
--------------- ------------ ------------- --------------
Net cash provided by (used for) financing
activities 1,210 (933) -- 277
--------------- ------------ ------------- --------------
Net increase (decrease) in cash and cash -- (470) 141
equivalents 611
Cash and cash equivalents, beginning of period (9) 437 1,660 2,088
--------------- ------------ ------------- --------------
Cash and cash equivalents, end of period $ (9) $ 1,048 $ 1,190 $ 2,229
=============== ============ ============= ==============
(9) Segment Information
Although the Company is organized by strategic business units, the Company
considers each of its government contracting units to have similar economic
characteristics, provide similar types of services and have a similar customer
base. Accordingly, the Company's government contracting segment aggregates the
operations of all of the Company's government contracting units.
(10) Interest Rate Swap Agreements
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.
(11) Supplemental Retirement Savings Plan
The Company implemented a Supplemental Retirement Savings Plan (the "Plan")
on January 1, 2004, that was amended on January 1, 2005, that permits eligible
employees and directors to defer all or a portion of their annual cash
compensation. The Company amended the Plan to comply with the requirements of
the American Jobs Creation Act signed into law on October 22, 2004. The Company
also filed a Registration Statement on Form S-8 with the Securities and Exchange
Commission ("SEC") to register the participation interests under the Plan. The
assets of the Plan are held in a trust to which contributions are made by the
Company based on amounts elected to be deferred by the Plan participants. The
Plan is treated as unfunded for tax purposes and its assets are subject to the
general claims of the Company's creditors. In order to provide for an
accumulation of assets comparable to the contractual liabilities accruing under
the Plan, the Company may direct the trustee of the Plan to invest the assets to
correspond to the hypothetical investment choices made by the Plan participants.
The Company records both the assets and obligations related to amounts
deferred under the Plan. Each reporting period, the assets, which have been
classified as trading securities, and obligations are adjusted to fair market
value, with gains (losses) on the assets included in other income (expense) and
corresponding adjustments to the obligations recorded as compensation expense.
As of March 31, 2005, the deferred compensation obligation was approximately
$1.5 million. For the three months ended March 31, 2005, the adjustments to fair
market value were not significant.
(12) Employee Stock Purchase Plan
Effective April 1, 2004, the Company implemented a non-compensatory
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 are used by the Company to provide for the purchase by the ESPP
administrator of the Company's 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 per share of the Company's common stock on the last
day of each quarterly offering period. The Compensation Committee initially set
the purchase price discount at 5% of the Company stock's fair market value. The
5% difference between the price paid for the common stock by the Company and the
proceeds received from the ESPP participants is charged to additional paid-in
capital. 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.
(13) Omnibus Stock Plan
On September 9, 2004, the Company filed a Registration Statement on Form
S-8 with the SEC to register an additional 1.5 million shares of the Company's
common stock available for issuance under its Amended and Restated Anteon
International Corporation Omnibus Stock Plan ("Omnibus Stock Plan"), as amended.
This increase in the number of shares available for issuance under the Omnibus
Stock Plan was approved by the Company's stockholders on May 27, 2004.
(14) Legal Proceedings
The Company is involved in various legal proceedings in the ordinary course
of business.
The Company cannot predict the ultimate outcome of these matters, but does
not believe that such matters will have a material impact on its financial
position or results of operations.
(15) 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 with fiscal years beginning
after 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 on its
operating results and financial condition.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Forward-looking statements
relate to future events or our future performance. These statements involve
known and unknown risks, uncertainties and other factors that may cause our and
our industry's actual results, levels of activity, performance or achievements
to be materially different from any results, levels of activity, performance or
achievements expressed or implied by these forward-looking statements. In some
cases, you can identify forward-looking statements by terminology like "may",
"will", "should", "expects", "plans", "projects", anticipates", "believes",
"estimates", "predicts", "potential" or "continue" or the negative of these
terms or other comparable terminology. Such forward-looking statements include,
but are not limited to:
o Funded backlog;
o total estimated remaining contract value;
o our expectations regarding the U.S. federal government's procurement
budgets and reliance on outsourcing of services; and
o our financial condition and liquidity, as well as future cash flows
and earnings.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of these statements. We
are under no duty to update any of the forward-looking statements after the date
of this quarterly report to conform these statements to actual results and do
not intend to do so. These statements are only predictions. Actual events or
results may differ materially. In evaluating these statements, you should
specifically consider various factors, including the following:
o changes in the U.S. federal government procurement laws, regulations,
policies and budgets;
o changes specifically in U.S. federal government military and
security-related outsourcing policies;
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; and
o our ability to retain our contracts during any rebidding process.
