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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 27, 1999
REGISTRATION NO. 333-84835
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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ANTEON CORPORATION
(Exact name of Registrant as specified in its charter)
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VIRGINIA 7379 54-1023915
(State or other jurisdiction of (Primary Standard Industrial (IRS Employer Identification
incorporation or organization) Classification Code Number) No.)
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3211 JERMANTOWN ROAD, SUITE 700
FAIRFAX, VIRGINIA, 22030-2801
703-246-0200
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
CURTIS L. SCHEHR, ESQ.
VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
ANTEON CORPORATION
3211 JERMANTOWN ROAD, SUITE 700
FAIRFAX, VIRGINIA, 22030-2801
703-246-0200
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies to:
CARL L. REISNER, ESQ.
PAUL, WEISS, RIFKIND, WHARTON & GARRISON
1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019-6064
212-373-3000
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APPROXIMATE DATE OF PROPOSED SALE TO PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
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If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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TABLE OF ADDITIONAL REGISTRANTS
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PRIMARY
STATE OR OTHER STANDARD IRS
JURISDICTION OF INDUSTRIAL EMPLOYER
INCORPORATION CLASSIFICATION IDENTIFICATION
NAME OR ORGANIZATION CODE NUMBER NUMBER
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Vector Data Systems, Inc....................... Virginia 8711 54-1559969
Techmatics, Inc................................ Virginia 8711 54-1194322
Analysis & Technology, Inc..................... Connecticut 8711 95-579365
Interactive Media Corp......................... Delaware 7373 25-1096900
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ADDRESS, INCLUDING ZIP CODE, AND
TELEPHONE NUMBER, INCLUDING AREA
CODE, OF REGISTRANTS' PRINCIPAL
NAME EXECUTIVE OFFICES
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Vector Data Systems, Inc....................... 1100 South Washington St.
Alexandria, VA 22030-2801
Techmatics, Inc................................ 3211 Jermantown Road
Fairfax, VA 22030-2801
Analysis & Technology, Inc..................... Technology Park
Route 2, P.O. Box 220
North Stonington, CT 06359
Interactive Media Corp......................... Technology Park
Route 2, P.O. Box 220
North Stonington, CT 06359
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PROSPECTUS
ANTEON CORPORATION
EXCHANGE OFFER FOR $100,000,000 OF ITS
12% SENIOR SUBORDINATED NOTES DUE 2009
TERMS OF THE EXCHANGE OFFER
- It will expire at 5:00 p.m., New York City time, on Tuesday, September 28,
1999, unless we extend it.
- If all the conditions to this exchange offer are satisfied, we will
exchange all old notes that are validly tendered and not withdrawn.
- You may withdraw your tender of old notes at any time before the
expiration of this exchange offer.
- The exchange notes that we will issue you in exchange for your old notes
will be substantially identical to your old notes except that, unlike your
old notes, the exchange notes will have no transfer restrictions or
registration rights.
- The exchange notes that we will issue you in exchange for your old notes
are new securities with no established market for trading.
BEFORE PARTICIPATING IN THIS EXCHANGE OFFER, PLEASE REFER TO THE SECTION IN
THIS PROSPECTUS ENTITLED "RISK FACTORS" COMMENCING ON PAGE 15.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
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The date of this prospectus is August 27, 1999.
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YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE
ON THE DATE OF THIS DOCUMENT.
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TABLE OF CONTENTS
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PAGE
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FORWARD-LOOKING STATEMENTS..................... ii
SUMMARY........................................ 1
RISK FACTORS................................... 15
USE OF PROCEEDS................................ 25
CAPITALIZATION................................. 26
SELECTED CONSOLIDATED FINANCIAL DATA........... 35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS................................... 39
BUSINESS....................................... 50
MANAGEMENT..................................... 69
CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS................................. 77
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT............................... 78
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DESCRIPTION OF OTHER MATERIAL AGREEMENTS....... 79
THE EXCHANGE OFFER............................. 82
DESCRIPTION OF THE NOTES....................... 90
CERTAIN UNITED STATES FEDERAL INCOME TAX
CONSIDERATIONS............................... 129
PLAN OF DISTRIBUTION........................... 133
LEGAL MATTERS.................................. 134
WHERE YOU CAN OBTAIN ADDITIONAL AVAILABLE
INFORMATION.................................. 134
DOCUMENTS INCORPORATED BY REFERENCE............
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS..... F-1
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FORWARD-LOOKING STATEMENTS
This prospectus includes and incorporates by reference forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. These statements relate to analyses and other information which are based
on forecasts of future results and estimates of amounts not yet determinable.
These statements also relate to our future projects, developments and business
strategies.
These forward-looking statements are identified by their use of terms and
phrases, such as "anticipate," "believe," "could," "estimate," "expect,"
"intend," "may," "plan," "predict," "project," "will" and similar terms and
phrases, and may also include references to assumptions. These statements are
contained in the sections entitled " Summary," "Risk Factors," "Management's
Discussion and Analysis of Financial Condition and Results of Operations--Anteon
Corporation," "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Analysis & Technology, Inc.," "Business" and other
sections of this prospectus.
Such forward-looking statements include, but are not limited to:
- funded backlog;
- our expectations regarding the Federal government's downsizing and
increased reliance on outsourcing of services;
- our financial condition and liquidity, as well as future cash flows and
earnings; and
- Analysis & Technology, Inc.'s financial condition and liquidity, as well
as future cash flows and earnings.
Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause actual results to be materially
different. Such factors include, but are not limited to, the following:
- the integration of Analysis & Technology, Inc. without disruption to our
other business activities;
- changes in general economic and business conditions;
- changes in Federal government procurement laws, regulations and policies;
- the number and type of contracts and task orders awarded to Anteon;
- technological changes;
- the ability to attract and retain qualified personnel;
- changes in Federal government procurement budgets;
- industry capacity;
- competition; and
- our ability to retain our contracts during any rebidding process.
Our risks are more specifically described in "Risk Factors." If one or more
of these risks or uncertainties materialize, or if underlying assumptions prove
incorrect, actual results may vary materially from those expected, estimated or
projected.
We do not undertake to update our forward-looking statements or risk factors
to reflect future events or circumstances.
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SUMMARY
THIS SUMMARY MAY NOT CONTAIN ALL OF THE INFORMATION THAT MAY BE IMPORTANT TO
YOU. WE ENCOURAGE YOU TO READ THE PROSPECTUS, INCLUDING THE FINANCIAL DATA AND
RELATED NOTES, IN ITS ENTIRETY.
UNLESS THE CONTEXT OTHERWISE REQUIRES, AS USED IN THIS PROSPECTUS, ALL
REFERENCES TO (I) "ANTEON," "WE" AND "US" ARE TO ANTEON CORPORATION AND ITS
SUBSIDIARIES, AND (II) "A&T" ARE TO ANALYSIS & TECHNOLOGY, INC. AND ITS
SUBSIDIARIES. THE TERM "INITIAL NOTES" REFERS TO THE 12% SENIOR SUBORDINATED
NOTES DUE 2009 THAT WERE ISSUED ON MAY 11, 1999. THE TERM "EXCHANGE NOTES"
REFERS TO THE 12% SENIOR SUBORDINATED NOTES DUE 2009 OFFERED WITH THIS
PROSPECTUS. THE TERM "NOTES" REFERS TO THE INITIAL NOTES AND THE EXCHANGE NOTES
COLLECTIVELY. UNLESS OTHERWISE INDICATED, THE INDUSTRY DATA IS DERIVED FROM
PUBLICLY AVAILABLE SOURCES, WHICH WE HAVE NOT INDEPENDENTLY VERIFIED. YOU SHOULD
PAY SPECIAL ATTENTION TO THE "RISK FACTORS" SECTION TO DETERMINE WHETHER TO
PARTICIPATE IN THIS EXCHANGE OFFER.
THIS PROSPECTUS CONTAINS REFERENCES TO AND DESCRIPTIONS OF A NUMBER OF
INDUSTRY-SPECIFIC TERMS. FOR YOUR CONVENIENCE, THE "GLOSSARY OF TERMS" THAT
APPEARS LATER IN THIS PROSPECTUS PROVIDES EXPLANATIONS OF SUCH TERMS.
THE COMPANY
Anteon is a leading provider of advanced information technology and
engineering systems and services. We serve hundreds of governmental clients,
principally within the U.S. Federal government, from 39 offices worldwide. We
have performed work for the U.S. Congress and all 14 Cabinet-level government
agencies, designing, maintaining and upgrading critical systems such as defense,
intelligence, emergency response, logistics support and financial management
systems. For the year ended December 31, 1998, we performed work on
approximately 3,000 task orders on more than 500 contracts. In addition, during
the past four years, we have increased revenues at a 32.0% compound annual
growth rate including a 19.9% compound annual growth rate excluding
acquisitions. Pro forma for our acquisition of A&T described below under "--The
Transactions," our 1998 revenues and Adjusted EBITDA (as defined) were $450.8
million and $35.1 million, respectively. Similarly, cash flows used in
operations on a pro forma basis were $2.3 million for 1998.
The Federal government is among the world's largest purchasers of
information technology, with total expenditures in fiscal 1999 expected to be in
excess of $30 billion and expected to increase by approximately 4.4% per annum
from $29.5 billion in 1998 to $35.1 billion in 2002. Due to projected increased
Federal government outsourcing, the amount of information technology services
procured from contractors is expected to increase at a faster rate, by
approximately 6.9% per annum from 1998 to 2002. We believe that the emphasis of
the Federal government on downsizing and budget constraints for large new
projects will continue to result in the increased use of technology to enhance
productivity with expenditures focused on upgrading existing equipment and
systems, including many that we designed and are currently supporting. In this
environment, contractors like us that are capable of providing complete
end-to-end technology services across a number of applications are
well-positioned to take advantage of the opportunities presented by these
trends.
We have developed over a 22-year period the expertise and capabilities to
deliver a broad range of technology solutions. For example, we are currently
working with the U.S. Federal Emergency Management Agency to design and
integrate the National Emergency Management Information System, a management
information system that enables the White House and other governmental offices
to effectively monitor and mobilize multiple agencies and financial resources in
response to national emergencies. This program is the largest WindowsNT
implementation in the Federal government and we believe it is the most
comprehensive emergency management system available. In addition, we believe
there is significant potential for generating additional revenues based on the
knowledge we have acquired in designing and integrating this system and its wide
applicability to other government agencies and projects. Another example of our
work is the logistics system we developed for the U.S. Air Force called Cargo
Movement Operation System ("CMOS"). CMOS tracks all equipment and cargo movement
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operations for the Air Force world wide. This system is the first standard U.S.
Air Force client/server application to be installed. CMOS is currently installed
at air bases worldwide, and was recently chosen by the Office of the Secretary
of Defense to be the model transportation system for the Department of Defense.
As a result of developing and integrating CMOS, we were awarded another major
logistics automation contract to develop a model logistics system to manage the
transportation requirements of all branches of the U.S. armed forces.
COMPETITIVE STRENGTHS
We attribute our growth and performance to several factors, including the
following:
- BROAD ENGINEERING AND INFORMATION TECHNOLOGY CAPABILITIES. We have
developed comprehensive information technology and engineering expertise
and capabilities over our 22-year history of providing support for
critical applications within the Federal government's military and
intelligence infrastructure. Our employees are highly trained, enabling us
to provide services for many complex governmental systems, including
defense, intelligence, emergency response, logistics support and financial
management.
- LEADING FEDERAL GOVERNMENT SYSTEMS INTEGRATOR AND STRONG REPUTATION. We
believe that the Federal government primarily uses three criteria in
seeking suppliers of technical systems and services: the ability to
deliver a broad range of sophisticated technical capabilities; a track
record of excellence in servicing the needs of the Federal government; and
the ability to deliver at a competitive price. Based on these criteria, we
have developed a reputation as a premier provider to the Federal
government and we have received numerous awards for our broad technical
expertise and consistently high quality performance. In March, 1999 we
were ranked as the No. 1 systems integrator in a survey of over 1,200
Federal government customers by FEDERAL COMPUTER WEEK, a leading
publication in the Federal government information technology sector. We
believe that our demonstrated capabilities and reputation for service
excellence have allowed us to maintain our position as an incumbent
service provider on 100% of our major contracts that have been recompeted
over the past three years.
- DIVERSE CUSTOMER AND CONTRACT BASE; STRONG INCUMBENT POSITIONS. We have a
diverse customer base with hundreds of governmental clients worldwide,
which has included all 14 Cabinet-level agencies and all branches of the
military. In 1998 we performed work on approximately 3,000 task orders,
and since 1996 we have completed approximately 7,000 task orders for our
clients. In executing these orders, we have acquired extensive knowledge
of the particular information technology needs of our clients, and we
believe that our typical position as the incumbent designer and integrator
enables us to anticipate their changing technical requirements. These
factors often position us as the preferred provider of ongoing support,
upgrades and next generation systems development. As a result of these
relationships we have developed a backlog of approximately $1.3 billion
(and, after giving pro forma effect to the Acquisition, a backlog of $2.1
billion as of June 30, 1999), providing significant predictability of
revenues. For a further discussion of management's calculation of our
backlog, please refer to the section in this prospectus entitled
"Business--Backlog."
- STRONG OPERATIONS MANAGEMENT; LOW COST STRUCTURE. Our focus on control of
indirect costs and cost center flexibility has permitted us to increase
profitability and we believe that we have achieved one of the lowest cost
structures in the industry. Management has developed rigorous control
procedures to mitigate losses in "at risk" situations where task order
performance has commenced but funding or appropriation has not been
formally authorized or where contract performance has begun because
management considers the award of a contract to be imminent. We also
employ management information and resource management systems to maximize
operational efficiency and reduce indirect costs. Our indirect costs have
been reduced to 15% of revenues in 1998 compared to an industry peer group
average estimated by management to be between 18% to 20%,
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and we have increased EBITDA margins from 1.9% in 1995 to 6.6% in 1998,
after giving pro forma effect to the Techmatics acquistion.
- WELL-POSITIONED TO CAPITALIZE ON INDUSTRY GROWTH. Federal government
information technology spending will total approximately $30 billion in
1999 according to the Office of Management and Budget and is expected to
increase to $35.1 billion in 2002. In addition, the outsourced portion of
this spending is expected to increase from 78% in 1998 to 86% in 2002. Due
to this increased outsourcing, the amount of information technology
services procured from contractors is estimated to increase at 6.9% per
year from 1998 to 2002. Anteon believes that growth in Federal government
information technology spending will be driven by government downsizing,
increased outsourcing and increasing attempts to utilize more efficient
means of procurement. We expect a significant portion of this growth to be
derived from major government-wide acquisition contract vehicles, such as
the $25 billion GSA ANSWER multiple-award contract and the $10 billion
Department of Transportation ITOP II multiple-award contract. We are one
of a limited number of qualified suppliers under both of these major
contract vehicles. We believe that our size, capabilities, reputation and
long-standing relationships combined with our position as incumbent
supplier to many Federal government agencies, position us to capitalize on
the opportunities presented by these industry trends.
- STRONG MANAGEMENT AND HIGHLY EXPERIENCED BOARD. Each of the five senior
members of Anteon's management team has over 20 years of experience in
managing both small and large companies in both the defense and commercial
markets. In addition, several members of management and the Board of
Directors are former military officers or senior government officials who
are familiar with the information technology requirements of government
agencies. Dr. Paul Kaminski, a director of Anteon, recently served as
Under Secretary of Defense for Acquisition and Technology. Mr. Gilbert
Decker, a Director of Anteon, recently served as Assistant Secretary of
the U.S. Army for Research, Development and Acquisition, and in that
capacity led the Army's acquisition and procurement reform efforts. Our
management team is responsible for our growth and improved profitability
in the current procurement environment and has a significant equity stake
in Anteon through direct investment and equity-based incentives.
BUSINESS STRATEGY
We believe that a key element of Anteon's success is its high standard of
performance and customer service. Past performance is one of the three critical
elements the government employs to evaluate information technology suppliers.
Our demonstrated performance record and service excellence have enabled us to
maintain our position as an incumbent service provider on 100% of our major
contracts that have been recompeted over the past three years. We believe that
our high-level technical abilities and low cost structure will allow us to
further expand our customer base, improve our operating results and continue to
grow. Specifically, we will pursue the following business strategies:
- BROADEN CAPABILITIES. We continually seek to acquire new expertise and
keep pace with developments in technology by acquiring and training our
employees and acquiring technologies to complement our skill set. We are
aggressively pursuing several new disciplines that complement our existing
technology capabilities. Particular areas of expertise we are pursuing
include network communications, remote sensor information processing,
geographic information systems and information security. We also seek to
broaden our technology skills by providing extensive training to new and
current employees. For example, we have an extensive in-house,
computer-based training program consisting of over 150 courses. These
efforts will enable us to remain at the forefront of information
technology applications and be more responsive and flexible in servicing
the needs of our customers.
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- LEVERAGE EXPERIENCE AND REPUTATION TO EXPAND MARKET SHARE. We have
performed a variety of services for a diverse base of customers, including
hundreds of governmental clients worldwide, including all Cabinet-level
agencies and all branches of the military. The new Federal government
procurement environment has reduced the number of suppliers and favors
those companies with experience and broad capabilities. We plan to
leverage our comprehensive capabilities and our position as the incumbent
provider on critical Federal government applications to provide complete
end-to-end services including new systems development, integration,
upgrades, maintenance, support and training. To support our plans, we have
increased our national and global presence, opening offices in
Albuquerque, New Mexico; Colorado Springs, Colorado; Australia and Asia.
We have also acquired a comprehensive new business development and bidding
software system, known as WinAward, which scans for and targets new
programs or task orders which require skills and services particularly
suited to Anteon's capabilities. This system provides early identification
of prospects, allowing us to mobilize the resources necessary to win the
award.
- CONTINUE TO IMPROVE OPERATING AND FINANCIAL PERFORMANCE. We believe that a
key element of our success in the Federal government market has been our
continuous pursuit of cost reductions and focus on working capital
management. We have developed and employ integrated management information
and resource management systems and policies that have enabled us to
maintain indirect cost levels that we believe are among the lowest in the
industry. We will continue to leverage our operating efficiency and risk
management capabilities to bid aggressively on contracts to further
improve our operating and financial performance.
- PURSUE STRATEGIC ACQUISITIONS. We believe the changes in the government
procurement market will result in continuing consolidation opportunities.
We will selectively review acquisition candidates with a focus on
companies having complementary skills and established positions in key
segments of the marketplace that provide opportunities for revenue
enhancement or a reduction in indirect costs. A key element of all
acquisitions is the existence of rigorous risk management procedures and
strong operational management.
THE TRANSACTIONS
On March 7, 1999, Anteon entered into a definitive merger agreement to
acquire all of the issued and outstanding shares of common stock of A&T at a
price of $26.00 per share. We consummated the acquisition on June 23, 1999 after
the approval of the acquisition by the stockholders of A&T. In connection with
the acquisition, Anteon received an equity contribution of $22.5 million from
affiliates of Caxton-Iseman Capital, Inc. In addition, in connection with the
acquisition we entered into a new credit facility in an aggregate principal
amount of $180.0 million, a portion of which was used to repay all of the
amounts previously outstanding under Anteon's and A&T's credit facilities. For
purposes of this prospectus, the "Transactions" refers to the acquisition, the
issuance of the initial notes, the equity contribution, the borrowings under the
new credit facility in connection with the Acquisition and the repayment of the
outstanding debt under the current credit facilities of A&T and Anteon.
Caxton-Iseman Capital is a New York based private equity investment company
founded in 1993. Caxton-Iseman Capital currently manages a $600 million private
investment fund on behalf of a select group of limited partners and seeks to
invest with management of companies positioned for growth in a variety of
industries. Caxton-Iseman Capital has made investments in eleven companies
including Magnavox Electronic Systems, Inc., Leisure Link Holdings and Glass's
Group.
Please refer to the section entitled "The Transactions" which appears later
in this prospectus for additional information.
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Our executive offices are located at 3211 Jermantown Road, Suite 700,
Fairfax, Virginia, 22030-2801 and our telephone number is (703) 246-0200.
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SUMMARY OF THE EXCHANGE OFFER
We are offering to exchange $100,000,000 aggregate principal amount of our
exchange notes for a like aggregate principal amount of our initial notes. In
order to exchange your initial notes, you must properly tender them and we must
accept your tender. We will exchange all outstanding initial notes that are
validly tendered and not validly withdrawn.
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Exchange Offer............... We will exchange our exchange notes for a like aggregate
principal amount at maturity of our initial notes.
Expiration Date.............. This exchange offer will expire at 5:00 p.m., New York City
time, on Tuesday, September 28, 1999, unless we decide to
extend it.
Conditions to the Exchange
Offer...................... We will complete this exchange offer only if:
- there is no litigation or threatened litigation which
would impair our ability to proceed with this exchange
offer,
- there is no change in the laws and regulations which would
impair our ability to proceed with this exchange offer,
- there is no change in the current interpretation of the
staff of the Commission which permits resales of the
exchange notes,
- there is no stop order issued by the Commission which
would suspend the effectiveness of the registration
statement which includes this prospectus or the
qualification of the exchange notes under the Trust
Indenture Act of 1939, and
- we obtain all the governmental approvals we deem necessary
to complete this exchange offer.
Please refer to the section in this prospectus entitled "The
Exchange Offer--Conditions to the Exchange Offer."
Procedures for Tendering
Initial Notes.............. To participate in this exchange offer, you must complete,
sign and date the letter of transmittal or its facsimile and
transmit it, together with your initial notes to be
exchanged and all other documents required by the letter of
transmittal, to IBJ Whitehall Bank & Trust Company, as
exchange agent, at its address indicated under "The Exchange
Offer--Exchange Agent." In the alternative, you can tender
your initial notes by book-entry delivery following the
procedures described in this prospectus. If your initial
notes are registered in the name of a broker, dealer,
commercial bank, trust company or other nominee, you should
contact that person promptly to tender your initial notes in
this exchange offer. For more information on tendering your
notes, please refer to the section in this prospectus
entitled "The Exchange Offer--Procedures for Tendering
Initial Notes."
Guaranteed Delivery
Procedures................. If you wish to tender your initial notes and you cannot get
the required documents to the exchange agent on time, you
may tender your notes by using the guaranteed delivery
procedures described under the section of this prospectus
entitled "The Exchange Offer--
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Procedures for Tendering Initial Notes--Guaranteed Delivery
Procedure."
Withdrawal Rights............ You may withdraw the tender of your initial notes at any
time before 5:00 p.m., New York City time, on the expiration
date of the exchange offer. To withdraw, you must send a
written or facsimile transmission notice of withdrawal to
the exchange agent at its address indicated under the "The
Exchange Offer--Exchange Agent" before 5:00 p.m., New York
City time, on the expiration date of the exchange offer.
Acceptance of Initial Notes
and Delivery of Exchange
Notes...................... If all the conditions to the completion of this exchange
offer are satisfied, we will accept any and all initial
notes that are properly tendered in this exchange offer on
or before 5:00 p.m., New York City time, on the expiration
date. We will return any initial notes that we do not accept
for exchange to you without expense as promptly as
practicable after the expiration date. We will deliver the
exchange notes to you as promptly as practicable after the
expiration date and acceptance of your initial notes for
exchange. Please refer to the section in this prospectus
entitled "The Exchange Offer--Acceptance of Initial Notes
for Exchange; Delivery of Exchange Notes."
Federal Income Tax Considera-
tions Relating to the
Exchange Offer............. Exchanging your initial notes for exchange notes should not
be a taxable event to you for United States federal income
tax purposes. Please refer to the section of this prospectus
entitled "Certain United States Federal Income Tax
Considerations."
Exchange Agent............... IBJ Whitehall Bank & Trust Company is serving as exchange
agent in the exchange offer.
Fees and Expenses............ We will pay all expenses related to this exchange offer.
Please refer to the section of this prospectus entitled "The
Exchange Offer--Fees and Expenses."
Use of Proceeds.............. We will not receive any proceeds from the issuance of the
exchange notes. We are making the exchange offer solely to
satisfy certain of our obligations under our registration
rights agreement.
Consequences to Holders who
do not Participate in the
Exchange Offer............. If you do not participate in this exchange offer:
- you will not necessarily be able to require us to register
your initial notes under the Securities Act,
- you will not be able to resell, offer to resell or
otherwise transfer your initial notes unless they are
registered under the Securities Act or unless you resell,
offer to resell or otherwise transfer them under an
exemption from the registration requirements of, or in a
transaction not subject to, the Securities Act, and
- the trading market for your initial notes will become more
limited to the extent other holders of initial notes
participate in the exchange offer.
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Please refer to the section in this exchange offer entitled
"Risk Factors--Your failure to participate in the exchange
offer will have adverse consequences."
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SUMMARY OF TERMS OF THE EXCHANGE NOTES
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Issuer....................... Anteon Corporation.
Notes Offered................ $100 million aggregate principal amount of 12% Senior
Subordinated Notes due 2009. The form and terms of the
exchange notes are the same as the form and terms of the
initial notes except that the exchange notes are registered
under the Securities Act, will not bear legends restricting
their transfer and will not be entitled to registration
rights under our registration rights agreement. The exchange
notes will evidence the same debt as the initial notes and
both the initial notes and the exchange notes will be
governed by the same indenture.
Maturity Date................ May 15, 2009.
Interest Payment Dates....... We will pay interest on the exchange notes on May 15 and
November 15 of each year, commencing November 15, 1999.
Optional Redemption.......... We cannot redeem the exchange notes prior to May 15, 2004,
except as discussed below. Until May 15, 2002, we can choose
to redeem the exchange notes in an amount not to exceed 25%
of the sum of the original principal amount of the exchange
notes and the original principal amount of any other notes
issued under the same Indenture, with money we raise in
certain equity offerings, as long as:
- we pay the holders of the exchange notes and any such
other notes redeemed a redemption price of 112% of the face
amount of the exchange notes and any such other notes we
redeem, plus accrued interest to the date of redemption;
and
- at least 75% of the original aggregate principal amount of
the exchange notes (including the original principal amount
of any additional notes) remains outstanding after each
such redemption.
On or after May 15, 2004, we can redeem some or all of the
exchange notes at the redemption prices listed in the
"Description of the Notes--Optional Redemption" section of
this prospectus, plus accrued interest to the date of
redemption.
Change of Control............ If a Change of Control of our company occurs, subject to
certain conditions, we must give holders of the exchange
notes an opportunity to sell to us their exchange notes at a
purchase price of 101% of their face amount, plus accrued
interest. The term "Change of Control" is defined in the
"Description of the Notes--Change of Control" section of
this prospectus.
Ranking...................... The exchange notes will be unsecured and subordinated
obligations and will rank junior to our existing and future
senior indebtedness. As of June 30, 1999, we had $73.0
million outstanding under our new credit facility. The
exchange notes will rank PARI PASSU in right of payment with
any future Senior Subordinated Indebtedness and will
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
rank senior to any other subordinated indebtedness. The
terms "Senior Indebtedness" and "Senior Subordinated
Indebtedness" are defined in the "Description of the
Notes--Certain Definitions" section of this prospectus.
Subsidiary Guaranties........ Our obligations to make any principal, premium and interest
payments on the exchange notes will be fully and
unconditionally guaranteed on a senior subordinated basis by
each of our existing and certain of our future domestic
subsidiaries. These subsidiary guaranties will be
subordinated to all existing and future Senior Indebtedness
of such subsidiaries, including their guarantee of our
obligations under the new credit facility. Please refer to
the sections in this prospectus entitled "Description of the
Notes--Subsidiary Guaranties" and "-- Certain
Covenants--Future Guarantors."
Restrictive Covenants........ The Indenture governing the exchange notes will contain
covenants that limit our ability and our subsidiaries'
ability to:
- incur or guarantee additional indebtedness;
- pay dividends or other distributions on our capital stock
or redeem, repurchase or retire our capital stock or
subordinated obligations;
- make investments;
- issue or sell capital stock of subsidiaries;
- engage in transactions with affiliates;
- restrict dividend or other payments to us;
- transfer or sell assets; and
- consolidate, merge or transfer all or substantially all of
our assets and the assets of our subsidiaries.
These covenants are subject to important exceptions and
qualifications, which are described in the "Description of
the Notes--Certain Covenants" section of this prospectus.
Federal Income Tax Considera-
tions Relating to the
Exchange Offer............. Exchanging your initial notes for exchange notes will not be
a taxable event to you for United States federal income tax
purposes. Please refer to the section of this prospectus
entitled "Certain United States Federal Income Tax
Considerations."
Absence of a Public Market
for the Exchange Notes..... The exchange notes are new securities with no established
market for them. We cannot assure you that a market for
these notes will develop or that this market will be liquid.
Form of the Exchange Notes... The exchange notes will be represented by one or more
permanent global securities in bearer form deposited on
behalf of The Depository Trust Company with IBJ Whitehall
Bank & Trust Company, as custodian. You will not receive
exchange notes in registered form unless one of the events
described in the section of this prospectus entitled
"Description of the Notes--Book Entry; Delivery and Form"
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
occurs. Instead, beneficial interests in the exchange notes
will be shown on, and transfers of these notes will be
effected only through, records maintained in book-entry form
by The Depository Trust Company with respect to its
participants. Initial notes issued in certificated form may
be exchanged for beneficial interests in the global
securities.
</TABLE>
RISK FACTORS
You should carefully consider all of the information provided in this
prospectus and, in particular, you should evaluate the specific factors
described under "Risk Factors" for a description of the risks associated with
this exchange offer and an investment in the exchange notes.
9
<PAGE>
SUMMARY UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
The following summary unaudited pro forma condensed consolidated financial
data of Anteon has been derived from the pro forma financial statements included
under Unaudited Pro Forma Condensed Consolidated Financial Data. The pro forma
statement of operations and other data give effect to the Transactions and
Anteon's acquisition of Techmatics, Inc. on May 29, 1998, as if they each
occurred on January 1, 1998. This pro forma data is not necessarily indicative
of Anteon's financial condition or actual results of operations that would have
occurred had the Transactions occurred on such date or of any expected future
results. This information should be read in conjunction with "Unaudited Pro
Forma Condensed Consolidated Financial Data," "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Anteon Corporation,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Analysis & Technology, Inc." and the historical consolidated
financial statements of Anteon, Techmatics and A&T, together with the respective
notes thereto, included elsewhere in this prospectus.
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
FOR THE YEAR FOR THE SIX
ENDED MONTHS ENDED
DECEMBER 31, 1998 JUNE 30, 1999
----------------- -----------------
<S> <C> <C>
(IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Revenues................................................................... $ 450,786 $ 235,706
Gross profit............................................................... 57,130 30,686
Operating income........................................................... 19,377 11,251
Interest expense, net...................................................... 22,546 11,453
Loss before income taxes................................................... (3,194) (219)
Income tax expense (benefit)............................................... (9) 547
-------- --------
Net loss................................................................... $ (3,185) $ (766)
-------- --------
-------- --------
OTHER DATA:
Cash interest expense (a).................................................. $ 19,060 $ 9,650
EBITDA (b)................................................................. 31,437 16,530
Adjusted EBITDA (c)........................................................ 35,093 17,910
Cash flow from (used in) operating activities.............................. (2,315) 18,304
Gross margin............................................................... 12.7% 13.0%
Capital expenditures....................................................... $ 5,105 $ 2,652
Adjusted EBITDA to cash interest expense................................... 1.8x 1.9x
Adjusted EBITDA minus capital expenditures to cash interest expense........ 1.6x 1.6x
Net debt to Adjusted EBITDA (d)............................................ 4.9x
</TABLE>
- ------------------------
(a) Cash interest expense excludes the noncash portion of interest expense.
(b) EBITDA represents earnings before interest, taxes and depreciation and
amortization. EBITDA also excludes infrequent and unusual charges of $0.1
million for the year ended December 31, 1998 relating to asset write-offs at
Techmatics, and $0.24 million for the six months ended June 30, 1999
relating to a settlement with a former executive. Management believes that
these charges will not recur and will not result in future cash charges.
EBITDA is presented because we believe that it is a widely accepted
supplemental indicator of an entity's ability to incur and service debt.
However, EBITDA should not be considered by an investor as an alternative to
net income or operating income as an indicator of our operating performance
or cash flow from operations, or as an alternative to cash flows as a
measure of liquidity.
10
<PAGE>
(c) Management believes that additional cost savings of $3.7 million will be
generated through reduced general and administrative expenses and the
allocation of a portion of Anteon's corporate expenses to A&T. Anteon's
Adjusted EBITDA equals pro forma EBITDA plus the following adjustments:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1998 JUNE 30, 1999
----------------- ----------------
(IN THOUSANDS)
<S> <C> <C>
Pro forma EBITDA.................................................. $ 31,437 $ 16,530
Anteon indirect cost reductions................................... 1,190 160
Increase in billable indirect costs............................... 2,466 1,220
------- -------
Adjusted EBITDA................................................. $ 35,093 $ 17,910
</TABLE>
ANTEON INDIRECT COSTS REDUCTIONS. Anteon has reduced indirect personnel
(I.E., personnel not directly engaged in contract performance) saving
approximately $1.2 million in total salary expense. In addition, on January
1, 1999 Anteon replaced Techmatics' employee benefits programs with its own
employee benefits programs to ensure consistency in benefits among its
employees. These new programs have resulted in savings of approximately $1.0
million per year. In 1999, Anteon closed a Techmatics office facility and
further reduced indirect overhead which produced combined savings of $1.9
million. Because the government previously reimbursed Anteon for a portion
of these expenses under cost-plus contracts, Anteon and the government will
share in the benefit of the expense reduction with Anteon realizing $1.2
million for the year ended December 31, 1998 and $0.2 million for the six
months ended June 30, 1999 of additional EBITDA and the government realizing
$2.9 million of lower costs annually.
INCREASE IN BILLABLE INDIRECT COSTS. After giving pro forma effect to
the acquisition of A&T, the level of billable indirect costs under our
contracts will increase because the proportion of our revenues generated by
cost-plus contracts will increase from 40% to 55%. This adjustment to
indirect billable costs is determined pursuant to government regulations and
accounting standards. As a result of this adjustment, Anteon will be
permitted to bill the government for a greater portion of its indirect
costs. Based on our ability to pass such indirects costs through to our
government customers, we estimate this will result in an additional
reimbursable costs of $2.5 million for the year ended December 31, 1998 and
$1.2 million for the six months ended June 30, 1999. As management
implements cost reductions following the acquisition, these savings will be
passed through to our customers.
There can be no assurances, however, that the projected cost savings
outlined above will be achieved.
KPMG LLP has not examined, reviewed or compiled adjusted EBITDA or its
composition, and therefore expresses no form of assurance on such amounts.
(d) Represents the ratio of net debt to Adjusted EBITDA using net debt as of
June 30, 1999 and Adjusted EBITDA for the year ended December 31, 1998.
11
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA--ANTEON CORPORATION
The following summary consolidated financial data has been derived from (1)
in the case of Anteon, its unaudited consolidated financial statements as of
June 30, 1999 and for the six months ended June 30, 1999 and 1998 and its
audited consolidated financial statements for the years ended December 31, 1998
and 1997 and for the period from April 1, 1996 to December 31, 1996 and (2) in
the case of Ogden Professional Services Corporation (the "Predecessor Company"),
its audited consolidated financial statements for the period from January 1,
1996 to March 31, 1996. In the opinion of management, the unaudited consolidated
financial statements include all adjustments, consisting of normal recurring
accruals, that are necessary for a fair presentation of the financial position
and results of operations for these periods. Each of the audited consolidated
financial statements of Anteon and our Predecessor Company have been audited by
KPMG LLP, independent certified public accountants. The results of operations
for each period presented below are not comparable to the prior period as a
result of business acquisitions consummated in 1997, 1998 and 1999. Results of
operations of these acquired businesses are included in Anteon's consolidated
financial statements for the periods subsequent to the respective dates of
acquisition. You should read the following information in conjunction with
"Capitalization," "Unaudited Pro Forma Condensed Consolidated Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Anteon Corporation," "Business" and the historical consolidated
financial statements of Anteon, together with the notes thereto, included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
PREDECESSOR ANTEON
COMPANY(A) -------------------------------------------------------
------------- PERIOD FROM
PERIOD FROM APRIL 1,
JANUARY 1, 1996
1996 TO YEAR ENDED SIX MONTHS ENDED
TO DECEMBER DECEMBER 31, JUNE 30,
MARCH 31, 31, -------------------- --------------------
1996 1996 1997 1998 1998 1999
------------- ----------- --------- --------- --------- ---------
(DOLLARS IN (DOLLARS IN THOUSANDS)
THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues....................... $ 32,046 $ 109,780 $ 176,292 $ 249,776 $ 108,196 $ 145,609
Gross profit................... 2,828 9,354 16,753 28,188 12,057 17,033
Operating income............... 757 2,678 5,080 10,443 5,009 6,648
Interest expense, net.......... -- 1,455 2,365 1,736 1,736 5,500
Income before provision for
income taxes and
extraordinary item........... 757 1,223 2,702 4,821 3,259 1,131
Income tax expense............. 303 416 1,063 2,353 1,310 399
Net income before extraordinary
item......................... $ 454 $ 807 $ 1,639 $ 2,468 1,949 732
Extraordinary item, net of
tax.......................... -- -- -- -- -- 463(b)
------------- ----------- --------- --------- --------- ---------
Net income..................... 454 807 1,639 2,468 1,949 269
------------- ----------- --------- --------- --------- ---------
------------- ----------- --------- --------- --------- ---------
OTHER DATA:
EBITDA(c)...................... $ 1,143 $ 5,800 $ 9,583 $ 15,988 $ 7,112 $ 9,393
EBITDA margin.................. 3.6% 5.3% 5.4% 6.4% 6.6% 6.5%
Cash flow from (used in)
operating activities......... $ 2,224 $ 7,519 $ 14,094 $ (8,340) $ (9,426) $ 5,677
Capital expenditures........... 211 376 817 2,089 1,164 1,335
Ratio of earnings to fixed
charges(d)................... 4.5x 1.6x 1.8x 1.6x 2.3x 1.2x
</TABLE>
<TABLE>
<CAPTION>
AS OF
JUNE 30,
1999
-------------
<S> <C>
BALANCE SHEET DATA:
Current assets..................................................................................... $ 106,459
Working capital.................................................................................... $ 43,602
Total assets....................................................................................... 287,107
</TABLE>
12
<PAGE>
- ------------------------
(a) Represents the results of operations and financial position of our
Predecessor Company prior to its acquisition by Anteon.
(b) Represents the write-off of $772 of deferred financing fees, net of income
taxes of $309, related to the existing credit facility which was repaid
early in conjunction with the Transactions.
