8-K/A 1 0001.txt AMENDED FORM 8-K SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 8-K/A CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported) October 20, 2000 ANTEON CORPORATION ------------------------------------------------------ (Exact name of registrant as specified in its charter) Virginia 333-84835 54-1023915 ---------------------------- ---------------- ------------------- (State or other jurisdiction (Commission File (IRS Employer of incorporation) Number) Identification No.) (703) 246-0200 --------------------------------------------------- (Registrants telephone number, including area code) N/A ------------------------------------------------------------- (Former name or former address, if changed since last report) 1 ANTEON CORPORATION AND SUBSIDIARIES (A Majority-Owned Subsidiary of Azimuth Technologies, Inc.) Item 7. Financial Statements and Exhibits (a) In accordance with Item 7 (a) (4) of Form 8-K, and because it was impractical to provide the required financial statements for the acquired business at the time the Company's current report on Form 8-K dated October 20, 2000 was filed, the Audited Consolidated Financial Statements for Sherikon, Inc. as of December 31, 1999 and 1998 and for the years ended December 31, 1999, 1998 and 1997 and related Independent Auditors' Report thereon, and the Unaudited Balance Sheet as of June 30, 2000 and Statements of Income for the six month period ended June 30, 2000 and 1999 are being filed as part of this Form 8-K/A beginning on page 4. (b) In accordance with Item (7) (b) (2) of Form 8-K, and because it was impractical to provide the required proforma financial information relative to the acquired business at the time the Company's current report on Form 8K dated October 20, 2000 was filed, the Unaudited Proforma Condensed Consolidated Statements of Income, Unaudited Proforma Condensed Consolidated Balance Sheet, and Notes to Unaudited Proforma Condensed Consolidated Financial Statements are being filed as part of this Form 8-K/A beginning on page 19. (c) Exhibits. Exhibit No. Document 2 Stock Purchase Agreement dated as of October 20, 2000, by and among Anteon Corporation, Sherikon Inc. and the shareholders of Sherikon, Inc. (incorporated by reference to the registrant's current report on Form 8K as filed November 6, 2000 (Commission File No. 333-84835). 2 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this amendment to be signed on its behalf by the undersigned hereunto duly authorized. ANTEON CORPORATION Date: November 13, 2000 By: ------------------------------- Joseph M. Kampf President and Chief Executive Officer Date: November 13, 2000 By: ------------------------------- Carlton B. Crenshaw Sr. Vice President of Finance and Administration and Chief Financial Officer 3 Independent AuditorS' REPORT To the Board of Directors SHERIKON, Inc. Chantilly, Virginia We have audited the accompanying consolidated balance sheets of SHERIKON, Inc. and Subsidiaries as of December 31, 1998 and 1999, and the related consolidated statements of income, cash flows, and stockholders' equity for each of the years in the three-year period ended December 31, 1997, 1998 and 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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 SHERIKON, Inc. and Subsidiaries as of December 31, 1998 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1999, in conformity with generally accepted accounting principles. Keller, Bruner & Company, LLP February 24, 2000 Bethesda, Maryland 4 SHERIKON, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, Six Months Ended June 30, -------------------------------------------- ---------------------------- 1997 1998 1999 1999 2000 ---------------------------------------------------------------------------- (Unaudited) (Unaudited) Contract revenue $ 72,353,170 $ 71,796,011 $ 62,719,045 $ 31,439,647 $ 33,149,458 ---------------------------------------------------------------------------- Direct contract costs: Direct labor 27,507,842 27,191,323 22,780,696 11,409,513 12,430,333 Direct subcontractors 9,568,779 8,990,349 6,925,619 3,518,919 4,102,174 Other direct costs 12,964,495 12,388,257 9,165,950 4,624,958 4,123,310 ---------------------------------------------------------------------------- 50,041,116 48,569,929 38,872,265 19,553,390 20,655,817 ---------------------------------------------------------------------------- Gross profit 22,312,054 23,226,082 23,846,780 11,886,257 12,493,641 Indirect expenses 19,130,084 21,023,697 19,302,673 9,713,603 10,310,595 ---------------------------------------------------------------------------- Operating income 3,181,970 2,202,385 4,544,107 2,172,654 2,183,046 ---------------------------------------------------------------------------- Interest income 16,963 42,852 200,923 69,546 121,767 Interest expense (401,382) (388,781) (220,865) (123,621) (148,721) ---------------------------------------------------------------------------- (384,419) (345,929) (19,942) (54,075) (26,954) ---------------------------------------------------------------------------- Income before income taxes and net insurance proceeds 2,797,551 1,856,456 4,524,165 2,118,579 2,156,092 Provision for income taxes (1,088,000) (727,000) (1,730,000) (837,000) (828,000) Net insurance proceeds -- -- 2,110,000 2,110,000 -- ---------------------------------------------------------------------------- Income from continuing operations 1,709,551 1,129,456 4,904,165 3,391,579 1,328,092 Loss from discontinued operations Net of income tax benefit (325,729) (572,023) -- -- -- ---------------------------------------------------------------------------- Net income $ 1,383,822 $ 557,433 $ 4,904,165 $ 3,391,579 $ 1,328,092 ============================================================================