GENERAL
We are a leading provider of information technology solutions and systems
engineering and integration services to U.S. federal government clients as
measured by revenue. We design, integrate, maintain and upgrade state-of-the-art
information systems for national defense, intelligence, emergency response and
other high priority government missions. We also provide many of our government
clients with the systems analysis, integration and program management skills
necessary to manage their mission systems development and operations.
We have a broad client and contract base and a diverse contract mix. We
currently serve over 1,000 U.S federal government clients in more than 50
government agencies, as well as state and foreign governments. For the three
months ended March 31, 2005, approximately 92.5% of our revenue was derived from
contracts with the Department of Defense, or "DOD", Department of Homeland
Security, or "DHS" and intelligence agencies, and approximately 6.7% from
civilian agencies of the U.S. federal government. For the three months ended
March 31, 2005, approximately 86.3% of our revenue was from contracts where we
were the lead, or "prime" contractor. For the three months ended March 31, 2005,
our diverse contract base had approximately 700 active contracts and
approximately 3,900 active task orders, and our largest contract or task order
accounted for approximately 8.8% of our revenue.
DESCRIPTION OF CRITICAL ACCOUNTING POLICIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses our unaudited condensed consolidated financial statements,
which have been prepared in accordance with U.S. generally accepted accounting
principles. The preparation of these unaudited condensed consolidated financial
statements requires management to make estimates and judgments that affect the
reported amount of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the unaudited condensed consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. On an ongoing basis, management evaluates its estimates,
including those related to uncollected accounts receivable, other contingent
liabilities, revenue recognition, goodwill and other intangible assets.
Management bases its estimates on historical experience and on various other
factors that are believed to be reasonable at the time the estimates are made.
Actual results may differ from these estimates under different assumptions or
conditions. Management believes that our critical accounting policies which
require more significant judgments and estimates in the preparation of our
unaudited condensed consolidated financial statements are revenue recognition,
costs of revenues, goodwill impairment, long-lived assets and identifiable
intangible asset impairment and business combinations.
Revenue Recognition
For the three months ended March 31, 2005, we estimate that approximately
99% of our revenues were derived from services and approximately 1% from product
sales. Services are performed under contracts that may be categorized into three
primary types: time and materials, cost-plus reimbursement and firm fixed price.
Revenues for time and materials contracts are recognized as time is spent at
hourly rates, which are negotiated with the customer 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. Revenues are
recognized under cost-plus contracts on the basis of direct and indirect costs
incurred plus a negotiated profit calculated as a percentage of costs, a fixed
amount or as a performance-based award fee. Cost-plus type contracts provide
relatively less risk than other contract types because we are reimbursed for all
direct costs and certain indirect costs, such as overhead and general and
administrative expenses, and are paid a fee for work performed. For 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 on similar tupe contracts.
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. Fixed price contracts that involve a defined number of hours
or a defined category of personnel are referred to as "level of effort"
contracts. For non-service-related fixed price contracts, revenues are
recognized as units are delivered (the units-of-delivery method). In addition,
we evaluate our contracts for multiple deliverables which may require the
segmentation of each deliverable into separate accounting units for proper
revenue recognition.
We recognize revenues under our U.S. federal government contracts when a
contract is executed, the contract price is fixed and determinable, delivery of
the services or products has occurred, the contract is funded and collectibility
of the contract price is considered probable. Our contracts with agencies of the
U.S. federal government are subject to periodic funding by the respective
contracting agency. Funding for a contract may be provided in full at inception
of the contract or ratably throughout the term of the contract as the services
are provided. From time to time, we may proceed with work based on customer
direction pending finalization and signing of contractual funding documents. We
have an internal process for approving any such work. All revenue recognition is
deferred during periods in which funding is not received. Costs incurred during
such periods are deferred if the receipt of funding is assessed as probable. In
evaluating the probability of funding being received, we consider our previous
experiences with the customer, communications with the customer regarding
funding status, and our knowledge of available funding for the contract or
program. If funding is not assessed as probable, costs are expensed as they are
incurred. Historically, we have not recorded any significant write-offs because
funding was not ultimately received.
For cost based contracts, we recognize revenues under our U.S. federal
government contracts based on allowable contract costs, as mandated by the U.S.
federal government's cost accounting standards. The costs we incur under U.S.
federal government contracts are subject to regulation and audit by certain
agencies of the federal government. Historically, contract cost disallowances
resulting from government audits have not been significant. We may be exposed to
variations in profitability, including potential losses, if we encounter
variances from estimated fees earned under award fee contracts and estimated
costs under fixed price contracts.