(c) EBITDA represents earnings before interest, taxes and depreciation and
amortization. EBITDA also excludes a one-time noncash, nonrecurring charge
of $0.1 million relating to asset write-offs at Techmatics. Management
believes that these charges will not recur and will not result in future
cash charges. EBITDA is presented because we believe that it is a widely
accepted supplemental indicator of an entity's ability to incur and service
debt. However, EBITDA should not be considered by an investor as an
alternative to net income or operating income as an indicator of our
operating performance or cash flow from operations, or as an alternative to
cash flows as a measure of liquidity.
(d) For purposes of this computation, earnings are defined as losses plus fixed
charges. Fixed charges are the sum of (i) interest expensed and capitalized,
(ii) amortization of deferred financing costs, premium and debt discounts,
(iii) the portion of operating lease rental expense that is representative
of the interest factor (deemed to be one-third) and (iv) dividends on
preferred stock.
13
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA--ANALYSIS & TECHNOLOGY, INC.
The following summary consolidated financial data has been derived from
A&T's audited consolidated financial statements as of March 31, 1997, 1998, and
1999, and for the years ended March 31, 1996, 1997, 1998, and 1999, which have
been audited by KPMG LLP, independent certified public accountants. The results
of operations for each period presented below are not comparable to the prior
period as a result of business acquisitions consummated in 1997 and 1998.
Results of operations of these acquired businesses are included in A&T's
consolidated financial statements for the periods subsequent to the respective
dates of acquisition. You should read this data in conjunction with
"Capitalization," "Unaudited Pro Forma Condensed Consolidated Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Analysis & Technology, Inc." "Business" and the historical
consolidated financial statements of A&T, together with the notes thereto,
included elsewhere in this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------------------
1996 1997 1998(A) 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Revenues......................................................... $ 122,924 $ 142,547 $ 159,956 $ 170,355
Operating earnings............................................... 6,254 6,770 7,945 10,280
Interest expense, net............................................ 512 319 171 350
Income before provision for income taxes......................... 5,404 5,813 8,344 8,751
Income tax expense............................................... 1,816 2,437 4,152 3,879
---------- ---------- ---------- ----------
Net earnings from continuing operations.......................... $ 3,588 $ 3,376 $ 4,192 $ 4,872
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
OTHER DATA:
EBITDA (b)....................................................... $9,155 $9,337 $11,781 $12,620
EBITDA margin.................................................... 7.4% 6.6% 7.4% 7.4%
Cash flow from operating activities.............................. $3,123 $9,108 $ 7,774 $ 6,130
Capital expenditures............................................. 1,748 2,327 3,031 2,508
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31,
-------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
BALANCE SHEET DATA:
Current assets................................................................... $ 28,869 $ 28,088 $ 31,110
Working capital.................................................................. 16,578 14,455 15,925
Total assets..................................................................... 57,813 63,609 73,746
</TABLE>
- ------------------------
(a) Includes the results of operations of Command Control, Inc. from October
1997, Interactive Media Solutions, Inc. from April 1997, UP, Inc. from
November 1997, Dalco Electronics Corporation from August 1997 and Cambridge
Acoustical Associates, Inc. from February 1998, the respective dates of
acquisition by A&T.
(b) EBITDA represents earnings before interest, taxes and depreciation and
amortization. EBITDA is presented because we believe that it is a widely
accepted supplemental indicator of an entity's ability to incur and service
debt. However, EBITDA should not be considered by an investor as an
alternative to net income or operating income as an indicator of operating
performance or cash flow from operations, or as an alternative to cash flows
as a measure of liquidity.
14
<PAGE>
RISK FACTORS
BEFORE YOU TENDER THE INITIAL NOTES IN THE EXCHANGE OFFER, YOU SHOULD
CAREFULLY CONSIDER THESE RISK FACTORS, AS WELL AS THE OTHER INFORMATION
CONTAINED IN THIS PROSPECTUS. THE RISKS DESCRIBED BELOW ARE NOT THE ONLY ONES
FACING OUR COMPANY. ADDITIONAL RISKS NOT PRESENTLY KNOWN TO US OR THAT WE
CURRENTLY DEEM IMMATERIAL MAY ALSO IMPAIR OUR BUSINESS OPERATIONS. CERTAIN
STATEMENTS IN THIS PROSPECTUS (INCLUDING CERTAIN OF THE FOLLOWING RISK FACTORS)
CONSTITUTE FORWARD-LOOKING STATEMENT. SEE "FORWARD-LOOKING STATEMENTS."
RISK FACTORS RELATING TO THE NOTES
SUBSTANTIAL LEVERAGE--OUR SUBSTANTIAL INDEBTEDNESS COULD AVERSELY AFFECT OUR
FINANCIAL HEALTH AND PREVENT US FROM FULFILLING OUR OBLIGATIONS UNDER THE NOTES.
We have a significant amount of debt outstanding. You should be aware that
this level of debt could have important consequences to you as a holder of the
notes. Below we have identified for you some of the material potential
consequences resulting from this significant amount of debt.
- We may be unable to obtain additional financing for working capital,
capital expenditures, acquisitions and general corporate purposes.
- A significant portion of our cash flow from operations must be dedicated
to the repayment of indebtedness, thereby reducing the amount of cash we
have available for other purposes.
- Our ability to adjust to changing market conditions may be hampered. We
may be more vulnerable in a volatile market.
ADDITIONAL BORROWINGS AVAILABLE--DESPITE CURRENT INDEBTEDNESS LEVELS, WE AND
OUR SUBSIDIARIES MAY STILL BE ABLE TO INCUR SUBSTANTIALLY MORE DEBT. THIS COULD
FURTHER EXACERBATE THE RISKS DESCRIBED ABOVE.
We and our subsidiaries may be able to incur additional indebtedness in the
future. The terms of the Indenture limit but do not prohibit us or our
subsidiaries from doing so. Our new credit facility currently permits additional
borrowings of up to $53.4 million, based on our current borrowing base and ratio
of net debt to EBITDA (as defined in the new credit facility) and amounts
currently outstanding under the revolving credit facility, and any such
borrowings will be senior to the notes and the Subsidiary Guarantees (as defined
in "Description of the Notes--Certain Definitions"). If new debt is added by us
or our subsidiaries, the related risks that we and they now face could
intensify. Please refer to the sections in this prospectus entitled
"Capitalization," "Selected Consolidated Financial Data," "Description of Other
Material Agreements--New Credit Facility" and "Description of the Notes."
ABILITY TO SERVICE DEBT--TO SERVICE OUR INDEBTEDNESS, WE WILL REQUIRE A
SIGNIFICANT AMOUNT OF CASH. OUR ABILITY TO GENERATE CASH DEPENDS ON MANY FACTORS
BEYOND OUR CONTROL.
You should be aware that our ability to repay or refinance our debt depends
on our successful financial and operating performance. We cannot assure you that
our business strategy will succeed or that we will achieve our anticipated
financial results. Our financial and operational performance depends upon a
number of factors, many of which are beyond our control. These factors include:
- the current economic and competitive conditions in the information
technology industry;
- Federal government spending levels, both generally and by our particular
customers;
- any operating difficulties, operating costs or pricing pressures we may
experience;
- the passage of legislation or other regulatory developments that affects
us adversely; and
- any delays in implementing any strategic projects we may have.
We cannot assure you that we will generate sufficient cash flow from
operations or that we will be able to obtain sufficient funding to satisfy all
of our obligations, including the notes. Our ratio of EBITDA to total cash
interest expense for the six months ended June 30, 1999 would have been 2.3 to
1.0. If we are
15
<PAGE>
unable to pay our debts, we will be required to pursue one or more alternative
strategies, such as selling assets, refinancing or restructuring our
indebtedness or selling additional equity capital. However, we cannot assure you
that any alternative strategies will be feasible at the time or prove adequate.
Also, certain alternative strategies would require the consent of our senior
secured lenders before we engage in any such strategy. Please refer to the
sections in this prospectus entitled "Description of Other Material Agreements"
and "Description of the Notes."
SUBORDINATION--YOUR RIGHT TO RECEIVE PAYMENTS ON THE NOTES IS JUNIOR TO A
SIGNIFICANT PORTION OF OUR GUARANTORS' EXISTING INDEBTEDNESS AND POSSIBLY ALL OF
OUR FUTURE BORROWINGS. FURTHER, THE CLAIMS OF CREDITORS OF OUR NON-GUARANTOR
SUBSIDIARIES WILL HAVE PRIORITY WITH RESPECT TO THE ASSETS AND EARNINGS OF SUCH
SUBSIDIARIES OVER YOUR CLAIMS.
The notes and the Subsidiary Guaranties will be subordinated to the prior
payment in full of our and the Subsidiary Guarantors' (as defined in
"Description of the Notes--Certain Definitions") current and future Senior
Indebtedness. As of June 30, 1999, we had $73.0 million outstanding under our
new credit facility and the Subsidiary Guarantors had $73.0 million of Senior
Indebtedness (consisting solely of their Senior Guaranty of our obligations
under the new credit facility). Because of the subordination provisions of the
notes, in the event of the bankruptcy, liquidation or dissolution of our company
or any subsidiary guarantor, our assets or the assets of the Subsidiary
Guarantors would be available to pay obligations under the notes only after all
payments had been made on our or the Subsidiary Guarantors' Senior Indebtedness.
We cannot assure you that sufficient assets will remain after all such payments
have been made to make any payments on the notes, including payments of interest
when due.
We conduct a portion of our business through our subsidiaries. Any future
domestic subsidiary that does not incur indebtedness and all of our foreign
subsidiaries will not be guaranteeing the notes. Claims of creditors or our
non-guarantor subsidiaries, including trade creditors, secured creditors and
creditors holding indebtedness or guaranties issued by such subsidiaries, will
generally have priority with respect to the assets and earnings of such
subsidiaries over the claims of creditors of our company, including holders of
the notes, even if the obligations of such subsidiaries do not constitute Senior
Indebtedness. As of June 30, 1999, after eliminating intercompany activity, our
subsidiaries that are not Subsidiary Guarantors would have 0.4% of our
consolidated liabilities and assets, respectively.
Please refer to the sections in this prospectus entitled "Description of the
Notes--Ranking" and "Description of the Notes--Certain Covenants--Limitations on
Indebtedness."
RESTRICTIVE DEBT COVENANTS--THE TERMS OF OUR NEW CREDIT FACILITY AND THE
INDENTURE IMPOSE SIGNIFICANT RESTRICTIONS ON OUR ABILITY AND THAT OF OUR
SUBSIDIARIES TO TAKE CERTAIN ACTIONS, WHICH MAY HAVE AN IMPACT ON OUR BUSINESS,
RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
The indenture and our new credit facility will impose significant operating
and financial restrictions on us and our subsidiaries and require us to meet
certain financial tests. These restrictions may significantly limit or prohibit
us from engaging in certain transactions, including the following:
- incurring or guaranteeing additional indebtedness;
- paying dividends or other distributions to our stockholders or redeeming,
repurchasing or retiring our capital stock or subordinated obligations;
- making investments;
- creating liens on our assets;
- issuing or selling capital stock of our subsidiaries;
- transforming or selling assets currently held by us;
- engaging in transactions with affiliates; and
- engaging in mergers or consolidations.
16
<PAGE>
The failure to comply with any of these covenants would cause a default
under the indenture and our other debt agreements. A default, if not waived,
could result in acceleration of our indebtedness, in which case the debt would
become immediately due and payable. If this occurs, we may not be able to repay
our debt or borrow sufficient funds to refinance it. Even if new financing is
available, it may not be on terms that are acceptable to us. Complying with
these covenants may cause us to take actions that are not favorable to holders
of the notes. Please refer to the sections in this prospectus entitled
"Description of Other Material Agreements" and "Description of the
Notes--Certain Covenants".
LIMITATIONS ON SUBSIDIARY GUARANTIES--THE GUARANTIES PROVIDED BY OUR
SUBSIDIARIES ARE SUBJECT TO CERTAIN DEFENSES WHICH MAY LIMIT YOUR RIGHT TO
RECEIVE PAYMENT ON THE NOTES AND ARE SUBORDINATED TO THE RIGHTS OF OTHER
CREDITORS OF SUCH SUBSIDIARY GUARANTORS.
Although the Subsidiary Guaranties provide the holders of the notes with a
direct claim against the assets of the Subsidiary Guarantors, enforcement of the
Subsidiary Guaranties against any Subsidiary Guarantor would be subject to
certain "suretyship" defenses available to guarantors generally. Enforcement
could also be subject to other defenses available to the Subsidiary Guarantors
in some circumstances. Please refer to the section in this prospectus entitled
"--Fraudulent Conveyance Matters." To the extent that the Subsidiary Guaranties
are not enforceable, the notes and Subsidiary Guaranties would be effectively
subordinated to all liabilities of the Subsidiary Guarantors, including trade
payables of such Subsidiary Guarantors, whether or not such liabilities
otherwise would constitute Senior Indebtedness under the indenture. In addition,
the payment of dividends to us by our subsidiaries is contingent upon the
earnings of those subsidiaries and approval of those subsidiaries.
FRAUDULENT CONVEYANCE MATTERS--FEDERAL AND STATE STATUTES ALLOW COURTS,
UNDER SPECIFIC CIRCUMSTANCES, TO VOID THE NOTES AND THE SUBSIDIARY GUARANTIES
AND REQUIRE NOTEHOLDERS TO RETURN PAYMENTS RECEIVED FROM ANTEON OR THE
SUBSIDIARY GUARANTORS.
An unpaid creditor or representative of creditors, such as a trustee in
bankruptcy or Anteon as a debtor-in-possession in a bankruptcy proceeding, could
file a lawsuit claiming that the issuance of the notes constituted a "fraudulent
conveyance." To make such a determination, a court would have to find that we
did not receive fair consideration or reasonably equivalent value for the notes,
and that, at the time the notes were issued, we:
- were insolvent;
- were rendered insolvent by the issuance of the notes;
- were engaged in a business or transaction for which our remaining assets
constituted unreasonably small capital; or
- intended to incur, or believed that we would incur, debts beyond our
ability to pay such debts as they matured.
If a court were to make such a finding, it could void our obligations under
the notes, subordinate the notes to our other indebtedness or take other actions
detrimental to you as a holder of the notes.
The measure of insolvency for these purposes will vary depending upon the
law of the jurisdiction being applied. Generally, however, a company will be
considered insolvent for these purposes if the sum of that company's debts is
greater than the fair value of all of that company's property, or if the present
fair saleable value of that company's assets is less than the amount that will
be required to pay its probable liability on its existing debts as they mature.
Moreover, regardless of solvency, a court could void an incurrence of
indebtedness, including the notes, if it determined that the transaction was
made with intent to hinder, delay or defraud creditors, or a court could
subordinate the indebtedness, including the notes, to the claims of all existing
and future creditors on similar grounds. We cannot determine in advance what
standard a court would apply to determine whether we were "insolvent" in
connection with the sale of the notes.
17
<PAGE>
The making of the Subsidiary Guaranties might also be subject to similar
review under relevant fraudulent conveyance laws if a bankruptcy, reorganization
or rehabilitation case or a lawsuit (including circumstances in which bankruptcy
is not involved) were commenced by, or on behalf of, unpaid creditors of the
Subsidiary Guarantors at some future date. A court could impose legal and
equitable remedies, including subordinating the obligations under the subsidiary
guaranties, directing the repayment of any amounts paid from the proceeds of the
Subsidiary Guaranties to a fund for the benefit of other creditors or taking
other actions detrimental to you as a holder of the notes.
FINANCING CHANGE OF CONTROL OFFER--WE MAY NOT HAVE THE ABILITY TO RAISE THE
FUNDS NECESSARY TO FINANCE THE CHANGE OF CONTROL OFFER REQUIRED BY THE
INDENTURE.
If a Change of Control (as defined in "Description of the Notes--Certain
Definitions") occurs, you have the right to require us to repurchase any or all
of the notes you own at a price equal to 101% of the principal amount thereof,
together with any interest we owe you. Upon a Change of Control, we may be
required immediately to repay the outstanding principal, any accrued interest on
the notes, any amounts owed by us under our new credit facility and other
indebtedness or preferred stock then outstanding. We cannot assure you that we
would be able to repay the amounts outstanding under our new credit facility or
the principal amount outstanding of our other indebtedness or shares of our
preferred stock, if applicable, or to obtain the necessary consents to purchase
the notes. Any requirement to offer to purchase any outstanding notes may result
in our having to refinance our outstanding indebtedness, which we may not be
able to do. In addition, even if we were able to refinance such indebtedness,
such financing may be on terms unfavorable to us. If we fail to repurchase all
of the notes tendered for purchase upon the occurrence of a Change of Control,
such failure will be an event of default under the indenture and under our new
credit facility.
NO PRIOR MARKET FOR THE EXCHANGE NOTES--AN ACTIVE TRADING MARKET MAY NOT
DEVELOP FOR THE EXCHANGE NOTES.
The exchange notes will be registered under the Securities Act but will not
be eligible for trading on the Private Offerings, Resales and Trading through
Automated Linkages market. The exchange notes will constitute a new issue of
securities with no established trading market, and there can be no assurance as
to:
- the development of any market for the exchange notes,
- the liquidity of any market for the exchange notes that may develop,
- your ability to sell your exchange notes, or
- the price at which would be able to sell your exchange notes.
We have been advised by the initial purchasers for the initial notes that
they presently intend to make a market in the exchange notes. However, they are
not obligated to do so and may discontinue any market-making activity with
respect to the exchange notes at any time without notice. If a market for the
exchange notes were to exist, the exchange notes could trade at prices that may
be higher or lower than their principal amount or purchase price, depending on
many factors, including prevailing interest rates, the market for similar
debentures and the financial performance of Anteon and A&T. Historically, the
market for non-investment grade debt has been subject to disruptions that have
caused substantial volatility in the prices of securities similar to the
exchange notes. We cannot assure you that the market for the exchange notes, if
any, will not be subject to similar disruptions. Any disruption may adversely
affect you as a holder of the exchange notes.
ISSUANCE OF THE EXCHANGE NOTES -- THE ISSUANCE OF THE EXCHANGE NOTES MAY
ADVERSELY AFFECT THE MARKET FOR THE INITIAL NOTES.
Following commencement of the exchange offer, you may continue to trade the
initial notes in the Private Offerings, Resales and Trading through Automated
Linkages market. If initial notes are tendered for exchange and accepted in the
exchange offer, the trading market for the untendered and tendered but
unaccepted initial notes could be adversely affected.
18
<PAGE>
FAILURE TO PARTICIPATE IN THE EXCHANGE OFFER -- YOUR FAILURE TO PARTICIPATE
IN THE EXCHANGE OFFER WILL HAVE ADVERSE CONSEQUENCES.
The initial notes were not registered under the Securities Act or under the
securities laws of any state and you may not resell them, offer them for resale
or otherwise transfer them unless they are subsequently registered or resold
under an exemption from the registration requirements of the Securities Act and
applicable state securities laws. If you do not exchange your initial notes for
exchange notes pursuant to the exchange offer, or if you do not properly tender
your initial notes in the exchange offer, you will not be able to resell, offer
to resell or otherwise transfer the initial notes unless they are registered
under the Securities Act. In addition, you will no longer be able to obligate us
to register the initial notes under the Securities Act except in the limited
circumstances provided under our registration rights agreement.
DELIVERY OF A PROSPECTUS -- CERTAIN PERSONS WHO PARTICIPATE IN THE EXCHANGE
OFFER MUST DELIVER A PROSPECTUS IN CONNECTION WITH RESALES OF THE EXCHANGE
NOTES.
Based on certain no-action letters issued by the staff of the Securities and
Exchange Commission, we believe that you may offer for resale, resell or
otherwise transfer the exchange notes without compliance with the registration
and prospectus delivery requirements of the Securities Act. However, in some
instances described in this prospectus under "The Exchange Offer," you will
remain obligated to comply with the registration and prospectus delivery
requirements of the Securities Act to transfer your exchange notes. In these
cases, if you transfer an exchange note without delivering a prospectus meeting
the requirements of the Securities Act or without an exemption from registration
of your exchange notes under this Act, you may incur liability under the
Securities Act. We do not and will not assume or indemnify you against this
liability.
RISKS ASSOCIATED WITH FEDERAL GOVERNMENT CONTRACTING
FEDERAL GOVERNMENT CONTRACTING RISKS--OUR BUSINESS COULD BE ADVERSELY
AFFECTED IF THERE WERE ANY SIGNIFICANT CHANGES IN THE CONTRACTING POLICIES OR
FISCAL POLICIES OF THE U.S. FEDERAL GOVERNMENT.
We derive substantially all of our revenues from contracts with the U.S.
Federal government or subcontracts under Federal government prime contracts, and
we believe that the success and development of our business will continue to
depend on our successful participation in Federal government contract programs.
Accordingly, changes in Federal government contracting policies could directly
affect our financial performance. Among the factors that could materially
adversely affect our Federal government contracting business are:
- budgetary constraints affecting Federal government spending generally, or
specific departments or agencies in particular, and changes in fiscal
policies or available funding;
- changes in Federal government programs or requirements;
- curtailment of the Federal government's use of technology services firms;
- the adoption of new laws or regulations;
- technological developments;
- Federal governmental shutdowns (such as that which occurred during the
Federal government's 1996 fiscal year);
- competition and consolidation in the information technology industry; and
- general economic conditions.
These or other factors could cause Federal governmental agencies to reduce their
purchases under contracts, to exercise their right to terminate contracts or not
to exercise options to renew contracts, any of which could have a material
adverse effect on our financial condition, results of operations and debt
service capability.
19
<PAGE>
Many of our Federal government customers are subject to increasingly
stringent budgetary constraints. We have substantial contracts in place with
many Federal departments and agencies, and our continued performance under these
contracts, or award of additional contracts from these agencies, could be
materially adversely affected by spending reductions or budget cutbacks at these
agencies. Please refer to the section in this prospectus entitled "Overview of
Federal Government Contracting." Such reductions or cutbacks could have a
material adverse effect on our financial condition, results of operations and
debt service capability.
EARLY TERMINATION OF CONTRACTS--WE ARE NOT ABLE TO GUARANTEE THAT OUR
CONTRACTS WITH THE U.S. FEDERAL GOVERNMENT AND SUBCONTRACTS UNDER FEDERAL
GOVERNMENT PRIME CONTRACTS WILL NOT BE TERMINATED PRIOR TO THEIR COMPLETION AND
THERE IS NO GUARANTEE THAT WE WILL RETAIN THESE CONTRACTS IN ANY COMPETITIVE
REBIDDING PROCESS.
We derive substantially all of our revenues from U.S. Federal government
contracts and subcontracts under Federal government prime contracts that
typically span one or more base years and one or more option years and are
awarded through formal competitive bidding processes. Many of the option periods
cover more than half of the contract's potential duration. Federal government
agencies generally have the right not to exercise these option periods. In
addition, our contracts typically also contain provisions permitting a
government client to terminate the contract on short notice, with or without
cause. A decision not to exercise option periods or to terminate contracts would
reduce the profitability of these contracts to us. Our contractual costs and
revenues are subject to adjustment as a result of Federal government audits.
Please refer to the section in this prospectus entitled "--Contracts Subject to
Audit."
Upon expiration, if the customer requires further services of the type
provided in the contract, there is frequently a competitive rebidding process,
and there can be no assurance that we will win any particular bid, or that we
will be able to replace business lost upon expiration or completion of a
contract. Further, all Federal government contracts are subject to protest by
competitors. The unexpected termination of one or more of our significant
contracts could result in significant revenue shortfalls. The termination or
nonrenewal of any of our significant contracts, short-term revenue shortfalls,
the imposition of fines or damages or our suspension or debarment from bidding
on additional contracts could have a material adverse effect on our financial
condition, results of operations and debt service capability. For a description
of some of our material contracts, please refer to the sections in this
prospectus entitled "Business-- Anteon Divisions" and "Business--A&T Divisions."
CONTRACTS SUBJECT TO AUDIT--OUR BUSINESS COULD BE ADVERSELY AFFECTED BY A
NEGATIVE AUDIT BY THE DEFENSE CONTRACT AUDIT AGENCY. WE COULD BE REQUIRED TO
REIMBURSE THE U.S. FEDERAL GOVERNMENT FOR COSTS THAT WE HAVE EXPENDED ON OUR
CONTRACTS AND OUR ABILITY TO COMPETE SUCCESSFULLY FOR FUTURE CONTRACTS COULD BE
MATERIALLY IMPAIRED.
The Defense Contract Audit Agency, which we refer to as "DCAA" and certain
other government agencies, routinely audit and investigate government contracts.
These agencies review a contractor's performance on its contract, pricing
practices, cost structure and compliance with applicable laws, regulations and
standards. Any costs found to be improperly allocated to a specific contract
will not be reimbursed, while costs already reimbursed must be refunded.
Therefore, a DCAA audit could result in a substantial adjustment to our
revenues. No material adjustments have resulted from any DCAA audits of us
completed as of December 31, 1996, and we believe that adjustments resulting
from subsequent audits will not adversely affect our business. If a government
audit uncovers improper or illegal activities, we may be subject to civil and
criminal penalties and administrative sanctions, including termination of
contracts, forfeitures of profits, suspension of payments, fines and suspension
or debarment from doing business with the Federal government. In addition, we
could suffer serious reputational harm if allegations of impropriety were made
against us. Any such government determination of impropriety or illegality, or
allegation of impropriety, could have a material adverse effect on our financial
condition, results of operations and debt service capabilities.
20
<PAGE>
RISKS UNDER IDIQ CONTRACTS AND GSA SCHEDULE CONTRACT VEHICLES--MANY OF OUR
U.S. FEDERAL GOVERNMENT CUSTOMERS SPEND THEIR PROCUREMENT BUDGETS THROUGH GSA
SCHEDULE CONTRACTS AND WE ARE REQUIRED TO COMPETE FOR POST-AWARD ORDERS.
Budgetary pressures and reforms in the procurement process have caused many
U.S. Federal government customers to increasingly purchase goods and services
through "indefinite delivery, indefinite quantity", which we refer to as "IDIQ",
contracts, General Service Administration, which we refer to as "GSA", Schedule
contracts and other multiple award and/or government-wide acquisition contract
vehicles. These contract vehicles have resulted in increased competition and
pricing pressure requiring that we make sustained post-award efforts to realize
revenues under the relevant contract. There can be no assurance that we will
continue to increase revenues or otherwise sell successfully under these
contract vehicles. Our failure to compete effectively in this procurement
environment could have a material adverse effect on our financial condition,
results of operations and debt service capability. For a description of some of
our material contracts, please refer to the sections in this prospectus entitled
"Business--Anteon Divisions" and "Business--A&T Divisions."
RISK FACTORS RELATING TO THE INDUSTRY
GOVERNMENT REGULATIONS--WE MAY BE LIABLE FOR PENALTIES UNDER A VARIETY OF
PROCUREMENT RULES AND REGULATIONS. CHANGES IN GOVERNMENT REGULATIONS COULD
ADVERSELY AFFECT OUR BUSINESS.
Our defense and commercial businesses must comply with and are affected by
various government regulations. Among the most significant regulations are the
Federal Acquisition Regulations, which comprehensively regulate the formation,
administration and performance of government contracts; the Truth in
Negotiations Act, which requires certification and disclosure of all cost and
pricing data in connection with contract negotiations; the Cost Accounting
Standards, which impose accounting requirements that govern our right to
reimbursement under certain cost-based government contracts; and laws,
regulations and Executive Orders restricting the use and dissemination of
information classified for national security purposes and the exportation of
certain products and technical data. These regulations affect how our customers
and we can do business and, in some instances, impose added costs on our
businesses. Any changes in applicable laws could adversely affect the financial
performance of the business affected by the changed regulations. Any failure to
comply with applicable laws could result in contract termination, price or fee
reductions or suspension or debarment from contracting with the Federal
government.
RISKS RELATING TO FURTHER REDUCTIONS OR CHANGES IN MILITARY EXPENDITURES--A
DECLINE IN THE U.S. DEFENSE BUDGET MAY ADVERSELY AFFECT OUR OPERATIONS.
Sales under contracts with the U.S. Government's Department of Defense,
including under subcontracts that identified the Department of Defense as the
ultimate purchaser, represented approximately 34% of our sales in 1998. The U.S.
defense budget has generally declined since the mid-1980s, resulting in a
slowing of new program starts, program delays and program cancellations. This
reduction in the U.S. defense budget has caused most defense-related government
contractors to experience declining revenues, increased pressure on operating
margins and, in some cases, net losses.
The loss or significant curtailment of our material U.S. or international
military contracts or the failure to renew or replace material contracts upon
expiration or completion or a general significant decline in military
expenditures, could materially and adversely affect our financial condition,
results of operations and debt service capability.
RISK FACTORS RELATING TO ANTEON AND A&T
BACKLOG--WE ARE NOT ABLE TO GUARANTEE THAT CONTRACT ORDERS IN OUR OR A&T'S
BACKLOG WILL RESULT IN ACTUAL REVENUES IN ANY PARTICULAR FISCAL PERIOD.
21
<PAGE>
There can be no assurance that our or A&T's backlog will result in actual
revenues in any particular period or at all. Further, there can be no assurance
that any contract included in backlog that generates revenue will be profitable.
Our backlog consists of "funded" backlog which is based upon amounts actually
appropriated by a customer for payment of goods and services and "unfunded"
backlog which is based upon management's estimate of the future potential of our
existing contracts to generate revenues for us. These estimates are based on our
experience under such contracts and similar contracts, and management believes
such estimates to be reasonable. However, there can be no assurances that all of
such backlog will be recognized as revenue.
In addition, the Federal government's ability to select multiple winners
under IDIQ contracts, as well as its right to award subsequent task orders to
any particular awardee, means that there is no assurance that unfunded contract
backlog will result in actual orders. Further, the Federal government enjoys
broad rights to unilaterally modify or terminate such contracts. Accordingly,
most of our and A&T's backlog is subject to modification and termination at the
Federal government's discretion. In addition, funding for orders from the
Federal government is subject to approval on an annual basis by Congress
pursuant to the appropriations process.
RELIANCE ON SUBCONTRACTORS--WE REGULARLY EMPLOY SUBCONTRACTORS TO ASSIST US
IN SATISFYING OUR CONTRACTUAL OBLIGATIONS. IF THESE SUBCONTRACTORS FAIL TO
PERFORM THEIR CONTRACTUAL OBLIGATIONS, OUR PRIME CONTRACT PERFORMANCE AND OUR
ABILITY TO OBTAIN FUTURE BUSINESS COULD BE MATERIALLY AND ADVERSELY IMPACTED.
Our performance of government contracts may involve the issuance of
subcontracts to other companies upon which we rely to perform all or a portion
of the work we are obligated to deliver to our customers. A failure by one or
more of our subcontractors to satisfactorily deliver on a timely basis the
agreed-upon supplies and/or perform the agreed-upon services may materially and
adversely impact our ability to perform our obligations as a prime contractor.
In extreme cases, such subcontractor performance deficiencies could result in
the government terminating Anteon's contract for default. A default termination
could expose Anteon to liability for excess costs of reprocurement by the
government and have a material adverse effect on our ability to compete for
future contracts and task orders.
DEPENDENCE ON KEY TECHNICAL PERSONNEL--IF WE LOSE OUR TECHNICAL PERSONNEL,
OUR BUSINESS MAY BE ADVERSELY AFFECTED.
Our continued success depends in large part on our ability to recruit and
retain the technical personnel necessary to serve our clients effectively.
Competition for skilled personnel in the information technology and engineering
services industry is intense, and technology service companies often experience
high attrition among their skilled employees. Excessive attrition among our
technical personnel could increase our costs of performing our contractual
obligations, reduce our ability to efficiently satisfy our clients' needs and
constrain our future growth. In addition, we must often comply with provisions
in Federal government contracts that require employment of persons with
specified levels of education, work experience and security clearances. The loss
of any significant number of our existing key technical personnel or the
inability to attract and retain key employees in the future could have a
material adverse effect on our ability to win new business as well as our
financial condition, results of operations and debt service capability. Please
refer to the sections in this prospectus entitled "Business--Employees" and
"Management."
ACQUISITION STRATEGY--WE INTEND TO PURSUE FUTURE ACQUISITIONS AND ARE
CURRENTLY CONSIDERING SPECIFIC ACQUISITIONS WHICH MAY ADVERSELY AFFECT OUR
BUSINESS IF WE CANNOT EFFECTIVELY INTEGRATE THESE NEW OPERATIONS.
Our continued success will depend upon our ability to integrate Vector Data
Systems, Inc., Tech-matics, A&T and any businesses we may acquire in the future.
The integration of such businesses into our operations may require a
disproportionate amount of management's attention and our resources. There can
be no assurance that the acquired entities will operate profitably, that we will
realize anticipated synergies or that acquisitions will cause our operating
performance to improve.
22
<PAGE>
Although management regularly engages in discussions with and submits
acquisition proposals to acquisition targets, there can be no assurance that
suitable acquisition targets will be available in the future on reasonable
terms. In addition, to the extent that we complete any additional acquisitions,
no assurance can be given that acquisition financing will be available on
reasonable terms or at all, that any new businesses will generate revenues or
net income comparable to our existing businesses or that such businesses will be
integrated successfully or operated profitably. In addition, the new credit
facility contains certain covenants restricting, among other things,
acquisitions and capital expenditures, and the new credit facility and the
indenture limit the incurrence of additional indebtedness. Such covenants may
further limit our ability to complete additional acquisitions.
POTENTIAL UNDISCLOSED LIABILITIES ASSOCIATED WITH ACQUISITIONS--WE MAY BE
SUBJECT TO CERTAIN LIABILITIES ASSUMED IN CONNECTION WITH OUR ACQUISITIONS THAT
COULD ADVERSELY AFFECT OUR BUSINESS.
We conduct due diligence in connection with each of our acquisitions. In
connection with our acquisition of A&T, or any other acquisition made by us,
there may be liabilities that we fail to discover or that we inadequately assess
in our due diligence efforts. In particular, to the extent that prior owners of
any acquired businesses failed to comply with or otherwise violated procurement
requirements or applicable laws, Anteon, as the successor owner, may be
financially responsible for these violations or otherwise be adversely affected.
The discovery of any material liabilities could have a material adverse effect
on our financial condition, results of operations and debt service capability.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS--OUR INTERNATIONAL BUSINESS
EXPOSES US TO ADDITIONAL RISKS INCLUDING EXCHANGE RATE FLUCTUATIONS, FOREIGN TAX
AND LEGAL REGULATIONS AND POLITICAL OR ECONOMIC INSTABILITY THAT COULD ADVERSELY
AFFECT OUR BUSINESS.
In connection with our international operations, which generated less than
5% of our 1998 revenues, we are subject to risks associated with operating in
and selling to foreign countries, including:
- devaluations and fluctuations in currency exchange rates;
- changes in or interpretations of foreign regulations that may adversely
affect our ability to sell all of our products or repatriate profits to
the United States;
- imposition of limitations on conversions of foreign currencies into
dollars;
- imposition of limitations on or increase of withholding and other taxes on
remittances and other payments by foreign subsidiaries or joint ventures;
- hyperinflation or political instability in foreign countries;
- imposition or increase of investment and other restrictions or
requirements by foreign governments; and
- U.S. arms export control regulations and policies which govern our ability
to supply foreign affiliates and customers.
To the extent we expand our international operations, these and other risks
associated with international operations are likely to increase. Although such
risks have not had a material adverse effect on our financial condition, results
of operations or debt service capability in the past, no assurance can be given
that such risks will not have such an adverse effect on us in the future.
CONCENTRATION OF OWNERSHIP--WE WILL BE CONTROLLED BY ENTITIES UNDER THE
CONTROL OF MR. ISEMAN, WHOSE INTERESTS MAY NOT BE ALIGNED WITH YOURS.
Affiliates of Caxton-Iseman Capital which are controlled by Mr. Frederick J.
Iseman beneficially own more than 99% of our capital stock. Consequently, Mr.
Iseman can control the election of our directors and the outcome of all matters
submitted to a vote of our shareholders, as well as our management, operations
and policies. Mr. Iseman's interests may not be fully aligned with yours and
this could lead to a strategy that is not in your best interests.
23
<PAGE>
RISKS ASSOCIATED WITH "YEAR 2000" PROBLEM
We are dependent on business systems, which include our information
technology systems and non-information technology devices with embedded
microprocessors in operating our business. We also depend on the proper
functioning of business systems of third parties, such as our vendors and
customers. The failure of any of these systems to appropriately interpret the
upcoming calendar year 2000 could have a material adverse effect on our
financial condition, results of operations, debt service capability, cash flow
and business prospects.
During fiscal 1998 we implemented a plan which prepared our systems to be
Year 2000 compliant. We have completed our inventory phase and, based on this
analysis, we believe that our systems and applications will not be adversely
affected by any Year 2000 issues. Our aggregate costs incurred in 1998 to assess
our Year 2000 readiness were not material and management expects that any future
expenditures in 1999 will be similarly immaterial. However, we cannot assure you
that this estimate will be correct.
In addition, we have addressed the Year 2000 issue with our significant
third-party suppliers and customers through inclusion of appropriate contractual
provisions in our business dealings with such companies to ensure their Year
2000 readiness. Management has no reason to believe that any such companies will
encounter Year 2000 issues. However, we cannot assure you that they will be
successful in avoiding any Year 2000 issues or resolving them in a timely
manner, or that any failure to do so would not materially and adversely affect
our business.
Our inability to remedy our own Year 2000 problems or the failure of third
parties to do so may cause business interruptions or shutdown and result in
financial loss, regulatory actions, reputational harm and/or legal liability.
24
<PAGE>
USE OF PROCEEDS
We will not receive any cash proceeds from the issuance of the exchange
notes in exchange for the outstanding initial notes. We are making this exchange
solely to satisfy our obligations under our registration rights agreement. In
consideration for issuing the exchange notes, we will receive initial notes in
like aggregate accreted value equal to the accreted value of the exchange notes.
The following table sets forth sources and uses of funds in connection with
the Transactions:
<TABLE>
<CAPTION>
AMOUNT
SOURCES USES -------------
- ------------------------------------- ------------------------------------- (IN
AMOUNT THOUSANDS)
-------------
(IN
THOUSANDS)
<S> <C> <C> <C>
New Credit Facility:
Revolving Credit Facility.......... $ 13,000 Acquisition of A&T................... $ 108,800
Term Loan Facility................. 60,000 Repayment of Anteon debt............. 76,200
Initial Notes........................ 100,000 Repayment of A&T debt................ 3,200
Equity Contribution.................. 22,500 Estimated fees and expenses.......... 11,600
Existing cash........................ 4,300
------------- -------------
Total Sources...................... $ 199,800 Total Uses........................... $ 199,800
------------- -------------
------------- -------------
</TABLE>
25
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of Anteon at June 30,
1999. Each of the Transactions were consummated prior to June 30, 1999 and are
reflected in the amounts in the table. You should read this table in conjunction
with the information in the sections entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Anteon Corporation,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Analysis & Technology, Inc." and the historical consolidated
financial statements of Anteon and A&T, together with the respective exchange
notes thereto, included elsewhere in this prospectus.