See Notes to Consolidated Financial Statements. 5 SHERIKON, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, ------------------------- June 30, ASSETS 1998 1999 2000 ------------------------------------------------------------------------------------- (Unaudited) Current Assets Cash $ 393,912 $ 4,238,484 $ 4,199,498 Accounts receivable - contracts 15,445,452 13,426,676 14,798,142 Prepaid expenses and other 350,074 351,652 219,734 Prepaid income taxes 309,140 1,870 24,653 Deferred tax benefits 35,065 819,933 819,933 --------------------------------------- Total current assets 16,533,643 18,838,615 20,061,960 --------------------------------------- Property and Equipment Office equipment and furniture 1,051,771 1,098,515 1,096,118 Other property 246,286 316,252 348,555 Shop equipment 101,953 216,075 216,075 --------------------------------------- 1,400,010 1,630,842 1,660,748 Less accumulated depreciation 980,525 1,193,239 1,270,588 --------------------------------------- 419,485 437,603 390,160 --------------------------------------- Other Assets Notes receivable - stockholder 235,000 235,000 235,000 Deposits and other 324,522 447,491 485,972 Cash surrender value of life insurance 232,769 56,761 56,761 Deferred tax benefits 162,800 61,200 61,200 --------------------------------------- 955,091 800,452 838,933 --------------------------------------- $17,908,219 $20,076,670 $21,291,053 =======================================
See Notes to Consolidated Financial Statements. (Continued) 6
December 31, LIABILITIES AND ------------------------- June 30, STOCKHOLDERS' EQUITY 1998 1999 2000 ----------------------------------------------------------------------------------------- (Unaudited) Current Liabilities Note payable - line of credit $ 5,682,928 $ 2,892,524 $ 3,445,180 Accounts payable 2,101,388 1,857,164 1,611,914 Accrued expenses 5,883,027 6,145,639 5,693,980 Income taxes payable -- 300,321 317,413 --------------------------------------- Total current liabilities 13,667,343 11,195,648 11,068,487 --------------------------------------- Deferred Compensation 448,530 184,511 197,963 --------------------------------------- Stockholders' Equity Common stock; no par value; 1,000 shares authorized; 970 shares issued 4,093 4,093 4,093 Retained earnings 3,848,253 8,752,418 10,080,510 --------------------------------------- 3,852,346 8,756,511 10,084,603 Less cost of 30 shares of treasury stock 60,000 60,000 60,000 --------------------------------------- Total stockholders' equity 3,792,346 8,696,511 10,024,603 --------------------------------------- $17,908,219 $20,076,670 $21,291,053 =======================================
7 SHERIKON, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, Six Months Ended June 30, ------------------------------------------ -------------------------- 1997 1998 1999 1999 2000 ------------------------------------------------------------------------------------------------------------------- (Unaudited) (Unaudited) Cash Flows from Operating Activies Net income $ 1,383,822 $ 557,433 $ 4,904,165 $ 3,391,579 $ 1,328,092 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Net proceeds from life insurance -- -- (2,110,000) (2,110,000) -- Depreciation and amortization 449,095 682,658 234,832 123,878 77,349 Provision for deferred income taxes (177,430) 138,000 (683,268) -- -- (Gain) loss on disposal of property and euipment 3,310 (8,019) 7,791 1,033 2,666 Loss on disposal of inventory -- 82,752 -- -- -- Changes in assets and liabilities Accounts receivable (2,107,781) 96,151 2,018,776 3,849,631 (1,371,466) Prepaid expenses and other 71,094 (159,755) (1,578) 107,765 131,918 Pepaid income taxes 86,957 (293,833) 307,270 118,394 (22,783) Inventory 86,004 -- -- -- -- Deposits and other (29,448) (73,767) (122,969) (68,635) (38,481) Accounts payable 67,751 (1,646,171) (223,873) (650,176) (245,250) Accrued expenses 2,001,318 531,944 262,612 (447,886) (451,662) Income taxes payable (298,477) (100,290) 300,321 -- 17,092 Deferred revenue (271,815) -- -- -- -- Deferred compensation 88,858 71,234 (264,019) (273,335) 13,452 ----------------------------------------------------------------------- Net cash provided by (used in) operating activities 1,353,258 (121,663) 4,630,060 4,042,248 (559,073) ----------------------------------------------------------------------- Cash Flows from Investing Activities Disbursement of notes receivable- stockholder (5,000) (70,000) -- -- -- Net proceeds from (increase in) cash surrender value of life insurance (39,315) (69,398) 2,286,008 2,286,008 -- Purchase of property and equipment (272,579) (220,214) (260,741) (49,803) (32,572) Proceeds from sale of property and equipment -- 427,500 -- -- -- ----------------------------------------------------------------------- Net cash provided by (used in) investing activities (316,894) 67,888 2,025,267 2,236,205 (32,572) -----------------------------------------------------------------------
(Continued) 8 SHERIKON, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years Ended December 31, Six Months Ended June 30, ------------------------------------------ -------------------------- 1997 1998 1999 1999 2000 -------------------------------------------------------------------------------------------------------------------- (Unaudited) (Unaudited) Cash Flows from Financing Activities Net borrowings (payments) on line of credit (819,149) 145,332 (2,790,404) (2,813,080) 552,659 Principal payments under capital leases (110,709) (555,089) (10,351) (7,147) -- Principal payments on notes payables (52,549) (25,791) (10,000) -- -- ----------------------------------------------------------------------- Net cash provided by (used in) financing activities (982,407) (435,548) (2,810,755) (2,820,227) 552,659 ----------------------------------------------------------------------- Net increase (decrease) in cash 53,957 (489,323) 3,844,572 3,458,226 (38,986) Cash Beginning 829,278 883,235 393,912 393,912 4,238,484 ----------------------------------------------------------------------- Ending $ 883,235 $ 393,912 $ 4,238,484 $ 3,852,138 $ 4,199,498 ======================================================================= Supplemental Disclosures of Cash Flow Information: Cash payments (refunds) for: Interest $ 478,835 $ 412,574 $ 219,370 $ 123,621 $ 148,721 ======================================================================= Taxes paid $ 552,560 $ 482,917 $ 1,225,530 $ 437,000 $ 829,500 ======================================================================= Taxes received $ (142,768) $ (15,307) $ (134,364) $ (114,527) $ (18,592) =======================================================================