Contract revenue recognition inherently involves estimation. Examples of
such estimates include the level of effort needed to accomplish the tasks under
the contract, the cost of those efforts, and the continual assessment of our
progress toward the completion of the contract. From time to time, circumstances
may arise which require us to revise our estimated total revenues or costs.
Typically, these revisions relate to contractual changes involving our services.
To the extent that a revised estimate affects contract revenue or profit
previously recognized, we record the cumulative effect of the revision in the
period in which it becomes known. In addition, the full amount of an anticipated
loss on any type of contract is recognized in the period in which it becomes
known.
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 41% time and materials, 36% cost-plus and 23% fixed price (a
substantial majority of which were firm fixed price level of effort, which have
lower risk than other types of fixed price contracts) during the three months
ended March 31, 2005. 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 5% to 7%. Under fixed price and time and materials
contracts, margins are not subject to statutory limits. However, the U.S.
federal government's objective in negotiating such contracts is to seldom allow
for operating profits in excess of 15% and, due to competitive pressures,
operating profits on such contracts are often less than 10%.
We maintain reserves for uncollectible accounts receivable which may arise
in the normal course of business. Historically, we have not had significant
write-offs of uncollectible accounts receivable. However, we do perform work on
many contracts and task orders and, on occasion, issues may arise that could
lead to accounts receivable not being fully collected.
Costs of Revenues
Our costs are categorized as either direct or indirect costs. Direct costs
are those that can be identified with and assigned 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 assigned or allocated to projects. Our principal
unallowable costs are interest expense, amortization expense for separately
identified intangibles from acquisitions, bad debt expense 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 control 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 $242.0 million and $242.1
million as of March 31, 2005 and December 31, 2004, respectively. In accordance
with SFAS No. 142, we test our goodwill for impairment at least annually using a
fair value approach. We have completed our annual impairment analysis as of
September 30, 2004, noting no indications of impairment for any of our reporting
units. As of March 31, 2005, 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 net carrying amount of long-lived assets and identifiable intangible
assets was approximately $23.9 million and $24.1 million at March 31, 2005 and
December 31, 2004, respectively. Long-lived assets and identifiable intangible
assets, excluding goodwill, are evaluated for impairment when events occur that
suggest that such assets may be impaired. Such events could include, but are not
limited to, the loss of a significant customer or contract, decreases in federal
government appropriations or funding of certain programs, or other similar
events. None of these events occurred during the three months ended March 31,
2005. We determine if an impairment has occurred based on a comparison of the
carrying amount of such assets to the future undiscounted net cash flows,
excluding charges for interest. If considered impaired, the impairment is
measured by the amount by which the carrying amount of the assets exceeds their
estimated fair value, as determined by an analysis of discounted cash flows
using a discounted interest rate based on our cost of capital and the related
risks of recoverability.
In evaluating impairment, we consider, among other things, our ability to
sustain our current financial performance on contracts and tasks, our access to
and penetration of new markets and customers and the duration of, and estimated
amounts from, our contracts. Any uncertainty of future financial performance is
dependent on the ability to maintain our customers and the continued funding of
our contracts and tasks by the government. Based upon contract value, we have
been able to historically win more than 90% of our contracts that have been
recompeted. In addition, we have been able to sustain financial performance
through indirect cost savings from our acquisitions, which have generally
resulted in either maintaining or improving margins on our contracts and tasks.
If we are required to record an impairment charge in the future, it could have
an adverse impact on our results of operations.
Business Combinations
We apply the provisions of SFAS No. 141, Business Combinations, whereby the
net tangible and separately identifiable intangible assets acquired and
liabilities assumed are recognized at their estimated fair market values at the
acquisition date. The purchase price in excess of the estimated fair market
value of the net tangible and separately identifiable intangible assets acquired
represents goodwill. The allocation of the purchase price related to our
business combinations involves significant estimates and management judgment
that may be adjusted during the allocation period, but in no case beyond one
year from the acquisition date. Costs incurred related to successful business
combinations are capitalized as costs of business combinations, while costs
incurred by us for unsuccessful or terminated acquisition opportunities are
expensed when we determine that such opportunities will no longer be pursued.
Costs incurred related to anticipated business combinations are deferred.