<TABLE>
<CAPTION>
AS OF
JUNE 30, 1999
-------------
<S> <C>
(IN
THOUSANDS)
Total debt:
New credit facility:
Revolving credit facility...................................................................... $ 13,000
Term loan facility............................................................................. 60,000
12% Senior Subordinated Notes Due 2009........................................................... 100,000
Subordinated notes payable for Techmatics acquisition............................................ 8,648
Mortgage long-term debt.......................................................................... 2,076
-------------
Total debt................................................................................... $ 183,724
-------------
Stockholders' equity:
Common stock, $0.05 par value, 4,415,460 shares authorized; 3,557,672 shares issued and
outstanding.................................................................................... 178
Additional paid-in capital....................................................................... 40,751
Accumulated other comprehensive income........................................................... 1,970
Retained earnings................................................................................ 5,183
-------------
Total stockholders' equity................................................................... 48,082
-------------
Total capitalization....................................................................... $ 231,806
-------------
-------------
</TABLE>
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<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma condensed consolidated financial data is
based on the historical consolidated financial statements of Anteon, A&T and
Techmatics, adjusted to give effect to (1) the acquisition of Techmatics, (2)
the acquisition of A&T, (3) the offering of the initial notes, (4) the receipt
of the equity contribution, (5) the initial borrowings under the new credit
facility, (6) the repayment of all the amounts outstanding under the existing
credit facility and the repayment of all the outstanding indebtedness of A&T.
The unaudited pro forma condensed consolidated statements of operations for
the year ended December 31, 1998 and the six months ended June 30, 1999 give
effect to the Transactions as if they were completed as of January 1, 1998 and
combine Anteon's and A&T's statements of income for the year ended December 31,
1998 and the six months ended June 30, 1999, and the results of operations of
Techmatics for the period from January 1, 1998 to May 29, 1998. The Techmatics
acquisition was effective as of May 29, 1998 and is reflected in the historical
balance sheet of Anteon as of June 30, 1999 and Anteon's historical statements
of income for the period from May 29, 1998 to December 31, 1998, and for the six
months ended June 30, 1999.
The acquisition of A&T has been accounted for using the purchase method of
accounting. The purchase method of accounting allocates the aggregate purchase
price to the identifiable tangible and intangible assets acquired and
liabilities assumed based upon their respective estimated fair market values as
of the assumed date of combination. These estimates were based on preliminary
appraisals and other studies that will be completed during the remainder of
1999. The estimates of fair market value in the final allocation of the purchase
price may differ from those presented in the accompanying unaudited pro forma
condensed consolidated financial data.
The unaudited pro forma condensed consolidated financial data does not
include certain cost savings related to the acquisition of A&T that we expect to
realize in connection with the acquisition or the costs of achieving such cost
savings. Such pro forma cost savings also do not reflect certain other cost
savings related to previous acquisitions or the costs of achieving such cost
savings. Management believes that additional cost savings will be generated
through reduced general and administrative expenses and the allocation of a
portion of Anteon's home office expenses to A&T. A significant portion of such
allocated home office expenses will be recovered through A&T's cost-plus
contracts which provide for reimbursement of a portion of A&T's indirect costs.
Management estimates that such cost savings will be approximately $3.7 million
annually before income taxes; however, there can be no assurance that such cost
savings will be achieved in the amounts expected or at all. These estimated
savings are not reflected in the pro forma data.
The method of combining historical financial statements for the preparation
of the pro forma condensed consolidated financial data is for presentation only.
Actual statements of operations of Anteon will reflect the operating results of
both Anteon and A&T from the closing date of the acquisition with no retroactive
restatements. The unaudited pro forma condensed consolidated financial data is
provided for illustrative purposes only and does not purport to be indicative of
the financial condition or results of operations that would have been reported
had the Transactions occurred on the dates indicated, nor does it represent a
forecast of the consolidated financial position or results of operations for any
future period. The unaudited pro forma condensed consolidated financial data
should be read in conjunction with the historical financial statements, together
with the respective notes thereto, for Anteon, A&T and Techmatics, included
elsewhere in this prospectus.
27
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADJUSTMENTS FOR ADJUSTMENTS
HISTORICAL HISTORICAL THE TECHMATICS PRO FORMA HISTORICAL FOR THE
ANTEON TECHMATICS(A) ACQUISITION ANTEON A&T(B) TRANSACTIONS PRO FORMA
---------- ------------- --------------- ---------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue......................... $ 249,776 $ 32,763 $ 282,539 $ 168,247 $ 450,786
Cost of revenues................ 221,588 28,639 250,227 143,429 393,656
---------- ------------- ---------- ---------- ----------
Gross profit.................... 28,188 4,124 32,312 24,818 57,130
General and administrative
expenses...................... 15,286 1,883 17,169 14,917 (568) (c) 31,518
Amortization of non-compete
agreements.................... 530 -- 379(d) 909 -- 909
Goodwill amortization........... 1,814 -- 372(d) 2,186 944 1,839(e) 4,969
Other........................... 115 -- 115 242 357
---------- ------------- ---------- ---------- ----------
Operating income................ 10,443 2,241 11,933 8,715 19,377
Interest expense, net........... 5,597 74 5,671 357 16,518(f) 22,546
Minority interest in earnings of
subsidiary.................... 25 -- 25 -- 25
---------- ------------- ---------- ---------- ----------
Income (loss) before provision
(benefit) for income taxes.... 4,821 2,167 6,237 8,358 (3,194)
Income tax expense (benefit).... 2,353 -- 275(g) 2,628 3,689 (6,326)(g) (9)
---------- ------------- ---------- ---------- ----------
Net income (loss)............... $ 2,468 $ 2,167 $ 3,609 $ 4,669 $ (3,185)
---------- ------------- ---------- ---------- ----------
---------- ------------- ---------- ---------- ----------
EBITDA(i)....................... $ 15,988 $ 18,772 $ 31,437
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying notes to Unaudited Pro Forma Condensed Consolidated Statements
of Operations.
28
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADJUSTMENTS
HISTORICAL HISTORICAL FOR THE
ANTEON A&T(B) TRANSACTIONS PRO FORMA
---------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
Revenue............................................................ $ 145,609 $ 90,097 $ 235,706
Cost of revenues................................................... 128,576 76,444 205,020
---------- ---------- ----------
Gross profit....................................................... 17,033 13,653 30,686
General and administrative expenses................................ 8,907 7,312 (292)(c) 15,927
Amortization of non-compete agreements............................. 454 -- 454
Goodwill amortization.............................................. 1,024 579 813(e) 2,416
Other.............................................................. -- 638 638
---------- ---------- ----------
Operating income................................................... 6,648 5,124 11,251
Interest expense, net.............................................. 5,500 93 5,860(f) 11,453
Minority interest in earnings of subsidiary........................ 17 -- 17
---------- ---------- ----------
Income (loss) before provision (benefit) for income taxes.......... 1,131 5,031 (219)
Income tax expense (benefit)....................................... 399 2,240 (2,092)(g) 547
---------- ---------- ----------
Net income (loss)(h)............................................... $ 732 2,791 $ (766)
---------- ---------- ----------
---------- ---------- ----------
EBITDA(i).......................................................... $ 9,393 $ 16,530
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to Unaudited Pro Forma Condensed Consolidated Statements
of Operations.
29
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
The following adjustments have been reflected in the Unaudited Pro Forma
Condensed Consolidated Statements of Operations:
(a) To reflect the historical results of operations of Techmatics for the period
January 1, 1998 to May 29, 1998. The Techmatics acquisition was effective as
of May 29, 1998 and is reflected in Anteon's historical statements of income
for the periods from May 29, 1998 to December 31, 1998, and January 1, 1999
to June 30, 1999.
(b) To reflect the historical results of operations of A&T.
(c) 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.
(d) To reflect incremental amortization of goodwill and non-compete agreements
resulting from the Techmatics acquisition for the period January 1, 1998 to
May 29, 1998.
(e) To reflect the amortization of goodwill of $83,490 from the acquisition of
A&T, determined as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1998 JUNE 30, 1999
----------------- -----------------
<S> <C> <C>
Amortization expense from the acquisition............... $ 2,783 $ 1,392
Elimination of historical A&T goodwill.................. (944) (579)
------ ------
Pro forma adjustment to goodwill amortization
expense............................................. $ 1,839 $ 813
------ ------
------ ------
</TABLE>
The acquisition was accounted for using the purchase method whereby the net
tangible and identifiable intangible assets acquired and liabilities assumed
were recognized at their estimated fair market values at the date of
combination. These estimates were based on preliminary appraisals and other
studies that will be completed during the remainder of 1999. Amortization
expense on the goodwill from the acquisition is being amortized on a
straight-line basis over 30 years.
(f) To reflect incremental interest expense associated with (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 existing credit
facility. The components of pro forma interest expense for the year ended
December 31, 1998 and the six months ended June 30, 1999 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1998 JUNE 30, 1999
----------------- ----------------
<S> <C> <C>
12% Senior Subordinated Notes Due 2009.................. $ 12,000 $ 6,000
Term Loan Facility...................................... 6,000 3,000
Revolving Credit Facility............................... 1,300 650
Techmatics subordinated notes payable................... 1,040 485
Amortization of deferred financing costs................ 1,780 1,217
Other................................................... 426 101
------- -------
Pro forma interest expense.............................. 22,546 11,453
Less historical interest expense........................ (6,028) (5,593)
------- -------
Pro forma adjustment to interest expense.............. $ 16,518 $ 5,860
------- -------
------- -------
</TABLE>
The interest rates used above are the interest rates that we estimate will
be applicable. The Term Loan Facility and the Revolving Credit Facility bear
interest at adjustable rates. An increase of 1/8% in the
30
<PAGE>
interest rate applicable to the Term Loan Facility or the Revolving Credit
Facility will result in pro forma interest expense and pro forma net loss
for the year ended December 31, 1998 and the six months ended June 30, 1999
as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 SIX MONTHS ENDED JUNE 30, 1999
----------------------------------- -----------------------------------
REVOLVING REVOLVING
TERM LOAN CREDIT TERM LOAN CREDIT
FACILITY FACILITY TOTAL FACILITY FACILITY TOTAL
----------- ----------- --------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Pro forma interest expense...... $ 22,621 $ 22,562 $ 22,637 $ 11,491 $ 11,461 $ 11,499
----------- ----------- --------- ----------- ----------- ---------
----------- ----------- --------- ----------- ----------- ---------
Pro forma net loss.............. $ (3,230) $ (3,195) $ (3,240) $ (789) $ (771) $ (794)
----------- ----------- --------- ----------- ----------- ---------
----------- ----------- --------- ----------- ----------- ---------
</TABLE>
(g) To recognize Federal and state income taxes at a combined rate of 40%, after
adjusting income (loss) before taxes for non-deductibility of goodwill
amortization expense.
(h) The accompanying unaudited pro forma condensed consolidated statement of
operations for the six months ended June 30, 1999 excludes $772 ($463, net
of tax) of deferred financing costs associated with the existing credit
facility, which were written off upon early repayment of all the amounts
outstanding under such facility.
(i) EBITDA represents earnings before interest, taxes and depreciation and
amortization. EBITDA also excludes infrequent and unusual charges of $0.1
million for the year ended December 31, 1998 relating to asset write-offs at
Techmatics, and $0.24 million for the six months ended June 30, 1999
relating to a settlement with a former executive. Management believes that
these charges will not recur and will not result in further cash charges.
EBITDA is presented because we believe that it is a widely accepted
supplemental indicator of an entity's ability to incur and service debt.
However, EBITDA should not be considered by an investor as an alternative to
net income or operating income as an indicator of our operating performance
or cash flow from operations, or as an alternative to cash flows as a
measure of liquidity.
31
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA OF ANTEON CORPORATION
The following selected consolidated financial data has been derived from (1)
in the case of Anteon, its unaudited consolidated financial statements as of
June 30, 1999 and for the six months ended June 30, 1999 and 1998 and its
audited consolidated financial statements as of and for the years ended December
31, 1998 and 1997 and for the period from April 1, 1996 to December 31, 1996 and
(2) in the case of our Predecessor Company, its audited consolidated financial
statements for the period from January 1, 1996 to March 31, 1996, in each case
included elsewhere in this prospectus. The following selected consolidated
financial data as of December 31, 1996 of Anteon and as of and for the year
ended December 31, 1995 of our Predecessor Company is derived from audited
consolidated financial statements not included in this prospectus. Each of the
audited consolidated financial statements of Anteon and our Predecessor Company
have been audited by KPMG LLP, independent certified public accountants. The
following selected consolidated financial data as of and for the year ended
December 31, 1994 of our Predecessor Company is unaudited and has been prepared
on the same basis as the audited consolidated financial statements of our
Predecessor Company included elsewhere in this prospectus. In the opinion of
Anteon's management, the unaudited data reflects all adjustments, consisting of
normal recurring adjustments, necessary for a fair presentation of such data.
These results are not necessarily indicative of the results that may be expected
for a complete year or for any future period and are not comparable to the prior
period as a result of business acquisitions consummated in 1997, 1998 and 1999.
Results of operations of these acquired businesses are included in Anteon's
consolidated financial statements for the periods subsequent to the respective
dates of acquisition. You should read this data in conjunction with
"Capitalization," "Unaudited Pro Forma Condensed Consolidated Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Anteon Corporation," "Business" and the historical consolidated
financial statements of Anteon, together with the respective notes thereto,
included elsewhere in this prospectus.
<TABLE>
<CAPTION>
ANTEON
PREDECESSOR COMPANY(A) ---------------------------------------------------------
---------------------------------
PERIOD FROM PERIOD FROM
JANUARY 1, APRIL 1,
1996 1996
YEAR ENDED TO MARCH TO DECEMBER YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 31, 31, DECEMBER 31, JUNE 30,
-------------------- ----------- ------------- -------------------- --------------------
1994 1995 1996 1996 1997(B) 1998(C) 1998(C) 1999(D)
--------- --------- ----------- ------------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues....................... $ 78,154 $ 108,504 $ 32,046 $ 109,780 $ 176,292 $ 249,776 $ 108,196 145,609
Costs of revenues.............. 73,771 101,084 29,218 100,426 159,539 221,588 96,139 128,576
--------- --------- ----------- ------------- --------- --------- --------- ---------
Gross profit................... 4,383 7,420 2,828 9,354 16,753 28,188 12,057 17,033
General and administrative
expenses..................... 9,471 6,489 2,071 4,616 8,061 15,286 6,203 8,907
Amortization of non-compete
agreements (e)............... -- -- -- 1,714 2,286 530 76 454
Goodwill amortization.......... -- -- -- 346 742 1,814 751 1,024
Costs of acquisitions (f)...... -- -- -- -- 584 115 18 --
--------- --------- ----------- ------------- --------- --------- --------- ---------
Operating income (loss)........ (5,088) 931 757 2,678 5,080 10,443 5,009 6,648
Interest expense, net.......... 952 105 -- 1,455 2,365 5,597 1,736 5,500
Minority interest in earnings
of subsidiary................ -- -- -- -- 13 25 14 17
--------- --------- ----------- ------------- --------- --------- --------- ---------
Income (loss) before provision
for income taxes and
extraordinary item........... (6,040) 826 757 1,223 2,702 4,821 3,259 1,131
Income tax expense (benefit)... (2,416) 330 303 416 1,063 2,353 1,310 399
--------- --------- ----------- ------------- --------- --------- --------- ---------
Net income (loss) before
extraordinary item........... $ (3,624) $ 496 $ 454 $ 807 $ 1,639 $ 2,468 $ 1,949 $ 732
Extraordinary item, net of
tax.......................... -- -- -- -- -- -- -- 463(g)
--------- --------- ----------- ------------- --------- --------- --------- ---------
Net income (loss).............. (3,624) 496 454 807 1,639 2,468 1,949 269
--------- --------- ----------- ------------- --------- --------- --------- ---------
--------- --------- ----------- ------------- --------- --------- --------- ---------
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
ANTEON
PREDECESSOR COMPANY(A) ---------------------------------------------------------
---------------------------------
PERIOD FROM PERIOD FROM
JANUARY 1, APRIL 1,
1996 1996
YEAR ENDED TO MARCH TO DECEMBER YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 31, 31, DECEMBER 31, JUNE 30,
-------------------- ----------- ------------- -------------------- --------------------
1994 1995 1996 1996 1997(B) 1998(C) 1998(C) 1999(D)
--------- --------- ----------- ------------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
EBITDA (h)........... $ (4,426) $ 2,039 $ 1,143 $ 5,800 $ 9,583 $ 15,988 $ 6,694 $ 9,393
EBITDA margin........ (5.7)% 1.9% 3.6% 5.3% 5.4% 6.4% 6.2% 6.5%
Cash flow from (used
in) operating
activities......... $ 849 $ (8,119) $ 2,224 $ 7,519 $ 14,094 $ (8,340) $ (9,426) $ 5,677
Capital
expenditures....... 570 1,195 211 376 817 2,089 1,164 1,255
Ratio of earnings to
fixed charges
(i)................ -- 1.8x 4.5 x 1.6 x 1.8x 1.6x 2.3x 1.2x
Deficiency in
earnings to cover
fixed charges...... $ (6,040) -- -- -- -- -- -- --
BALANCE SHEET DATA
(AS OF DECEMBER
31):
Currents assets...... $ 32,135 $ 36,591 $ 42,394 $ 35,744 $ 73,556 $ 106,459
Working capital...... 22,223 23,859 23,397 11,767 34,161 43,602
Total assets......... 38,673 40,697 59,599 68,572 143,168 287,107
Net debt (j)......... -- -- 19,486 23,448 73,573 170,427
</TABLE>
- ------------------------
(a) Represents the results of operations and financial position of our
Predecessor Company prior to its acquisition by Anteon, effective April 1,
1996.
(b) Includes the results of operations of Vector Data from August 29, 1997, the
date of acquisition by Anteon.
(c) Includes the results of operations of Techmatics from May 29, 1998, the date
of acquisition by Anteon.
(d) The Company consummated the acquisition of A&T on June 23, 1999. The results
of operations of A&T were not significant for the period ended June 30, 1999
and are not included in Anteon's consolidated statements of operations for
the six months ended June 30, 1999. Balance sheet data as of June 30, 1999
reflects the acquisition of A&T.
(e) Non-compete agreements entered into by Anteon in connection with purchase
business combinations are amortized on a straight-line basis over the terms
of such non-compete agreements.
(f) Costs incurred on successful acquisitions are capitalized as a cost of the
acquisition, while costs incurred by Anteon in connection with proposed
acquisitions that were unsuccessful or discontinued are expensed as
incurred.
(g) Represents the write-off of $772 of deferred financing fees, net of income
taxes of $309, related to the existing credit facility which was repaid
early in conjunction with the Transactions.
(h) EBITDA represents earnings before interest, taxes and depreciation and
amortization. EBITDA also excludes infrequent and unusual charges of $0.1
million for the year ended December 31, 1998 relating to asset write-offs at
Techmatics, and $0.24 million for the six months ended June 30, 1999
relating to a settlement with a former executive. Management believes that
these charges will not recur and will not result in future cash charges.
EBITDA is presented because we believe that it is a widely accepted
supplemental indicator of an entity's ability to incur and service debt.
However, EBITDA should not be considered by an investor as an alternative to
net income or operating income as an indicator of our operating performance
or cash flow from operations, or as an alternative to cash flows as a
measure of liquidity.
(i) For purposes of determining the ratio of earnings to fixed charges,
"earnings" includes pre-tax income adjusted for fixed charges. "Fixed
charges" consist of interest expense and that portion of operating lease
rental expense representative of interest (deemed to be one-third of rental
expense).
(j) Net debt represents total indebtedness less cash and investments in
marketable securities.
33
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA OF ANALYSIS & TECHNOLOGY, INC.
The following selected consolidated financial data as of March 31, 1999, and
1998 and for the years ended March 31, 1999, 1998 and 1997 has been derived from
the audited consolidated financial statements of A&T, each included elsewhere in
this prospectus. The following selected consolidated financial data as of March
31, 1997, 1996 and 1995 and for the years ended March 31, 1996 and 1995 have
been derived from the audited consolidated financial statements of A&T not
included in this prospectus. Each of these audited consolidated financial
statements have been audited by KPMG LLP, independent certified public
accountants. You should read the following information in conjunction with
"Capitalization," "Unaudited Pro Forma Condensed Consolidated Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Analysis & Technology, Inc.," "Business" and the audited
consolidated financial statements of A&T, together with the respective notes
thereto, included elsewhere in this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------------------------------
1995 1996 1997 1998(A) 1999
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues from continuing operations......................... $ 131,174 $ 122,924 $ 142,547 $ 159,956 $ 170,355
Costs and expenses.......................................... 125,222 116,670 135,777 152,011 160,075
---------- ---------- ---------- ---------- ----------
Operating earnings from continuing operations............... 5,952 6,254 6,770 7,945 10,280
Interest expense............................................ 542 512 319 171 350
Other, net.................................................. 269 338 638 (570) 1,179
---------- ---------- ---------- ---------- ----------
Earnings before provision for income taxes.................. 5,141 5,404 5,813 8,344 8,751
Income tax expense.......................................... 2,171 1,816 2,437 4,152 3,879
---------- ---------- ---------- ---------- ----------
Net earnings from continuing operations..................... 2,970 3,588 3,376 4,192 4,872
DISCONTINUED OPERATIONS:
Loss from discontinued operations, net of tax............... (197) (195) -- -- --
Loss from disposal of discontinued operations, net of tax... -- (1,316) -- -- --
---------- ---------- ---------- ---------- ----------
Net earnings................................................ $ 2,773 $ 2,077 $ 3,376 $ 4,192 $ 4,872
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------------------
1995 1996 1997 1998(A) 1999
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C>
OTHER DATA:
EBITDA (b)................................................. $ 8,444 $ 9,155 $ 9,337 $ 11,781 $ 12,620
Gross margin (c)........................................... 4.5% 5.1% 4.8% 5.0% 6.0%
EBITDA margin.............................................. 6.4% 7.5% 6.6% 7.4% 7.4%
Cash flow from operating activities........................ $ 4,888 $ 3,123 $ 9,108 $ 7,774 $ 6,130
Capital expenditures....................................... 2,258 1,748 2,327 3,031 2,508
Ratio of earnings to fixed charges (d)..................... 3.5x 3.6x 3.8x 4.8x 4.8x
BALANCE SHEET DATA (AS OF END OF PERIOD):
Current assets............................................. $ 29,910 $ 31,232 $ 28,869 $ 28,088 $ 31,110
Working capital............................................ 15,610 19,789 16,578 14,455 15,925
Total assets............................................... 61,033 56,437 57,813 63,609 73,746
</TABLE>
- ------------------------
(a) Includes the results of operations of Command Control, Inc. from October
1997, Interactive Media Solutions, Inc. from April 1997, UP, Inc. from
November 1997, Dalco Electronics Corporation from August 1997 and Cambridge
Acoustical Associates, Inc. from February 1998, the respective dates of
acquisition by A&T.
(b) EBITDA represents earnings before interest, taxes and depreciation and
amortization. EBITDA is presented because we believe that it is a widely
accepted supplemental indicator of an entity's ability to incur and service
debt. However, EBITDA should not be considered by an investor as an
alternative to net income or operating income as an indicator of our
operating performance or cash flow from operations, or as an alternative to
cash flows as a measure of liquidity.
(c) Gross margin is determined by dividing gross profit by revenues from
continuing operations. Gross profit is based on operating income from
continuing operations, including amortization of intangibles and
depreciation expense.
(d) For purposes of determining the ratio of earnings to fixed charges,
"earnings" includes pre-tax income adjusted for fixed charges. "Fixed
charges" consist of interest expense and that portion of operating lease
rental expense representative of interest (deemed to be one-third of rental
expense).
35
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS--
ANTEON CORPORATION
YOU SHOULD READ THE FOLLOWING INFORMATION TOGETHER WITH OUR CONSOLIDATED
FINANCIAL STATEMENTS AND THE RELATED NOTES INCLUDED ELSEWHERE IN THIS
PROSPECTUS. CERTAIN STATEMENTS IN THIS SECTION ARE "FORWARD-LOOKING STATEMENTS"
AND YOU SHOULD READ THE "FORWARD-LOOKING STATEMENTS" SECTION FOR SPECIAL
INFORMATION ABOUT OUR PRESENTATION OF FORWARD-LOOKING INFORMATION.
GENERAL
Anteon is a leading provider of advanced information technology and
engineering services principally to a wide range of customers within the U.S.
Federal government. We serve hundreds of governmental clients through 39 offices
worldwide. We have performed work for all 14 Cabinet-level agencies, designing,
maintaining and upgrading critical elements of the government's information
technology infrastructure, such as emergency response, defense, intelligence,
logistics and financial management systems. The Federal government is among the
world's largest purchasers of information technology with expected total
expenditures in fiscal 1999 in excess of $30 billion.
In April 1996 an investor group led by affiliates of Caxton-Iseman Capital
acquired Ogden Professional Services Corporation (the Predecessor Company),
which was renamed Anteon Corporation. Since that acquisition, we have
implemented a strategy designed to increase revenues through internal growth and
acquisitions, improve EBITDA profit margins to a level among the highest in our
industry and improve asset turnover. As a result of this strategy, from 1995 to
1998 we increased revenues at a compound annual growth rate of 32%. Improved
internal performance accounted for approximately 19% of this compound annual
growth rate with the remaining 13% increase attributable to our acquisitions of
Vector Data and Techmatics. In addition, EBITDA increased at a faster rate than
revenues and grew from $2.0 million in 1995 to $16.0 million in 1998 (or $18.8
million after giving effect to the full year of the Techmatics acquisition).
EBITDA margins increased from 1.9% to 6.4% during the same period (or 6.6% after
giving effect to the full year of the Techmatics acquisition). Cash flows used
in operations were $9.4 million for 1998.
Substantially all of our services and products are provided under long-term
government contracts. Our contract base is well diversified and in 1998, we
performed work on approximately 3,000 task orders under more than 500 contracts
for approximately 400 customers. Management estimates that no task order
accounted for more than 5% of 1998 revenues. The contracts we perform can be
categorized into three primary types: time and materials ("time and materials"),
cost-plus fixed fee reimbursement ("cost-plus") and firm fixed price ("fixed
price"). Time and materials contracts represented approximately 47% of our 1998
revenues. Revenue recognition for time and materials contracts is recorded at
hourly rates, which are negotiated with the customer. Time and materials
contracts are typically more profitable because of our ability to negotiate
rates and manage costs on those contracts. Cost-plus contracts represented
approximately 34% of our 1998 revenues. Revenue is recognized under cost-plus
contracts on the basis of direct and indirect costs incurred plus a negotiated
profit calculated as a percentage of our costs. Cost-plus contracts provide
lower risk to us than other contract types because we are reimbursed for all
direct costs and certain indirect costs, such as overhead and general and
administrative charges, and are paid a fixed fee for work performed. Revenues
are recognized under fixed price contracts based on a percentage-of-completion
method. We may be exposed to cost overruns if we encounter variances from our
estimated costs under fixed price contracts. Accordingly, we attempt to minimize
the number of fixed price contracts, particularly for advanced software
development projects. Over the past three-year period fixed price contracts have
represented only 15% to 20% of our revenues, including 19% of 1998 revenues.
36
<PAGE>
Prices on Federal government contracts are generally set using estimated
costs plus a negotiated profit percentage. Under time and materials and fixed
price contracts, margins are not limited by law or regulation; however, the
Federal government's profit objectives in negotiating time and materials and
fixed price contracts seldom provide for operating profits in excess of 15%. Due
to competitive pressures, operating profits on time and materials and fixed
price contracts are often less than 10%. Under cost-plus contracts, operating
profits are statutorily limited to 15% of costs.
In each year a significant portion of our revenues is derived from contract
backlog and a significant portion of that backlog 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 the overall financial success of Anteon and we believe that we manage costs
effectively. This allows us to be highly competitive on price. Our demonstrated
performance record and service excellence have enabled us to maintain our
position as an incumbent service provider on 100% of our major contracts that
have been recompeted over the past three years, while increasing our backlog
from $428 million in 1996 to $1.1 billion at June 30, 1999. These backlog
amounts consist of "funded" backlog, which is based upon amounts actually
appropriated by a customer for payment of goods and services and "unfunded"
backlog which is based upon management's estimates of the future potential of
our existing contracts to generate revenues for us.
Anteon's costs may be categorized as direct costs such as labor and related
fringe costs which are directly attributable to contract performance, and
indirect costs such as corporate overhead which are not directly attributable to
contract performance. Under our time and materials and cost-plus contracts we
are allowed to charge our direct costs and an agreed-upon portion of our
indirect costs to the customer. A key element in the successful bidding and
execution of contracts is the control of indirect costs. We have developed
comprehensive management information and resource management systems in order to
increase the productivity of our finance and administrative support areas. As a
result of these efforts, our indirect costs have grown at rates much lower than
overall revenues. We believe our indirect costs, at approximately 15% of sales,
are among the lowest in the industry.
On March 7, 1999 we entered into a definitive agreement to acquire all the
outstanding shares of common stock of A&T. We consummated the acquisition on
June 23, 1999 after the approval of the acquisition by the shareholders of A&T.
The acquisition significantly increased the size of Anteon. Pro forma for the
acquisition, Anteon's net sales and EBITDA in 1998 would have been $450.8
million and $31.4 million, respectively. Following the consummation of the
acquisition, in addition to the cost savings reflected in the Unaudited Pro
Forma Condensed Consolidated Financial Data appearing elsewhere in this
prospectus, we believe that Anteon will be able to realize costs savings through
synergies in indirect costs and general and administrative expenses. In
addition, after giving pro forma effect to the acquisition, the level of
billable indirect costs under our contracts will increase because the proportion
of our revenues generated by cost-plus contracts will increase from 40% to 55%.
This will allow Anteon to receive payment for a greater portion of its indirect
costs. Based on our ability to pass such indirect costs through to our
government customers, we estimate this will result in an additional $2.5 million
of reimbursable costs.
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<PAGE>
RESULTS OF OPERATIONS
The following table sets forth our results of operations based on the
percentage relationship of certain items to contract revenues during the period
shown:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31 JUNE 30
------------------------------- --------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
Revenues............................................................... 100.0% 100.0% 100.0% 100% 100%
Costs of revenues...................................................... 91.4 90.5 88.7 89.1 88.3
--------- --------- --------- --------- ---------
Gross profit....................................................... 8.6 9.5 11.3 10.9 11.7
General and administrative expenses.................................. 4.7 4.6 6.1 5.4 5.6
Costs related to acquisitions(a)..................................... 1.5 2.0 1.0 0.8 1.5
--------- --------- --------- --------- ---------
Operating income................................................... 2.4 2.9 4.2 4.7 4.6
</TABLE>
- ------------------------
(a) Includes amortization of non-compete agreements, goodwill amortization and
costs incurred in connection with unsuccessful acquisitions.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1998
REVENUES
Revenue increased 34.8% to $145.6 million in for the first six months in
1999 from $108.0 million in 1998. The revenue growth reflects the acquisition of
Techmatics as well as continued internal growth from the Company's information
technology and engineering technology businesses. Techmatics generated $43.9
million in revenue during the six months ended June 1999 as compared with one
month's revenue of $8.2 million in June 1998. The company was also able to
significantly increase its contract backlog with several major awards in late
1998 and early 1999 including Answer, ITOP II and Theater Ballistic Missile
Defense and began to earn revenue on the startup of those new contracts. Backlog
increased from $414 million as of June 30, 1998 to $1.3 billion as of June 30,
1999.
COSTS OF REVENUES
Costs of revenues, as a percent of revenues, decreased to 88.3% during the
first six months in 1999 from 89.1% increasing the gross profit, which grew by
8%, from 10.9% in 1998 to 11.7% in 1999. This favorable result is attributable
to several factors. Contributing to the growth was the relatively higher
operating profit margin of Techmatics and the improved profitability of the
Company's Products and Services business unit.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses, which consists of corporate management,
finance and administration, marketing and contracts, was 5.6% of revenues for
the first six months of 1999. This was a 4% increase from the same period in
1998. The growth can be attributed primarily to an investment in infrastructure
to support a substantially larger company. In addition, the Company spent more
on marketing costs to pursue opportunities created from new contract awards
which substantially increased backlog.
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<PAGE>
OPERATING INCOME
Operating income continued to grow increasing by 33.3% to $6.8 million in
fiscal 1999 from $5.1 million in fiscal 1998. The operating profit growth was
attributable to the addition of Techmatics. Operating margins remained steady at
4.7% of revenue.
Net interest expense increased 224% to $5.5 million in the first six months
of 1999 from $1.7 million in the same period in 1998. This was principally due
to the cost of debt incurred to acquire Techmatics and accrued interest expenses
for the new senior subordinated notes. This included fees associated with a
bridge loan facility.
Earnings before taxes decreased 67% to $1.1 million in the first six months
of 1999 from $3.4 million in the same period in 1998. This decline was primarily
attributable to interest expense on the notes.
1998 COMPARED WITH 1997
REVENUES
Revenues increased by $73.5 million or 41.7% to $249.8 million in 1998 from
$176.3 million in 1997 due to internal growth and acquisitions. Anteon's
internal growth (I.E., excluding acquisitions) of 13.5%, or $23.9 million, was
primarily driven by increased licensing revenues from the Product Applications
and Services Group of the Enterprise Solutions and Services Group and increased
revenues under the TC-AIMS contract. Techmatics generated $49.6 million in
revenues subsequent to its acquisition on May 29, 1998. The full year impact
from the acquisition of Techmatics increased Anteon's pro forma revenues to
$282.5 million. Anteon also significantly increased its contract backlog by
winning several major awards in late 1998, including the $25 billion GSA ANSWER
contract and the $10 billion Department of Transportation ITOP II contract.
Backlog increased during 1998 from $341 million at January 1, 1998 to $1.2
billion at December 31, 1998, $119.2 million of which was attributable to new
contract awards and $230 million of which was attributable to the acquisition of
Techmatics and the remainder of which was attributable to our ability to
maintain our position as an incumbent service provider on 100% of our major
contracts that have been recompeted.
COSTS OF REVENUES
Costs of revenues increased by $62.1 million or 38.9% to $221.6 million in
1998 from $159.5 million in 1997. As a percentage of revenues, costs of revenues
decreased to 88.7% in 1998 from 90.5% in 1997. The improvement in gross margins
was attributable to improved reimbursement for indirect overhead expenses,
higher gross profit margins of Techmatics and improved profitability of Anteon's
Product Applications and Services Group.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased by $7.2 million or 88.9% from
$15.3 million in 1998 from $8.1 million in 1997. As a percentage of revenues,
general and administrative expenses increased to 6.1% in 1998 from 4.6% in 1997.
General and administrative expenses consist of corporate management, finance and
administration, marketing and contract functions. The increase in general and
administrative expense was attributable primarily to the addition of $3.1
million of overhead expenses of Techmatics in 1998 and the expansion of Anteon's
personnel and management to meet the increasing demands of its expanding
business. Generally, a significant portion of these costs are reimbursable under
Anteon's contracts. Additionally, general and administrative expenses were
increased by a $0.7 million write-off of unamortized contract start-up costs
incurred by our Predecessor Company relating to contracts that were awarded in
1995.
39
<PAGE>
OPERATING INCOME
Operating income increased by $5.3 million or 103.9% to $10.4 million in
1998 from $5.1 million in 1997. As a percentage of revenues, operating income
improved by 45% to 4.2% in 1998 from 2.9% in 1997.
Net interest expense increased to $5.6 million in 1998 from $2.4 million in
1997 principally due to increased debt incurred to acquire Techmatics.
Income before taxes increased 78% to $4.8 million in 1998 from $2.7 million
in 1997. Anteon's effective tax rate increased to 48.8% in 1998 from 39.3% in
1997 principally due to the non-deductibility of goodwill generated by Anteon's
acquisition of Vector Data. After-tax income increased 56.3% to $2.5 million in
1998 from $1.6 million in 1997. The large increase in revenue and operating
earnings, offset in part by the increase in interest expense and tax rate,
contributed to this increase in net income.
1997 COMPARED WITH 1996
REVENUES
Revenues increased by $34.5 million or 24.3% to $176.3 million in 1997 from
$141.8 million in 1996. Internal growth (I.E., excluding acquisitions) of 20.4%
or $28.9 million was driven by increased revenues under the CAPZONE and PACZONE
contracts. Vector Data generated $5.6 million in revenues subsequent to its
acquisition in August 1997.
COSTS OF REVENUES
Costs of revenues increased by $29.9 million or 23.1% to $159.5 million in
1997 from $129.6 million in 1996. As a percentage of revenues, costs of revenues
decreased to 90.5% in 1997 from 91.4% in 1996. Fiscal 1997 represented the first
full fiscal year in which current management operated Anteon. The increase in
gross margins was attributable to improved performance on several fixed price
contracts.
GENERAL AND ADMINISTRATIVE EXPENSES
General and adminstrative expenses increased by $1.4 million or 20.9% to
$8.1 million in 1997 from $6.7 million in 1996. As a percentage of revenues,
general and administrative expenses decreased to 4.6% in 1997 from 4.7% in 1996.
The aggregate dollar increase was attributable to the addition of Vector Data's
general and administrative charges and the expansion of Anteon's marketing staff
in an effort to increase backlog.
OPERATING INCOME
Operating income increased by $1.7 million or 50.0% to $5.1 million in 1997
from $3.4 million in 1996. Operating margins grew by 21% to 2.9% in 1997 from
2.4% in 1996. This improved operating income was primarily due to certain
profitable contracts and improved profits generated by Vector Data.
Interest expense increased to $2.4 million in 1997 from $1.5 million in
1996, principally reflecting a full year of debt outstanding in 1997 compared to
eight months the prior year (reflecting the date of the original acquisition of
the Predecessor Company) as well as increased indebtedness due to the
acquisition of Vector Data.
Income before taxes increased 35.0% to $2.7 million in 1997 from $2.0
million in 1996 as a result of a higher operating profit margin, offset by
increased interest expense. Anteon's effective tax rate increased to 39.3% in
1997 from 36.3% in 1996, principally due to the non-deductibility of goodwill
generated from Anteon's acquisition of Vector Data. After-tax income increased
23.1% to $1.6 million in 1997 from $1.3 million in 1996.
40
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
SIX MONTHS ENDED JUNE 30, 1999 CASH FLOW
For the first six months of 1999, net cash provided from operating
activities totaled $9.6 million. The positive cash flow resulted primarily from
a $1.9 million decrease in accounts receivable and a $5.8 increase in accounts
payable/accrued expenses. The decrease in accounts receivable was driven in
large part by the successful collection efforts of invoices that had been
backed-up in processing by the Federal government in a number of its payment
offices. The overall days sales outstanding ("DSO") for the Company at mid-year
ended June 30, 1999 was 76 days. While the Company's core business maintained a
DSO in the 55-70 day range during 1998, its acquired subsidiaries, Techmatics
and Vector Data, have maintained DSO's of over 100 days during the past year.