See Notes to Consolidated Financial Statements. 9 SHERIKON, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Retained Treasury Stock Earnings Stock Total ------------------------------------------------------------------------------------------ Balance, December 31, 1996 $ 4,903 $ 1,906,998 $ (60,000) $ 1,851,091 Net income -- 1,383,822 -- 1,383,822 ------------------------------------------------------ Balance, December 31, 1997 4,093 3,290,820 (60,000) 3,234,913 Net income -- 557,433 -- 557,433 ------------------------------------------------------ Balance, December 31, 1998 4,093 3,848,253 (60,000) 3,792,346 Net income -- 4,904,165 -- 4,904,165 ------------------------------------------------------ Balance, December 31, 1999 4,093 8,752,418 (60,000) 8,696,511 Net income for the six months ended June 30, 2000 (Unaudited) -- 1,328,092 -- 1,328,092 ------------------------------------------------------ Balance at June 30, 2000 (Unaudited) $ 4,093 $10,080,510 $ (60,000) $10,024,603 ======================================================
See Notes to Consolidated Financial Statements. 10 SHERIKON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- Note 1. Nature of Business and Significant Accounting Policies Nature of business: SHERIKON, Inc. (the Company), is a professional services firm with the majority of its revenue derived from U.S. Government contracts. A summary of the Company's significant accounting policies follows: Principles of consolidation: The consolidated financial statements include the financial statements of the Company and its wholly-owned subsidiaries, SHERIKON Space Systems, Inc., which was incorporated on September 30, 1993, and South Texas Ship Repair, Inc., which was incorporated on May 29, 1996. All significant intercompany accounts and transactions are eliminated in consolidation. As discussed more thoroughly in Note 9, the Company's Precision Metals division is presented as discontinued operations. Revenue and cost recognition: Revenue on cost-plus-fee contracts is recognized to the extent of reimbursable contract costs incurred, plus the fee earned. Services performed which have been authorized, but which may not be currently billable, are burdened with operational overhead and general and administrative expenses, and shown as unbilled costs. Revenue on firm-fixed-price contracts is recognized on the percentage of completion method based on the relationship that contract costs incurred to date bear to management's estimate of total contract costs. Revenue on time and material contracts is recognized at contractual rates as labor hours and material costs are incurred. Revenue derived from contracts awarded to the Company while under the 8(a) program is approximately $14.2 million, $8.0 million and $3.3 million in 1997, 1998 and 1999, respectively. The Company graduated from the 8(a) program in 1994. Revenue under the 8(a) program contracts for the six months ended June 30, 1999 and 2000 was approximately $4.9 and $1.9 million (unaudited), respectively. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. The Company's United States Government contracts (approximately 96%, 98% and 97% of total revenue for 1997, 1998 and 1999, respectively) are subject to government audit of direct and indirect costs. All such incurred cost audits have been completed through December 31, 1996. Management does not anticipate any material adjustments to the financial statements in subsequent periods as a result of final settlement of these contracts. Accounts receivable: In accordance with industry practice, accounts receivable relating to long-term contracts are classified as current assets, although an indeterminable portion of the amounts is not expected to be realized within one year. Income taxes: Provision for deferred income taxes are provided on a liability method, whereby, deferred tax assets are recognized for deductible temporary differences and tax credit carryforwards, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. 11 SHERIKON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- Note 1. Nature of Business and Significant Accounting Policies (Continued) Property and equipment: Property and equipment are recorded at cost. Depreciation is provided using both straight-line and accelerated methods at rates calculated to amortize the cost of the applicable assets over estimated useful lives of three to seven years. Software-related product costs: The Company capitalized certain development costs of software-related products after technological feasibility and marketability had been demonstrated. In August 1997, these products were completed. The capitalized costs were being amortized over their estimated economic useful lives. Based upon the Company's evaluation of the recoverability of these costs, the net book value of the capitalized costs in the amount of $359,416, was written off in 1998. Financial credit risk: The Company maintains its cash in bank deposit accounts which, at times, may exceed Federally insured limits. The Company has not experienced any losses in such accounts. The Company believes it is not exposed to any significant credit risk on cash. Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications: Certain reclassifications have been made to prior years' financial statements, in order for them to conform to the current presentation. Interim financial information: The accompanying unaudited financial information for the six months ended June 30, 1999 and 2000, have been prepared in accordance with generally accepted accounting principles for interim financial information and with Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. All references to amounts at June 30, 2000, and the six month periods ended June 30, 1999 and 2000, are unaudited. 12 SHERIKON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- Note 2. Accounts Receivable - Contracts Accounts receivable as of December 31, 1998 and 1999 and June 30, 2000, consist of the following:
June 30, 1998 1999 2000 -------------------------------------------------------------------------------------- (Unaudited) Amounts billed $11,340,394 $10,202,145 $12,007,550 Unbilled receivables 4,249,640 3,224,531 2,790,592 --------------------------------------- 15,590,034 13,426,676 14,798,142 Less provision for doubtful accounts 144,582 -- -- --------------------------------------- $15,445,452 $13,426,676 $14,798,142 =======================================
Unbilled accounts receivable as of 1998 and 1999 consist primarily of work performed in December and billed in January. Note 3. Notes Receivable - Stockholder The primary stockholder borrowed $235,000 from the Company. The borrowings are evidenced by notes, which are unsecured, due upon demand, and accrue interest at 5.5% per annum. Note 4. Note Payable - Line of Credit The Company's current loan agreement was entered into in October 1996 and amended October 1999. The loan agreement covers the consolidated Companies of SHERIKON, Inc. Under this agreement, the line of credit is secured by substantially all assets of the Company, is payable upon demand, and carries interest at Libor, plus 1.75%. The interest rate at December 31, 1999, was 8.229%. The maximum amount available on this line of credit is 90% of eligible billed government receivables, and 80% of eligible billed commercial receivables of SHERIKON, Inc. and SHERIKON Space Systems, Inc. If approved by the lender and in its sole discretion, 80% of the eligible billed commercial receivables of South Texas Ship Repair, Inc. may be included in the borrowing base. The borrowing base is also reduced by the face amounts of any letters of credit for the borrowers. The total of all loans outstanding at any time may not exceed $8,500,000. The loan expires in December 2000. The balance outstanding on the line of credit at December 31, 1998 and 1999, was $5,682,928 and $2,892,524, respectively. 13 SHERIKON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- Note 5. Income Taxes The provision (benefit) for income taxes charged to operations for the years ended December 31, 1997, 1998 and 1999, consist of the following: 1997 1998 1999 ----------------------------------------------------------------------------- Current: Federal tax expense $ 1,060,000 $ 490,800 $ 1,694,338 State tax expense 205,430 98,200 341,662 ----------------------------------------- 1,265,430 589,000 2,036,000 ----------------------------------------- Deferred: Federal tax expense (benefit) (148,680) 115,000 (254,650) State tax expense (benefit) (28,750) 23,000 (51,350) ----------------------------------------- (177,430) 138,000 (306,000) ----------------------------------------- $ 1,088,000 $ 727,000 $ 1,730,000 ========================================= Net deferred tax amounts as of December 31, 1998 and 1999, consist of the following: 1998 1999 ------------------------------------------------------------------------------- Deferred tax liabilities: Property and equipment $ (7,952) $ (9,380) Prepaid expenses (15,927) (33,454) Contractually unbillable (535,582) (286,174) ----------------------------- (559,461) (329,008) ----------------------------- Deferred tax assets: Accrued vacation and salaries 197,979 226,602 Deferred compensation 170,735 70,566 Accrued expenses 367,676 912,973 Receivable reserves 20,936 -- ----------------------------- 757,326 1,210,141 ----------------------------- $ 197,865 $ 881,133 ============================= 14 SHERIKON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- Note 5. Income Taxes (Continued) The deferred tax amounts mentioned above have been classified on the accompanying consolidated balance sheets as of December 31, 1998 and 1999, as follows: 1998 1999 -------------------------------------------------------------------------------- Current assets $ 35,065 $819,933 Non-current assets 162,800 61,200 --------------------------- $197,865 $881,133 =========================== A reconciliation of the income tax provision and the amount computed by applying the statutory U.S. and state income tax rates for the years ended December 31, 1997, 1998 and 1999, is as follows:
1997 1998 1999 ------------------------------------------------------------------------------------- Amount at statutory U.S. rate $ 772,000 $ 318,000 $1,538,000 State taxes net of U.S. tax benefit 92,000 40,000 180,000 Expenses not deductible for tax purposes and miscellaneous reconciling items 24,000 20,000 12,000 -------------------------------------- $ 888,000 $ 378,000 $1,730,000 ====================================== Effective tax rate 39.10% 40.40% 38.20%
The income tax expense recorded for the six months ended June 30, 1999 and June 30, 2000 (unaudited), was based on the Parent's effective tax rate for 1998 and 1999. Note 6. Depreciation and Amortization Depreciation and amortization charged to expense for the years ended December 31, 1997, 1998 and 1999, is as follows:
Estimated Asset Category Useful Lives 1997 1998 1999 --------------------------------------------------------------------------------------------------- Office equipmemt and furniture 3 - 5 years $ 171,386 $ 182,640 $ 152,087 Office Property 2 - 7 years 40,199 43,518 51,063 Shop equipment 3 - 5 years 137,510 97,084 31,682 ------------------------------------------ 349,095 323,242 234,832 Software related products 5 years 100,000 359,416 - ------------------------------------------ $ 449,095 $ 682,658 $ 234,832 ==========================================