Statements of Operations
The following is a description of the elements of certain line items from
our unaudited condensed consolidated statements of operations, which include the
operations of IMSI and STI, since August 11, 2004 and July 27, 2004, the dates
of their respective 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.
Other income is from non-core business items such as fair market
adjustments to the retirement savings plan and a gain on the reversal of a
reserve created from a prior acquisition.
Amortization expenses relate to intangible assets from our acquisitions.
These intangible assets consist of a noncompete agreement, contract backlog and
contracts and related customer relationships acquired as part of our
acquisitions.
Interest expense is primarily related to our term loans and revolving
facility, our Senior Subordinated Notes due 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 Total Estimated Remaining Contract Value
Each year a significant portion of our revenue is derived from existing
contracts with our government clients, and a portion of the revenue represents
work related to maintenance, upgrade or replacement of systems under contracts
or projects for which we are the incumbent provider. Proper management of
contracts is critical to our overall financial success and we believe that
effective management of costs makes us competitive on price. We believe that our
demonstrated performance record and service excellence have enabled us
historically to maintain our position as an incumbent service provider on more
than 90% of our contracts that have been recompeted. We have increased our total
remaining estimated contract value by approximately $93 million, from $6.3
billion at December 31, 2004, to $6.4 billion at March 31, 2005. Funded backlog
increased $40 million to $870.9 million at March 31, 2005, from $830.9 million
as of December 31, 2004.
Our total estimated remaining contract value, excluding new indefinite
delivery, indefinite quantity "IDIQ" and multiple award contracts, represents
the aggregate contract revenue we estimate will be earned over the remaining
life of our contracts including all option years. For IDIQ and multiple award
contracts, we compute the total estimated remaining contract value by
calculating the three month rolling average run rate on each of these contracts
and extrapolating it over the life of the contract. Funded backlog is based upon
amounts actually appropriated by a customer for payment for goods and services.
Because the U.S federal government operates under annual appropriations,
agencies of the U.S. federal government typically fund contracts on an
incremental basis. Accordingly, the majority of the total estimated remaining
contract value is not funded backlog. Our total estimated remaining contract
value is based on our experience under contracts and we believe our estimates
are reasonable. However, there can be no assurance that our existing contracts
will result in actual revenues in any particular period or at all. These amounts
could vary depending upon government budgets and appropriations.
RESULTS OF OPERATIONS
The following table sets forth our results of operations based on the
amounts and percentage relationship of the items listed to contract revenues
during the period shown:
For the Three Months Ended March 31,
2005 2004
---- ----
($ in thousands)
Revenues $ 349,982 100.0% $ 288,150 100.0%
Costs of revenues 298,226 85.2 248,059 86.1
--------------- ---------- -------------- -----------
Gross profit 51,756 14.8 40,091 13.9
--------------- ---------- -------------- -----------
Operating expenses:
General and administrative expenses 20,270 5.8 15,875 5.5
Amortization of intangible assets 686 0.2 679 0.2
--------------- ---------- -------------- -----------
Total operating expenses 20,956 6.0 16,554 5.7
--------------- ---------- -------------- -----------
Operating income 30,800 8.8 23,537 8.2
Other income, net 873 0.2 2 --
Interest expense, net 2,214 0.6 1,794 0.7
Minority interest in earnings of subsidiaries (29) -- (5) --
--------------- ---------- -------------- -----------
Income before income taxes 29,430 8.4 21,740 7.5
Provision for income taxes 11,406 3.3 8,406 2.9
--------------- ---------- -------------- -----------
Net income $ 18,024 5.1% $ 13,334 4.6%
=============== ========== ============== ===========
REVENUES
For the three months ended March 31, 2005, revenues increased by $61.8
million, or 21.5%, to $350.0 million from $288.2 million for the three months
ended March 31, 2004. The increase in revenues was attributable to organic
growth and the acquisitions of IMSI and STI. We define organic growth as the
increase in revenues excluding the revenues associated with acquisitions,
divestitures and closures of businesses in comparable periods. We believe that
organic growth is a useful supplemental measure to revenue. Management uses
organic growth as part of its evaluation of core operating results and
underlying trends. For the three months ended March 31, 2005, our organic growth
was 17.1%. The acquisitions of IMSI and STI combined accounted for approximately
$12.4 million of the revenue growth for the three months ended March 31, 2005.