Processes are being put in place to reduce the DSO to the 60-day range during
the second half of 1999.
Net cash used in investing activities for the six months totaled $118.7
million. The principal investment was the purchase of Analysis & Technology for
approximately $115.4 million, including transaction costs, which closed on June
23. Capital expenditures totaled $1.3 million for the six months.
Net cash provided by financing activities for the six months totaled $111.7
million. This was primarily due to $100 million in funds obtained through
issuance of the new senior subordinated notes, an equity contribution of $22.5
million, net of a $4.9 million in paydown of deferred obligations associated
with the 1998 acquisition of Techmatics, and $8.5 million of fees incurred in
connection with the new senior subordinated notes and the new credit facility.
1998 CASH FLOW
Net cash used in operating activities for 1998 totaled $8.3 million. The net
cash requirements resulted primarily from a $15.6 million increase in accounts
receivable. This increase was principally due to a delay in processing of
contractor payments by the Federal government in a number of its payment offices
due to a reduction of administrative personnel and difficulties in successfully
implementing office automation to relieve the congestion. The Federal government
is working to correct this problem and we believe these delays should be
resolved by the end of 1999. We focus on capital management in order to maximize
asset turnover and reduce working capital. At the time its Predecessor Company
was acquired, Anteon had days sales oustanding ("DSO") of 119 days. Anteon was
able to reduce overall DSO for the years ended December 31, 1996, 1997 and 1998
to 79 days, 59 days and 89 days, respectively. Anteon's DSO increased in 1998
due to the acquisition of Vector Data in late 1997 and Techmatics in May 1998.
Prior to the acquisitions of Vector Data and Techmatics, Anteon maintained a
63-day average DSO in 1998. Vector Data and Techmatics each had DSOs of over 100
days during 1998. Anteon has implemented initiatives to reduce Anteon's overall
DSO to the 70-day range by the end of June 1999.
Net cash used in investing activities for 1998 totaled $37.5 million. The
principal investment requirement was $29.7 million for the acquisition of
Techmatics. Capital expenditures totaled $2.1 million, approximately 40% of
which were attributable to Anteon's capital expenditure for CostPoint, an
integrated enterprise-wide information system.
Net cash provided by financing activities for 1998 totaled $45.3 million.
This included an increase of $46.3 million in senior debt borrowing to $70.4
million at December 31, 1998 from $24.1 million at December 31, 1997.
1997 CASH FLOW
Net cash flow from operating activities in 1997 totaled $14.1 million,
principally reflecting a $10.1 million reduction in accounts receivable, $5.1
million in depreciation and amortization and $1.6 million in net income.
41
<PAGE>
Net cash used in investing activities totaled $18.1 million in 1997. The net
cash cost of acquiring Vector Data was $17.2 million. Additionally, Anteon had
$0.8 million capital expenditures.
Net cash provided from financing activities totaled $4.5 million, reflecting
an increase in Anteon's senior debt from $19.6 million at December 31, 1996 to
$24.1 million at December 31, 1997.
LIQUIDITY
In June 1999, the Company entered into a new five-year line of credit with
nine major banks totaling $180 million. This line of credit is comprised of a
$120 million revolving credit facility subject to availability based on a
borrowing base and a $60 million term note. The borrowing base is determined by
computing a percentage of Anteon's billed and billable accounts receivable, with
availability totaling $54.9 million as of June 30, 1999. Aggregate loans drawn
under this revolving line of credit totaled $13.0 million as of June 30, 1999.
In addition, Anteon secured advances of $60.0 million against the term note.
June 1999 ending cash balance totaled $2.9 million. However, access to the bank
line is further restricted by the leverage covenant which is 5.75 times the
adjusted, pro forma EBITDA (as defined in the new credit facility) over the past
12 months. Based on the June 30th leverage of just under 5.00, this left
approximately $27 million in immediately available liquidity. The Company plans
a further improvement in its accounts receivable DSO over the next 6-9 months
timeframe, freeing up approximately $12-15 million in cash. This DSO reduction
and liquidity improvement would be used to reduce the Company's overall
leverage.
We intend to meet future capital commitments, which principally involve the
execution of additional acquisitions, through additional senior bank debt and
the issuance of subordinated debt and equity in the public and private capital
markets.
YEAR 2000
During fiscal 1998 we implemented a plan which prepared our systems to be
Year 2000 compliant. We have completed our inventory phase and, based on this
analysis, we believe that our systems and applications will not be adversely
affected by any Year 2000 issues. Our aggregate costs incurred in 1998 to assess
our Year 2000 readiness were not material and management expects that any future
expenditures in 1999 will be similarly immaterial. However, we cannot assure you
that this estimate will be correct.
In addition, we have addressed the Year 2000 issue with our significant
third-party suppliers and customers through inclusion of appropriate contractual
provisions in our business dealings with such companies to ensure their Year
2000 readiness. Management has no reason to believe that any such companies will
encounter Year 2000 issues. However, we cannot assure you that they will be
successful in avoiding any Year 2000 issues or resolving them in a timely
manner, or that any failure to do so would not materially and adversely affect
our business.
42
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS--
ANALYSIS & TECHNOLOGY, INC.
YOU SHOULD READ THE FOLLOWING INFORMATION TOGETHER WITH A&T'S CONSOLIDATED
FINANCIAL STATEMENTS AND THE RELATED NOTES INCLUDED ELSEWHERE IN THIS
PROSPECTUS. CERTAIN STATEMENTS IN THIS SECTION ARE "FORWARD-LOOKING STATEMENTS"
AND YOU SHOULD READ THE "FORWARD-LOOKING STATEMENTS" SECTION FOR SPECIAL
INFORMATION ABOUT OUR PRESENTATION OF FORWARD-LOOKING INFORMATION.
RESULTS OF OPERATIONS
FISCAL 1999 COMPARED WITH FISCAL 1998
The major factors in the comparison of fiscal 1999 with fiscal 1998 are as
follows:
- Revenue increased 6.5% to $170.4 million from $160.0 million.
- Revenue for the Company's Engineering and Information Technologies
("Engineering/IT") business grew 3.2%
- Interactive Media's revenue increased 29.7%, including a 16.4% increase in
commercial revenue.
- Operating margin increased to 6.0% from 5.0%.
-- Operating margin was 6.1% for Engineering/IT and 5.6% for Interactive
Media.
-- Margins improved due to improved cost controls. Also contributing to
the margin improvement in Interactive Media was a decrease of fixed
indirect expenses as a percentage of revenue due to revenue growth.
-- Operating margin was 5.3% for fiscal 1998 without the effect of a
non-recurring software charge.
- Net earnings were $4.9 million compared with $4.2 million resulting in an
increase of 16.2%. During fiscal 1998, the Company sold its share of a
joint venture, Automation Software Incorporated (ASI), and took the
software charge previously noted. The joint venture sale increased the
Company's effective tax rate. The net effect of these non-recurring items
and their tax effects was an after-tax gain of $87 thousand.
- Basic earnings per share increased 12.6% to $1.34 from $1.19. On a diluted
basis, earnings per share increased 12.1% to $1.20 from $1.07.
Revenue increased 6.5% to $170.4 million in fiscal 1999 from $160.0 million
in fiscal 1998. The revenue increase is attributable to continued growth in both
the Company's Engineering/IT business and its Interactive Media technology-based
training business. For fiscal 1999, the Company's Engineering/IT revenue grew
3.2% to $144.2 million from $140.0 million in fiscal 1998. Interactive Media's
revenue increased 29.7% to $26.1 million from $20.1 million in fiscal 1998. Its
commercial revenue increased 16.4% to $17.1 million from $14.7 million in fiscal
1998.
Revenue for the Company's Engineering/IT business was adversely affected by
a decrease in work subcontracted to other companies and a decrease in purchased
materials. For fiscal 1999, work subcontracted to other companies and purchased
materials decreased $5.3 million and $1.9 million, respectively, from fiscal
1998. Subcontracting was down because in some cases A&T is gaining market share,
some subcontractors have gotten their own contracts, and some subcontractor's
work has not been renewed by the customer. Purchases of materials are down due,
in part, to a U.S. Navy mine clearing hardware
43
<PAGE>
contract that is nearing completion. Without the effect of subcontracts and
materials, Engineering/IT revenue would have been up 10.2% for fiscal 1999.
Interactive Media's revenue was favorably affected by the acquisition of UP,
Inc. in November of last year and by an expanded sales force.
During the year, total backlog varied between $589.4 million and $805.7
million. In fiscal 1999, $56.1 million of backlog expired without being funded,
while in fiscal 1998, $50.7 million of backlog expired without being funded. The
backlog used during fiscal 1999, plus the unfunded backlog that expired, was
more than offset by newly awarded contracts. Backlog as of March 31, 1999 was
$775.8 million, a 31.6% increase from $589.4 million at the end of fiscal 1998.
Government funding continues to be dependent on congressional approval of
program level funding and on contracting agency approval for the Company's work.
The extent to which backlog will be funded in the future cannot be determined.
Operating earnings increased 29.4% to $10.3 million from $7.9 million in
fiscal 1998. Operating margins from continuing operations were 6.0% in fiscal
1999 compared with 5.0% in fiscal 1998. Fiscal 1998 operating earnings were
negatively affected by software charges totaling $530 thousand, recorded in the
second quarter of fiscal 1998, primarily for capitalized software development
costs to support customers in the natural gas business and software development
and related costs for image processing products which the Company deemed to be
unrecoverable. Without these charges, the operating margin for fiscal 1998 was
5.3%.
Operating margin for Engineering/IT, increased from 5.3% in fiscal 1998,
without the software charges, to 6.1% in fiscal 1999. The reduction in lower
margin subcontract and material revenue plus improved cost controls and good
performance on contracts contributed to the Engineering/IT increase. Operating
margins for Interactive Media increased from 5.4% in fiscal 1998 to 5.6% in
fiscal 1999. The increase was due to a decrease in indirect expenses as a
percentage of revenue due to the revenue growth.
Total other expenses as a percentage of revenue were 0.9% for fiscal 1999
compared to 0.7% in fiscal 1998, excluding the effect of the sale of the
Company's Interest in ASI to the Company's joint venture partner. The sale
resulted in a pre-tax gain of $1.6 million in fiscal 1998. For fiscal 1999, both
interest expense and amortization of goodwill increased due to the Company's
recent acquisitions, including a contingent payment to the former owner of UP,
Inc. as discussed more fully in "Liquidity and Capital Resources."
Earnings before income taxes increased 4.9% to $8.8 million from $8.3
million in fiscal 1998. The Company's effective tax rate on earnings before
income taxes was 44.3% in fiscal 1999 compared with 49.8% in fiscal 1998. The
effective tax rate was higher in fiscal 1998, primarily due to the recognition
of deferred taxes on undistributed earnings of the Company's joint venture, as a
result of the sale. The effective tax rate without the effect of the joint
venture sale was 43.9%. The effective tax rate in fiscal 1999, compared to the
effective tax rate without the effect of the joint venture sale is fiscal 1998,
was higher due to an increase in nondeductible amortization of goodwill
associated with the UP acquisition.
Net earnings increased 16.2% to $4.9 million from $4.2 million in fiscal
1998. The revenue increase and the operating margin increase both contributed to
the net earnings increase. The net effect of the sale of the Company's interest
in its joint venture and the software charges noted above was an after-tax gain
of $87 thousand for fiscal 1998.
Basic earnings per common share increased 12.6% to $1.34 from $1.19 in
fiscal 1998. Diluted earnings per common share increased 12.1% to $1.20 from
$1.07 in fiscal 1998.
The weighed average number of common shares used to compute basic earnings
per share increased to 3.6 million in fiscal 1999 from 3.5 million in fiscal
1998. The weighted average number of common shares used to compute diluted
earnings per share increased to 4.0 million in fiscal 1999 from 3.9 million in
fiscal 1998. The increase was due primarily to an increase in the number of
stock options outstanding and a
44
<PAGE>
higher average stock price, offset in part by the repurchase of the Company's
shares as discussed more fully below in "Liquidity and Capital Resources".
FISCAL 1998 COMPARED WITH FISCAL 1997
Revenues increased 12.2% to $160.0 million in fiscal 1998 from $142.5
million in fiscal 1997. The revenue increase is attributable to continued growth
in both A&T's Engineering/IT business and in its Interactive Media
technology-based training business. In fiscal 1998, A&T's Engineering/IT
revenues grew 11.5% to $140.0 million from $125.4 million in fiscal 1997. IMC's
revenues increased 17.3% to $20.1 million. Its commercial revenues increased
58.7% to $14.7 million in fiscal 1998 from $9.3 million in fiscal 1997 and its
government related revenues decreased 30% to $5.4 million in fiscal 1998 from
$7.9 million in fiscal 1997.
A&T made five acquisitions during fiscal year 1998. In total, these
acquisitions added approximately $6.6 million to A&T's fiscal 1998 revenues.
During the year, total backlog varied between $461.7 million and $589.4
million. In fiscal 1998, $50.7 million of backlog expired without being funded,
while in fiscal 1997, $19.5 million of backlog expired without being funded. The
backlog used during fiscal 1998, plus the unfunded backlog that expired, was
more than offset by newly awarded contracts and backlog added as a result of
A&T's acquisitions. Backlog as of March 31, 1998 was $589.4 million, a 22.6%
increase from $480.7 million as of March 31, 1997, and was well above A&T's
benchmark of two and one-half times current revenues. Government funding
continues to be dependent on congressional approval of program level funding and
on contracting agency approval for A&T's work. The extent to which backlog will
be funded in the future cannot be determined.
Operating earnings increased 17.4% to $7.9 million in fiscal 1998 from $6.8
million in fiscal 1997. Operating margins were 5.0% in fiscal 1998 compared with
4.7% in fiscal 1997. Fiscal 1998 operating earnings were negatively affected by
software charges totaling $530,000, recorded in the second quarter of fiscal
1998, primarily for capitalized software development costs to support customers
in the natural gas business and software development and related costs for image
processing products which A&T deemed to be unrecoverable. Without these charges,
the operating margin for fiscal 1998 was 5.3%.
Operating margins for Engineering/IT, without the software charges,
increased from 5.0% in fiscal 1997 to 5.3% in fiscal 1998. Operating margins for
IMC during these same periods increased from 3.2% to 5.4%. Margins improved
overall because of improved cost controls. Also contributing to margin
improvement in IMC was a decrease of fixed indirect expenses as a percentage of
revenues due to revenue growth.
Total other expenses were affected by the sale of A&T's interest in
Automation Software Incorporated ("ASI") to A&T's joint venture partner. The
sale resulted in a pre-tax gain of $1.6 million in fiscal 1998. In addition, the
proceeds from the sale were used to pay down certain of A&T's long-term debt,
resulting in decreased interest expense in fiscal 1998. Other net expense
increased in fiscal 1998 to 0.6% of revenue compared with 0.5% of revenues in
fiscal 1997. The other net expense increase was due, in part, to the
amortization of goodwill associated with A&T's fiscal 1998 acquisitions.
Earnings before income taxes increased 43.5% to $8.3 million in fiscal 1998
from $5.8 million in fiscal 1997. A&T's effective tax rate on earnings before
income taxes was 49.8% in fiscal 1998 compared with 41.9% in fiscal 1997. The
effective tax rate was higher in fiscal 1998, primarily due to the recognition
of deferred taxes on undistributed earnings of A&T's joint venture as a result
of the sale, and due to an increase in nondeductible amortization of goodwill
associated with A&T's acquisitions. The effective tax rate without the effect of
the joint venture sale was 43.9%.
Net earnings increased 24.2% to $4.2 million from $3.4 million in fiscal
1997. The revenue increase and the operating margin increase both contributed to
the increase in net earnings. The net effect of the sale of A&T's interest in
its joint venture and the software charges noted above and the related tax
effects was an after-tax gain of $0.1 million in fiscal 1998.
45
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
FISCAL 1999 CASH FLOW
For fiscal 1999, net cash provided by operating activities totaled $5.9
million. The net cash increase resulted primarily from net earnings before
deducting non-cash charges for depreciation of property and amortization of
intangible assets, and a decrease in accounts payable and accrued expenses of
$1.3 million, offset in part and an increase in contract, notes, and other
receivables of $3.3 million. Contract receivables totaled $28.7 million, $25.6
million and $247.7 million as of March 31, 1999, 1998, and 1997, respectively,
and represented approximately 41%, 40%, and 43% of total assets as of those
dates. The average period of payment to the Company was 57 days at March 31,
1999, 54 days at March 31, 1998; and 58 days at March 31, 1997.
Net cash used in investing activities for fiscal 1999 totaled $5.6 million.
The primary use of this cash was for the addition of office equipment, the
development of a new management information system, and for acquisitions,
including a contingent payment to the former owners of UP, Inc., in accordance
with the purchase agreement for the acquisition executed in November 1997.
Net cash used in financing activities for fiscal 1999 totaled $1.2 million.
The primary source of cash from financing activities was from the exercise of
stock options. The primary uses of cash from financing activities were for the
payment of dividends and the repurchase of the Company's common shares. On May
30, 1997, the Company announced it had expanded its share repurchase program.
The Company's Board of Directors authorized the repurchase of an additional
450,000 shares or a total of up to 750,000 shares in amounts and at times and
prices to be determined by the Company's management. Since the program was
initiated in March 1996, the Company has repurchased 399,400 shares. Since March
31, 1998 the company has repurchased 42,900 shares under this repurchase program
at current market prices on the dates of purchase. There are approximately 3.7
million shares outstanding at March 31, 1999.
Any capital needs not satisfied by cash generated from operations, were, and
in the future will be, met with money borrowed by the Company under its
revolving credit agreement. The total funds available to the Company under its
revolving credit agreement at March 31, 1999 were $20.0 million. There was no
borrowing under the Company's agreement as of March 31, 1999 or 1998.
It is anticipated that the Company's existing cash, together with funds
generated from operations and available borrowings under its revolving credit
agreements, will be sufficient to meet its normal working capital requirements
for the foreseeable future. As of March 31, 1999, the Company does not have any
major capital commitments.
The Company believes that inflation has not had a material effect on its
business.
FISCAL 1998 CASH FLOW
For fiscal 1998, net cash provided by operating activities totaled $7.8
million. The net cash increase resulted primarily from earnings before deducting
non-cash charges for depreciation of property and amortization of intangible
assets, and a decrease in contract, notes and other receivables of $1.1 million.
The decrease in contract receivables was due primarily to faster payment by the
government as a result of electronic processing of selected government invoices
and to collection of receivables under firm fixed-price contracts. Contract
receivables totaled $25.6 million, $24.7 million and $24.2 million as of March
31, 1998, 1997, and 1996, respectively, and represented approximately 40%, 43%
and 43% of total assets as of those dates, respectively. The average period of
payment to A&T was 54 days at March 31, 1998, 58 days at March 31, 1997 and 71
days at March 31, 1996.
Net cash used in investing activities for fiscal 1998 totaled $9.1 million.
Cash provided from the sale of ASI of $3.0 million was more than offset by
facility expenditures and by expenditures for A&T's fiscal 1998
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acquisitions. Payments for the acquisitions were made from existing cash and
funds available under A&T's revolving credit agreement.
Net cash used in financing activities for fiscal 1998 totaled $670,000. The
primary source of cash from financing activities was from the exercise of stock
options. The primary uses of cash from financing activities were for the payment
of dividends and the repurchase of shares of A&T's common stock.
YEAR 2000
A&T established a task force in January 1998 to assess Year 2000 risks,
identify and implement solutions to known problems and report the results of the
assessment. The task force examined the services and products A&T provides, its
internal information technology software, facilities and infrastructure and
third-party risks. A&T is approaching its Year 2000 readiness program in three
phases: assessment, planning and preparation, and implementation.
While A&T has plans in place to address known Year 2000 issues under its
control, an infrastructure problem outside of its control could disrupt A&T's
operations depending on the nature and severity of the problems. A&T expects
that most utilities and service providers would be able to restore service
interruptions caused by Year 2000 problems within days. However, more pervasive
system problems involving multiple providers could last longer depending on the
complexity of the systems and the effectiveness of their contingency plans.
Although A&T is dedicating reasonable resources towards attaining Year 2000
readiness, there is no assurance it will be successful in its efforts to
identify and address all Year 2000 issues. Even if A&T acts in a timely manner
to complete all of its assessments and identifies, develops and implements
remediation plans it believes to be adequate, some problems may not be
identified or corrected in time to prevent material adverse consequences to A&T.
Our statements above regarding estimated completion dates, costs, risks and
other forward-looking statements regarding Year 2000 are based on A&T's best
estimates given information that is currently available and is subject to
change. As A&T continues to progress with its Year 2000 initiatives, it may
discover that actual results will differ materially from these estimates.
A more detailed explanation of the "Year 2000 Readiness Disclosure" for A&T
is available in A&T's Annual Report on Form 10-K for the fiscal year ended March
31, 1998. Please refer to the section entitled "Where You Can Find More
Information" which appears later in this prospectus for more information.
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THE FEDERAL GOVERNMENT INFORMATION TECHNOLOGY SERVICES INDUSTRY
OVERVIEW
The U.S. Federal government is among the world's largest purchasers of
information technology. The Office of Management and Budget ("OMB") projects
that total information technology expenditures in fiscal 1999 will exceed $30
billion. These expenditures have grown consistently during the 1990s. According
to the OMB, from 1991 to 1998 the Federal government information technology
market increased at a consolidated annual growth rate of 4.2%. As shown below,
the annual Federal information technology budget for fiscal year 1998 through
fiscal year 2002 is expected to grow at a rate of approximately 4.4% annually.
Civilian agency information technology budgets are expected to be 60% to 65% of
the total Federal information technology budget, or between $18 billion and $20
billion annually, and annual defense information technology budgets are expected
to be 35% to 40% of such total budget, or between $11 and $12 billion annually.
However, due to projected increased Federal government outsourcing, the amount
of information technology services procured from contractors is expected to
increase at a faster rate, by approximately 6.9% per annum from 1998 to 2002.
The following table sets forth the Federal government's historical and projected
expenditures for information technology from 1991 to 2002:
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
TOTAL FEDERAL IT SPENDING LEVELS
(1991-2002)
<S> <C>
$ (BILLIONS)
1991 22.10
1992 23.50
1993 25.00
1994 25.80
1995 27.30
1996 28.00
1997 29.00
1998 29.50
1999 30.30
2000 31.60
2001 33.10
2002 35.10
Source:OMB
</TABLE>
TRENDS
There are five primary factors that should drive this growth of the Federal
information technology services market: (1) increased outsourcing, (2) emphasis
on systems modernization, (3) legislative efforts to streamline government
procurement procedures, (4) the increasing requirement for integration of
commercial and custom information technology applications and (5) increased
emphasis on training and simulation.
- INCREASED OUTSOURCING. Major forces contributing to the increase in
information technology outsourcing are Federal government downsizing,
increased procurement efficiency, the declining availability of
programming skills among Federal government personnel (and government
staffing limits) and the backlog of software maintenance tasks at most
government data centers. The GSA anticipates a continuation of the trend
toward the use of outside information technology providers. According to
the OMB, 78% of the Federal government's information technology spending
in 1998, or $23.1 billion, flowed through to contractors. According to
OMB, outsourced information technology services are projected to grow at a
rate faster than overall Federal government expenditures on information
technology, increasing to 86% of projected expenditures in 2002 or $30.2
billion and resulting in a 6.9% growth rate per annum.
- EMPHASIS ON SYSTEM MODERNIZATION. As part of their efforts to reduce
procurement costs, the Department of Defense and the U.S. Navy, in
particular, are emphasizing upgrading existing platforms to next
generation technologies rather than procuring completely new systems. For
example, the Department of Defense's funding priorities in 1999 emphasize
the modernization and upgrading of shipboard systems to maintain the U.S.
Navy's superior fighting capabilities. Rather
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than replace its aging fleet of ships, the U.S. Navy has decided to invest
in upgrading its existing fleet with the latest computer and weapons
systems. To accomplish this in an environment of reduced Armed Forces
personnel, the U.S. Navy is increasingly dependent on highly skilled
technical specialists to provide a full spectrum of services to support
these activities. After giving effect to the acquisition, we will be
deeply involved in virtually every major U.S. Navy platform as well as
with many of the strategic Program Executive Offices. Moreover, A&T is
among the top-tier U.S. Navy Warfare Center contractors and is the leading
contractor based on 1998 revenues for the Naval Undersea Warfare Center
("NUWC"). With a broad-based presence on critical U.S. Navy programs,
management believes that Anteon and A&T are well-positioned to benefit
from the billions of dollars in modernization and upgrade expenditures
anticipated by the U.S. Navy over the next decade.
- INFORMATION TECHNOLOGY MANAGEMENT REFORM ACT OF 1996 ("ITMRA"). The ITMRA,
through acquisition vehicles such as GSA Schedules and IDIQ contracts, has
changed the government's process of procuring information technology by
(1) placing increased attention on the cost effectiveness of information
technology, the return on the government's investment and resulting
contractor performance with respect to such technology and (2) making
individual agencies accountable for oversight of information technology
budgets. These two trends are expected to result in increased interagency
coordination and sharing of expenses, and fewer proprietary or single
agency solution systems. Companies such as Anteon and A&T, which are
well-positioned across several major governmental agencies, should benefit
from these trends.
- INCREASED USE OF COMMERCIAL OFF-THE-SHELF HARDWARE AND SOFTWARE. The
Federal government has sought to address an increasing portion of its
information technology needs through relatively inexpensive, open
architecture systems based on commercial off-the-shelf ("COTS") hardware
and software, which are rapidly displacing the single purpose, custom
systems historically favored by the Federal government. These hardware and
software products are, unlike proprietary systems, more open, modular and
scaleable, and in some instances even better suited to meet governmental
needs. The implementation and usage of COTS products are expected to
increase as the government seeks to ensure the compatibility of its
systems across agencies. In addition, the continued shortening of software
upgrade cycles is expected to increase the demand for new products. These
trends will favor system integrators such as Anteon and A&T, who have a
deep knowledge of their customers and systems through years of performing
contracts, as well as extensive expertise in COTS solutions.
- INCREASED MODELING, TRAINING AND SIMULATION. Because of the high cost of
weapon systems development, testing and field training, there is increased
reliance on modeling and simulations using software applications (from the
conceptual design of weapons to their operations and maintenance and the
training of personnel), training simulators and other mission rehearsal
techniques. Anteon has significant experience in designing and
implementing such systems and programs for a variety of customers, such as
the Air Force and U.S. Navy. Management believes that this experience will
permit Anteon to obtain future new awards.
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BUSINESS
Anteon is a leading provider of advanced information technology and
engineering systems and services. We serve hundreds of governmental clients,
principally within the U.S. Federal government, from 39 offices worldwide. We
have performed work for the U.S. Congress and all 14 Cabinet-level government
agencies, designing, maintaining and upgrading critical systems such as defense,
intelligence, emergency response, logistics support and financial management
systems. For the year ended December 31, 1998, we performed work on
approximately 3,000 task orders on more than 500 contracts. In addition, during
the past four years, we have increased revenues at a 32.0% compound annual
growth rate including a 19.9% compound annual growth rate excluding
acquisitions. Pro forma for the acquisition, our 1998 revenues and Adjusted
EBITDA were $450.8 million and $35.1 million, respectively. Cash flows used in
operating activities on a pro forma basis were $2.3 million for 1998.
The Federal government is among the world's largest purchasers of
information technology, with total expenditures in fiscal 1999 expected to be in
excess of $30 billion and expected to increase by approximately 4.4% per annum
from $29.5 billion in 1998 to $35.1 billion in 2002. Due to projected increased
Federal government outsourcing, the amount of information technology services
procured from contractors is expected to increase at a faster rate, by
approximately 6.9% per annum from 1998 to 2002. We believe that the emphasis of
the Federal government on downsizing and budget constraints for large new
projects will continue to result in the increased use of technology to enhance
productivity with expenditures focused on upgrading existing equipment and
systems, including many that we designed and are currently supporting. In this
environment, contractors like us that are capable of providing complete
end-to-end technology services across a number of applications and are
well-positioned to take advantage of the opportunities presented by these
trends.
We have developed over a 22-year period the expertise and capabilities to
deliver a broad range of technology solutions. For example, we are currently
working with the U.S. Federal Emergency Management Agency to design and
integrate the National Emergency Management Information System, a management
information system that enables the White House and other governmental offices,
to effectively monitor and mobilize multiple agencies and financial resources in
response to national emergencies. This program is the largest WindowsNT
implementation in the Federal government and we believe it is the most
comprehensive emergency management system available. In addition, we believe
there is significant potential for generating additional revenues based on the
knowledge we have acquired in designing and integrating this system and its wide
applicability to other government agencies and projects. Another example of our
work is the logistics system we developed for the U.S. Air Force called Cargo
Movement Operation System ("CMOS"). CMOS tracks all equipment and cargo movement
operations for the Air Force world wide. This system is the first standard U.S.
Air Force client/server application to be installed. CMOS is currently installed
at air bases worldwide, and was recently chosen by the Office of the Secretary
of Defense to be the model transportation system for the Department of Defense.
As a result of developing and integrating CMOS, we were recently awarded another
major logistics automation contract to develop a model logistics system to
manage the transportation requirements of all branches of the U.S. armed forces.
On March 7, 1999, we entered into a definitive agreement to acquire A&T. A&T
is a market leader in undersea warfare, acoustics, command and control and
training support and in many instances is a national repository of acoustical
and hydrodynamic technologies. The acquisition will strengthen and broaden our
customer and contract base and will complement our extensive presence as a
leading supplier to the U.S. Navy, combining Anteon's surface ship systems
capabilities with A&T's strength in submarine and undersea warfare. In addition,
this acquisition provides vertical integration of our skill set, enhancing our
ability to provide services across the complete project life-cycle from concept
to implementation to support. A&T's early stage engineering capabilities in
design, requirements analysis and technology development will complement
Anteon's late stage capabilities and track record of executing and integrating
complex technological systems. Finally, the acquisition also expands our
presence at key client locations
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and adds an experienced management team. With the acquisition of A&T, Anteon
will increase its 1999 pro forma revenues and Adjusted EBITDA to $450.8 million
and $35.1 million, respectively. Cash flows used in operating activities on a
pro forma basis were $2.3 million for 1998.
COMPETITIVE STRENGTHS
We attribute our growth and performance to several factors, including the
following:
- BROAD ENGINEERING AND INFORMATION TECHNOLOGY CAPABILITIES. We have
developed comprehensive information technology and engineering expertise
and capabilities over our 22-year history of providing support for
critical applications within the Federal government's military and
intelligence infrastructure. Our employees are highly trained, enabling us
to provide services for many complex governmental systems, including
defense, intelligence, emergency response, logistics support and financial
management.
- LEADING FEDERAL GOVERNMENT SYSTEMS INTEGRATOR AND STRONG REPUTATION. We
believe that the Federal government primarily uses three criteria in
seeking suppliers of technical systems and services: the ability to
deliver a broad range of sophisticated technical capabilities; a track
record of excellence in servicing the needs of the Federal government; and
the ability to deliver at a competitive price. Based on these criteria, we
have developed a reputation as a premier provider to the Federal
government and we have received numerous awards for our broad technical
expertise and consistently high quality performance. We were recently
ranked as the No. 1 systems integrator in a survey of over 1,200 Federal
government customers by FEDERAL COMPUTER WEEK, a leading publication in
the Federal government information technology sector. We believe that our
demonstrated capabilities and reputation for service excellence have
allowed us to maintain our position as an incumbent service provider on
100% of our major contracts that have been recompeted over the past three
years.
- DIVERSE CUSTOMER AND CONTRACT BASE; STRONG INCUMBENT POSITIONS. We have a
diverse customer base with hundreds of governmental clients worldwide,
which has included all 14 Cabinet-level agencies and all branches of the
military. In 1998 we performed work on approximately 3,000 task orders,
and since 1996 we have completed approximately 7,000 task orders for our
clients. In executing these orders, we have acquired extensive knowledge
of the particular information technology needs of our clients, and we
believe that our typical position as the incumbent designer and integrator
enables us to anticipate their changing technical requirements. These
factors often position us as the preferred provider of ongoing support,
upgrades and next generation systems development. As a result of these
relationships we have developed a backlog of approximately $1.1 billion
(and, after giving pro forma effect to the Acquisition, a backlog of $2.1
billion as of June 30, 1999, providing significant predictability of
revenues. For a further discussion of management's calculation of our
backlog, see "--Backlog."
- STRONG OPERATIONS MANAGEMENT; LOW COST STRUCTURE. Our focus on control of
indirect costs and cost center flexibility has permitted us to increase
profitability and we believe that we have achieved one of the lowest cost
structures in the industry. Management has developed rigorous control
procedures to mitigate losses in "at risk" situations where task order
performance has commenced but funding or appropriation has not been
formally authorized or where contract performance has begun because
management considers the award of a contract to be imminent. We also
employ management information and resource management systems to maximize
operational efficiency and reduce indirect costs. Our indirect costs have
been reduced to 15% of revenues in 1998 compared to an industry peer group
average estimated by management to be between 18% to 20%, and we have
increased EBITDA margins from 1.9% in 1995 to 6.6% in 1998 (after giving
pro forma effect to the Techmatics acquistion).
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- WELL-POSITIONED TO CAPITALIZE ON INDUSTRY GROWTH. Federal government
information technology spending will total approximately $30 billion in
1999 according to the OMB and is expected to increase to $35.1 billion in
2002. In addition, the outsourced portion of this spending is expected to
increase from 78% in 1998 to 86% in 2002. Due to this increased
outsourcing, the amount of information technology services procured from
contractors is estimated to increase at 6.9% per year from 1998 to 2002.
Anteon believes that growth in Federal government information technology
spending will be driven by government downsizing, increased outsourcing
and increasing attempts to utilize more efficient means of procurement. We
expect a significant portion of this growth to be derived from major
government-wide acquisition contract vehicles, such as the $25 billion GSA
ANSWER multiple-award contract and the $10 billion Department of
Transportation ITOP II multiple-award contract. We are one of a limited
number of qualified suppliers under both of these major contract vehicles.
We believe that our size, capabilities, reputation and long-standing
relationships combined with our position as incumbent supplier to many
Federal government agencies, position us to capitalize on the
opportunities presented by these industry trends.
- STRONG MANAGEMENT AND HIGHLY EXPERIENCED BOARD. Each of the five senior
members of Anteon's management team has over 20 years of experience in
managing both small and large companies in both the defense and commercial
markets. In addition, several members of management and the Board of
Directors are former military officers or senior government officials who
are familiar with the information technology requirements of government
agencies. Dr. Paul Kaminski, a director of Anteon, recently served as
Under Secretary of Defense for Acquisition and Technology. Mr. Gilbert
Decker, a Director of Anteon, recently served as Assistant Secretary of
the U.S. Army for Research, Development and Acquisition, and in that
capacity led the Army's acquisition and procurement reform efforts. Our
management team is responsible for our growth and improved profitability
in the current procurement environment and has a significant equity stake
in Anteon through direct investment and equity-based incentives.
BUSINESS STRATEGY
We believe that a key element of Anteon's success is its high standard of
performance and customer service. Past performance is one of the three critical
elements the government employs to evaluate information technology suppliers.
Our demonstrated performance record and service excellence have enabled us to
maintain our position as an incumbent service provider on 100% of our major
contracts that have been recompeted over the past three years. We believe that
our high-level technical abilities and low cost structure will allow us to
further expand our customer base, improve our operating results and continue to
grow. Specifically, we will pursue the following business strategies:
- BROADEN CAPABILITIES. We continually seek to acquire new expertise and
keep pace with developments in technology by acquiring and training our
employees and acquiring technologies to complement our skill set. We are
aggressively pursuing several new disciplines that complement our existing
technology capabilities. Particular areas of expertise we are pursuing
include network communications, remote sensor information processing,
geographic information systems and information security. We also seek to
broaden our technology skills by providing extensive training to new and
current employees. For example, we have an extensive in-house,
computer-based training program consisting of over 150 courses. These
efforts will enable us to remain at the forefront of information
technology applications and be more responsive and flexible in servicing
the needs of our customers.
- LEVERAGE EXPERIENCE AND REPUTATION TO EXPAND MARKET SHARE. We have
performed a variety of services for a diverse base of customers, including
hundreds of governmental clients worldwide, including all Cabinet-level
agencies and all branches of the military. The new Federal government
procurement environment has reduced the number of suppliers and favors
those companies with experience and broad capabilities. We plan to
leverage our comprehensive capabilities and our
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position as the incumbent provider on critical Federal government
applications to provide complete end-to-end services including new systems
development, integration, upgrades, maintenance, support and training. To
support our plans, we have increased our national and global presence,
opening offices in Albuquerque, New Mexico; Colorado Springs, Colorado;
Australia and Asia. We have also acquired a comprehensive new business
development and bidding software system, known as WinAward, which scans
for and targets new programs or task orders which require skills and
services particularly suited to Anteon's capabilities. This system
provides early identification of prospects, allowing us to mobilize the
resources necessary to win the award.
- CONTINUE TO IMPROVE OPERATING AND FINANCIAL PERFORMANCE. We believe that a
key element of our success in the Federal government market has been our
continuous pursuit of cost reductions and focus on working capital
management. We have developed and employ integrated management information
and resource management systems and policies that have enabled us to
maintain indirect cost levels that we believe are among the lowest in the
industry. We will continue to leverage our operating efficiency and risk
management capabilities to bid aggressively on contracts to further
improve our operating and financial performance.
- PURSUE STRATEGIC ACQUISITIONS. We believe the changes in the government
procurement market will result in continuing consolidation opportunities.
We will selectively review acquisition candidates with a focus on
companies having complementary skills and established positions in key
segments of the marketplace that provide opportunities for revenue
enhancement or a reduction in indirect costs. A key element of all
acquisitions is the existence of rigorous risk management procedures and
strong operational management.
ANTEON DIVISIONS
We provide our services through five operating divisions (including our
subsidiaries): Techmatics, the Federal Information Technology Group, Vector
Data, the Enterprise Solutions and Services Group and the GSA Programs Group.
The following is a brief description of each of Anteon's divisions and examples
of some of the projects and programs Anteon has performed for its government
clients.
TECHMATICS
Techmatics has over 15 years of experience in supporting U.S. Navy
technology acquisition programs. The Techmatics Division provides systems
engineering and systems development, mission and threat analysis and acquisition
management services to most major ship and weapon system acquisition projects
currently in progress in the U.S. Navy. Techmatics has been a team member in the
development and acquisition of the U.S. Navy's AEGIS cruisers and destroyers,
the U.S. Navy's Theater Air Defense strategy and National Missile Defense
planning, as well as the latest submarine, aircraft carrier and amphibious
designs. The division's client base is predominantly the U.S. Navy and includes
approximately 30 customers or agencies within the U.S. Navy. Projects on which
Techmatics is engaged include the Ballistic Missile Defense Program, the Cruise
Missile Defense Program, the Ship Self Defense Program and the Navy Theater Air
Defense program.