15 SHERIKON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- Note 7. Profit Sharing Plan The Company maintains a defined contribution profit sharing plan under the provisions of Section 401(k) of the Internal Revenue Code. All employees completing 500 hours and three consecutive months of service, and who are age 21 or older are eligible to participate. The plan provides for a discretionary contribution by the Company determined by the Board of Directors based primarily on earnings. Employees are vested in the discretionary contributions in accordance with a graded vesting schedule, and are fully vested after five years of participation. Discretionary contributions were $455,872, $351,170 and $334,438 for the years ended December 31, 1997, 1998 and 1999, respectively. Note 8. Leasing Arrangements The Company leases all of its office space and rents equipment under lease agreements which expire through 2011. Some of these leases are subject to increases due to adjustments in the Consumer Price Index, operating costs and real estate taxes. The minimum annual lease payments under noncancelable agreements accounted for as operating leases, are as follows: Years ending December 31, -------------------------------------------------------------------------------- 2000 $2,261,910 2001 1,688,940 2002 1,209,833 2003 1,037,764 2004 840,384 Thereafter 2,325,202 ---------- $9,364,033 ========== Total rent expense of $3,184,670, $3,076,230 and $2,180,891 was charged to operations for the years ended December 31, 1997, 1998 and 1999, respectively. Note 9. Discontinued Operations On March 1, 1995, the Company purchased the inventory of Modern Metal Manufacturing, Inc. The purchase resulted in $420,349 of intangible asset. In 1996, the unamortized balance of the intangible asset, in the amount of $396,996 was charged to amortization expense. This operation was renamed SHERIKON Precision Metals. 16 SHERIKON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- Note 9. Discontinued Operations (Continued) In September 1998, the Company decided to discontinue operations of the Precision Metals division. Accordingly, the operating results of the division have been segregated from continuing operations and reported as a separate line item on the Consolidated Statements of Income. The Company has restated its prior financial statements to present the operating results of Precision Metals as discontinued operations. The Company either sold or disposed of all property and equipment of the line of business during September and October of 1998. The estimated loss from operations and on disposal of the discontinued operations, are as follows:
1997 1998 1999 ---------------------------------------------------------------------------------------- Operating loss, net of income tax benefit of $200,000 and $292,000 for 1997 and1998 $(325,729) $(478,862) $ -- Loss on disposal, net of income tax benefit of $0 and $57,000 in 1997 and 1998 -- (93,161) -- -------------------------------- Loss from discontinued operations $(325,729) $(572,023) $ -- ================================
Note 10. Deferred Compensation The Company currently has a deferred compensation agreement with one key employee. The agreement requires the Company to pay the employee $113,379 per year for 15 years upon attainment of age sixty-five. Upon Company approval, benefits at a reduced percentage will be provided in the event of early retirement, or if the employee becomes disabled. If employment is terminated for any reason, the employee is entitled to benefits based upon a vesting schedule. The agreement further stipulates that the entire benefit will be provided to the designated beneficiaries upon the death of the employee. The present value of the estimated liability under the agreement is being accrued over the expected remaining years of employment. The Company is the owner and beneficiary of one life insurance policy, with a face amount totaling $411,000 on the life of the above-mentioned employee, which will fund the potential benefits owed by the Company. As more fully described in Note 11, a deferred compensation agreement became payable in 1999 as the result of the death of Edward R. Fernandez. The deferred compensation expense for the years ended December 31, 1997, 1998 and 1999, was $88,858, $71,234 and $26,907, respectively, which are the payments that would be required to fund the present value of the benefits discounted at 7.5%. The plan does not qualify under the Internal Revenue Code and therefore, tax deductions are allowable only when the benefits are paid. 17 SHERIKON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- Note 10. Deferred Compensation (Continued) The Company also provided one of its executives with a split dollar life insurance policy whereby the Company paid the premiums on the executive's behalf. The cumulative premiums paid were $120,000, $212,430 and $277,450, at December 31, 1997, 1998 and 1999, respectively. The amount of cumulative premiums will be reimbursed to the Company from proceeds from the insurance policy or its cash surrender value. Note 11. Net Insurance Proceeds On January 31, 1999, Edward R. Fernandez, SHERIKON, Inc.'s founder, President, and Chief Executive Officer, died in the crash of his private airplane. SHERIKON, Inc. maintained various life insurance policies on Mr. Fernandez and had a deferred compensation agreement which became payable in April 1999, as a lump sum payment to Mr. Fernandez's wife. The after tax proceeds from the insurance policies, less the present value of the deferred compensation obligation, net of its tax benefit, was approximately $2,110,000. Note 12. Litigation The Company is involved in various legal actions arising in the normal course of business. After taking into consideration legal counsel's evaluation of such actions, management is of the opinion that any potential liability, arising from these claims against the Company, not covered by insurance, would be minimal. 