The increase in revenue was driven by the increased tasking and related
increases in employee headcount in the following business areas: task orders in
support of a wide range of federal government agencies under our GSA
Applications and Support for Widely-diverse End User Requirements (ANSWER) and
Management and Business Services (MOBIS) contracts; Stricom Omnibus Contract
including Military Operations on Urban Terrain; and task orders under our Naval
Sea Systems Command (NAVSEA) Multiple Award Contract.
COSTS OF REVENUES
For the three months ended March 31, 2005, costs of revenues increased by
$50.2 million, or 20.2%, to $298.2 million from $248.1 million for the three
months ended March 31, 2004. The increase in costs of revenues was due to the
corresponding growth in revenues resulting from organic growth, the acquisitions
of IMSI and STI and the increase in employee headcount.
GENERAL and ADMINISTRATIVE EXPENSES
For the three months ended March 31, 2005, general and administrative
expenses increased $4.4 million, or 27.7%, to $20.3 million from $15.9 million
for the three months ended March 31, 2005. General and administrative expenses
for the three months ended March 31, 2005, as a percentage of revenues,
increased to 5.8% from 5.5%. The dollar increase was primarily attributable to
the overall growth in the business and additions to the allowance for
uncollectible receivables.
AMORTIZATION
For the three months ended March 31, 2005, amortization expense increased
$7,000, or 1.0%, to $686,000 from $679,000 for the comparable period in 2004.
Amortization as a percentage of revenues for the three months ended March 31,
2005 remained constant at 0.2%.
OPERATING INCOME
For the three months ended March 31, 2005, operating income increased $7.3
million, or 30.9%, to $30.8 million from $23.5 million for the three months
ended March 31, 2004. Operating income as a percentage of revenues increased to
8.8% for the three months ended March 31, 2005 from 8.2% for the same period in
2004, primarily as a result of an increase in labor based revenues and
improvements to profit rates on certain contracts.
OTHER INCOME
For the three months ended March 31, 2005, other income increased to
$873,000 from $2,000 for the three months ended March 31, 2004. The increase in
other income, for the three month period, was primarily related to a gain on the
reversal of a reserve created from a prior acquisition.
INTEREST EXPENSE, NET
For the three month period ended March 31, 2005, interest expense, net of
interest income, increased $420,000, or 23.4%, to $2.2 million from $1.8 million
for the three months ended March 31, 2004. The increase in interest expense was
due to the higher interest rates and a higher principal balance on the Term Loan
B as of March 31, 2005. The Term Loan B balance as of March 31, 2005 and 2004
was $164.2 million and $149.6 million, respectively. During the three months
ended March 31, 2005, the interest rate on the Term Loan B borrowings ranged
from 4.31% to 4.60% compared to a range of 3.11% to 3.16% on the previous term
loan for the same period in the prior year.
PROVISION FOR INCOME TAXES
Our effective tax rate for the three months ended March 31, 2005 was 38.8%
compared to an effective tax rate of 38.7% for the three months ending March 31,
2004.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows for the Three Months Ended March 31, 2005 and 2004
We generated $51.7 million and $549,000 in cash from operations for the
three months ended March 31, 2005 and 2004, respectively. This increase in cash
flows was due to an improvement in collections on accounts receivables. Total
days sales outstanding, or "DSO," at March 31, 2005 decreased to 77 days, from
82 days as of December 31, 2004. The decrease in DSO during the period was due
to improved timing of receipt of payments, and the collections of some
outstanding 2004 invoices from various government payment offices. Our cash
flows from operations are dependant on the timing of receipts from various
government payment offices and, as a result, may differ from period to period
and such differences could be significant. Accounts receivable totaled $299.1
million at March 31, 2005 and represented 48.0% of total assets at that date.
For the three months ended March 31, 2005, net cash used for investing
activities was $1.4 million, which was primarily attributable to the purchase of
property and equipment. Cash used in financing activities was $19.2 million for
the three months ended March 31, 2005, primarily related to the paydown of the
revolving loan portion of our Credit Facility with funds generated from
operations.
LIQUIDITY
Our principal working capital need is for funding accounts receivable,
which has typically increased with the growth in our business. As of March 31,
2005, working capital decreased by $57,000 to $169.1 million from $169.2 million
for the year ended December 31, 2004. Our principal sources of cash to fund our
working capital needs are cash generated from operating activities and
borrowings under the revolving portion of our Credit Facility. 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 March 31, 2005, we
did not have any capital commitments greater than $1.0 million.
We have relatively low capital investment requirements. Capital
expenditures were $1.5 million and $685,000 for the three months ended March 31,
2005 and 2004, respectively, primarily for leasehold improvements and office
equipment.