- NAVY THEATRE BALLISTIC MISSILE DEFENSE PROGRAM. An example of
Techmatics' work is the service it performed in connection with the
Navy Theater Ballistic Missile Defense Program. In January 1999,
Techmatics was awarded a $63 million five-year IDIQ contract to
provide professional, technical and management services to support the
Navy Theater Ballistic Missile Defense Program. The purpose of the
Ballistic Missile Defense Program is to place on each ship in the
program a defense system that will use missiles on board to counter
and destroy incoming enemy missiles. While the program itself will
cost several billions of dollars and will be developed by major
government defense prime contractors such as Lockheed Martin and
Raytheon, Techmatics supports and advises the U.S. Navy in
implementing this program. In
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this capacity, Techmatics works in close partnership with U.S. Navy
departments in evaluating alternatives on systems engineering, systems
requirements, software and hardware. Management believes Techmatics,
with its long history of technical support on naval projects and large
number of experienced former naval officers, is well-positioned to
fill this role for the U.S. Navy.
Techmatics' extensive experience on earlier U.S. Navy projects allowed
us to develop the expertise and establish relationships necessary to
bid successfully for the Navy Theater Ballistic Missile Defense
Program. Techmatics was solicited to make a bid and, because of our
longstanding incumbent position and institutional knowledge,
Techmatics was the only contractor to bid for the project. Because of
these relationships, Techmatics was also recently selected to provide
systems engineering support for the next generation destroyer, the new
attack submarine and the aircraft carrier programs. We believe that
due to our established relationships and track record with the U.S.
Navy, we have a competitive advantage when bidding for similar
projects in the future.
- U.S. NAVY AEGIS PROGRAM. AEGIS is largely considered to be the world's
most advanced air defense system, and is composed of over 50 cruisers
and destroyers equipped with a sophisticated computer controlled
missile engagement system. The heart of the AEGIS capability is a
multifunction, phased array radar system. Due to the solid reputation
AEGIS has developed, the AEGIS Combat System has also been installed
on four Japanese Maritime Self Defense ships and the Spanish Navy is
building AEGIS equipped ships. Techmatics supports all aspects of this
program, including ship design, construction and maintenance; AEGIS
Combat System engineering and testing; and the engineering and
introduction of a Theater Ballistic Missile Defense capability in
AEGIS. Recently, the AEGIS programs were merged with all surface ship
air defense efforts in the Program Executive Office for Theater
Surface Combatants. Techmatics provides engineering and technical
support to this consolidated organization.
FEDERAL INFORMATION TECHNOLOGY GROUP
The Federal Information Technology Group focuses on providing information
technology services to the U.S. Army, U.S. Air Force, Defense Finance and
Accounting Service, Federal Emergency Management Agency ("FEMA"), Bureau of
Indian Affairs and selected additional government and commercial organizations.
The division provides system integration and full end-to-end information
technology services. The division provides its services through multiple
contract vehicles including GSA Schedule, GSA CAPZONE, GSA ANSWER and Department
of Transportation ITOP. Within these contract vehicles, we execute our work
through hundreds of contracts or task orders.
- FEDERAL EMERGENCY MANAGEMENT AGENCY. An example of the services our
Federal Information Technology Group provides is our support for FEMA.
FEMA works in coordination with state and local government to provide
a federal response to emergencies, such as tornadoes, hurricanes,
earthquakes or fires). In 1995, FEMA hired Anteon to develop a system
to assist it in managing disaster operations on-site at its regional
offices and at its headquarters. In response, Anteon developed the
National Emergency Management Information System ("NEMIS"). NEMIS is
an enterprise-wide Oracle-based client/server management information
system that connects several thousand desktop and mobile
terminals/handsets and provides FEMA with a fully mobile, nationwide
response and disaster management system. Anteon worked with FEMA over
a 2 1/2-year period to build NEMIS. Over 100 analysts and software
technicians were involved in all major aspects of designing and
implementing this project. To date, the Federal government has spent
approximately $70 million on the development of NEMIS Version 1. Our
work on NEMIS Version 1 was critical to our success in being chosen to
develop NEMIS Version 2, a project which is expected to have a budget
of approximately $6 million per year. In addition, we continue to
provide support and maintenance to NEMIS
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Version 1 under a five-year $28 million contract. The NEMIS system is
the most comprehensive emergency management system available and we
believe there are significant opportunities to sell this system to
individual states and foreign governments.
- CARGO MOVEMENT OPERATIONS SYSTEM FOR THE AIR FORCE. Another example of
Anteon's achievements is its work on the U.S. Air Force CMOS project,
which began as a systems development and integration contract and has
evolved into an end-to-end support relationship. Anteon has been
supporting CMOS since 1989 when its started to develop this mission
critical system for the U.S. Air Force to automate cargo movement
operations. CMOS is one of the largest open systems within the
Department of Defense, and the first standard Air Force client server
application to be installed at air bases worldwide. The CMOS project
involved full systems development, end-to-end support, integration of
COTS systems and custom developed software, configuration management,
maintenance implementation, and training. Anteon continues to provide
support, maintenance and upgrades to CMOS under a multi-year contract.
During the past ten years, Anteon's involvement in CMOS has generated
approximately $25.6 million in revenues. Because of Anteon's track
record as the incumbent services provider for the work performed,
Anteon acts as sole supplier for task orders under this contract.
- TC-AIMS PROJECT. As a result of our record of performance on CMOS, we
have been awarded the Transportation Coordination Automated
Information Movement Systems ("TC-AIMS") contract through the
Department of Transportation ITOP II contract. TC-AIMS is using the
CMOS system as a model to develop a transportation and deployment
management system that will coordinate critical logistics requirements
throughout the Department of Defense. CMOS was chosen as the model
system for TC-AIMS by the Office of the Secretary of Defense. While
TC-AIMS is similar in function to CMOS, it will have broader
capabilities and will be used in one single combined system with other
service systems. TC-AIMS will also be used for the redeployment and
recovery of troops and equipment. Anteon currently has approximately
46 people working on the TC-AIMS contract.
VECTOR DATA
Vector Data provides systems engineering including what is known in the
defense industry as command, control, computers, communications, intelligence,
surveillance and reconnaissance ("C(4)ISR") services to national and
international defense organizations. Vector Data provides services and support
worldwide for NATO and other coalition warfare, strategic and tactical
communications, imagery exploitation and mission rehearsal from the beginning
stages of a program through its entire life. The division's client base
includes, among others, the U.S. Department of Defense, NATO and the U.K.
Ministry of Defense. Vector Data's support of C(4)ISR systems such as Linked
Operations/Intelligence Centers Europe ("LOCE") has been critical in providing a
common structure and set of standards that allow for the rapid distribution and
exchange of tailored intelligence data to support coalition operations in peace,
crisis and war.
- LINKED OPERATIONS/INTELLIGENCE CENTERS EUROPE PROGRAM FOR NATO. Vector
Data provides on-site maintenance support to the LOCE program. The
LOCE program provides a common view of intelligence derived from
multiple sources for the United States, NATO and U.N. peacekeeping
forces in Europe. Near-real time intelligence is available through
such technology as imagery, shared early warning systems, and
interfaces with other U.S. and NATO systems. We support the LOCE
program by providing software and hardware maintenance, communications
engineering, formal classroom and on-site training, and
hardware/software configuration management. We also provide
responsive, on-site daily customer service from the U.S., Italy, U.K.,
and Germany. Vector Data is in its third contract on this project and
is currently the sole-source provider.
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ENTERPRISE SOLUTIONS AND SERVICES GROUP
The Enterprise Solutions and Services Group is a multifunctional division
which includes four groups; the Dayton Operation, the Product Applications and
Services Operation, the Business Development Group and the Proposal Development
Group. Our Dayton Operation conducts materials science research and development
efforts and covers the spectrum of basic research and exploratory and advanced
development efforts for the Air Force's Research Laboratory. The Product
Applications and Services Operation sells a wide variety of products, such as
Oracle's latest database and applications software, and maintenance and other
services and training to the Federal government through Anteon's GSA Schedule
contract. The Business Development Group is responsible for generating new
business for Anteon and the Proposal Development Group is responsible for
preparing new proposals for all of Anteon's operating groups.
- WRIGHT PATTERSON AIR FORCE BASE. Our Dayton Operation has helped to
design, build and operate the largest continuous wave gas laser in the
United States, located at Wright Patterson Air Force Base. At the
material engineering laboratory, we conduct test and evaluation
services. Our expertise includes manufacturing processes, materials,
and coating technologies. In the area of program management, we are
the lead agent for cooperative efforts between industry and the
Federal government. Through our information dissemination and
brokering service, we inform prospective users of newly developed
technologies and facilitate the establishment of beneficial
relationships between government agencies and private industry. We
also provide program and acquisition services which include
acquisition planning documentation, program management support,
specification and standards development, database design and
development, participation on electromagnetic compatibility advisory
boards and frequency allocation application support.
GSA PROGRAMS GROUP
The GSA Programs Group consists of more than 500 individuals providing
information technology services on approximately 300 task orders to a wide
variety of customers in the western U.S. through one or more of our GSA
contracts or our GSA Schedules. Our client base includes, among others, the U.S.
Navy, Army, Corps of Engineers, Air Force, the Environmental Protection Agency,
the GSA and Department of Interior.
- GSA ADVANTAGE! The GSA Programs Group developed the GSA ADVANTAGE!
system which is an Internet-based electronic ordering system used by
government purchasing officials to buy goods and services from GSA
Schedules. Anteon is providing the technical support to design,
implement and maintain GSA ADVANTAGE!, which provides an automated
service procurement system for the GSA schedule program and will
support approximately 1,500 vendors and over 1,000,000 schedule line
items.
- U.S. NAVY'S SITE CHARACTERIZATION AND ANALYSIS PENETROMETER SYSTEM.
Another example of the type of services provided by the GSA Programs
Group is the engineering and information technology support provided
to the U.S. Navy's Site Characterization and Analysis Penetrometer
System ("SCAPS") since 1994. The SCAPS is an innovative technology
developed by the Naval Command, Control and Ocean Surveillance
Center--Research and Development. Anteon geologists use SCAPS to
rapidly characterize subsurface conditions at sites for real-time data
processing of on-site evaluations.
A&T DIVISIONS
A&T provides its services through two operating divisions, the
Engineering/Information Technology division and Interactive Media Corp. The
following is a brief description of each of A&T's divisions and examples of some
of the projects and programs A&T has performed for its government customers.
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E/IT DIVISION
The E/IT division consists of three groups, the Systems Technology Group,
the Engineering Techology Group and the Information Technology Group, which are
primarily organized according to functional capabilities and customer focus. The
Systems Technology Group provides expertise in undersea warfare through full
end-to-end services, including requirements definition, combat system
engineering, test and evaluation, production and support. The Engineering
Technology Group and the Information Technology Group each provide technical
expertise in key technology areas such as ship signature modeling, signal
processing, smart product modeling, and development of tactical decision aids.
In 1998, the E/IT division had revenues of approximately $140 million.
SYSTEMS TECHNOLOGY GROUP
The Systems Technology Group has provided the full spectrum of engineering
and analytical services primarily to the Naval Undersea Warfare Center for more
than three decades. Over the years, its customer focus has been expanded to
include U.S. Navy Systems and Operations commands. Additionally, through A&T's
purchase of Command Control, Inc., the Systems Technology Group has leveraged
its naval C(4)ISR experience into other branches of the armed forces. While the
group has expanded its reach, the NUWC remains a key customer. The Systems
Technology Group has the capability to provide end-to-end services to meet
customer requirements including (1) requirements definition; (2) systems
engineering and integration; (3) testing and evaluation; and (4) support.
- NEW ATTACK SUBMARINE'S COMBAT SYSTEM. An example of the work of the
Systems Technology Group is the services it provides for detailed
mission analysis, translating operational requirements into functional
specifications in support of the Combat System for the New Attack
Submarine ("NSSN"), the next generation of attack submarine. This
subcontract currently generates annual revenues of approximately $3.6
million, and expires in 2002. Management believes A&T is well
positioned for a follow-on effort to develop a full-scale mock-up of
the NSSN's Combat System, in order to model and evaluate the system's
ability to support rapid reconfiguration and the infusion of COTS
technology.
- C(3)I ENGINEERING SERVICES--NAVAL UNDERSEA WARFARE CENTER. An example
of the services provided by A&T is the contract awarded to A&T by
NUWC. This contract award continues A&T's longstanding relationship
with NUWC in support of the next generation of submarines. Under this
award, A&T is providing engineering support services for Seawolf
non-propulsion systems and the New Attack Submarine's command,
control, communications and intelligence systems ("C(3)I"). A&T's
services range from concept development through operational support,
including design, development and equipment prototyping. This contract
is the latest in the evolution of NUWC's C(3)I initiatives and
demonstrates A&T's longstanding support to this program. A&T was
awarded this $33 million cost-plus contract in April 1996. The current
contract term extends through April 2001.
- FLEET TECHNICAL SUPPORT CENTER ATLANTIC ("FTSCA"). Another example of
services the Systems Technology Group provides is in-service
engineering. This service addresses the end-to-end maintenance and
support of deployed systems, including installation support, system
modernization, equipment modification and field service repair. The
U.S. Navy is increasingly outsourcing these activities and A&T has
been awarded a five-year $130 million cost-plus contract with the
FTSCA. A&T's contract with the FTSCA is its largest single prime
contract. A&T will provide equipment installations, inspections,
testing and modernization upgrades, as well as training, for equipment
on board both surface ships and submarines of the Atlantic Fleet.
Consistent with the U.S. Navy's procurement demands and demonstrative
of A&T capabilities,
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many of the system modernization upgrades will involve the
implementation of COTS technologies. The contract strategically
positions A&T to obtain significant follow-on work in the growing
fleet support area. This IDIQ contract expires in September 2003.
- ACOUSTIC SIMULATION AND TACTICS--NAVAL RESEARCH LABORATORY. A&T also
provides the Naval Research Laboratory's Stennis Space Center with
software development services for gathering, analyzing, classifying
and deploying time-sensitive data across the internet using electronic
documentation. In addition, the division is developing prototype
communication software in support of the U.S. Navy's IT-21 initiative
that will incorporate COTS technology to speed solutions to the fleet.
Software engineers will code programs to convert scientific papers and
publications to digital documents, and then deploy the documents over
the internet for easy access by all registered users. A&T was awarded
this five-year $21.1 million cost-plus contract in March 1998.
ENGINEERING TECHNOLOGY GROUP
The E/IT division's Engineering Technology Group strategically combines ship
design and engineering and combat systems engineering expertise with acquisition
and program management support services to further A&T's strategy of positioning
the division as a provider of end-to-end services for technology solutions. This
combination of services allows A&T to successfully exploit the knowledge gained
from the day-to-day management of high profile U.S. Navy programs to capture
high-end ship design and engineering and combat systems engineering work.
Management believes that the Engineering Technology Group has a strong
reputation in both engineering and support services by U.S. Navy agencies, ship
builder and combat system platform prime contractors for its comprehensive
abilities.
- TECHNOLOGY TRANSFER AND POWER ELECTRONIC BUILDING BLOCK ("PEBB")
PROGRAMS--OFFICE OF NAVAL RESEARCH ("ONR"). An example of the work of
the Engineering Technology Group is the service it provides to ONR's
Technology Transfer and PEBB Programs. The Technology Transfer
program's goal is to transition technology developed in U.S. Navy
research and development programs to the fleet and to private
industry. The objective of the PEBB program is to reduce new ship
construction costs as well as maintenance costs by providing a smart
multifunction device that interfaces between the ship's machinery,
systems and power supply. To facilitate this, A&T's machinery research
and development engineers are designing and developing a new class of
programmable electronic power modules for shipboard power control and
conversion. This includes providing engineering support from
requirements definition to design, development, prototyping and device
fabrication and installation. The PEBB contract was awarded in April
1997, expires in March 2002 and has a total contract value of $26
million.
- ADVANCED SIGNATURE REDUCTION--NAVAL SURFACE WARFARE CENTER ("NSWC").
The Engineering Technology Group has enjoyed a long-standing
relationship with the NSWC that spans more than two decades. NSWC is
currently one of A&T's top-five customers. A&T's most recent work for
NSWC includes a $22.7 million cost-plus contract to perform high level
theoretical and applied research to reduce various signatures in
combatant ships. Studies will be directed primarily at the New Attack
Submarine and the first ship commissioned under the U.S. Navy's SC-21
initiative, the destroyer class DD-21. This contract demonstrates
A&T's ship design capabilities. This award will allow the Engineering
Technology Group to perform work on passive and active vibration and
acoustic control systems for the U.S. Navy, as well as other advanced
critical ship signature design issues in the areas of radar cross
section and magnetics. The contract was awarded in 1998 and expires in
2003.
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INFORMATION TECHNOLOGY GROUP
A&T has a long history of providing information technology services. The
Information Technology Group specializes in developing tactical decision aids
primarily for the U.S. Navy. Its attractive capabilities include (1) software
development, (2) telecommunications/networking, (3) database systems, (4) COTS
product integration, (5) training, (6) simulation and (7) modeling and data
fusion. The Information Technology Group helps customers improve the capability,
responsiveness, and reliability of their systems through advanced network
architectures and user friendly software platforms.
- SENSOR PERFORMANCE PREDICTION SUPPORT--THE ADVANCED SYSTEMS TECHNOLOGY
OFFICE OF THE NAVAL SEA SYSTEMS COMMAND ("NAVSEA"). A&T is providing
COTS solutions to develop a high-technology graphical user interface
("GUI") for the Advanced Systems Technology Office of NAVSEA. A&T has
helped to set the standard for GUI, focusing on ways to make an array
of complex information easy to interpret. As the U.S. Navy rolls out
its information technology for the 21st Century initiative, system
operators will be inundated with large quantities of information.
A&T's work under this contract helps to assure that this information
is instantaneously processed and presented in a readily useable
format. This $33 million cost-plus contract currently generates
approximately $5 million in revenues per year and expires in March of
2001.
- REAL-TIME DISTRIBUTION AND DYNAMIC MANAGEMENT OF METEOROLOGY AND
OCEANOGRAPHY ("METOC") DATABASE PRODUCTS--NAVAL RESEARCH LABORATORY.
A&T was also selected by the Naval Research Laboratory to perform
research and development on the METOC database, a system that reduces
event-triggered human decision errors. A&T is working to improve the
efficiency of the Naval Research Laboratory's data architecture
focusing on information availability and clarity. Under this $14.6
million cost-plus contract, the group has designed proprietary
data-mining techniques that enable users to extract data quickly and
in an organized fashion. As a result of A&T's work, the METOC system
was selected by NATO as the standard for the Allied forces'
environmental analysis systems. A&T was awarded this contract in July
1996 and it runs through July 2001.
INTERACTIVE MEDIA CORP.
IMC has approximately 235 technical specialists providing custom training
and performance solutions across all major computer platforms and delivery
systems. Capitalizing on its reputation, IMC has established leading positions
in telecommunications and financial services as well as in the rapidly growing
web-based training market. Currently over 50% of IMC's revenues involve
web-based training.
IMC has many years of consulting, performance improvement and training
services experience. Since 1990, IMC's personnel have developed over 3,500 hours
of interactive media courseware. IMC's skilled computer programmers and
consultants use web-based delivery systems and multimedia technology, including
computer generated graphics, animation, full motion video and high fidelity
audio to develop training solutions that are both educational and expedient to
the end user. The unit's multimedia technologies are platform and tool
independent, allowing them to be easily integrated into any company's computer
environment.
- US WEST COMMUNICATIONS ("US WEST"). An example of IMC's work is the
service it provides to US West. IMC was awarded a fixed-price $1.1
million contract by US West. Under this contract, IMC will develop an
intranet-based training program that will distribute 118 hours of
interactive media based training to US West's national sales force. An
integral part of this initiative is IMC's KNOWLEDGE BANK, a program
that focuses on the need for quick reference tools to enhance
productivity and facilitate learning. IMC technicians and software
engineers have developed an interactive program that catalogs
frequently referred to subjects and makes
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them available over US West's corporate intranet for quick access by
all members of the sales staff.
- REGIONAL TELEPHONE COMPANY OPERATIONS CURRICULUM: INTERNET-BASED
TRAINING. IMC was also recently contracted by a large regional
telephone company to provide an effective, multi-platform solution
that both reduces classroom time and teaching materials and provides
an on-line reference tool in accordance with the telephone company's
program. Under this contract, IMC consultants developed a unique model
that eliminates redundant course materials and provides trainees with
information via three proprietary delivery methods: orientation/
foundation courses; job specific courses; and online reference tools.
For this effort, IMC developed a CD-ROM based training program for
courses containing general company information and an updatable
internet based training system for courses with job specific content.
By developing a system that documents job specific content
electronically, the student is able to access information on a
just-in-time basis, thereby reducing the time spent in training by
over 30%.
CONTRACT PROFILE
ANTEON
Anteon is one of a select group of qualified suppliers of information
technology services to the Federal government under multiple long-term contract
vehicles. Anteon performed work on approximately 7,000 task orders under such
contracts in the past three years and we are performing work on approximately
3,000 task orders. No one task order accounted for more than 5% of total 1998
revenues. In 1998, approximately 47%, 34% and 19% of Anteon's revenues were
generated by time and materials contracts, cost-plus contracts and fixed price
contracts, respectively.
Management believes that Anteon has secured a place as a prime contractor or
a subcontractor for every major government-wide acquisition contract issued
since January 1996. We have been awarded two major contracts as a prime
contractor since the second quarter of 1998. The GSA ANSWER contract is a
10-year multiple-award contract with an overall contract value of $25 billion.
We were previously the incumbent supplier on task orders under the predecessors
to this contract vehicle (GSA PACZONE and CAPZONE). The Department of
Transportation ITOP II contract is a 7-year multiple-award contract with an
overall contract value of $10 billion. The ITOP II contract was awarded to 14
prime contractors, including Anteon.
A&T
A&T also maintains a diversified contract base with no one contract
accounting for more than 5% of total 1998 revenues. In fiscal year 1999,
approximately 71%, 20% and 9% of A&T's revenues were generated by cost-plus
contracts, fixed price contracts and time and materials contracts, respectively.
However, in October 1998, A&T won a $130 million five-year contract from the
FTSCA, its largest win ever, which represents a significant future growth
opportunity. Over 80% of A&T's work is performed as a government prime
contractor, much of it for the U.S. Navy. Within the E/IT division,
approximately 80% of its work is performed on a cost-plus basis. Within IMC,
most work, both commercial and government, is done on a fixed price basis.
CONTRACTUAL RISK MANAGEMENT
At each stage of the contracting process, we attempt to reduce financial and
performance risks. At the pre-award stage, we frequently bid through teaming
agreements with other contractors having complementary technical strengths that
enhance the likelihood of winning the contract, including, in many instances,
our main competitors. Sometimes, before a Federal government agency has actually
signed or begun funding for services under a contract or task order, our
employees will begin providing services. We have
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internal procedures in place to ensure that such "at risk" provisions of
services only occur when funding is delayed due to bureaucratic or other
technical reasons and it remains highly probable that we will ultimately receive
funding.
Once we win a contract or task order, we assign a program manager and, at a
lower level, a task leader, to ensure timely and high quality performance of
services. Program managers are given access to our financial management
information systems to assist them in making sure that our incurred costs do not
exceed funded costs under our contracts and task orders. Program managers also
constantly interface with our customers to ensure their needs are being
satisfied.
BACKLOG
Anteon and A&T, like most of their competitors, possess a substantial
backlog of several hundred contracts that provide multi-year revenues. Most of
our contracts are operational over a one to ten-year period. In the past, we
have generally been successful in substantially expanding the scope and size of
our principal contracts. Pro forma for the acquisition, our estimated total
contract backlog as of June 30, 1999 was $2.1 billion with an additional $155
million of bids outstanding and over $1 billion of identified bid opportunities.
These backlog amounts consist of "funded" backlog which is based upon
amounts actually appropriated by a customer for payment of goods and services
and "unfunded" backlog which is based upon management's estimate of the future
potential of our existing contracts to generate revenues for Anteon and A&T.
Because the Federal government operates under annual appropriations, agencies of
the Federal government typically fund contracts on an incremental basis.
Accordingly, a significant portion of our total contract backlog is not
"funded." Funded backlog generally varies depending on procurement and funding
cycles and other factors beyond our control. Accordingly, period-to-period
comparisons are difficult and not necessarily indicative of any future trends in
revenues.
Anteon's and A&T's ability to significantly increase their backlogs during
recent years is the result of their successful track records of maintaining
their respective positions as the incumbent service providers on their contracts
as well as success in winning new business. During 1998, Anteon's and A&T's bid
recompete success rates were 100% and 90%, respectively. Set forth in the table
below is a summary of the aggregate dollar amount of (1) contracts that Anteon
and A&T have retained in competitive rebidding processes and (2) new contracts
attained by each of them from 1996 to 1998.
RECOMPETE WINS AND NEW BUSINESS WINS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1996 1997 1998
--------- --------- ---------
<CAPTION>
(IN MILLIONS)
<S> <C> <C> <C>
RECOMPETE WINS
Anteon........................................................................... $ 56.5 $ 232.0 $ 949.6
A&T.............................................................................. 71.1 124.9 85.2
--------- --------- ---------
Subtotal......................................................................... $ 127.6 $ 356.9 $ 1,034.8
NEW BUSINESS WINS
Anteon........................................................................... $ 85.0 $ 150.5 $ 119.2
A&T.............................................................................. 25.0 222.2 273.4
--------- --------- ---------
Subtotal......................................................................... $ 110.0 $ 372.7 $ 392.6
--------- --------- ---------
Total........................................................................ $ 237.6 $ 729.6 $ 1,427.4
--------- --------- ---------
--------- --------- ---------
</TABLE>
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CUSTOMERS
We are one of a select group of qualified suppliers of information
technology services to the Federal government. Domestically, Anteon and A&T
service more than 60 agencies, bureaus and divisions of the U.S. Federal
government, Cabinet-level agencies and all branches of the military services,
which customers provide approximately 93% of Anteon's and A&T's aggregate
revenues. State and local governments, international clients and the commercial
sector provide the remaining 7%. Anteon performed work on approximately 3,000
task orders in 1998 under several hundred contracts. A&T also has a diverse
contract base with over 100 contracts. In particular, Anteon and A&T have an
established track record of providing quality services to the U.S. Navy.
Together, Anteon and A&T maintain contracts with approximately 30 different U.S.
Navy organizations. These organizations independently contract for our services
and generate, after giving pro forma effect to the acquisition, approximately
51% of Anteon's and A&T's combined 1998 revenues. The GSA, the Environmental
Protection Agency and FEMA are Anteon and A&T's largest civil government
customers.
Approximately 66% of IMC's revenues were generated from commercial
customers. These customers include FORTUNE 500 companies primarily in
telecommunications, financial services and information technology. IMC has
developed training systems for companies such as MCI Worldcom, Ameritech, GTE,
Royal Bank of Canada, National City Bank, SmithKline Beecham and Merck.
COMPETITION
The Federal information technology and engineering services industries are
comprised of a large number of enterprises ranging from small, niche-oriented
companies to multi-billion dollar corporations with a major presence throughout
the Federal government. Because of the diverse requirements of Federal
government clients and the highly competitive nature of large Federal
contracting initiatives, corporations frequently form teams to pursue contract
opportunities. Prime contractors leading large proposal efforts select team
members on the basis of their relevant capabilities and experience particular to
each opportunity. As a result of these circumstances, companies that are
competitors for one opportunity may be team members for another opportunity.
Anteon frequently competes against well-known firms in the industry as a
prime contractor. Obtaining a position as either a prime contractor or
subcontractor on large government-wide contracting vehicles is only the first
step to ensuring a secure competitive position. Competition then takes place at
the task order level, where knowledge of the client and its procurement
requirements and environment is the key to winning the business. We have been
highly successful in ensuring our presence on contracts and GSA Schedules, and
in competing for work under those contracts. Through the variety of contractual
vehicles at our disposal, as either a prime contractor or subcontractor, we have
the ability to market our services to any Federal agency. Because of our
extensive experience in providing services to a diverse array of Federal
departments and agencies, we have first-hand knowledge of our clients and their
goals, problems and challenges. We believe this knowledge gives us a competitive
advantage in competing for tasks and positions us well for future growth.
A&T's core Department of Defense market is comprised of a small number of
large players with a diverse portfolio of services from automated data
processing services to outsourcing capabilities, as well as a large number of
smaller firms with specialized capabilities. Management believes that A&T is
well-positioned to remain competitive in this market and to sustain its growth
trends.
EMPLOYEES
Anteon employs approximately 2,200 personnel, representing a highly trained
and technically proficient work force. These employees support hundreds of
national and international clients from our headquarters in Fairfax, Virginia,
and from 39 offices worldwide. Our workforce is highly educated and experienced
in the defense and intelligence sectors. Functional areas of expertise include
engineering,
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computer science, business process reengineering, logistics, transportation,
materials technologies, C(4)I, avionics, finance and acquisition management.
None of Anteon's employees is represented by collective bargaining agreements.
Management believes its relationship with its employees is very good.
A&T employs approximately 1,700 full-time employees, approximately 1,400 of
whom are professional and technical personnel. A&T's highly talented scientists,
engineers and technicians are experts in signal processing, acoustics, ship
survivability and hydrodynamics. A&T's information technology professionals are
experienced in software engineering and development, system integration,
networking and training. A&T has invested significant resources assembling a
team of respected software engineers specializing in high-level systems
architecture, client/server applications and object-oriented programming. None
of A&T's employees is represented by collective bargaining agreements.
Management of A&T believes its relationship with its employees is very good.
FACILITIES
Anteon's corporate offices are located in leased facilities in Fairfax,
Virginia. Anteon also leases approximately 411,602 square feet of office, shop
and warehouse space in 39 facilities across the United States, United Kingdom,
South Korea and Australia.
A&T owns its corporate headquarters located in North Stonington,
Connecticut, which occupies 60,330 square feet of office space. A&T also owns
office and shop space in New London, Connecticut and Butler, Pennsylvania. A&T
presently subleases to tenants approximately 23,000 square feet of its Butler
office space and 20,000 square feet of its New London office space.
A&T also leases approximately 357,000 square feet of office, shop and
warehouse space in 36 locations across the United States, Australia, and Canada.
LEGAL MATTERS
Anteon received a demand letter from one of Anteon's subcontractors claiming
approximately $3.2 million in damages arising in connection with Anteon's
decision to terminate the subcontractor. The termination was a result of certain
actions taken by Anteon's customer. Anteon believes there are valid defenses to
such claim and that the matter will not have a material adverse affect on
Anteon's financial condition, results of operations or cash flow. Neither Anteon
nor A&T is involved in any other material legal proceedings except for ordinary
routine litigation incidental to its business which is not otherwise material to
its business or financial condition. From time to time, we or our competitors
file bid protests, as permitted under Federal procurement regulations, in
connection with specific contract awards. Historically, these proceedings have
not had any material effect on Anteon's financial condition, results of
operations or cash flow. Management is not able to assure you that either
company will not become involved in material legal proceedings or contract bid
protest proceedings in the future.
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OVERVIEW OF FEDERAL GOVERNMENT CONTRACTING
GOVERNMENT BIDDING OVERVIEW
There are several different processes through which a Federal government
agency will solicit bids. The following is a summary of the typical bidding
process which government contractors such as Anteon and A&T encounter. If a
Federal government agency has a requirement, such as the upgrade of a management
information system, the agency makes a brief announcement of its requirements in
the COMMERCE BUSINESS DAILY or on a government electronic bulletin board to
which contractors like Anteon and A&T have access. Interested contractors then
submit packages expressing their interest and highlighting their qualifications.
The agency responds to those contractors it deems preliminarily qualified by
providing them with a request for a proposal ("RFP") or similar solicitation.
The RFP is an extensive document describing the desired services and terms and
conditions that will form the final agency contract. The RFP includes a
statement of the criteria according to which bids will be evaluated (usually
focusing on price, past performance and quality of technical/management plan).
Bidders then submit proposals in response to the RFP. The agency evaluates all
the proposals and announces the winner. This process can take up to a year.
The competitive process for a multiple award contract procurement is similar
to that described above, except that the government awards multiple contracts to
a selected group of contractors, rather than a single contract. Federal agencies
desiring to procure goods and services through a particular multi-agency
contract such as GSA ANSWER, will request the servicing agency (for example,
GSA) to initiate a limited competition among the selected awardees, resulting in
the issuance of a task order to a single contractor. A task order calls for a
specific set of services to be delivered by the contractor to a particular
client agency. Competition for task orders among initial awardees can be intense
and often focuses on price, because the initial awardees are already qualified
to supply the service through the initial award of the government contract
vehicle. However, our experience has been that after winning a task order and
effectively providing the requested services, we will typically receive
successive task orders from the same agency for follow-on services. Our
experience has also been that the key factors in bidding successfully for these
Federal government contracts are technical capabilities, past performance,
competitive prices and reputation, all four of which management believes are
factors that strongly favor both Anteon and A&T.
TYPES OF CONTRACT VEHICLES
The Federal information technology procurement environment has changed
dramatically in recent years. Federal government agencies traditionally procured
information technology solutions through agency-specific contracts awarded to a
single contractor or contractor team. Several statutory and regulatory changes
have significantly altered Federal government procurement practices. The number
of procurement "vehicles" available to Federal government customers to satisfy
their requirements has increased dramatically in recent years. Federal
government agencies are now more likely to use flexible contract vehicles that
permit multiple sources to compete for specific orders. We believe these trends
are likely to continue.
IDIQ contracts are essentially umbrella contracts that set forth the basic
terms and conditions under which the Federal government may order goods and
services from one, and in some cases, more than one, contractor. Such contracts
will also specify the labor and other costing rates that will apply to services
that may be the subject of task orders under those contracts. IDIQ contracts may
be awarded to a single contractor, or to multiple contractors. Multiple-award
IDIQ contracts are increasingly being used for large-scale Federal government
purchases of services and/or integrated systems that may include a significant
service or maintenance component, along with the provision of computer hardware
and software. The periods of performance for IDIQ contracts usually span a base
year and a number of option years. IDIQ contracts do not obligate the Federal
government to purchase goods or services at the maximum levels set forth in the
contract.
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Federal government agencies also frequently purchase information technology
services and products through other contract vehicles such as GSA Schedules. GSA
awards such indefinite quantity fixed price contracts to companies for stated
periods of time through which individual agencies may place orders, receive
shipments and make payments directly to contractors. In order for a company to
provide services under a GSA contract, the company must be pre-qualified and
selected by the GSA. In the information technology service sector the three
ratings criteria employed by the GSA for pre-qualification are technical skills,
price and a history of excellence in government contract administration. Anteon
and A&T both have GSA Schedule contracts.
The changed environment for Federal government contractors presents a number
of challenges for companies like Anteon. In the case of contracts like GSA
Schedule contracts or IDIQ contracts, a substantial amount of marketing must be
done after winning the initial contract in order to win subsequent delivery and
task orders.
Our experience has been that the changed environment for government
contractors has on balance been highly favorable to companies like Anteon that
have a wide range of technological capabilities, are very focused on cost
control and have a high degree of sophistication and experience in government
contracting. First, these more flexible forms of contract vehicles provide for
very sizable revenue generation opportunities. Some of our IDIQ contracts
potentially involve billions of dollars of revenues for awardees. Second, these
vehicles permit us to market our services to a much wider range of customers
than was possible under more traditional contracting vehicles. Third, the
current environment tends to favor entities that have the size and technological
breadth to offer a variety of services because the umbrellas provide for broader
opportunities. Finally, we have found that this environment encourages building
longer term and stable supplier/customer relationships because there are often a
number of contract vehicles under which Federal agencies may be able to direct
work to preferred contractors. This tends to lessen the risks to customer and
supplier of going through recompetes in order to continue to transact business,
and provides a reward for suppliers such as Anteon that establish a reputation
for quality and integrity.
CONTRACT PAYMENT TYPES
The contract vehicles described above employ various payment methodologies.
Contracts are typically referred to as time and materials contracts, cost-plus
contracts and fixed-price contracts. Each of these contract payment types is
described below.
TIME AND MATERIALS CONTRACTS
Some of our largest contracts are negotiated on the basis of time and
materials. Under this type of contract, a contractor is paid a fixed hourly rate
for direct labor hours expended. Labor costs, overhead and profit are included
in the fixed hourly rate. Materials, subcontractors and other direct costs are
reimbursed at actual cost-plus general and administrative expenses and, in some
instances, an agreed-upon percentage of profit. A contractor makes critical
pricing assumptions when proposing fixed labor rates for a time and materials
contract and risks loss of profitability on time and materials contracts if its
actual costs exceed assumed costs made. In 1998, time and materials contracts
accounted for approximately 46.7% of Anteon's revenues, approximately 9.4% of
A&T's revenues, and approximately 32.7% of Anteon's revenues pro forma for the
acquisition.
COST-PLUS CONTRACTS
Cost-plus contracts provide for reimbursement of costs, to the extent that
such costs are allowable, and the payment of a fixed "fee," which is essentially
the profit negotiated between the contractor and the contracting agency.
Cost-plus incentive fee and cost-plus award fee contracts provide for increases
or decreases in the contract fee, within specified limits, based upon actual
results as compared to contractual targets for factors such as cost, quality,
schedule and performance. In fiscal 1998, cost-plus contracts
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accounted for approximately 34.2% of Anteon's revenues, approximately 70.6% of
A&T's revenues, and approximately 47.8% of Anteon's revenues pro forma for the
Acquisition.
FIXED PRICE CONTRACTS
Under fixed price contracts, a contractor agrees to perform specified work
for a fixed-price and, accordingly, risk of performing the contract. In fiscal
1998, fixed price contracts accounted for approximately 19.2% of Anteon's
revenues, approximately 20.0% of A&T's revenues, and approximately 19.5% of
Anteon's revenues giving pro forma effect to the acquisition.
FEDERAL GOVERNMENT RECEIVABLES
Almost all of our accounts receivable is derived from Federal government
agencies. An account receivable from a Federal government agency enjoys the
overall credit worthiness of the Federal government, even though each such
agency is a separate agency with its own budget. Pursuant to the Prompt Payment
Act, payments from government agencies must be made within 30 days of final
invoice or interest must be paid.
REGULATION
The passage of the ITMRA in late 1996 resulted in major changes in Federal
government procurement rules governing the acquisition of information technology
goods and services. The ITMRA changed the government's process for procuring
information technology by (1) placing increased attention on the
cost-effectiveness of information technology, return on investment and
performance and (2) allocating to individual agencies authority and
accountability for information technology budgets. These trends are expected to
result in increased interagency coordination and sharing of expense and fewer
proprietary or single agency solution systems. Companies such as Anteon and A&T
which are well-positioned across several major government agencies should
benefit from these trends. As a result of the ITMRA, multiple-award IDIQ
government-wide contracts as the preferred vehicle for procuring information
technology. Accordingly, contractors have a decreased need for large-scale
investment in bid and proposal activities and an increased need to commit
marketing resources to identify and capture tasks under existing contracts.