18 UNAUDITED PROFORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION The unaudited proforma condensed consolidated financial information has been prepared by Anteon's management and gives effect to the acquisition of Analysis & Technology, Inc. (A&T) completed on June 23, 1999, the acquisition of Sherikon, Inc. (Sherikon) completed on October 20, 2000, the offering of the initial senior subordinated notes completed on May 11, 1999, the initial borrowing under the new credit facility on June 23, 1999, the repayment of amounts outstanding under the old credit facility on June 23, 1999 and the repayment of all of the outstanding indebtedness of A&T and Sherikon on June 23, 1999, and October 20, 2000, respectively. The unaudited proforma condensed consolidated statement of operations for the year ended December 31, 1999, has been prepared to give effect to the A&T and Sherikon acquisitions as if they had occurred on January 1, 1999. The unaudited proforma condensed consolidated statement of operations for the six-month period ended June 30, 2000, has been prepared to give effect to the Sherikon acquisition as if it had occurred as of January 1, 1999. The unaudited proforma condensed consolidated balance sheet as of June 30, 2000, has been prepared to give effect to the Sherikon acquisition as if it had occurred as of June 30, 2000. The proforma adjustments, which are based on available information and certain assumptions that Anteon believes are reasonable under the circumstances, are applied to the historical financial statements of Anteon, A&T and Sherikon. The acquisitions are accounted for under the purchase method of accounting. Anteon's allocation of the A&T purchase price is based upon independent appraisals and other studies completed subsequent to the A&T acquisition. Anteon's allocation of the Sherikon purchase price is based upon the preliminary estimated fair value of assets acquired and liabilities assumed. The purchase price allocations for the Sherikon acquisition reflected in the accompanying unaudited proforma condensed consolidated financial statements may be different from the final allocation of the purchase price, which will occur upon completion of an independent appraisal and other studies, and any such differences may be material. The accompanying unaudited proforma condensed consolidated financial information should be read in conjunction with the historical financial statements and the notes thereto for Anteon, A&T and Sherikon. The unaudited proforma condensed consolidated financial information is provided for informational purposes only and do not purport to represent what Anteon's financial position or results of operations would actually have been had the acquisitions occurred on such dates or to project Anteon's results of operations or financial position for any future period. 19 Anteon Corporation Unaudited Proforma Condensed Consolidated Statement of Operations (in thousands)
Year ended December 31, 1999 ------------------------------------------------------------ Historical Historical Proforma Acquisition Proforma Anteon(a) A&T(b) Adjustments Anteon ------------------------------------------------------------ Revenues $ 400,850 $ 90,097 -- $ 490,947 Costs of revenues 353,245 76,444 -- 429,689 ------------------------------------------------------------ Gross profit 47,605 13,653 -- 61,258 Operating Expenses: General and administrative expenses 25,610 7,312 (292)(d) 32,630 Amortization of noncompete agreements 909 -- -- 909 Goodwill amortization 3,440 579 515(f) 4,534 Intangible Amortization -- -- 1,717(h) 1,717 Costs of acquisitions/acquisition related severance costs 2,316 638 -- 2,954 ------------------------------------------------------------ Total operating expenses 32,275 8,529 1,940 42,744 ------------------------------------------------------------ Operating income 15,330 5,124 (1,940) 18,514 Other income (2,585) -- -- (2,585) Interest expense, net of interest income 16,042 93 5,860(j) 21,995 Minority interest in earnings of subsidiary 40 -- -- 40 ------------------------------------------------------------ Income (loss) before provision for income taxes 1,833 5,031 (7,800) (936) Provision for income taxes 1,543 2,240 (2,839)(l) 944 ------------------------------------------------------------ Net income (loss) $ 290 $ 2,791 $ (4,961) $ (1,880) ============================================================ Year ended December 31, 1999 --------------------------------------------------------- Historical Proforma Acquisition Proforma Sherikon(c) Adjustments Consolidated --------------------------------------------------------- Revenues $ 62,719 -- $ 553,666 Costs of revenues 38,872 -- 468,561 --------------------------------------------------------- Gross profit 23,847 -- 85,105 Operating Expenses: General and administrative expenses 19,303 (1,939)(e) 49,994 Amortization of noncompete agreements -- -- 909 Goodwill amortization -- 1,077(g) 5,611 Intangible Amortization -- 257(i) 1,974 Costs of acquisitions/acquisition related severance costs -- -- 2,954 --------------------------------------------------------- Total operating expenses 19,303 (605) 61,442 --------------------------------------------------------- Operating income 4,544 605 23,663 Other income -- -- (2,585) Interest expense, net of interest income 20 2,802(k) 24,817 Minority interest in earnings of subsidiary -- -- 40 --------------------------------------------------------- Income (loss) before provision for income taxes 4,524 (2,197) 1,391 Provision for income taxes 1,730 (368)(l) 2,306 --------------------------------------------------------- Net income (loss) $ 2,794 $ (1,829) $ (915) =========================================================
