10-Q 1 anteon10q.txt ANTEON 1ST QUARTER 10Q 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
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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