Federal government contracts are subject to the Federal Acquisition
Regulations ("FAR") and other agency FAR supplements. Major contracts are also
subject to the Truth in Negotiations Act ("TIN Act") and Cost Accounting
Standards ("CAS"). Among other procurement regulations, the FAR contains the
cost principles for setting contract prices while the TIN Act requires us to
provide current, accurate and complete cost or pricing data in connection with
the negotiation of a contract. CAS requires consistency of accounting practices
over time and compliance with specific cost accounting criteria.
To the extent that a company fails to comply with procurement requirements,
the Federal government may adjust contract prices. Additionally, changes in cost
accounting practice are subject to a required procedure for negotiation of the
cost of the change. The Federal government is protected from paying increased
costs resulting from accounting changes. Finally, the Federal government has the
right to audit contractors for three years after final payment. Such audits are
generally performed by the DCAA. Accordingly, Anteon's revenues are subject to
adjustment.
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THE TRANSACTIONS
THE ACQUISITION
On March 7, 1999, Anteon entered into an agreement and plan of merger to
acquire all of the issued and outstanding shares of A&T common stock at a price
of $26.00 per share. Under the merger agreement, Buffalo Acquisition
Corporation, a Connecticut corporation and wholly-owned subsidiary of Anteon,
merged into A&T and A&T became a wholly-owned subsidiary of Anteon. We completed
the acquisition on June 23, 1999.
IMC CONTINGENT PAYMENT, STOCK OPTIONS AND RETENTION ARRANGEMENTS
IMC, a subsidiary of A&T, acquired all the outstanding stock of UP, Inc.
("UP") under a stock purchase agreement among A&T, IMC and the former
stockholders of UP (the "UP Sellers"), dated as of November 14, 1997 (the "UP
Stock Purchase Agreement").
The UP Stock Purchase Agreement provided for a contingent payment to be made
to the UP Sellers (the "UP Contingent Payment") which became due and payable
upon consummation of the merger. The UP Contingent Payment to all of the UP
Sellers equals, at their election, either (a) 81,100 shares of common stock of
IMC (which would equal 9.1% of the outstanding shares of IMC after issuance but
before exercise of options to purchase IMC stock as described below), (b)
$2,250,000 in cash or (c) a combination of shares and cash which equals the
appraised value of the 81,100 shares of IMC, however, the Sellers may not elect
to receive more than $2,250,000 in cash. The management of A&T believes that it
is likely that the appraised value of the 81,100 shares of IMC will be less than
the cash payment alternative of $2,250,000, and this prospectus assumes that all
the UP Sellers elect to receive cash and are not entitled to receive any shares
of IMC stock by reason of the UP Contingent Payment. In addition, if the UP
Sellers elect to receive cash for the UP Contingent Payment, they will also be
granted options to purchase an additional 81,100 shares of common stock of IMC
in the aggregate at an exercise price of $27.74 per share.
In addition, IMC has issued to certain of its key employees options to
purchase an aggregate of 180,000 shares of common stock of IMC which would
constitute 18.2% of the outstanding shares of stock, after exercise, assuming
that no shares of IMC common stock are issued as part of the UP Contingent
Payment. Under the agreements pursuant to which these options were granted, the
options fully vested upon the consummation of the merger. IMC and A&T have the
right to purchase such options for a purchase price equal to the difference
between the exercise price of the options and a formula price, called the Parent
Company Change in Control Price under such agreements. The exercise price of the
options is $11.78 per share.
IMC has also entered into agreements with certain of its employees pursuant
to which they will be entitled to receive retention bonuses in the aggregate
amount of approximately $800,000 if they are still employed by IMC, A&T or any
successor thereof eighteen months following the consummation of the merger, or
if their employment is involuntarily terminated prior to that date other than
for cause.
NEW CREDIT FACILITY
Anteon entered into the new credit facility with Credit Suisse First Boston,
as administrative agent and advisor and arranger, Mellon Bank N.A., as
syndication agent, Deutsche Bank AG, as documentation agent, and a syndicate of
financial institutions, including CSFB, Mellon and Deutsche Bank. The new credit
facility consists of a $60.0 million term loan facility and a $120.0 million
revolving credit facility. At the closing of the acquisition, Anteon borrowed
$60.0 million under the term loan facility. The undrawn portion of the revolving
credit facility will be available to us for general corporate purposes,
including additional permitted acquisitions and investments. See "Description of
Other Material Agreements--New Credit Facility" for additional information on
the new credit facility.
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EQUITY CONTRIBUTION
Before the acquisition, Azimuth Technologies, Inc., our parent company, an
affiliate of Caxton-Iseman Capital, contributed $22.5 million to our equity. The
equity contribution was funded by persons who are indirectly existing investors
in Azimuth, or their affiliates, through a limited liability company that is
indirectly controlled by Mr. Frederick Iseman.
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MANAGEMENT
The directors and executive officers of Anteon and their respective ages as
of the date of this prospectus are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION HELD
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Frederick J. Iseman.................................. 46 Chairman of the Board and Director
Joseph M. Kampf...................................... 54 President, Chief Executive Officer and Director
Noreen Centracchio................................... 54 Group Vice President, GSA Programs Group
Thomas M. Cogburn.................................... 55 Executive Vice President and Chief Operating Officer
and Director
Carlton B. Crenshaw.................................. 54 Senior Vice President, Chief Financial and
Administrative Officer
Ken Guest............................................ 58 Group Vice President, Federal Information Technology
Group
Roger A. Gurner...................................... 57 Group Vice President, Enterprise Solutions and
Services Group
Mark Heilman......................................... 50 Senior Vice President Corporate Development
Joseph Maurelli...................................... 57 President of Techmatics and Director
Seymour L. Moskowitz................................. 67 Senior Vice President
Curtis L. Schehr..................................... 40 Vice President, General Counsel and Secretary
Gilbert F. Decker.................................... 61 Director
Robert A. Ferris..................................... 56 Director
Dr. Paul Kaminski.................................... 56 Director
Steven M. Lefkowitz.................................. 34 Director
</TABLE>
FREDERICK J. ISEMAN has served as Chairman of Anteon since its formation in
April 1996. Mr. Iseman is Chairman and President of Caxton-Iseman Capital, Inc.
(a private investment firm) which was founded by Mr. Iseman in 1993. Prior to
establishing Caxton-Iseman Capital, Inc., Mr. Iseman founded Hambro-Iseman
Capital Partners (a merchant banking firm) in 1990. From 1988 to 1990, Mr.
Iseman was a member of Hambro International Venture Fund. Mr. Iseman is a
director of the following companies: Leisure Link Holdings, Cremascoli Ortho
S.A., Metropolitan T.L.C. Holdings, Inc. and the Advisory Board of Duke Street
Capital. He is a former director of: Franklin Hotel and Investments, Ltd.,
Framleydove Ltd. (Glass's Information Services), Golden Valley LLC, Magnavox
Electronic Systems Corporation Holdings, Inc., Electronic Distribution
Acquisition Company (Deanco), Geowaste, Inc. and Hambro America, Inc. (the U.S.
subsidiary of Hambros PLC). Mr. Iseman received a B.A. from Yale University in
1975.
JOSEPH M. KAMPF has served as Anteon's President and Chief Executive Officer
and a director since April 1996. From January 1994 to 1996, Mr. Kampf was a
Senior Partner of Avenac Corporation, a consulting firm providing advice in
change management, strategic planning, corporate finance, and mergers and
acquisitions to middle market companies. From 1990 through 1993, Mr. Kampf
served as Executive Vice President of Vitro Corporation, a wholly owned
subsidiary of The Penn Central Corporation. Prior to his position as Executive
Vice President of Vitro Corporation, Mr. Kampf served as the Senior Vice
President of Vitro Corporation's parent company, Penn Central Federal Systems
Company, and as Chief Liaison Officer for the group with The Penn Central
Corporation. Between 1982 and 1986, Mr. Kampf was Vice President of Adena
Corporation, an oil and gas exploration and development company. Mr. Kampf
received a B.A. from the University of North Carolina in 1966.
NOREEN CENTRACCHIO has served as Anteon's Group Vice President, GSA Programs
since January 1999. During 1998, she served as Anteon's Vice President,
Corporate Communications. From 1996 to 1998, Ms. Centracchio served as Anteon's
Vice President, Corporate Development. From 1988 to 1996, Ms. Centracchio served
as Vice President and Program Manager for Ogden Professional Services
Corporation, the Predecessor Company. Prior to 1988, Ms. Centracchio was a Vice
President at Group Operations, Inc. for a period of 10 years. Ms. Centracchio
received a B.A. from Adelphi University in 1966.
THOMAS M. COGBURN has served as Executive Vice President and Chief Operating
Officer and a director since April 1996. From 1992 to 1996, he served in the
same capacity at Ogden Professional Services Corporation, the predecessor
company to Anteon. From 1988 to 1992, Mr. Cogburn served as Vice
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President of the Information System Support Division of CACI International, Inc.
Mr. Cogburn's experience also includes 21 years in information systems design,
operation, program management, and policy formulation for the U.S. Air Force.
Mr. Cogburn received a B.B.A. from the University of Texas in 1965 and an M.B.A
from Arizona State University in 1971.
CARLTON B. CRENSHAW has served as Anteon's Senior Vice President, Chief
Financial and Administrative Officer since July 1996. From 1989 to 1996, Mr.
Crenshaw was Orbital Sciences Corporation Executive Vice President, Finance and
Administration, and Chief Financial Officer of Orbital Sciences Corporation (a
commercial technology company). He served in a similar capacity with Software AG
Systems, Inc. from 1985 to 1989. From 1971 to 1985, Mr. Crenshaw progressed from
financial analyst to Vice President of Strategic Planning for the Sperry Univac
division and was Treasurer for Sperry Corporation. Mr. Crenshaw received a
B.B.A. from Southern Methodist University in 1966 and an M.B.A. from New York
University in 1971.
KEN GUEST has served as Anteon's Group Vice President, Federal Information
Technology Group since January 1999. From 1997 to January 1999, he served as
Anteon's Vice President of Defense Programs and Systems. Prior to joining
Anteon, Mr. Guest served 34 years with the U.S. Army, retiring as a Major
General in September 1997. Mr. Guest received a B.A. from North Georgia College
in 1966 and an M.S. from the University of Georgia in 1971.
ROGER A. GURNER has served as Anteon's Group Vice President, Enterprise
Solutions and Services Group since January 1999. From July 1997 to December
1998, Mr. Gurner served as Anteon's Vice President and Director, Business
Development, from June 1996 to June 1997 as Anteon's Vice President and
Director, West Coast Operations, and from January 1996 to June 1996 as Anteon's
Vice President and Director, Information Services Center. Prior to joining
Anteon, Mr. Gurner worked at Oracle Corporation where he served as principal
point of contact for Oracle's Enterprise Engineering Program from 1995 to 1996.
From 1993 to 1995, Mr. Gurner was a Government Program Manager with Xerox
Corporation. From 1987 to 1992, Mr. Gurner was a Program Manager with CACI
International, Inc. Prior to 1987, Mr. Gurner served 23 years with the Air Force
where he held numerous assignments in research and development, nuclear weapons
development and system acquisition. Mr. Gurner received a B.S. from Allegheny
College in 1963 and an M.B.A. from Central Michigan University in 1977.
MARK HEILMAN has served as Anteon's Senior Vice President for Corporate
Development since October 1998. From 1991 to 1998, Mr. Heilman was a partner and
principal of CSP Associates, Inc., where he specialized in strategic planning
and mergers and acquisition support for the aerospace, defense and information
technology sectors. From 1987 to 1991, Mr. Heilman was Vice President and an
Executive Director of Ford Aerospace and Communications Corporation. Mr. Heilman
received a B.A. from the University of Iowa in 1970.
JOSEPH MAURELLI has served as a director of Anteon since July 1998. Mr.
Maurelli currently serves as the President and Chief Executive Officer of
Techmatics. Mr. Maurelli joined Techmatics as a Vice President in 1983, and
became President and Chief Executive Officer of Techmatics in January 1984. From
1967 to 1983, Mr. Maurelli was a senior civilian professional for the U.S. Navy
Department. He has written numerous technical articles and is an active member
of the American Society of Naval Engineers and the U.S. Navy League and
currently serves on the Board of Directors of the Professional Services Council
and the Virginia Opera. Mr. Maurelli received a B.S. from the State University
of New York in 1963 and an M.S. from George Washington University in 1971.
SEYMOUR L. MOSKOWITZ served as a consultant to Anteon beginning in April
1996 and became Anteon's Senior Vice President in April 1997, and is responsible
for strategic planning with an emphasis on current and future technologies.
Prior to joining Anteon, Mr. Moskowitz served as Senior Vice President of
Technology at Vitro Corporation from 1985 to 1994, where he was responsible for
the development and acquisition of technologies and management of Research and
Development personnel and laboratory resources. Prior thereto, Mr. Moskowitz
served as Director of Research and Development for
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Curtiss-Wright Corporation for 30 years. Mr. Moskowitz received a B.S. from the
City College of New York in 1954.
CURTIS L. SCHEHR has served as Anteon's Vice President, General Counsel and
Secretary since October 1996. From 1991 to 1996, Mr. Schehr served as Associate
General Counsel at Vitro Corporation. During 1990, Mr. Schehr served as Legal
Counsel at Information Systems and Networks Corporation. Prior to 1990, Mr.
Schehr served for six years in several legal and contract oriented positions at
Westinghouse Electric Corporation (Defense Group). Mr. Schehr received a B.A.
from Lehigh University in 1980 and a J.D. from George Washington University in
1984.
GILBERT F. DECKER has served as a director of Anteon since June 1997. From
April 1994 to May 1997, Mr. Decker served as the Assistant Secretary of the U.S.
Army for Research, Development and Acquisition. As Assistant Secretary, Mr.
Decker led the Army's acquisition and procurement reform efforts, with an
emphasis on eliminating excessive government requirements throughout the
acquisition process. He also served as the Army Acquisition Executive, the
Senior Procurement Executive, the Science Advisor to the Secretary and the
Senior Research and Development official for the Army. From 1983 to 1989, Mr.
Decker was on the Army Science Board and served as Chairman from March 1987
until the end of his appointment. In the private sector, Mr. Decker has served
as President and Chief Executive Officer of three technology companies,
including Penn Central Federal Systems Company. Mr. Decker received a B.S. from
Johns Hopkins University in 1958 and an M.S. from Stanford University in 1967.
ROBERT A. FERRIS has served as a director of Anteon since April 1996. From
1998, Mr. Ferris has been a Managing Director of Caxton-Iseman Capital, Inc. (a
private investment firm). From 1981 to 1998, Mr. Ferris was a General Partner of
Sequoia Associates (a private investment firm). Prior to founding Sequoia
Associates, Mr. Ferris was a Vice President of Arcata Corporation, a New York
Stock Exchange-listed company. Mr. Ferris currently is a director of Clayton
Group, Inc. and Newell Manufacturing Corporation, as well as several other
privately owned corporations. Mr. Ferris received a B.A. from Boston College in
1963, and a J.D. from Fordham University Law School in 1966.
DR. PAUL KAMINSKI has served as a director of Anteon since June 1997. From
1994 to May 1997, Dr. Kaminski served as the Under Secretary of Defense for
Acquisition and Technology. In this position, Dr. Kaminski was responsible for
all matters, relating to Department of Defense acquisition, including research
and development, procurement, acquisition reform, dual-use technology and the
defense technology and industrial base. Prior to 1994, he served as Chairman of
a technology oriented investment banking and consulting firm. Dr. Kaminski also
served as Chairman of the Defense Science Board and as a consultant and advisor
to many government agencies. Mr. Kaminski received a B.S. from the Air Force
Academy in Colorado in 1964, two M.A. degrees from the Massachusetts Institute
of Technology in 1966 and a Ph.D. from Stanford University in 1971.
STEVEN M. LEFKOWITZ has served as a director of Anteon since April 1996. Mr.
Lefkowitz has been a principal of Caxton-Iseman Capital Inc. (a private
investment firm) since 1993. From 1988 to 1993, Mr. Lefkowitz was employed by
Mancuso & Company (a private investment firm) and served in several positions
including Vice President and as a Partner of Mancuso Equity Partners. Mr.
Lefkowitz received a B.A. from Northwestern University in 1986 and an M.B.A.
from J.L. Kellogg Graduate School of Management in 1987.
BOARD OF DIRECTORS
There are currently eight members of the Board of Directors of Anteon.
COMPENSATION OF DIRECTORS
Some directors of Anteon who are not employees of Anteon are paid an annual
retainer. In 1998, each of Messrs. Decker and Kaminski received a retainer of
$25,250 and Mr. Ferris received a retainer of $25,000. Each director of Anteon
is compensated for expenses incurred in connection with serving as a member of
the Board of Directors.
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EXECUTIVE COMPENSATION
The following table provides you with information on the compensation
awarded to, earned by or paid to the Chief Executive Officer and the four other
most highly compensated executive officers of Anteon whose individual
compensation exceeded $100,000 during the fiscal year ended December 31, 1998
for services rendered in all capacities to Anteon and its subsidiaries. The
persons listed in the table below are referred to as the "Named Executive
Officers."
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL AWARDS
COMPENSATION -----------------
------------------------------------------------------ NUMBER OF SHARES
OTHER ANNUAL UNDERLYING STOCK
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) OPTIONS
- ------------------------------------------------- --------- --------- --------- --------------------- -----------------
<S> <C> <C> <C> <C> <C>
Joseph M. Kampf.................................. 1998 $ 235,566 $ 200,000 -- --
President and Chief Executive Officer
Thomas M. Cogburn................................ 1998 176,341 82,500 -- 5,000
Executive Vice President and
Chief Operating Officer
Carlton B. Crenshaw.............................. 1998 183,495 92,750 -- --
Senior Vice President, Chief
Financial and Administrative Officer
Seymour L. Moskowitz............................. 1998 150,864 82,500 -- --
Senior Vice President
Roger A. Gurner.................................. 1998 114,222 -- -- --
Group Vice President,
Enterprise Solutions and Services Group
</TABLE>
- --------------------------
(1) No Named Executive Officer received Other Annual Compensation in an amount
in excess of the lesser of either $50,000 or 10% of the total of salary and
bonus reported from him in the two preceding columns.
The following table sets forth certain information regarding options granted
during fiscal 1998 to each of the Named Executive Officers under Anteon's
Omnibus Amended and Restated Stock Option Plan:
OPTION GRANTS IN 1998
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK
PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM(1)
---------------------------------------------------------------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
NUMBER OF SHARES
UNDERLYING % OF TOTAL EXERCISE OR
OPTIONS OPTIONS GRANTED TO BASE EXPIRATION
NAME GRANTED EMPLOYEES IN 1998 PRICE PER SHARE DATE 5% 10%
- ------------------------ ----------------- --------------------- ----------------- --------------- --------- ---------
Joseph M. Kampf......... -- --% $ -- -- $ -- $ --
Thomas M. Cogburn....... 5,000(2) 3.3 37.30 (2) 51,526 113,860
Carlton B. Crenshaw..... -- -- -- -- -- --
Seymour L. Moskowitz.... -- -- -- -- -- --
Roger A. Gurner......... -- -- -- -- -- --
</TABLE>
- --------------------------
(1) The indicated dollar amounts are the result of calculations based on the
exercise price of the options and assume five and ten percent appreciation
rates and, therefore, are not intended to forecast possible future
appreciation, if any, of Anteon's stock price.
(2) Represents options granted under Anteon's Amended and Restated Omnibus Stock
Option Plan.
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The following table sets forth certain information with respect to options
held at the end of fiscal 1998 by each of the Named Executive Officers:
AGGREGATED OPTION EXERCISES IN 1998
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------------
<S> <C> <C>
NUMBER OF SHARES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY
AT DECEMBER 31, 1998 OPTIONS AT DECEMBER 31, 1998
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE(1)
- ---------------------------------------------------- -------------------------- --------------------------------
Joseph M. Kampf..................................... 11,615/17,425 $354,838/$532,334
Thomas M. Cogburn................................... 0/5,000 0/0
Carlton B. Crenshaw................................. 5,607/8,412 171,294/256,987
Seymour L. Moskowitz................................ 17,623/26,438 538,383/807,681
Roger A. Gurner..................................... 0/0 0/0
</TABLE>
- --------------------------
(1) Based on the difference between the latest per share market value
calculation on December 8, 1998 for Anteon's common stock, which was $37.30
per share, and the option exercise price. The above valuations may not
reflect the actual value of unexercised options, as the value of unexercised
options will fluctuate with market activity.
OMNIBUS STOCK PLAN
In January 1997, the Board of Directors adopted, and Anteon's sole
stockholder approved, Anteon's Omnibus Stock Plan and on April 3, 1998 the Board
of Directors adopted, and Anteon's sole stockholder approved, Anteon's Amended
and Restated Omnibus Stock Plan (as amended, the "Plan") which enables Anteon to
make grants of stock-based incentive compensation to officers and other key
employees and consultants of Anteon and its subsidiaries. The purposes of the
Plan are to promote the long-term growth and profitability of Anteon and its
stockholders by (i) providing key people with incentives to improve stockholder
value and to contribute to the growth and financial success of Anteon and (ii)
enabling Anteon to attract, retain and reward the best available persons for
positions of substantial responsibility. The principal provisions of the Plan
are summarized below. This summary, however, does not purport to be complete and
is qualified in its entirety by the terms of the Plan, which may be obtained
from Anteon upon request.
The Plan is administered by the Board of Directors or, in the alternative, a
committee (the "Committee") appointed by the Board of Directors consisting of
not less than three members of the Board of Directors to administer the Plan on
behalf of the Board, subject to such terms and conditions as the Board may
prescribe. The members of the Committee are required to be both "Non-Employee
Directors" (within the meaning of Rule 16b-3 promulgated under the Securities
Exchange Act of 1934) and "outside directors" (within the meaning of section
162(m) of the Internal Revenue Code of 1986 (the "Code")) to the extent Rule
16b-3 and Code section 162(m), respectively, are applicable to Anteon and the
Plan. The Plan is not subject to the Employee Retirement Income Security Act of
1974, as amended or Section 401(a) of the Code.
The Plan became effective upon approval of the stockholders in January, 1997
and will remain in effect until January 30, 2007 unless sooner terminated by the
Board. On July 24, 1998, by resolution of the Board of Directors, and with the
written consent of the sole stockholder of Anteon, the Plan was amended to
increase the number of shares of common stock available for award under the Plan
from 250,000 shares to 325,000 shares and on July 23, 1999, by further
resolution of the Board of Directors, and with the consent of the stockholders
of Anteon, the Plan was amended to increase the number of shares of common stock
available for award under the Plan from 325,000 shares to 575,000 shares. The
Board of Directors may amend, alter, suspend, discontinue, or terminate the Plan
or any portion thereof at any time; provided that no such action may be taken
without stockholder approval if such approval is necessary to comply with
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any tax or regulatory requirement, or rule of any exchange or Nasdaq system on
which the shares of common stock of Anteon may then be listed or quoted,
including any stockholder approval required for continued compliance with Rule
16b-3 or to enable the Committee to grant incentive stock options pursuant to
the plan. The Committee is authorized to make minor or administrative
modifications to the plan including those dictated, authorized or made desirable
by requirements of applicable federal or state laws. The Committee may also
amend or modify any outstanding award to the extent that it would have had the
authority to make such award as so modified or amended. The Committee has full
power and authority to administer and interpret the plan and to adopt such
rules, regulations, agreements, guidelines and instruments for the
administration of the plan and for the conduct of its business as the Committee
deems necessary or advisable and to interpret same, all within the Committee's
sole and absolute discretion; provided that no such action which would impair
the rights of any participant or any holder or beneficiary of any award may be
taken without the consent of the affected participant, holder or beneficiary.
The plan authorizes the grant of awards to participants with respect to a
maximum of 325,000 shares of common stock. Any shares covered by awards which
are forfeited, expire or which are terminated or canceled for any reason (other
than as a result of the exercise or vesting of the award) will again be
available for grant under the plan. In addition, in the event of a
reclassification, recapitalization, stock split, stock dividend, combination of
shares or other similar event, the maximum number and kind of shares reserved
for issuance or with respect to which awards may be granted under the plan are
required to be adjusted to reflect such event, and the Committee is required to
make such adjustments as it deems appropriate and equitable in the number, kind
and price of shares covered by outstanding awards made under the plan, and in
any other matters which relate to awards and which are affected by the changes
in the common stock referred to above.
The Committee is authorized to make adjustments in the terms and conditions
of, and the criteria included in, awards in recognition of unusual or
nonrecurring events affecting Anteon, or the financial statements of Anteon or
any subsidiary, or of changes in applicable laws, regulations, or accounting
principles, whenever the Committee determines that such adjustments are
appropriate in order to prevent dilution or enlargement of the benefits or
potential benefits intended to be made available under the plan.
In the event of any proposed change in control (as defined in the Plan), the
Committee is required to take such action as it deems appropriate and equitable
to effectuate the purposes of the plan and to protect the grantees of the
awards, including, without limitation, the following: (i) acceleration or change
of the exercise dates of any award so that the unvested portion of any award
shall become fully vested and immediately exercisable; (ii) arrangements with
grantees for the payment of appropriate consideration to them for the
cancellation and surrender of any award, which shall not be less than
consideration paid for other common stock of Anteon which is acquired, sold,
transferred, or exchanged because of the proposed change in control; and (iii)
in any case where equity securities other than common stock of Anteon are
proposed to be delivered in exchange for or with respect to common stock of
Anteon, arrangements providing that any award shall become one or more awards
with respect to such other equity securities.
There is no restriction under the Federal securities laws on the resale of
any shares acquired pursuant to the Plan, except that (i) persons who at the
time of the resale are considered "affiliates" of Anteon (by reason of being in
a "control" relationship with Anteon) may resell such shares only pursuant to
Rule 144 under the Securities Act of 1933 or pursuant to a "reoffer prospectus"
which may hereinafter be filed by Anteon as part of a registration statement
relating to the plan and (ii) purchases and sales by corporate officers and
directors of any securities of Anteon are subject to section 16(b) of the
Securities Exchange Act of 1934 and the rules promulgated thereunder relating to
insider short-swing profits.
Anteon may require that a participant, as a condition to exercise of an
award, and as a condition to the delivery of any share certificate, provide to
Anteon, at the time of each such exercise and each such delivery, a written
representation (i) that the shares of common stock being acquired shall be
acquired by
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the participant solely for investment and will not be sold or transferred
without registration or the availability of an exemption from registration under
the Securities Act of 1933 and applicable state securities laws; and (ii) as to
the knowledge and experience in financial and business matters of the
participant and the participant's ability to bear the economic risk of such an
investment, in compliance with applicable law. Anteon may also require that the
participant obtain a "purchaser representative" as that term is defined under
applicable law. The stock certificates for any shares of common stock issued
pursuant to the plan are required to bear a legend restricting their
transferability unless such shares are registered or an exemption from
registration is available under the Securities Act of 1933 and applicable state
securities laws. Anteon may notify its transfer agent to stop any transfer of
shares of common stock not made in compliance with these restrictions. Common
stock may not be issued with respect to an award granted under the plan unless
the exercise of such award and the issuance and delivery of share certificates
for such common stock pursuant thereto comply with all relevant provisions of
law, including, without limitation, the Securities Act of 1933, the Securities
Exchange Act of 1934, the rules and regulations promulgated thereunder and the
requirements of any national securities exchange or Nasdaq system on which the
common stock may then be listed or quoted, and such compliance to be subject to
the approval of counsel for Anteon to the extent such approval is sought by the
Committee.
Under the plan, the Committee may grant awards in the following forms:
non-qualified stock options, incentive stock options, stock appreciation rights
(including free standing, tandem and limited stock appreciation rights),
restricted stock or unrestricted stock awards, phantom stock, or any combination
of the foregoing. The Committee may grant awards alone, in addition to, in
tandem with, or in substitution for any other award. Awards may be granted for
no cash consideration or for such consideration as may be determined by the
Committee. Each award, and each right under any award, may be exercised during
the participant's lifetime only by the participant, unless otherwise determined
by the Committee or, if permissible under applicable law, by the participant's
guardian or legal representative; and may not be assigned, alienated, pledged,
attached, sold or otherwise transferred or encumbered by a participant other
than by will or by the laws of descent and distribution provided that the
designation of a beneficiary will not constitute an assignment, alienation,
pledge, attachment, sale, transfer or encumbrance for purposes of the plan.
STOCK OPTIONS
A stock option granted under the plan provides a participant the right to
purchase, within a specified period of time, a stated number of shares of common
stock at the price specified in the option. Non-qualified and incentive stock
options granted under the plan will be subject to such terms, including exercise
price and the conditions and timing of exercise, as may be determined by the
Committee.
On and after the date a participant terminates employment with Anteon or any
of its affiliates for any reason, Anteon shall have the right to purchase, and
the participant shall have the corresponding obligation to sell, upon delivery
of written notice to the participant by Anteon, any or all of the participant's
vested options and any or all shares then owned by the participant. The purchase
price of the shares shall be the fair market value of such shares as of the date
Anteon mails or otherwise delivers such written notice to the participant. The
purchase price of any vested option shall be the difference between the exercise
price per share and the fair market value of one share of common stock, measured
as of the date Anteon mails or otherwise delivers such written notice to the
participant, multiplied by the number of shares to which the option relates that
are being purchased. The Committee may in its sole and absolute discretion
deduct from the purchase price payable any and all amounts owed by the grantee
to Anteon at the time that payment of the purchase price is due the participant.
In the event of the participant's disability or death, the provisions of the
plan will apply to the participant's legal representative or guardian, executor,
personal representative, or to the person to whom the option and/or shares shall
have been transferred by will or the laws of descent and distribution, as though
such person is the participant.
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STOCK APPRECIATION RIGHTS
A stock appreciation right provides the participant the right to receive an
amount equal to the excess of the fair market value of a share of common stock
on the date of exercise of the stock appreciation right over the grant price
thereof. Stock appreciation rights granted under the plan will be subject to
such terms, including grant price and the conditions and limitations applicable
to the exercise thereof, as may be determined by the Committee. Stock
appreciation rights may be granted in tandem with another award, in addition to
another award, or freestanding and unrelated to another award. The Committee is
authorized under the plan to determine whether a stock appreciation right shall
be settled in cash, shares of common stock or a combination of cash and shares
of common stock.
STOCK AWARDS: RESTRICTED STOCK, UNRESTRICTED STOCK AND PHANTOM STOCK
Subject to the other applicable provisions of the plan, the Committee may at
any time and from time to time grant stock awards to eligible participants in
such amount and for such consideration, including no consideration or such
minimum consideration as may be required by law, as it determines. A stock award
may be denominated in shares of common stock or stock-equivalent units, and may
be paid in common stock, in cash, or in a combination of common stock and cash,
as determined in the sole and absolute discretion of the Committee from time to
time.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CAXTON-ISEMAN ARRANGEMENT
Anteon's management and an investor group organized by Caxton-Iseman
Capital, through Azimuth, acquired in April 1996 all of the outstanding capital
stock of our Predecessor Company, a wholly-owned subsidiary of Ogden Technology
Services Corporation and indirectly a wholly-owned subsidiary of Ogden
Corporation.
Azimuth obtained the funds required for the acquisition of our Predecessor
Company by issuing subordinated debt and common stock to Azimuth Technologies,
L.P. and to certain directors and executive officers of Anteon. The limited
partners of Azimuth LP include, among others, affiliates of Caxton-Iseman
Capital, Mr. Steven Lefkowitz, Mr. Robert Ferris and a number of business
associates of Caxton-Iseman Capital. The sole general partner of Azimuth LP is
Georgica (Azimuth Technologies), L.P., the sole general partner of which is a
corporation solely owned by Mr. Frederick Iseman. As a result, Mr. Frederick
Iseman controls Azimuth LP, Azimuth and Anteon.
Since April 1997, Anteon has been party to an arrangement (the
"Caxton-Iseman Capital Arrangement") with Caxton-Iseman Capital, an affiliate of
Anteon. The terms of the Caxton-Iseman Capital Arrangement are that
Caxton-Iseman Capital will monitor and assist the activities of Anteon in
accordance with, and subject to the investment objectives and guidelines
established by Anteon. Under the terms of the Caxton-Iseman Arrangement, Anteon
paid Caxton-Iseman Capital (1) a $500,000 annual fee, payable annually
commencing January 1, 1998, and terminating upon the successful completion of
the acquisition, (2) a fee, paid upon the successful completion of the
acquisition, of $1.15 million and (3) an annual fee, paid upon the successful
completion of the acquisition, equal to 3% of the EBITDA of Anteon. The fees
under clauses (1) and (3) were pro-rated for partial years. Anteon expensed and
paid $400,000 under this arrangement during 1998.
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SECURITY OWNERSHIP
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The table below sets forth, as of June 30, 1999, the number of shares of
common stock beneficially owned by each of the 5% stockholders of Anteon, each
of its directors, the Named Executive Officers and all directors and executive
officers as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF SHARES OF COMMON TOTAL SHARES OF
STOCK OF ANTEON COMMON STOCK
BENEFICIALLY OWNED(A) OF ANTEON
--------------------------- ---------------
<S> <C> <C>
Azimuth Technologies, Inc. (b)....................................... 3,551,972 99.8%
Frederick J. Iseman (b).............................................. 3,551,972 99.8
Gilbert F. Decker (c)................................................ 2,000 *
Dr. Paul Kaminski (c)................................................ 2,000 *
Joseph M. Kampf (d).................................................. 11,615 *
Carlton B. Crenshaw (e).............................................. 5,607 *
Seymour L. Moskowitz (f)............................................. 17,623 *
All Directors and Executive Officers as a Group(g)................... 99.8
</TABLE>
- ------------------------
* Denotes beneficial ownership of less than 1%.
(a) Determined in accordance with Rule 13d-3 under the Exchange Act.
(b) By virtue of Mr. Frederick Iseman's indirect control of Azimuth through
Azimuth LP, the limited partners of which include affiliates of
Caxton-Iseman Capital, Mr. Steven Lefkowitz and Mr. Robert Ferris. Mr.
Frederick Iseman has sole voting and dispositive power over 3,551,972 shares
of Anteon common stock and may be deemed to be the beneficial owner thereof.
Mr. Frederick Iseman's address is c/o Caxton-Iseman Capital, Inc., 667
Madison Avenue, New York, New York 10021.
(c) Includes 2,000 shares of common stock issuable pursuant to stock options
exercisable within 60 days of April 13, 1999. Does not include 4,000 shares
of common stock issuable pursuant to stock options that are not exercisable
within 60 days of such date.
(d) Includes 11,615 shares of common stock issuable pursuant to stock options
exercisable within 60 days of April 13, 1999. Does not include 17,425 shares
of common stock issuable pursuant to stock options that are not exercisable
within 60 days of such date.
(e) Includes 5,607 shares of common stock issuable pursuant to stock options
exercisable within 60 days of April 13, 1999. Does not include 8,412 shares
of common stock issuable pursuant to stock options that are not exercisable
within 60 days of such date.
(f) Includes 17,623 shares of common stock issuable pursuant to stock options
exercisable within 60 days of April 13, 1999. Does not include 26,438 shares
of common stock issuable pursuant to stock options that are not exercisable
within 60 days of such date.
(g) Includes 40,645 shares of common stock issuable pursuant to stock options
exercisable within 60 days of April 13, 1999. Does not include 87,075 shares
of common stock issuable pursuant to stock options that are not exercisable
within 60 days of such date.
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DESCRIPTION OF OTHER MATERIAL AGREEMENTS
OGDEN NOTE
The consideration paid by Azimuth when it acquired our predecessor company
included a note of Azimuth in favor of Ogden Technology Services Corporation
("Ogden"), the parent company of Ogden Professional Services Corporation, in the
principal amount of $8.5 million, of which $3.65 million is outstanding. The
Ogden note is an adjustable, nonnegotiable, subordinated 9% promissory note due
April 22, 2004. Ogden has the right, so long as (1) no defaults under a senior
credit agreement have occurred and (2) Ogden, at its sole cost and expense, has
delivered a written report of an independent third-party appraiser that Azimuth
will be solvent (after giving effect to the guarantee described in this
sentence), to cause Azimuth to execute and deliver to Ogden a guarantee of the
Ogden note; provided that the terms and conditions of such guarantee must be
satisfactory to the senior debt holders in all respects. Such guarantee must be
subject to a subordination agreement acceptable to the senior debt holders, and
must be secured by a subordinated second lien on the collateral under the senior
credit agreement on terms acceptable to the senior debt holders.
Interest on the Ogden note is due and payable quarterly in arrears. Azimuth
may at any time prepay principal or interest, in whole or in part, without
premium or penalty. Azimuth must prepay in full upon a sale, merger or public
offering of the capital stock of Anteon. The Ogden note is wholly subordinate
and junior in right of payment to Anteon's borrowings under the new credit
facility and any amendments, refinancings or replacements thereof.
EXISTING INTEREST RATE SWAP AGREEMENTS
We have entered into interest rate swap agreements to reduce the impact of
changes in interest rates under our new credit agreement. At June 30, 1999, we
had outstanding interest rate swap agreements with commercial banks having a
total notional principal amount of $35 million. The interest rate swap
agreements mature as of December 31, 2002, December 31, 2003, and September 25,
2003, respectively. The differential to be paid or received is accrued as
interest rates change and is recognized over the life of the agreements. We
expect to repay all our obligations under these interest rate swap agreements
and terminate them at the same time as the existing credit agreement.
VECTOR DATA CONTINGENT PAYMENTS
On August 29, 1997, Anteon acquired all of the outstanding stock of Vector
Data, as well as Vector Data's 80% interest in Vector Data Systems (UK) Limited.
The consideration to the former stockholders of Vector Data included up to $6
million in cash to be paid by Anteon contingent upon Vector Data meeting certain
revenue and gross profit thresholds for fiscal years 1998 and 1999. Vector Data
did not meet the revenue and gross profit thresholds for fiscal year 1998, and,
accordingly, a maximum of $3 million only can now potentially become payable.
TECHMATICS DEFERRED AND CONTINGENT PAYMENTS
On May 29, 1998, Anteon acquired all of the outstanding stock of Techmatics.
Additional consideration of between $3.75 million and $6.25 million may become
due to be paid by Anteon contingent upon Techmatics meeting certain operating
profit thresholds for its fiscal year ending June 30, 1999, to be calculated by
September 30, 1999. However, if Anteon chooses to modify Techmatics' financial
reporting to a calendar year basis, such calculation must be made by April 1,
2000, but interest at a rate of 6% per year will accrue beginning September 30,
1999 and will increase to a rate of 7.5% per year beginning April 1, 2000 on any
amount of contingent consideration subsequently determined to have been earned.