See accompanying notes to unaudited proforma consolidated financial information. 20 Anteon Corporation Unaudited Proforma Condensed Consolidated Statement of Operations (in thousands)
Six Months Ended June 30, 2000 ------------------------------------------------------------- Proforma Historical Historical Acquisition Proforma Anteon Sherikon (c) Adjustments Consolidated ------------------------------------------------------------- Revenues $ 255,984 $ 33,150 -- $ 289,134 Costs of revenues 222,608 20,656 -- 243,264 ------------------------------------------------------------- Gross profit 33,376 12,494 -- 45,870 Operating Expenses: General and administrative expenses 18,690 10,311 (970)(e) 28,031 Amortization of noncompete agreements 448 -- -- 448 Goodwill amortization 2,204 -- 539(g) 2,743 Intangible amortization 1,717 -- 129(i) 1,846 Costs of acquisitions 19 -- -- 19 ------------------------------------------------------------- Total operating expenses 23,078 10,311 (302) 33,087 ------------------------------------------------------------- Operating income 10,298 2,183 302 12,783 Other income -- -- -- -- Interest expense, net of interest income 10,744 27 1,401(k) 12,172 Minority interest in earnings of subsidiary 2 -- -- 2 ------------------------------------------------------------- Income (loss) before provision for income taxes (448) 2,156 (1,099) 609 Provision (benefit) for income taxes (261) 828 600(l) 1,167 ------------------------------------------------------------- Net income (loss) $ (187) $ 1,328 $ (1,699) $ (558) =============================================================
See accompanying notes to unaudited proforma consolidated financial information. 21 The following adjustments have been reflected in the Unaudited Proforma Condensed Consolidated Statements of Operations: (a) The historical results of operations of Anteon for the year ended December 31, 1999 exclude an extraordinary loss of $463,000 (net of taxes of $309,000) associated with the write-off of deferred financing costs related to the old credit facility. (b) To reflect historical results of A&T. (c) To reflect historical results of operations of Sherikon, Inc. The historical results of operations of Sherikon for the year ended December 31, 1999 exclude $2,110,000 of net insurance proceeds received upon the death of its founder, President and Chief Executive Officer. (d) To reflect cost savings associated with the elimination of general and administrative expenses of A&T operating as a public company, including fees payable to the board of directors of A&T. (e) To reflect reductions in Sherikon's historical executive compensation costs, duplicate facilities costs and other costs that will be eliminated subsequent to the acquisition, as follows:
Year Ended Six Months Ended December 31, 1999 June 30, 2000 ---------- ---------- Executive compensation $1,277,000 $ 639,000 Duplicate facilities 637,000 319,000 Other 25,000 12,000 ---------- ---------- $1,939,000 $ 970,000 ========== ==========
(f) To reflect the amortization of goodwill of $72,965,000 from the acquisition of A&T, determined as follows:
Year Ended December 31, 1999 ----------------- Incremental goodwill amortization expense from the A&T acquisition for the period January 1, 1999 to June 23, 1999 $ 1,094,000 Elimination of historical A&T goodwill (579,000) ----------- Pro forma adjustment to A&T goodwill amortization expense $ 515,000 ===========
The acquisition of A&T was accounted for using the purchase method whereby the net tangible and identifiable intangible assets acquired and liabilities assumed were recognized at their 22 estimated fair values at the date of combination. Amortization expense on the goodwill from the acquisition is being amortized on a straight-line basis over 30 years. (g) To record amortization of goodwill of $21,344,000 associated with the purchase of Sherikon. Goodwill will be amortized on a straight line basis over approximately 20 years.
Year Ended Six Months Ended December 31, 1999 June 30, 2000 ----------------- ------------- Amortization expense from the acquisition $1,077,000 $ 539,000
The acquisition of Sherikon will be accounted for using the purchase method whereby the net tangible and identifiable intangible assets acquired and liabilities assumed will be recognized at their estimated fair values at the date of combination. The allocation of the Sherikon purchase price is based upon the preliminary estimated fair value of assets acquired and liabilities assumed. The purchase price allocations reflected in the accompanying unaudited proforma condensed consolidated financial statements may be different from the final allocation of the purchase price, which will occur upon completion of an independent appraisal and other studies, and any such differences may be material. (h) To record amortization expense related to the identifiable intangible assets associated with the acquisition of A&T. The Company obtained an independent appraisal in June 2000 for the allocation of the purchase price related to the acquisition of A&T. Based upon the results of the valuation the company recorded the following intangible assets:
Year Ended December 31, 1999 ----------------- Workforce $2,500,000 7 years $ 357,000 Contract Backlog $6,800,000 5 years 1,360,000 ---------- $1,717,000 ==========
(i) To record amortization expense related to the preliminary estimate of the fair value of identifiable intangible assets associated with the acquisition of Sherikon, as follows:
Year Ended Six Months Ended December 31, 1999 June 30, 2000 ----------------- ------------- Workforce $1,100,000 7 years $ 157,000 $ 79,000 Contract Backlog $ 500,000 5 years 100,000 50,000 ---------- ---------- $ 257,000 $ 129,000 ========== ==========