We intend to, and expect over the next twelve months to be able to, fund
our operating cash, capital expenditure and debt service requirements through
cash flows from operations and borrowings under our revolving portion of 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.
CAPITAL RESOURCES
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 three
months ended March 31, 2005, we were in compliance with all of the financial
covenants. Additionally, as a result of changes made in the amendment and
restatement, as described below, 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 borrowings 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
above. As of March 31, 2005, total debt outstanding was $164.2 million,
consisting of $164.2 million of Term Loan B, and zero outstanding under the
revolving loan portion of our Credit Facility. The total funds available to us
under the revolving loan portion of our Credit Facility as of March 31, 2005
were $194.7 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.
OFF-BALANCE SHEET ARRANGEMENTS AND AGGREGATE CONTRACTUAL OBLIGATIONS
We use off-balance sheet financing, primarily to finance certain capital
items. Operating leases are used primarily to finance computers, servers, phone
systems, and to a lesser extent, other fixed assets, such as furnishings. As of
March 31, 2005, we financed equipment with an original cost of approximately
$14.0 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.
INFLATION
We do not believe that inflation has had a material effect on our business
in the three months ended March 31, 2005 as we are able to build escalation into
our contract rates each year.
ITEM 3. QUANTITATIVE and QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have interest rate exposure relating to certain of our long-term
obligations. In June 2004, we redeemed the remaining $1.9 million balance of our
12% Notes, which had a fixed interest rate of 12%. The interest rates on both
the Term Loan B and the revolving loan portion of our Credit Facility are
affected by changes in market interest rates. We manage these fluctuations by
reducing the amount of outstanding debt through cash flow by focusing on billing
and 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 further interest rate swap agreements. However, as
market conditions change, we will reevaluate our position.
A 1% change in interest rates on variable rate debt would have resulted in
our interest expense fluctuating by approximately $423,000 and $368,000 for the
three months ended March 31, 2005 and 2004, respectively.
ITEM 4. CONTROLS AND PROCEDURES.
Our management, with the participation of our chief executive officer and
chief financial officer (our principal executive officer and principal financial
officer), evaluated the effectiveness of our disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15-d-15(e) under the Exchange Act) as of
March 31, 2005. Based on this evaluation, our chief executive officer and chief
financial officer concluded that, as of March 31, 2005, our disclosure controls
and procedures were (1) designed to ensure that material information relating to
us, including our consolidated subsidiaries, is made known to our chief
executive officer and chief financial officer by others within those entities,
particularly during the period in which this report was being prepared and (2)
effective, in that they provide reasonable assurance that information required
to be disclosed by us in the reports that we file or submit under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms.
No change in our internal controls over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the three
months ended March 31, 2005 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION REQUIRED IN REPORT
ITEM 1. LEGAL PROCEEDINGS
We are involved in various legal proceedings in the ordinary course of
business.
We cannot predict the ultimate outcome of these matters, but do not believe
that such matters will have a material impact on our financial position or
results of operations.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS, AND ISSUER PURCHASES OF
EQUITY SECURITIES
The Anteon International Corporation Employee Stock Purchase Plan ("ESPP")
became effective on April 1, 2004
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. The
table below details the total shares purchased to date under the plan:
(c) Total Number of (d) Maximum Number of
(b)Average Shares Purchased as Shares that May Yet
(a) Total Number of Price Paid per Part of Publicly Be Purchased Under
Period Shares Purchased Share Announced Plans 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
January 1, 2005 14,669 $ 41.77 14,669 1,154,401
--------------- ------------ ----------------- ---------------
Total 45,599 45,599 1,154,401
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
ITEM 5. OTHER INFORMATION
NONE
ITEM 6. EXHIBITS
10.1 Form of executive retention agreement between Anteon
International Corporation and its executive officers as
entered into from time to time.
31.1 Certification of the Chief Executive Officer pursuant to
Rule 13a-14(a) of the Securities Exchange Act of 1934,
as amended.
31.2 Certification of the Chief Financial Officer pursuant to
Rule 13a-14(a) of the Securities Exchange Act of 1934,
as amended.
32.1 Certification of the Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of the Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ANTEON INTERNATIONAL CORPORATION
Date: May 16, 2005 /s/ Joseph M. Kampf
---------------- -----------------------------------------
Joseph M. Kampf - President and
Chief Executive Officer
Date: May 16, 2005 /s/ Charles S. Ream
---------------- ----------------------------------------------
Charles S. Ream - Executive Vice President and
Chief Financial Officer