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TECHMATICS NOTES
On May 29, 1998, as part of Anteon's acquisition of Techmatics, Anteon
issued subordinated promissory notes due May 31, 2000 in favor of each of the
then existing stockholders and option holders of Techmatics, in the aggregate
principal amount of $10 million. Under the terms of the Techmatics notes,
one-tenth of the aggregate principal amount, $1 million, was paid as of May 31,
1999, and the remaining nine-tenths of the aggregate principal amount, $9
million, together with interest accruing from May 31, 1999 on four-ninths of the
principal amount then outstanding, $4 million, at a rate of 6% per annum, is due
and payable on May 31, 2000. All overdue amounts of principal will bear interest
at a rate of 7.5% per annum. Anteon is entitled to prepay the Techmatics notes,
in whole or in part, without penalty or premium.
The Techmatics notes are wholly subordinate and junior in right of payment
to Anteon's borrowings under the new credit facility and any amendments,
refinancings or replacements thereof, and to the Ogden note.
Anteon will be in default under any particular Techmatics note upon the
occurrence of any of the following events of default: (1) Anteon fails to make
any payment of principal or interest under such Techmatics note when due; (2)
Anteon defaults under its new credit agreement or any amendments, refinancings
or replacements thereof, or under the Ogden note; (3) (a) a consolidation,
merger or similar reorganization in which Anteon's stockholders before the
reorganization own less than 50% of the voting power of the surviving entity
after the reorganization, or (b) any transaction or series of transactions in
which more than 50% of Anteon's voting power is transferred except any public
offering of Anteon's common stock; (4) a sale, lease, transfer or other
disposition in a transaction or series of transactions of all or substantially
all of the assets of Anteon; or (5) Anteon is involved in proceedings relating
to bankruptcy, insolvency, reorganization or relief of debts.
NEW CREDIT FACILITY
Simultaneous with the completion of the acquisition, Anteon entered into a
new credit facility under a new credit agreement among Anteon, as borrower,
CSFB, as administrative agent and lead arranger, Mellon, as co-arranger,
collateral agent and syndication agent, Deutsche Bank, as documentation agent,
and a syndicate of financial institutions, including CSFB, Deutsche Bank and
Mellon. Pursuant to the terms of the new credit agreement, the lenders, subject
to certain conditions, provide a credit facility of up to $180.0 million to
Anteon consisting of: (1) a $120.0 million six-year senior secured revolving
credit facility with a $10.0 million letter of credit sublimit and (2) a $60.0
million six-year senior secured term loan facility. The Techmatics notes are
also wholly subordinate and junior in right of payment to any refinancings or
replacements of our existing credit facility, including our new credit facility
and the Ogden note. The aggregate amount available for borrowing under the
revolving credit facility is determined based on a portion of eligible accounts
receivable. At June 30, 1999 Anteon had up to $66.4 million of borrowing
availability under the revolving credit facility, subject to Anteon's borrowing
base and ratio of net debt to EBITDA (as defined in the new credit facility), of
which $13.0 million had been drawn. See "Use of Proceeds" included elsewhere in
this prospectus.
SECURITY AND GUARANTEES
All existing and future domestic subsidiaries of Anteon unconditionally
guarantee the repayment of the new credit facility. The new credit facility is
secured by substantially all of the tangible and intangible assets of Anteon and
the credit agreement guarantors. All of the capital stock of Anteon and
substantially all of the capital stock of Anteon's subsidiaries, including A&T,
is pledged as part of the security for the new credit facility.
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MATURITY AND AMORTIZATION
Loans made under the term loan facility will mature on the sixth anniversary
of June 23, 1999, and up to $45 million of the aggregate principal amount under
the new credit facility will amortize ratably on a quarterly basis commencing 24
months after June 23, 1999, with up to $15 million due at final maturity. Loans
made under the revolving credit facility will mature on the sixth anniversary of
June 23, 1999.
INTEREST
Borrowings under the new credit facility bear interest at a floating rate
based upon, at the option of Anteon, LIBOR or the base rate, in each case plus a
margin determined based upon Anteon's ratio of net debt to EBITDA (as defined in
the new credit facility). Anteon has also agreed to pay administration fees,
commitment fees and certain expenses and to provide certain indemnities, all of
which Anteon believes are customary for financings of this type.
PREPAYMENTS
Anteon is required to prepay, subject to exceptions set forth in the new
credit agreement, borrowings under the term loan facility with (i) 75% of excess
cash flow, (ii) 100% of net cash proceeds of non-ordinary course asset sales or
other dispositions of property by Anteon and its subsidiaries, (iii) 100% of net
cash proceeds of issuances of debt obligations of Anteon and its subsidiaries
and (iv) 50% of net cash proceeds of public issuances of equity securities of
Anteon.
COVENANTS
The new credit agreement contains affirmative and negative covenants
customary for such financings. The new credit agreement also contains financial
covenants customary for such financings, including, but not limited to: maximum
ratio of net debt to EBITDA; maximum ratio of senior debt to EBITDA (as defined
in the new credit facility); limitation on capital expenditures; and minimum
EBITDA.
EVENTS OF DEFAULT
The new credit agreement contains events of default customary for such
financings, including, but not limited to: nonpayment of principal, interest,
fees or other amounts when due; violation of covenants; failure of any
representation or warranty to be true in all material respects when made or
deemed made; cross default and cross acceleration; change in control; bankruptcy
events; material judgments; ERISA; and actual or Anteon-asserted invalidity of
the guarantees or security documents. Such events of default allow for certain
grace periods.
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THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER
We are offering to exchange our exchange notes for a like aggregate
principal amount at maturity of our initial notes.
The exchange notes that we propose to issue in this exchange offer will be
substantially identical to our initial notes except that, unlike our initial
notes, the exchange notes will have no transfer restrictions or registration
rights. You should read the description of the exchange notes in the section in
this prospectus entitled "Description of the Notes."
We reserve the right in our sole discretion to purchase or make offers for
any initial notes that remain outstanding following the expiration or
termination of this exchange offer and, to the extent permitted by applicable
law, to purchase initial notes in the open market or privately negotiated
transactions, one or more additional tender or exchange offers or otherwise. The
terms and prices of these purchases or offers could differ significantly from
the terms of this exchange offer. In addition, nothing in this exchange offer
will prevent us from exercising our right to discharge our obligations on the
initial notes by depositing certain securities with the trustee and otherwise.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS; TERMINATION
This exchange offer will expire at 5:00 p.m., New York City time, on
Tuesday, September 28, 1999, unless we extend it in our reasonable discretion.
The expiration date of this exchange offer will be at least 20 business days
after the commencement of the exchange offer in accordance with Rule 14e-1(a)
under the Securities Exchange Act of 1934.
We expressly reserve the right to delay acceptance of any initial notes,
extend or terminate this exchange offer and not accept any initial notes that we
have not previously accepted if any of the conditions described below under
"--Conditions to the Exchange Offer" have not been satisfied or waived by us. We
will notify the exchange agent of any extension by oral notice promptly
confirmed in writing or by written notice. We will also notify the holders of
the initial notes by mailing an announcement or by a press release or other
public announcement communicated before 9:00 a.m., New York City time, on the
next business day after the previously scheduled expiration date unless
applicable laws require us to do otherwise.
We also expressly reserve the right to amend the terms of this exchange
offer in any manner. If we make any material change, we will promptly disclose
this change in a manner reasonably calculated to inform the holders of our
initial notes of the change including providing public announcement or giving
oral or written notice to these holders. A material change in the terms of this
exchange offer could include a change in the timing of the exchange offer, a
change in the exchange agent and other similar changes in the terms of this
exchange offer. If we make any material change to this exchange offer, we will
disclose this change by means of a post-effective amendment to the registration
statement which includes this prospectus and will distribute an amended or
supplemented prospectus to each registered holder of initial notes. In addition,
we will extend this exchange offer for an additional five to ten business days
as required by the Exchange Act, depending on the significance of the amendment,
if the exchange offer would otherwise expire during that period. We will
promptly notify the exchange agent by oral notice, promptly confirmed in
writing, or written notice of any delay in acceptance, extension, termination or
amendment of this exchange offer.
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PROCEDURES FOR TENDERING INITIAL NOTES
PROPER EXECUTION AND DELIVERY OF LETTERS OF TRANSMITTAL
To tender your initial notes in this exchange offer, you must use one of the
six alternative procedures described below:
(1) REGULAR DELIVERY PROCEDURE: Complete, sign and date the letter of
transmittal, or a facsimile of the letter of transmittal. Have the
signatures on the letter of transmittal guaranteed if required by the letter
of transmittal. Mail or otherwise deliver the letter of transmittal or the
facsimile together with the certificates representing the initial notes
being tendered and any other required documents to the exchange agent on or
before 5:00 p.m., New York City time, on the expiration date.
(2) BOOK-ENTRY DELIVERY PROCEDURE: Send a timely confirmation of a
book-entry transfer of your initial notes, if this procedure is available,
into the exchange agent's account at The Depository Trust Company in
accordance with the procedures for book-entry transfer described under
"--Book-Entry Delivery Procedure" below, on or before 5:00 p.m., New York
City time, on the expiration date.
(3) GUARANTEED DELIVERY PROCEDURE: If time will not permit you to
complete your tender by using the procedures described in (1) or (2) above
before the expiration date, comply with the guaranteed delivery procedures
described under "--Guaranteed Delivery Procedure" below.
The method of delivery of the initial notes, the letter of transmittal and
all other required documents is at your election and risk. Instead of delivery
by mail, we recommend that you use an overnight or hand-delivery service. If you
choose the mail, we recommend that you use registered mail, properly insured,
with return receipt requested. IN ALL CASES, YOU SHOULD ALLOW SUFFICIENT TIME TO
ASSURE TIMELY DELIVERY. You should not send any letters of transmittal or
initial notes to us. You must deliver all documents to the exchange agent at its
address provided below. You may also request your broker, dealer, commercial
bank, trust company or nominee to tender your initial notes on your behalf.
Only a holder of initial notes may tender initial notes in this exchange
offer. A holder is any person in whose name initial notes are registered on our
books or any other person who has obtained a properly completed bond power from
the registered holder.
If you are the beneficial owner of initial notes that are registered in the
name of a broker, dealer, commercial bank, trust company or other nominee and
you wish to tender your notes, you must contact that registered holder promptly
and instruct that registered holder to tender your notes on your behalf. If you
wish to tender your initial notes on your own behalf, you must, before
completing and executing the letter of transmittal and delivering your initial
notes, either make appropriate arrangements to register the ownership of these
notes in your name or obtain a properly completed bond power from the registered
holder. The transfer of registered ownership may take considerable time.
You must have any signatures on a letter of transmittal or a notice of
withdrawal guaranteed by:
(1) a member firm of a registered national securities exchange or of the
National Association of Securities Dealers, Inc.,
(2) a commercial bank or trust company having an office or correspondent
in the United States, or
(3) an eligible guarantor institution within the meaning of Rule 17Ad-15
under the Exchange Act,
UNLESS the initial notes are tendered:
(1) by a registered holder or by a participant in The Depository Trust
Company whose name appears on a security position listing as the owner, who
has not completed the box entitled "Special Issuance Instructions" or
"Special Delivery Instructions" on the letter of transmittal and only if the
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exchange notes are being issued directly to this registered holder or
deposited into this participant's account at The Depository Trust Company,
or
(2) for the account of a member firm of a registered national securities
exchange or of the National Association of Securities Dealers, Inc., a
commercial bank or trust company having an office or correspondent in the
United States or an eligible guarantor institution within the meaning of
Rule 17Ad-15 under the Securities Exchange Act of 1934.
If the letter of transmittal or any bond powers are signed by:
(1) The recordholder(s) of the initial notes tendered: the signature
must correspond with the name(s) written on the face of the initial notes
without alteration, enlargement or any change whatsoever.
(2) A participant in The Depository Trust Company: the signature must
correspond with the name as it appears on the security position listing as
the holder of the initial notes.
(3) A person other than the registered holder of any initial notes:
these initial notes must be endorsed or accompanied by bond powers and a
proxy that authorize this person to tender the initial notes on behalf of
the registered holder, in satisfactory form to us as determined in our sole
discretion, in each case, as the name of the registered holder or holders
appears on the initial notes.
(4) Trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity: these persons should so indicate when signing. Unless waived by
us, evidence satisfactory to us of their authority to so act must also be
submitted with the letter of transmittal.
BOOK-ENTRY DELIVERY PROCEDURE
Any financial institution that is a participant in The Depository Trust
Company's systems may make book-entry deliveries of initial notes by causing The
Depository Trust Company to transfer these initial notes into the exchange
agent's account at The Depository Trust Company in accordance with The
Depository Trust Company's procedures for transfer. To effectively tender notes
through The Depository Trust Company, the financial institution that is a
participant in The Depository Trust Company will electronically transmit its
acceptance through the Automatic Tender Offer Program. The Depository Trust
Company will then edit and verify the acceptance and send an agent's message to
the exchange agent for its acceptance. An agent's message is a message
transmitted by The Depository Trust Company to the exchange agent stating that
The Depository Trust Company has received an express acknowledgment from the
participant in The Depository Trust Company tendering the notes that this
participation has received and agrees to be bound by the terms of the letter of
transmittal, and that we may enforce this agreement against this participant.
The exchange agent will make a request to establish an account for the initial
notes at The Depository Trust Company for purposes of the exchange offer within
two business days after the date of this prospectus.
A delivery of initial notes through a book-entry transfer into the exchange
agent's account at The Depository Trust Company will only be effective if an
agent's message or the letter of transmittal or a facsimile of the letter of
transmittal with any required signature guarantees and any other required
documents is transmitted to and received by the exchange agent at the address
indicated below under "--Exchange Agent" on or before the expiration date unless
the guaranteed delivery procedures described below are complied with. DELIVERY
OF DOCUMENTS TO THE DEPOSITORY TRUST COMPANY DOES NOT CONSTITUTE DELIVERY TO THE
EXCHANGE AGENT.
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GUARANTEED DELIVERY PROCEDURE
If you are a registered holder of initial notes and desire to tender your
notes, and (1) these notes are not immediately available, (2) time will not
permit your notes or other required documents to reach the exchange agent before
the expiration date or (3) the procedures for book-entry transfer cannot be
completed on a timely basis and an agent's message delivered, you may still
tender in this exchange offer if:
(1) you tender through a member firm of a registered national securities
exchange or of the National Association of Securities Dealers, Inc., a
commercial bank or trust company having an office or correspondent in the
United States, or an eligible guarantor institution within the meaning of
Rule 17Ad-15 under the Exchange Act,
(2) on or before the expiration date, the exchange agent receives a
properly completed and duly executed letter of transmittal or facsimile of
the letter of transmittal, and a notice of guaranteed delivery,
substantially in the form provided by us, with your name and address as
holder of the initial notes and the amount of notes tendered, stating that
the tender is being made by that letter and notice and guaranteeing that
within five business days after the expiration date the certificates for all
the initial notes tendered, in proper form for transfer, or a book-entry
confirmation with an agent's message, as the case may be, and any other
documents required by the letter of transmittal will be deposited by the
eligible institution with the exchange agent, and
(3) the certificates for all your tendered initial notes in proper form
for transfer or a book-entry confirmation as the case may be, and all other
documents required by the letter of transmittal are received by the exchange
agent within five business days after the expiration date.
ACCEPTANCE OF INITIAL NOTES FOR EXCHANGE; DELIVERY OF EXCHANGE NOTES
Your tender of initial notes will constitute an agreement between you and us
governed by the terms and conditions provided in this prospectus and in the
related letter of transmittal.
We will be deemed to have received your tender as of the date when your duly
signed letter of transmittal accompanied by your initial notes tendered, or a
timely confirmation of a book-entry transfer of these notes into the exchange
agent's account at The Depository Trust Company with an agent's message, or a
notice of guaranteed delivery from an eligible institution is received by the
exchange agent.
All questions as to the validity, form, eligibility, including time of
receipt, acceptance and withdrawal of tenders will be determined by us in our
sole discretion. Our determination will be final and binding.
We reserve the absolute right to reject any and all initial notes not
properly tendered or any initial notes which, if accepted, would, in our opinion
or our counsel's opinion, be unlawful. We also reserve the absolute right to
waive any conditions of this exchange offer or irregularities or defects in
tender as to particular notes. Our interpretation of the terms and conditions of
this exchange offer, including the instructions in the letter of transmittal,
will be final and binding on all parties. Unless waived, any defects or
irregularities in connection with tenders of initial notes must be cured within
such time as we shall determine. We, the exchange agent or any other person will
be under no duty to give notification of defects or irregularities with respect
to tenders of initial notes. We and the exchange agent or any other person will
incur no liability for any failure to give notification of these defects or
irregularities. Tenders of initial notes will not be deemed to have been made
until such irregularities have been cured or waived. The exchange agent will
return without cost to their holders any initial notes that are not properly
tendered and as to which the defects or irregularities have not been cured or
waived as promptly as practicable following the expiration date.
If all the conditions to the exchange offer are satisfied or waived on the
expiration date, we will accept all initial notes properly tendered and will
issue the exchange notes promptly thereafter. Please refer to the section of
this prospectus entitled "--Conditions to the Exchange Offer" below. For
purposes of this
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exchange offer, initial notes will be deemed to have been accepted as validly
tendered for exchange when, as and if we give oral or written notice of
acceptance to the exchange agent.
We will issue the exchange notes in exchange for the initial notes tendered
pursuant to a notice of guaranteed delivery by an eligible institution only
against delivery to the exchange agent of the letter of transmittal, the
tendered initial notes and any other required documents, or the receipt by the
exchange agent of a timely confirmation of a book-entry transfer of initial
notes into the exchange agent's account at The Depository Trust Company with an
agent's message, in each case, in form satisfactory to us and the exchange
agent.
If any tendered initial notes are not accepted for any reason provided by
the terms and conditions of this exchange offer or if initial notes are
submitted for a greater principal amount than the holder desires to exchange,
the unaccepted or non-exchanged initial notes will be returned without expense
to the tendering holder, or, in the case of initial notes tendered by book-entry
transfer procedures described above, will be credited to an account maintained
with the book-entry transfer facility, as promptly as practicable after
withdrawal, rejection of tender or the expiration or termination of the exchange
offer.
By tendering into this exchange offer, you will irrevocably appoint our
designees as your attorney-in-fact and proxy with full power of substitution and
resubstitution to the full extent of your rights on the notes tendered. This
proxy will be considered coupled with an interest in the tendered notes. This
appointment will be effective only when, and to the extent that we accept your
notes in this exchange offer. All prior proxies on these notes will then be
revoked and you will not be entitled to give any subsequent proxy. Any proxy
that you may give subsequently will not be deemed effective. Our designees will
be empowered to exercise all voting and other rights of the holders as they may
deem proper at any meeting of note holders or otherwise. The initial notes will
be validly tendered only if we are able to exercise full voting rights on the
notes, including voting at any meeting of the note holders, and full rights to
consent to any action taken by the note holders.
WITHDRAWAL OF TENDERS
Except as otherwise provided in this prospectus, you may withdraw tenders of
initial notes at any time before 5:00 p.m., New York City time, on the
expiration date.
For a withdrawal to be effective, you must send a written or facsimile
transmission notice of withdrawal to the exchange agent before 5:00 p.m., New
York City time, on the expiration date at the address provided below under
"--Exchange Agent" and before acceptance of your tendered notes for exchange by
us.
Any notice of withdrawal must:
(1) specify the name of the person having tendered the initial notes to
be withdrawn,
(2) identify the notes to be withdrawn, including, if applicable, the
registration number or numbers and total principal amount of these notes,
(3) be signed by the person having tendered the initial notes to be
withdrawn in the same manner as the original signature on the letter of
transmittal by which these notes were tendered, including any required
signature guarantees, or be accompanied by documents of transfer sufficient
to permit the trustee for the initial notes to register the transfer of
these notes into the name of the person having made the original tender and
withdrawing the tender,
(4) specify the name in which any of these initial notes are to be
registered, if this name is different from that of the person having
tendered the initial notes to be withdrawn, and
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(5) if applicable because the initial notes have been tendered though
the book-entry procedure, specify the name and number of the participant's
account at The Depository Trust Company to be credited, if different than
that of the person having tendered the initial notes to be withdrawn.
We will determine all questions as to the validity, form and eligibility,
including time of receipt, of all notices of withdrawal and our determination
will be final and binding on all parties. Initial notes that are withdrawn will
be deemed not to have been validly tendered for exchange in this exchange offer.
The exchange agent will return without cost to their holders all initial
notes that have been tendered for exchange and are not exchanged for any reason,
as promptly as practicable after withdrawal, rejection of tender or expiration
or termination of this exchange offer.
You may retender properly withdrawn initial notes in this exchange offer by
following one of the procedures described under "--Procedures for Tendering
Initial Notes" above at any time on or before the expiration date.
CONDITIONS TO THE EXCHANGE OFFER
We will complete this exchange offer only if:
(1) there is no action or proceeding instituted or threatened in any
court or before any governmental agency or body that in our judgment would
reasonably be expected to prohibit, prevent or otherwise impair our ability
to proceed with this exchange offer,
(2) there is no change in the laws and regulations which, in our
judgment, would reasonably be expected to impair our ability to proceed with
this exchange offer,
(3) there is no change in the current interpretation of the staff of the
Commission which permits resales of the exchange notes,
(4) there is no stop order issued by the Commission or any state
securities authority suspending the effectiveness of the registration
statement which includes this prospectus or the qualification of the
indenture for our exchange notes under the Trust Indenture Act of 1939 and
there are no proceedings initiated or, to our knowledge, threatened for that
purpose, and
(5) we obtain all governmental approvals that we deem in our sole
discretion necessary to complete this exchange offer.
These conditions are for our sole benefit. We may assert any one of these
conditions regardless of the circumstances giving rise to it and may also waive
any one of them, in whole or in part, at any time and from time to time, if we
determine in our reasonable discretion that it has not been satisfied, subject
to applicable law. We will not be deemed to have waived our rights to assert or
waive these conditions if we fail at any time to exercise any of them. Each of
these rights will be deemed an ongoing right which we may assert at any time and
from time to time.
If we determine that we may terminate this exchange offer because any of
these conditions is not satisfied, we may:
(1) refuse to accept and return to their holders any initial notes that
have been tendered,
(2) extend the exchange offer and retain all notes tendered before the
expiration date, subject to the rights of the holders of these notes to
withdraw their tenders, or
(3) waive any condition that has not been satisfied and accept all
properly tendered notes that have not been withdrawn or otherwise amend the
terms of this exchange offer in any respect as provided under the section in
this prospectus entitled "--Expiration Date; Extensions; Amendments;
Termination."
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ACCOUNTING TREATMENT
We will record the exchange notes at the same carrying value as the initial
notes as reflected in our accounting records on the date of the exchange.
Accordingly, we will not recognize any gain or loss for accounting purposes. We
will amortize the costs of the exchange offer and the unamortized expenses
related to the issuance of the exchange notes over the term of the exchange
notes.
EXCHANGE AGENT
We have appointed IBJ Whitehall Bank & Trust Company as exchange agent for
this exchange offer. You should direct all questions and requests for assistance
on the procedures for tendering and all requests for additional copies of this
prospectus or the letter of transmittal to the exchange agent as follows:
By mail:
IBJ Whitehall Bank & Trust Company
One State Street
New York, NY 10004
By hand/overnight delivery:
IBJ Whitehall Bank & Trust Company
One State Street
New York, NY 10004
Facsimile Transmission: (212) 858-2103
Confirm by Telephone: (212) 858-2611
Attention: Ms. Patricia Gallagher
FEES AND EXPENSES
We will bear the expenses of soliciting tenders in this exchange offer,
including fees and expenses of the exchange agent and trustee and accounting,
legal, printing and related fees and expenses.
We will not make any payments to brokers, dealers or other persons
soliciting acceptances of this exchange offer. However, we will pay the exchange
agent reasonable and customary fees for its services and will reimburse the
exchange agent for its reasonable out-of-pocket expenses in connection with this
exchange offer.
We will pay all transfer taxes, if any, applicable to the exchange of
initial notes in accordance with this exchange offer. However, tendering holders
will pay the amount of any transfer taxes, whether imposed on the registered
holder or any other persons, if:
(1) certificates representing exchange notes or initial notes for
principal amounts not tendered or accepted for exchange are to be delivered
to, or are to be registered or issued in the name of, any person other than
the registered holder of the notes tendered,
(2) tendered initial notes are registered in the name of any person
other than the person signing the letter of transmittal, or
(3) a transfer tax is payable for any reason other than the exchange of
the initial notes in this exchange offer.
If you do not submit satisfactory evidence of the payment of any of these
taxes or of any exemption from this payment with the letter of transmittal, we
will bill you directly the amount of these transfer taxes.
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YOUR FAILURE TO PARTICIPATE IN THE EXCHANGE OFFER WILL HAVE ADVERSE CONSEQUENCES
The initial notes were not registered under the Securities Act or under the
securities laws of any state and you may not resell them, offer them for resale
or otherwise transfer them unless they are subsequently registered or resold
under an exemption from the registration requirements of the Securities Act and
applicable state securities laws. If you do not exchange your initial notes for
exchange notes in accordance with this exchange offer, or if you do not properly
tender your initial notes in this exchange offer, you will not be able to
resell, offer to resell or otherwise transfer the initial notes unless they are
registered under the Securities Act or unless you resell them, offer to resell
or otherwise transfer them under an exemption from the registration requirements
of, or in a transaction not subject to, the Securities Act. In addition, you
will not necessarily be able to obligate us to register the initial notes under
the Securities Act.
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DESCRIPTION OF THE NOTES
Anteon Corporation issued the notes under an indenture dated as of May 11,
1999 between itself and IBJ Whitehall Bank & Trust Company, as trustee (the
"Trustee"), a copy of which is filed as an exhibit to the registration statement
relating to this exchange offer. The terms of the notes include those stated in
the indenture and those made part of the indenture by reference to the Trust
Indenture Act of 1939.
Some terms used in this description are defined under the subheading
"--Certain Definitions". In this description, the word "Company" refers only to
Anteon Corporation and not to any of its subsidiaries.
The following description is only a summary of the material provisions of
the indenture. We urge you to read the indenture because it, not this
description, defines your rights as holders of these notes. You may request
copies of the these agreements at our address set forth under the heading "Where
You Can Find More Information".
BRIEF DESCRIPTION OF THE NOTES
These notes:
- are unsecured senior subordinated obligations of the Company;
- are subordinated in right of payment to all existing and future Senior
Indebtedness of the Company;
- are senior in right of payment to any future Subordinated Obligations of
the Company; and
- are subject to registration with the SEC pursuant to the Registration
Rights Agreement.
PRINCIPAL, MATURITY AND INTEREST
The Company issued the notes initially in the principal amount of $100
million. The Company will issue the notes in denominations of $1,000 and any
integral multiple of $1,000. The notes mature on May 15, 2009. Subject to our
compliance with the covenant described under the subheading "--Certain
Covenants--Limitation on Indebtedness", we are permitted to issue more notes
under the indenture in an unlimited principal amount. Any such additional notes
that are actually issued will be treated as issued and outstanding notes for all
purposes of the indenture and this "Description of the Notes" unless the context
indicates otherwise.
Interest on these notes will accrue at the rate of 12% per annum and will be
payable semiannually in arrears on May 15 and November 15, commencing on
November 15, 1999. We will make each interest payment to the holders of record
of these notes on the immediately preceding May 1 and November 1. We will pay
interest on overdue principal at 1% per annum in excess of the above rate and
will pay interest on overdue installments of interest at such higher rate to the
extent lawful.
Interest on these notes will accrue from the date of original issuance or,
if interest has already been paid, from the date it was most recently paid.
Interest will be computed on the basis of a 360-day year comprised of twelve
30-day months.
OPTIONAL REDEMPTION
Except as set forth below, we will not be entitled to redeem the notes at
our option prior to May 15, 2004.
On and after May 15, 2004, we will be entitled at our option to redeem all
or a portion of these notes upon not less than 30 nor more than 60 days' notice,
at the redemption prices (expressed in percentages of principal amount on the
redemption date), plus accrued interest to the redemption date (subject to the
right of holders of record on the relevant record date to receive interest due
on the relevant interest
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payment date), if redeemed during the 12-month period commencing on May 15 of
the years set forth below:
<TABLE>
<CAPTION>
REDEMPTION
PERIOD PRICE
- --------------------------------------------------------------------------------- -----------
<S> <C>
2004............................................................................. 106.00%
2005............................................................................. 104.00
2006............................................................................. 102.00
2007 and thereafter.............................................................. 100.00
</TABLE>
In addition, before May 15, 2002, we may at our option on one or more
occasions redeem notes (which includes additional notes, if any) in an aggregate
principal amount not to exceed 25% of the aggregate principal amount of the
notes (which includes additional notes, if any) originally issued at a
redemption price (expressed as a percentage of principal amount of 112%, plus
accrued and unpaid interest to the redemption date, with the net cash proceeds
from one or more Public Equity Offerings following which there is a Public
Market (PROVIDED that, if the Public Equity Offering is an offering by Parent, a
portion of the Net Cash Proceeds thereof equal to the amount required to redeem
any such notes is contributed to the equity capital of the Company); PROVIDED
that
(1) at least 75% of such aggregate principal amount of notes (which includes
additional notes, if any) remains outstanding immediately after the
occurrence of each such redemption (other than notes held, directly or
indirectly, by the Company or its Affiliates); and
(2) each such redemption occurs within 60 days after the date of the related
Public Equity Offering.
SELECTION AND NOTICE OF REDEMPTION
If we are redeeming less than all the notes at any time, the Trustee will
select notes on a PRO RATA basis, by lot or by such other method as the Trustee
in its sole discretion shall deem to be fair and appropriate.
We will redeem notes of $1,000 or less in whole and not in part. We will
cause notices of redemption to be mailed by first-class mail at least 30 but not
more than 60 days before the redemption date to each holder of notes to be
redeemed at its registered address.
If any note is to be redeemed in part only, the notice of redemption that
relates to that note shall state the portion of the principal amount thereof to
be redeemed. We will issue a new note in principal amount equal to the
unredeemed portion of the original note in the name of the holder thereof upon
cancelation of the original note. Notes called for redemption become due on the
date fixed for redemption. On and after the redemption date, interest ceases to
accrue on notes or portions of them called for redemption.
MANDATORY REDEMPTION; OFFERS TO PURCHASE; OPEN MARKET PURCHASES
Subject to the terms described above, we are not required to make any
mandatory redemption or sinking fund payments with respect to the notes.
However, under certain circumstances, we may be required to offer to purchase
the notes as described under the captions "--Change of Control" and "Certain
Covenants--Limitation on Sales of Assets and Subsidiary Stock". We may at any
time and from time to time purchase notes in the open market or otherwise.
SUBSIDIARY GUARANTIES
The Subsidiary Guarantors will jointly and severally guarantee, on a senior
subordinated basis, our obligations under these notes. The obligations of each
Subsidiary Guarantor under its Subsidiary Guaranty will be limited as necessary
to prevent that Subsidiary Guaranty from constituting a fraudulent conveyance
under applicable law. See "Risk Factors--Subordination".
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Each Subsidiary Guarantor that makes a payment under its Subsidiary Guaranty
will be entitled to a contribution from each other Subsidiary Guarantor in an
amount equal to such other Subsidiary Guarantor's PRO RATA portion of such
payment based on the respective net assets of all the Subsidiary Guarantors at
the time of such payment determined in accordance with GAAP.
If a Subsidiary Guaranty were rendered voidable, it could be subordinated by
a court to all other indebtedness (including guarantees and other contingent
liabilities) of the applicable Subsidiary Guarantor, and, depending on the
amount of such indebtedness, a Subsidiary Guarantor's liability on its
Subsidiary Guaranty could be reduced to zero. See "Risk Factors--Subordination".
The Subsidiary Guaranty of a Subsidiary Guarantor will be released:
(1) upon the sale or other disposition (including by way of consolidation or
merger) of a Subsidiary Guarantor;
(2) upon the sale or disposition of all or substantially all the assets of a
Subsidiary Guarantor; or
(3) the designation of such Subsidiary Guarantor as an Unrestricted
Subsidiary pursuant to the terms of the indenture;
in the case of (1) and (2) above, other than to the Company or an Affiliate of
the Company and as permitted by the indenture.
RANKING
SENIOR INDEBTEDNESS VERSUS NOTES
The payment of the principal of, premium, if any, and interest on the notes
and the payment of any Subsidiary Guaranty will be subordinate in right of
payment to the prior payment in full in cash of all Senior Indebtedness of the
Company or the relevant Subsidiary Guarantor, as the case may be, including the
obligations of the Company and such Subsidiary Guarantor under the Credit
Agreement.
As of December 31, 1998, after giving pro forma effect to the Transactions:
(1) the Company's Senior Indebtedness would have been approximately $78.9
million, all of which was secured indebtedness; and
(2) the Senior Indebtedness of the Subsidiary Guarantors would have been
approximately $78.9 million. Substantially all of the pro forma Senior
Indebtedness of the Subsidiary Guarantors comprises their respective
guaranties of Senior Indebtedness of the Company under the Credit
Agreement.
Although the indenture contains limitations on the amount of additional
Indebtedness that the Company and the Subsidiary Guarantors may incur, under
certain circumstances the amount of such Indebtedness could be substantial and,
in any case, such Indebtedness may be Senior Indebtedness. See "--Certain
Covenants--Limitation on Indebtedness".
LIABILITIES OF SUBSIDIARIES VERSUS NOTES
A substantial portion of our operations are conducted through our
subsidiaries. Some of our subsidiaries are not guaranteeing the notes. Claims of
creditors of such non-guarantor subsidiaries, including trade creditors holding
indebtedness or guarantees issued by such non-guarantor subsidiaries, and claims
of preferred stockholders of such non-guarantor subsidiaries generally will have
priority with respect to the assets and earnings of such non-guarantor
subsidiaries over the claims of our creditors, including holders of the notes,
even if such claims do not constitute Senior Indebtedness. Accordingly, the
notes and each Subsidiary Guaranty will be effectively subordinated to creditors
(including trade creditors) and preferred stockholders, if any, of such
non-guarantor subsidiaries.
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At March 31, 1999, after giving pro forma effect to the Transactions, the
total liabilities of our subsidiaries (other than the Subsidiary Guarantors)
would have been approximately $0.9 million, including trade payables. Although
the indenture limits the incurrence of Indebtedness and preferred stock of
certain of our subsidiaries, such limitation is subject to a number of
significant qualifications. Moreover, the indenture does not impose any
limitation on the incurrence by such subsidiaries of liabilities or obligations
that are not considered Indebtedness under the indenture. See "--Certain
Covenants-- Limitation on Indebtedness".
OTHER SENIOR SUBORDINATED INDEBTEDNESS VERSUS NOTES
Only Indebtedness of the Company or a Subsidiary Guarantor that is Senior
Indebtedness will rank senior to the notes and the relevant Subsidiary Guaranty
in accordance with the provisions of the indenture. The notes and each
Subsidiary Guaranty will in all respects rank PARI PASSU with all other Senior
Subordinated Indebtedness of the Company and the relevant Subsidiary Guarantor,
respectively.
We have agreed in the indenture that we will not Incur, directly or
indirectly, any indebtedness that is contractually subordinate or junior in
right of payment to our senior Indebtedness, unless such indebtedness is Senior
Subordinated Indebtedness or is expressly subordinated in right of payment to
senior Subordinated Indebtedness. The indenture does not treat unsecured
Indebtedness as subordinated or junior to Secured Indebtedness merely because it
is unsecured.
PAYMENT OF NOTES
We are not permitted to pay principal of, premium, if any, or interest on
the notes or make any deposit pursuant to the provisions described under
"--Defeasance" below and may not repurchase, redeem or otherwise retire any
notes (collectively, "pay the notes") if:
(1) any Designated Senior Indebtedness is not paid when due; or
(2) any other default on designated Senior Indebtedness occurs and the
maturity of such designated Senior Indebtedness is accelerated in
accordance with its terms;
unless, in either case, the default has been cured or waived and any such
acceleration has been rescinded or such Designated Senior Indebtedness has been
paid in full in cash. Regardless of the foregoing, we are permitted to pay the
notes if we and the Trustee receive written notice approving such payment from
the Representative of any Designated Senior Indebtedness with respect to which
either of the events set forth in clause (1) or (2) above has occurred and is
continuing.
During the continuance of any default (other than a default described in
clause (1) or (2) above) with respect to any Designated Senior Indebtedness
pursuant to which the maturity thereof may be accelerated without further notice
(except such notice as may be required to effect such acceleration) or the
expiration of any applicable grace periods, we are not permitted to pay the
notes for a period (a "Payment Blockage Period") commencing upon the receipt by
the Trustee (with a copy to us) of written notice (a "Blockage Notice") of such
default from the Representative of the holders of such Designated Senior
Indebtedness specifying an election to effect a Payment Blockage Period and
ending 179 days thereafter. The Payment Blockage Period will end earlier if such
Payment Blockage Period is terminated:
(1) by written notice to the Trustee and us from the Person or Persons who
gave such Blockage Notice;
(2) because no defaults continue in existence which would permit the
acceleration of the maturity of any designated Senior Indebtedness at
such time; or
(3) because such Designated Senior Indebtedness has been discharged or
repaid in full in cash.
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Notwithstanding the provisions described above, unless the holders of such
Designated Senior Indebtedness or the Representative of such holders have
accelerated the maturity of such Designated Senior Indebtedness, or any payment
default described in clause (1) or (2) of the second preceding paragraph exists,
we are permitted to resume paying the notes after the end of such Payment
Blockage Period. The notes shall not be subject to more than one Payment
Blockage Period in any consecutive 360-day period, irrespective of the number of
defaults with respect to Designated Senior Indebtedness during such period,
except that if any Blockage Notice is delivered to the Trustee by or on behalf
of holders of Designated Senior Indebtedness (other than holders of the Bank
Indebtedness), a Representative of holders of Bank Indebtedness may give another
Blockage Notice within such period. However, in no event may the total number of
days during which any Payment Blockage Period or Periods is in effect exceed 179
days in the aggregate during any 360 consecutive day period, and there must be
181 days during any 360-day consecutive period during which no Payment Blockage
Period is in effect.