(j) To reflect incremental interest expense associated with the purchase of A&T (1) the 12% Senior Subordinated Notes Due 2009, (2) initial borrowings under the new credit facility and (3) the amortization of deferred financing costs. Also reflects the elimination of interest expense associated with the old credit facility. 23 The interest rates used above are the interest rates that we estimate will be applicable. The Revolving Credit Facility will bear interest at adjustable rates. An increase of 1/8% in the interest rate applicable to the Revolving Credit Facility will result in proforma interest expense of $24,872 and proforma net loss of $(948) for the year ended December 31, 1999. (k) To record interest expense at a rate of 11.75% (the company's average incremental borrowing rate) related to the additional average borrowings of $22.1 million from the Sherikon acquisition and to record a reduction in interest income at a rate of 5.0% to reflect the use of the available cash balance of $4.1 million. (l) To recognize Federal and state income taxes at a combined rate of 40.0%, after adjusting income (loss) before taxes for non-deductibility of goodwill amortization expense. 24 Anteon Corporation Unaudited Proforma Condensed Consolidated Balance Sheet (in thousands)
As of June 30, 2000 ----------------------------------------------------------- Proforma Historical Historical Acquisition Proforma Anteon Sherikon (a) Adjustments (b) Consolidated ----------------------------------------------------------- Current assets: Cash and cash equivalents $ 1,309 $ 4,199 ($ 4,115) $ 1,393 Accounts receivable, net 120,304 14,798 -- 135,102 Prepaid expenses and other current assets 6,549 748 -- 7,297 ----------------------------------------------------------- Total current assets 128,162 19,745 (4,115) 143,792 Due from parent Property and equipment, at cost, net of accumulated depreciation and amortization 20,056 390 -- 20,446 Goodwill, net of accumulated amortization 122,786 -- 22,884 145,170 Other Intangible Assets, net 7,583 -- 1,600 9,183 Other assets, net 9,091 778 -- 9,869 ----------------------------------------------------------- Total assets $ 287,678 $ 20,913 $ 18,869 $ 328,460 =========================================================== Liabilities and Stockholders' Equity Current liabilities: Accounts Payable $ 19,680 $ 1,612 -- $ 21,292 Accrued Expenses 37,827 5,694 1,244 44,765 Other current liabilities, net 369 3,445 (1,045) 2,769 Business purchase consideration payable -- -- 4,474 4,474 Term loan facility, current portion 2,813 -- -- 2,813 ----------------------------------------------------------- Total current liabilities 60,689 10,751 4,673 76,113 Revolving credit Facility 21,600 -- 22,112 43,712 Term loan Facility 57,187 -- -- 57,187 Senior subordinated notes payable 100,000 -- -- 100,000 Business purchase consideration payable -- -- 2,002 2,002 Noncurrent deferred tax liabilities, net 8,349 (61) 640 8,928 Other long term liabilities 1,482 198 467 2,147 ----------------------------------------------------------- Total liabilities 249,307 10,888 29,894 290,089 Minority interest in subsidiaries 627 -- -- 627 Stockholders' equity: Common stock 178 4 (4) 178 Additional paid-in capital 33,038 -- -- 33,038 Treasury stock (5) (60) 60 (5) Accumulated other comprehensive income (22) -- -- (22) Retained earnings 4,555 10,081 (10,081) 4,555 ----------------------------------------------------------- Total stockholders' equity 37,744 10,025 (10,025) 37,744 ----------------------------------------------------------- Total liabilities and stockholders' equity $ 287,678 $ 20,913 $ 19,869 $ 328,460 ===========================================================
See accompanying notes to unaudited proforma consolidated financial information. 25 Notes to Unaudited Pro Forma Condensed Consolidated Balance Sheet The following adjustments have been reflected in the Unaudited Pro Forma Condensed Consolidated Balance Sheet: (a) To reflect the historical financial position of Sherikon. Certain reclassifications of Sherikon's historical balance sheet accounts have been made to conform to the presentation of Anteon. (b) The Sherikon acquisition will be accounted for as a purchase pursuant to APB Opinion No. 16. Accordingly, the identifiable tangible and intangible assets acquired and liabilities assumed will be presented at their estimated fair values as of the date of combination. The pro forma adjustments herein are based on management's preliminary estimates of fair value. The final allocation of the purchase price will be based on an independent appraisal and other studies which, when completed, may differ materially from the preliminary purchase price allocation herein. The purchase price paid for Sherikon is as follows: Cash consideration paid at closing $20,800,000 Bonuses paid to Sherikon management at closing 5,005,000 Business purchase consideration payable, discounted to present value at 11.75% 6,476,000 Guaranteed future bonuses to management, discounted to present value at 11.75% 1,512,000 Estimated costs and expenses 386,000 ----------- Total consideration $34,179,000 ===========
The cash consideration portion of the acquisition was financed with approximately $22.1 million of draws from Anteon's revolving credit facility and approximately $4.1 million of available cash. At closing, approximately $590,000 of Sherikon debt was repaid. The preliminary allocation of the purchase price is as follows: Historical net assets of Sherikon $11,035,000 Accrual for termination and duplicate facilities (200,000) Deferred taxes on purchase accounting adjustments (640,000) Goodwill 22,384,000 Workforce 1,100,000 Contract backlog 500,000 ----------- Total consideration $34,179,000 ===========
The adjustment for the elimination of Sherikon's historical stockholders' equity in the accompanying pro forma condensed consolidated balance sheet differs from the amount described above by approximately $1,010,000 due to the timing of the acquisition. 26