Upon any payment or distribution of the assets of the Company upon any
liquidation or dissolution or reorganization of or similar proceeding relating
to the Company or its property:
(1) the holders of Senior Indebtedness will be entitled to receive payment
in full in cash of all Obligations with respect to such Senior
Indebtedness before the holders of the notes are entitled to receive any
payment;
(2) until all Obligations with respect to Senior Indebtedness are paid in
full in cash, any payment or distribution to which holders of the notes
would be entitled but for the subordination provisions of the indenture
will be made to holders of such Senior Indebtedness as their interests
may appear, except that holders of notes may receive certain Capital
Stock and subordinated debt obligations; and
(3) if a distribution is made to holders of the notes that, due to the
subordination provisions, should not have been made to them, such holders
of the notes are required to hold it in trust for the holders of Senior
Indebtedness and pay it over to them as their interests may appear.
If payment of the notes is accelerated because of an Event of Default, the
Company or the Trustee must promptly notify the holders of Designated Senior
Indebtedness or the Representative of such holders of the acceleration. If any
Designated Senior Indebtedness is outstanding, neither the Company nor any
Subsidiary Guarantor may pay the notes until five Business Days after the
Representatives of all the issues of Designated Senior Indebtedness receive
notice of such acceleration and, thereafter, may pay the notes only if the
indenture otherwise permits payment at that time.
A Subsidiary Guarantor's obligations under its Subsidiary Guaranty are
senior subordinated obligations. As such, the rights of Noteholders to receive
payment by a Subsidiary Guarantor pursuant to its Subsidiary Guaranty will be
subordinated in right of payment to the rights of holders of Senior Indebtedness
of such Subsidiary Guarantor. The terms of the subordination provisions
described above with respect to the Company's obligations under the notes apply
equally to a Subsidiary Guarantor and the obligations of such Subsidiary
Guarantor under its Subsidiary Guaranty.
By reason of the subordination provisions contained in the indenture, in the
event of a liquidation or insolvency proceeding, creditors of the Company or a
Subsidiary Guarantor who are holders of Senior Indebtedness of the Company or a
Subsidiary Guarantor, as the case may be, may recover more, ratably, than the
holders of the notes, and creditors of ours who are not holders of Senior
Indebtedness may recover less, ratably, than holders of Senior Indebtedness and
may recover more, ratably, than the holders of the notes.
The terms of the subordination provisions described above will not apply to
payments from money or the proceeds of U.S. Government Obligations held in trust
by the Trustee for the payment of principal of and interest on the Notes
pursuant to the provisions described under "--Defeasance", if the foregoing
subordination provisions were not violated at the time the respective amounts
were deposited pursuant to such defeasance provisions.
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CHANGE OF CONTROL
Upon the occurrence of any of the following events (each a "Change of
Control"), each Holder shall have the right to require that the Company
repurchase such Holder's notes at a purchase price in cash equal to 101% of the
principal amount thereof on the date of purchase plus accrued and unpaid
interest, if any, to the date of purchase (subject to the right of holders of
record on the relevant record date to receive interest due on the relevant
interest payment date):
(1) prior to the earlier to occur of (A) the first public offering of common
stock of Parent or (B) the first public offering of common stock of the
Company, the Permitted Holders cease to be the "beneficial owner" (as
defined in Rules 13d-3 and 13d-5 under the Exchange Act), directly or
indirectly, of a majority in the aggregate of the total voting power of
the Voting Stock of the Company, whether as a result of issuance of
securities of the Parent or the Company, any merger, consolidation,
liquidation or dissolution of the Parent or the Company, any direct or
indirect transfer of securities by Parent or otherwise (for purposes of
this clause (1) and clause (2) below, the Permitted Holders shall be
deemed to beneficially own any Voting Stock of a corporation (the
"specified corporation") held by any other corporation (the "parent
corporation") so long as the Permitted Holders beneficially own (as so
defined), directly or indirectly, in the aggregate a majority of the
voting power of the Voting Stock of the parent corporation);
(2) any "person" (as such term is used in Sections 13(d) and 14(d) of the
Exchange Act), other than one or more Permitted Holders, is or becomes
the beneficial owner (as defined in clause (1) above, except that for
purposes of this clause (2) such person shall be deemed to have
"beneficial ownership" of all shares that any such person has the right
to acquire, whether such right is exercisable immediately or only after
the passage of time), directly or indirectly, of more than 35% of the
total voting power of the Voting Stock of the Company; PROVIDED, HOWEVER,
that the Permitted Holders beneficially own (as defined in clause (1)
above), directly or indirectly, in the aggregate a lesser percentage of
the total voting power of the Voting Stock of the Company than such other
person and do not have the right or ability by voting power, contract or
otherwise to elect or designate for election a majority of the Board of
Directors (for the purposes of this clause (2), such other person shall
be deemed to beneficially own any Voting Stock of a specified corporation
held by a parent corporation, if such other person is the beneficial
owner (as defined in this clause (2)), directly or indirectly, of more
than 35% of the voting power of the Voting Stock of such parent
corporation and the Permitted Holders beneficially own (as defined in
clause (1) above), directly or indirectly, in the aggregate a lesser
percentage of the voting power of the Voting Stock of such parent
corporation and do not have the right or ability by voting power,
contract or otherwise to elect or designate for election a majority of
the board of directors of such parent corporation);
(3) individuals who on the Issue Date constituted the Board of Directors
(together with any new directors whose election by such Board of
Directors or whose nomination for election by the shareholders of the
Company was approved by a vote of 66 2/3% of the directors of the Company
then still in office who were either directors on the Issue Date or whose
election or nomination for election was previously so approved) cease for
any reason to constitute a majority of the Board of Directors then in
office;
(4) the merger or consolidation of the Company with or into another Person
or the merger of another Person with or into the Company, or the sale of
all or substantially all the assets of the Company to another Person
(other than a Person that is controlled by the Permitted Holders), and,
in the case of any such merger or consolidation, the securities of the
Company that are outstanding immediately prior to such transaction and
which represent 100% of the aggregate voting power of the Voting Stock of
the Company are changed into or exchanged for cash, securities or
property, unless pursuant to such transaction such securities are changed
into or
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exchanged for, in addition to any other consideration, securities of the
surviving corporation that represent immediately after such transaction,
at least a majority of the aggregate voting power of the Voting Stock of
the surviving corporation.
Within 30 days following any Change of Control, we will mail a notice to
each Holder with a copy to the Trustee (the "Change of Control Offer") stating:
(1) that a Change of Control has occurred and that such Holder has the right
to require us to purchase such Holder's notes at a purchase price in cash
equal to 101% of the principal amount thereof on the date of purchase,
plus accrued and unpaid interest, if any, to the date of purchase
(subject to the right of Holders of record on the relevant record date to
receive interest on the relevant interest payment date);
(2) the circumstances and relevant facts regarding such Change of Control
(including information with respect to pro forma historical income, cash
flow and capitalization after giving effect to such Change of Control);
(3) the repurchase date (which shall be no earlier than 30 days nor later
than 60 days from the date such notice is mailed); and
(4) the instructions, as determined by us, consistent with the covenant
described hereunder, that a Holder must follow in order to have its Notes
purchased.
If the terms of the Credit Agreement prohibit the Company from making a
Change of Control Offer or from purchasing any notes pursuant thereto, prior to
the mailing of the notice to Holders described in the preceding paragraph, but
in any event within 30 days following any Change of Control, the Company
covenants to:
(1) repay in full any indebtedness outstanding under the Credit Agreement or
offer to repay in full all such indebtedness and repay the Indebtedness
of each lender which has accepted such offer; or
(2) obtain the requisite consent under the Credit Agreement to permit the
purchase of the Notes as described above.
The Company must first comply with the covenant described above before it
will be required to purchase notes in the event of a Change of Control;
PROVIDED, HOWEVER, that the Company's failure to comply with the covenant
described in the preceding sentence or to make a Change of Control offer because
of any such failure shall constitute a Default described in clause (4) under
"--Defaults" below (and not under clause (2) thereof). As a result of the
foregoing, a holder of the Notes may not be able to compel the Company to
purchase the notes unless the Company is able at the time to refinance all of
the Indebtedness outstanding under the Credit Agreement or obtain requisite
consents under the Credit Agreement.
We will not be required to make a Change of Control Offer following a Change
of Control Offer if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the indenture applicable to a Change of Control Offer made by us and
purchases all notes validly tendered and not withdrawn under such Change of
Control Offer.
We will comply, to the extent applicable, with the requirements of Section
14(e) of the Exchange Act and any other securities laws or regulations in
connection with the repurchase of notes as a result of a Change of Control. To
the extent that the provisions of any securities laws or regulations conflict
with the provisions of the covenant described hereunder, we will comply with the
applicable securities laws and regulations and shall not be deemed to have
breached our obligations under the covenant described hereunder by virtue
thereof.
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The Change of Control purchase feature of the notes may in certain
circumstances make more difficult or discourage a sale or takeover of the
Company and, thus, the removal of incumbent management. The Change of Control
purchase feature is a result of negotiations between the Company and the Initial
Purchasers. We have no present intention to engage in a transaction involving a
Change of Control, although it is possible that we could decide to do so in the
future. Subject to the limitations discussed below, we could, in the future,
enter into certain transactions, including acquisitions, refinancings or other
recapitalizations, that would not constitute a Change of Control under the
indenture, but that could increase the amount of indebtedness outstanding at
such time or otherwise affect our capital structure or credit ratings.
Restrictions on our ability to Incur additional Indebtedness are contained in
the covenant described under "--Certain Covenants--Limitation on Indebtedness".
Such restrictions can only be waived with the consent of the holders of a
majority in principal amount of the notes then outstanding. Except for the
limitations contained in such covenants, however, the Indenture will not contain
any covenants or provisions that may afford holders of the notes protection in
the event of a highly leveraged transaction.
The Credit Agreement will prohibit us from purchasing any notes, and will
also provide that the occurrence of certain change of control events with
respect to the Company would constitute a default thereunder. In the event a
Change of Control occurs at a time when we are prohibited from purchasing notes,
we may seek the consent of our lenders to the purchase of Notes or may attempt
to refinance the borrowings that contain such prohibition. If we do not obtain
such a consent or repay such borrowings, we will remain prohibited from
purchasing notes. In such case, our failure to purchase tendered Notes would
constitute an Event of Default under the indenture which would, in turn,
constitute a default under the Credit Agreement. In such circumstances, the
subordination provisions in the indenture would likely restrict payment to the
Holders of notes.
Future indebtedness that we may incur may contain prohibitions on the
occurrence of certain events that would constitute a Change of Control or
require the repurchase of such indebtedness upon a Change of Control. Moreover,
the exercise by the holders of their right to require us to repurchase the notes
could cause a default under such indebtedness, even if the Change of Control
itself does not, due to the financial effect of such repurchase on us. Finally,
our ability to pay cash to the holders of notes following the occurrence of a
Change of Control may be limited by our then existing financial resources. There
can be no assurance that sufficient funds will be available when necessary to
make any required repurchases.
The provisions under the indenture relative to our obligation to make an
offer to repurchase the notes as a result of a Change of Control may be waived
or modified with the written consent of the holders of a majority in principal
amount of the Notes.
CERTAIN COVENANTS
The indenture contains covenants including, among others, the following:
LIMITATION ON INDEBTEDNESS
(a) The Company will not, and will not permit any Restricted Subsidiary to,
Incur, directly or indirectly, any Indebtedness; PROVIDED, HOWEVER, that the
Company or any Restricted Subsidiary may Incur Indebtedness if, on the date of
such Incurrence and after giving effect thereto, (1) the Consolidated Coverage
Ratio exceeds 2.00 to 1.00 if such Indebtedness is Incurred prior to May 15,
2001 or 2.25 to 1.00 if such Indebtedness is Incurred thereafter and (2) the
Consolidated Leverage Ratio would be less than 5.75 to 1.00 if such Indebtedness
is Incurred prior to December 31, 2000 or 5.50 to 1.00 if such Indebtedness is
Incurred thereafter.
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(b) Notwithstanding the foregoing paragraph (a), the Company and the
Restricted Subsidiaries may Incur any or all of the following Indebtedness:
(1) Indebtedness of the Company Incurred pursuant to the Revolving Credit
Facilities; PROVIDED, HOWEVER, that, immediately after giving effect to
any such Incurrence, the aggregate principal amount of all Indebtedness
Incurred under this clause (1) and then outstanding does not exceed the
greater of (A) $110.0 million and (B) 90% of accounts receivable of the
Company and its Restricted Subsidiaries;
(2) Indebtedness of the Company Incurred pursuant to the Term Loan
Facilities; PROVIDED, HOWEVER, that, after giving effect to any such
Incurrence, the aggregate principal amount of all Indebtedness Incurred
under this clause (2) and then outstanding does not exceed $60.0 million
less the aggregate sum of all principal payments with respect to such
Indebtedness pursuant to paragraph (a)(3)(A) of the covenant described
under "--Limitation on Sales of Assets and Subsidiary Stock";
(3) Indebtedness of the Company or any Restricted Subsidiary owed to and
held by the Company or a Restricted Subsidiary; PROVIDED, HOWEVER, that
any subsequent issuance or transfer of any Capital Stock which results in
any such Restricted Subsidiary ceasing to be a Restricted Subsidiary or
any subsequent transfer of such Indebtedness (other than to the Company
or another Restricted Subsidiary) shall be deemed, in each case, to
constitute the Incurrence of such Indebtedness by the issuer thereof;
(4) the notes (other than any additional notes);
(5) Indebtedness outstanding on the Issue Date (other than Indebtedness
described in clause (1), (2), (3) or (4) of this covenant);
(6) Refinancing Indebtedness in respect of Indebtedness Incurred pursuant to
paragraph (a) or pursuant to clause (4) or (5) or this clause (6);
(7) Hedging Obligations under or with respect to Interest Rate Agreements
and Currency Agreements required under the Credit Agreement or entered
into in the ordinary course of business and not for the purpose of
speculation;
(8) Indebtedness in respect of performance bonds, bankers' acceptances,
letters of credit and surety or appeal bonds provided by the Company and
the Restricted Subsidiaries in the ordinary course of their business and
which do not secure other Indebtedness of the Company or any Restricted
Subsidiary (except Indebtedness permitted under the Indenture);
(9) Subsidiary Guaranties of the Subsidiary Guarantors;
(10) the Guarantee of any Indebtedness otherwise permitted to be Incurred
pursuant to the Indenture;
(11) Indebtedness of the Company or any Restricted Subsidiary consisting of
indemnification, adjustment of purchase price, earn-out or similar
obligations, in each case incurred in connection with the acquisition or
disposition of any assets, including shares of Capital Stock or divisions
or lines of business, of the Company or any Restricted Subsidiary; and
(12) Indebtedness of the Company in an aggregate principal amount which,
together with all other Indebtedness of the Company outstanding on the
date of such Incurrence (other than Indebtedness permitted by clauses (1)
through (11) above or paragraph (a)) does not exceed $25 million.
(c) Notwithstanding the foregoing, the Company shall not, and shall not
permit any Restricted Subsidiary to, Incur any Indebtedness pursuant to the
foregoing paragraph (b) if the proceeds thereof are used, directly or
indirectly, to Refinance any Subordinated Obligations unless such Indebtedness
shall be
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subordinated to the Notes or the relevant Subsidiary Guaranty, as applicable, to
at least the same extent as such Subordinated Obligations.
(d) For purposes of determining compliance with this covenant, (1) in the
event that an item of Indebtedness meets the criteria of more than one of the
types of Indebtedness described above at the time of its Incurrence, the
Company, in its sole discretion, will classify such item of Indebtedness and
only be required to include the amount and type of such Indebtedness in one of
the above clauses (provided that any Indebtedness classified as Incurred
pursuant to clause (b)(12) above may later be reclassified as having been
Incurred pursuant to paragraph (a) above to the extent that such reclassified
Indebtedness could be Incurred pursuant to paragraph (a) above at the time of
such reclassification) and (2) an item of Indebtedness may be divided and
classified in more than one of the types of Indebtedness described above.
(e) Notwithstanding paragraphs (a) and (b) above, the Company shall not, and
shall not permit any Subsidiary Guarantor to, Incur (1) any Indebtedness if such
Indebtedness is expressly subordinate or junior in ranking in any respect to any
Senior Indebtedness of the Company or such Subsidiary Guarantor, as applicable,
unless such Indebtedness is Senior Subordinated Indebtedness or is expressly
subordinated in right of payment to Senior Subordinated Indebtedness or (2) any
Secured Indebtedness that is not Senior Indebtedness unless contemporaneously
therewith effective provision is made to secure the notes or the relevant
Subsidiary Guaranty, as applicable, equally and ratably with such Secured
Indebtedness for so long as such Secured Indebtedness is secured by a Lien.
LIMITATION ON RESTRICTED PAYMENTS
(a) The Company will not, and will not permit any Restricted Subsidiary,
directly or indirectly, to make a Restricted Payment if at the time the Company
or such Restricted Subsidiary makes such Restricted Payment:
(1) a Default shall have occurred and be continuing (or would result
therefrom);
(2) the Company is not able to Incur an additional $1.00 of Indebtedness
pursuant to paragraph (a) of the covenant described under "--Limitation
on Indebtedness"; or
(3) the aggregate amount of such Restricted Payment and all other Restricted
Payments since the Issue Date would exceed the sum of (without
duplication):
(A) 50% of the Consolidated Net Income accrued during the period (treated
as one accounting period) from the beginning of the fiscal quarter
immediately following the fiscal quarter during which the Issue Date
occurs to the end of the most recent fiscal quarter for which
financial statements are then available prior to the date of such
Restricted Payment (or, in case such Consolidated Net Income shall be
a deficit, minus 100% of such deficit); plus
(B) 100% of the aggregate Net Cash Proceeds received by the Company from
the issuance or sale of its Capital Stock (other than Disqualified
Stock) and the aggregate cash received by the Company as a capital
contribution, in each case subsequent to the Issue Date (other than
an issuance or sale to a Subsidiary of the Company and other than an
issuance or sale to an employee stock ownership plan or to a trust
established by the Company or any of its Subsidiaries for the benefit
of their employees); plus
(C) the amount by which Indebtedness of the Company or its Restricted
Subsidiaries is reduced on the Company's consolidated balance sheet
upon the conversion or exchange (other than by a Subsidiary of the
Company) subsequent to the Issue Date of any Indebtedness of the
Company or any Restricted Subsidiary convertible or exchangeable for
Capital Stock (other than Disqualified Stock) of the Company (less
the amount of any cash, or the fair value of any other property,
distributed by the Company or such Restricted Subsidiary upon such
conversion or exchange); plus
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(D) an amount equal to the sum of (x) the net reduction in Investments in
any Person resulting from dividends, repayments of loans or advances
or other transfers of assets, in each case to the Company or any
Restricted Subsidiary from such Person, or from the proceeds received
by the Company or any Restricted Subsidiary upon the disposition of
any Investment and (y) the portion (proportionate to the Company's
equity interest in such Subsidiary) of the fair market value of the
net assets of an Unrestricted Subsidiary at the time such
Unrestricted Subsidiary is designated a Restricted Subsidiary;
PROVIDED, HOWEVER, that the foregoing sum shall not exceed, in the
case of any Person, the amount of Investments previously made (and
treated as a Restricted Payment) by the Company or any Restricted
Subsidiary in such Person or, in the case of any Investment
outstanding on the Issue Date (but not to exceed in the aggregate $10
million) an amount not to exceed the lesser of the amount of such net
reduction or the amount of such Investment.
(b) The preceding provisions will not prohibit:
(1) any Restricted Payment made by exchange for, or out of the proceeds of
the substantially concurrent sale of, or capital contribution in respect
of, Capital Stock of the Company (other than Disqualified Stock and other
than Capital Stock issued or sold to a Subsidiary of the Company or an
employee stock ownership plan or to a trust established by the Company or
any of its Subsidiaries for the benefit of their employees); PROVIDED,
HOWEVER, that (A) such Restricted Payment shall be excluded in the
calculation of the amount of Restricted Payments and (B) the Net Cash
Proceeds from such sale shall be excluded from the calculation of amounts
under clause (3)(B) of paragraph (a) above;
(2) any purchase, repurchase, redemption, defeasance or other acquisition or
retirement for value of Subordinated Obligations made by exchange for, or
out of the proceeds of the substantially concurrent sale of, Indebtedness
of the Company which is permitted to be Incurred pursuant to the covenant
described under "--Limitation on Indebtedness"; PROVIDED, HOWEVER, that
such purchase, repurchase, redemption, defeasance or other acquisition or
retirement for value shall be excluded in the calculation of the amount
of Restricted Payments;
(3) dividends paid within 60 days after the date of declaration thereof if
at such date of declaration such dividend would have complied with this
covenant; PROVIDED, HOWEVER, that at the time of payment of such
dividend, no other Default shall have occurred and be continuing (or
result therefrom); PROVIDED FURTHER, HOWEVER, that such dividend shall be
included in the calculation of the amount of Restricted Payments;
(4) the repurchase or other acquisition of shares of, or options to purchase
shares of, common stock of the Company or any of its Subsidiaries from
employees, former employees, consultants, directors or former directors
of the Company or any of its Subsidiaries or Parent (or permitted
transferees of such employees, former employees, consultants, directors
or former directors), pursuant to the terms of the agreements (including
employment agreements) or plans (or amendments thereto) approved by the
Board of Directors under which such individuals purchase or sell or are
granted the option to purchase or sell, shares of such common stock;
PROVIDED, HOWEVER, that the aggregate amount of such repurchases and
other acquisitions shall not exceed the sum of (A) $5 million plus (B)
the aggregate Net Cash Proceeds received by the Company from the issuance
of such Capital Stock to, or the exercise of options to purchase such
Capital Stock by, employees or directors of the Company or any of its
Subsidiaries that occurs after the Issue Date (to the extent the Net Cash
Proceeds from the sale of such Capital Stock have not otherwise been
applied to the payment of Restricted Payments by virtue of clause (3)(B)
of paragraph (a) above or applied pursuant to clause (b)(1) above) plus
(C) the Net Cash Proceeds actually received by the Company after the
Issue Date from insurance proceeds paid in respect of
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the death or disability of any employee or director; PROVIDED FURTHER,
HOWEVER, that such repurchases and other acquisitions shall be excluded
in the calculation of the amount of Restricted Payments;
(5) dividends, distributions or advances to Parent to the extent required to
pay non-deferrable scheduled cash interest when due on, or the principal
amount at final scheduled maturity of, the Ogden Note; provided, however,
that (A) no Default shall have occurred and be continuing (or would
result therefrom) and (B) Parent shall immediately apply any such
dividend to make such cash interest or principal payment; PROVIDED
FURTHER, HOWEVER, that such dividends, distributions and advances shall
be included in the calculation of the amount of Restricted Payments;
(6) dividends, distributions or advances to Parent to be used by Parent to
pay Federal, state and local taxes payable by Parent and directly
attributable to (or arising as a result of) the operations of the Company
and its Restricted Subsidiaries; PROVIDED, HOWEVER, that (A) the amount
of such dividends shall not exceed the amount that the Company and its
Restricted Subsidiaries would be required to pay in respect of such
Federal, state and local taxes were the Company to pay such taxes as a
stand-alone taxpayer and (B) such dividends pursuant to this clause (6)
are used by Parent for such purposes within 20 days of the receipt of
such dividends; PROVIDED FURTHER, HOWEVER, that such dividends shall be
excluded in the calculation of the amount of Restricted Payments;
(7) dividends, distributions or advances to Parent to the extent necessary
to pay for general corporate and overhead expenses incurred by Parent in
the ordinary course of business; PROVIDED, HOWEVER, that such dividends,
shall not exceed $250,000 in any fiscal year of the Company; PROVIDED
FURTHER, HOWEVER, that such dividends, distributions or advances shall be
included in the calculation of the amount of Restricted Payments;
(8) any purchase or redemption of Subordinated Obligations from Net
Available Cash to the extent permitted by the covenant described under
"--Limitation on Sales of Assets and Subsidiary Stock"; PROVIDED,
HOWEVER, that such purchase or redemption shall be excluded in the
calculation of the amount of Restricted Payments;
(9) upon the occurrence of a Change of Control and within 60 days after the
completion of the offer to repurchase the notes pursuant to the covenant
described under "--Change of Control" above (including the purchase of
the notes tendered), any purchase or redemption of Subordinated
Obligations required pursuant to the terms thereof as a result of such
Change of Control at a purchase or redemption price not to exceed the
outstanding principal amount thereof, plus any accrued and unpaid
interest; PROVIDED, HOWEVER, that (A) at the time of such purchase or
redemption no Default shall have occurred and be continuing (or would
result therefrom), (B) the Company would be able to Incur an additional
$1.00 of Indebtedness pursuant to paragraph (a) of the covenant described
under "--Limitation on Indebtedness" after giving pro forma effect to
such Restricted Payment and (C) such purchase or redemption shall be
included in the calculation of the amount of Restricted Payments; or
(10) payments required pursuant to the terms of the Merger Agreement to
consummate the Acquisition by the Company or a Restricted Subsidiary
pursuant to the terms of the Merger Agreement; PROVIDED, HOWEVER, that
such payments shall be excluded in the calculation of the amount of
Restricted Payments;
LIMITATION ON RESTRICTIONS ON DISTRIBUTIONS FROM RESTRICTED SUBSIDIARIES
The Company will not, and will not permit any Restricted Subsidiary to,
create or otherwise cause or permit to exist or become effective any consensual
encumbrance or restriction on the ability of any Restricted Subsidiary to (a)
pay dividends or make any other distributions on its Capital Stock to the
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Company or a Restricted Subsidiary or pay any Indebtedness owed to the Company,
(b) make any loans or advances to the Company or (c) transfer any of its
property or assets to the Company, except:
(1) any encumbrance or restriction pursuant to an agreement in effect at or
entered into on the Issue Date, or, in the case of the Credit Agreement,
as in effect on the Acquisition Closing Date;
(2) any encumbrance or restriction with respect to a Restricted Subsidiary
pursuant to an agreement relating to any Indebtedness Incurred by such
Restricted Subsidiary on or prior to the date on which such Restricted
Subsidiary was acquired by the Company (other than Indebtedness Incurred
as consideration in, or to provide all or any portion of the funds or
credit support utilized to consummate, the transaction or series of
related transactions pursuant to which such Restricted Subsidiary became
a Restricted Subsidiary or was acquired by the Company) and outstanding
on such date;
(3) any encumbrance or restriction pursuant to an agreement effecting a
Refinancing of Indebtedness Incurred pursuant to an agreement referred to
in clause (1) or (2) of this covenant or this clause (3) or contained in
any amendment to an agreement referred to in clause (1) or (2) of this
covenant or this clause (3); PROVIDED, HOWEVER, that the encumbrances and
restrictions with respect to such Restricted Subsidiary contained in any
such refinancing agreement or amendment are no less favorable to the
Noteholders than encumbrances and restrictions with respect to such
Restricted Subsidiary contained in such predecessor agreements;
(4) any such encumbrance or restriction consisting of customary
non-assignment provisions in leases or licenses to the extent such
provisions restrict the transfer of the lease or license or the property
leased or licensed thereunder;
(5) any encumbrance or restriction consisting of any restriction on the sale
or other disposition of assets or property securing Indebtedness as a
result of a Lien permitted to be Incurred under the indenture on such
asset or property;
(6) in the case of clause (c) above, restrictions contained in security
agreements or mortgages securing Indebtedness of a Restricted Subsidiary
to the extent such restrictions restrict the transfer of the property
subject to such security agreements or mortgages;
(7) any restriction with respect to a Restricted Subsidiary imposed pursuant
to an agreement entered into for the sale or disposition of all or
substantially all the Capital Stock or assets of such Restricted
Subsidiary pending the closing of such sale or disposition; and
(8) any restriction in any agreement that is not more restrictive than the
restrictions under the terms of the Credit Agreement as in effect on the
closing date of the acquisition.
LIMITATION ON SALES OF ASSETS AND SUBSIDIARY STOCK
(a) The Company shall not, and shall not permit any Restricted Subsidiary
to, directly or indirectly, consummate any Asset Disposition unless:
(1) the Company or such Restricted Subsidiary receives consideration at the
time of such Asset Disposition at least equal to the fair market value
(including as to the value of all non-cash consideration), as determined
in good faith by the Board of Directors, of the shares and assets subject
to such Asset Disposition;
(2) at least 75% of the consideration thereof received by the Company or
such Restricted Subsidiary is in the form of cash or cash equivalents
(provided that such 75% requirement shall not apply to any Asset
Disposition in which the cash or cash equivalents portion of the
consideration received therefor is no less than an amount equal to the
product of (x) six and (y) the amount of EBITDA directly attributable to
the assets or Capital Stock included in such Asset Disposition); and
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(3) an amount equal to 100% of the Net Available Cash from such Asset
Disposition is applied by the Company (or such Restricted Subsidiary, as
the case may be):
(A) first, to the extent the Company elects (or is required by the terms
of any Indebtedness), to prepay, repay, redeem or purchase Senior
Indebtedness or Indebtedness (other than any Disqualified Stock) of a
Restricted Subsidiary (in each case other than Indebtedness owed to
the Company or an Affiliate of the Company) within one year from the
later of the date of such Asset Disposition or the receipt of such
Net Available Cash;
(B) second, to the extent of the balance of such Net Available Cash after
application in accordance with clause (A), to the extent the Company
elects, to acquire Additional Assets within one year from the later
of the date of such Asset Disposition or the receipt of such Net
Available Cash;
(C) third, to the extent of the balance of such Net Available Cash after
application in accordance with clauses (A) and (B), to make an offer
to the holders of the Notes (and to holders of other Senior
Subordinated Indebtedness designated by the Company) to purchase
Notes (and such other Senior Subordinated Indebtedness) pursuant to
and subject to the conditions contained in the indenture; and
(D) fourth, to the extent of the balance of such Net Available Cash after
application in accordance with clauses (A), (B) and (C), for any
purpose not prohibited by the terms of the indenture;
PROVIDED, HOWEVER, that in connection with any prepayment, repayment or
purchase of Indebtedness pursuant to clause (A) or (C) above, the Company or
such Restricted Subsidiary shall permanently retire such Indebtedness and shall
cause the related loan commitment (if any) to be permanently reduced in an
amount equal to the principal amount so prepaid, repaid or purchased.
Notwithstanding the foregoing provisions of this covenant, the Company and
the Restricted Subsidiaries will not be required to apply any Net Available Cash
in accordance with this covenant except to the extent that the aggregate Net
Available Cash from all Asset Dispositions which are not applied in accordance
with this covenant exceeds $10 million. Pending application of Net Available
Cash pursuant to this covenant, such Net Available Cash shall be invested in
Permitted Investments or used to temporarily reduce loans outstanding under
Revolving Credit Facilities.
For the purposes of this covenant, the following are deemed to be cash or
cash equivalents:
(1) the assumption of Indebtedness of the Company or any Restricted
Subsidiary and the release of the Company or such Restricted Subsidiary
from all liability on such Indebtedness in connection with such Asset
Disposition; and
(2) securities received by the Company or any Restricted Subsidiary from the
transferee that are promptly converted by the Company or such Restricted
Subsidiary into cash.
(b) In the event of an Asset Disposition that requires the purchase of the
Notes (and other Senior Subordinated Indebtedness) pursuant to clause (a)(3)(C)
above, the Company will be required to purchase notes tendered pursuant to an
offer by the Company for the notes (and other Senior Subordinated Indebtedness)
at a purchase price of 100% of their principal amount, without premium, plus
accrued but unpaid interest (or, in respect of such other Senior Subordinated
Indebtedness, such lesser price, if any, as may be provided for by the terms of
such Senior Subordinated Indebtedness) in accordance with the procedures
(including prorating in the event of oversubscription) set forth in the
indenture. If the aggregate purchase price of notes (and any other Senior
Subordinated Indebtedness) tendered pursuant to such offer is less than the Net
Available Cash allotted to the purchase thereof, the Company will be required to
apply the remaining Net Available Cash in accordance with clause (a)(3)(D)
above. If the aggregate purchase price of the securities tendered exceeds the
Net Available Cash allotted to purchase
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thereof, the Company will select the securities to be purchased on a pro rata
basis but in denominations of $1,000 or multiples thereof. The Company shall not
be required to make such an offer to purchase notes (and other Senior
Subordinated Indebtedness) pursuant to this covenant if the Net Available Cash
available therefor is less than $10 million (which lesser amount shall be
carried forward for purposes of determining whether such an offer is required
with respect to the Net Available Cash from any subsequent Asset Disposition).
(c) The Company will comply, to the extent applicable, with the requirements
of Section 14(e) of the Exchange Act and any other securities laws or
regulations in connection with the repurchase of notes pursuant to this
covenant. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this covenant, the Company shall comply
with the applicable securities laws and regulations and shall not be deemed to
have breached its obligations under this clause by virtue thereof.
LIMITATION ON AFFILIATE TRANSACTIONS
(a) The Company will not, and will not permit any Restricted Subsidiary to,
enter into or permit to exist any transaction (including the purchase, sale,
lease or exchange of any property, employee compensation arrangements or the
rendering of any service) with, or for the benefit of, any Affiliate of the
Company (an "Affiliate Transaction") unless:
(1) the terms of the Affiliate Transaction are no less favorable to the
Company or such Restricted Subsidiary than those that could be obtained
at the time of the Affiliate Transaction in arm's-length dealings with a
Person who is not an Affiliate;
(2) if such Affiliate Transaction involves an amount in excess of $1
million, the terms of the Affiliate Transaction are set forth in writing
and a majority of the non-employee directors of the Company disinterested
with respect to such Affiliate Transactions have determined in good faith
that the criteria set forth in clause (1) are satisfied and have approved
the relevant Affiliate Transaction as evidenced by a Board resolution;
and
(3) if such Affiliate Transaction involves an amount in excess of $10
million, the Board of Directors shall also have received a written
opinion from an investment banking firm of national prominence that is
not an Affiliate of the Company to the effect that such Affiliate
Transaction is fair, from a financial standpoint, to the Company and its
Restricted Subsidiaries.
(b) The provisions of the preceding paragraph (a) shall not prohibit:
(1) any Investment (other than a Permitted Investment) or other Restricted
Payment, in each case permitted to be made pursuant to the covenant
described under "--Limitation on Restricted Payments";
(2) any issuance of securities, or other payments, awards or grants in cash,
securities or otherwise pursuant to, or the funding of, employment
arrangements, stock options and stock ownership plans approved by the
Board of Directors;
(3) the grant of stock options or similar rights to employees and directors
of the Company pursuant to plans approved by the Board of Directors;
(4) loans or advances to employees in the ordinary course of business in
accordance with the past practices of the Company or its Restricted
Subsidiaries, but in any event not to exceed $3 million in the aggregate
outstanding at any one time;
(5) the payment of reasonable compensation or employee benefit arrangements
to and indemnity provided for the benefit of directors, officers or
employees of the Company or its Restricted Subsidiaries in the ordinary
course of business;
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(6) any employment, noncompetition or confidentiality agreements entered
into by the Company or any Restricted Subsidiary with its employees in
the ordinary course of business.
(7) the payment of reasonable fees to directors of the Company and its
Restricted Subsidiaries who are not employees of the Company or its
Restricted Subsidiaries;
(8) the payment by the Company of fees to Caxton-Iseman and its Affiliates
in connection with any acquisition transaction entered into by the
Company or any Restricted Subsidiary; PROVIDED, HOWEVER, that the
aggregate amount of fees paid to Caxton-Iseman and its Affiliates in
respect of any acquisition transaction shall not exceed 1% of the total
acquisition cost of such transaction;
(9) the accrual (and, to the extent provided below, the payment) by the
Company of management fees payable to Caxton-Iseman and its Affiliates in
an amount not to exceed $1 million in any fiscal year of the Company;
PROVIDED, HOWEVER, that the amount of such fees actually paid in any
fiscal year does not exeed an amount equal to the sum of (A) in the event
the Consolidated Coverage Ratio on the date of any proposed payment is
greater than 2.0 to 1.0 but less than or equal to 2.25 to 1.0, $500,000,
plus (B) in the event the Consolidated Coverage Ratio on the date of any
proposed payment exceeds 2.25 to 1.0, an additional $500,000, in each
case together with the amount of unpaid management fees accrued in any
prior fiscal year that could have been paid in such prior fiscal year had
the Consolidated Coverage Ratio applicable to clause (A) or (B) on the
date of such proposed payment been in effect on the date of accrual of
such prior year's fee; PROVIDED FURTHER, HOWEVER, that at the time of
such accrual or payment, no other Default shall have occurred and be
continuing (or result therefrom);
(10) any Affiliate Transaction between the Company and a Wholly Owned
Subsidiary or between Wholly Owned Subsidiaries; and
(11) the issuance or sale of any Capital Stock (other than Disqualified
Stock) of the Company.
LIMITATION ON THE SALE OR ISSUANCE OF CAPITAL STOCK OF RESTRICTED SUBSIDIARIES
The Company shall not sell or otherwise dispose of any Capital Stock of a
Restricted Subsidiary, and shall not permit any Restricted Subsidiary, directly
or indirectly, to issue or sell or otherwise dispose of any of its Capital Stock
except:
(1) to the Company or a Wholly Owned Subsidiary;
(2) directors' qualifying shares;
(3) the issuance of shares of common stock of Interactive Media Corporation
pursuant to the terms of any agreement or option related thereto as in
effect on the Acquisition Closing Date;
(4) if, immediately after giving effect to such issuance, sale or other
disposition, neither the Company nor any of its Subsidiaries own any
Capital Stock of such Restricted Subsidiary; or
(5) if, immediately after giving effect to such issuance, sale or other
disposition, such Restricted Subsidiary would no longer constitute a
Restricted Subsidiary and any Investment in such Person remaining after
giving effect thereto would have been permitted to be made under the
covenant described under "--Limitation on Restricted Payments" if made on
the date of such issuance, sale or other disposition.
Notwithstanding the foregoing, the issuance or sale of shares of Capital
Stock of any Restricted Subsidiary of the Company will not violate the
provisions of the immediately preceding sentence if such shares are issued or
sold in connection with (x) the formation or capitalization of a Restricted
Subsidiary or (y) a single transaction or a series of substantially
contemporaneous transactions whereby such Restricted Subsidiary becomes a
Restricted Subsidiary of the Company by reason of the acquisition of securities
or assets from another Person.
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MERGER AND CONSOLIDATION
The Company will not consolidate with or merge with or into, or convey,
transfer or lease, in one transaction or a series of transactions, all or
substantially all its assets to, any Person, unless:
(1) the resulting, surviving or transferee Person (the "Successor Company")
shall be a Person organized and existing under the laws of the United
States of America, any State thereof or the District of Columbia and the
Successor Company (if not the Company) shall expressly assume, by an
indenture supplemental thereto, executed and delivered to the Trustee, in
form reasonably satisfactory to the Trustee, all the obligations of the
Company under the notes and the indenture;
(2) immediately after giving effect to such transaction (and treating any
Indebtedness which becomes an obligation of the Successor Company or any
Subsidiary as a result of such transaction as having been Incurred by
such Successor Company or such Subsidiary at the time of such
transaction), no Default shall have occurred and be continuing;
(3) immediately after giving effect to such transaction, the Successor
Company would be able to Incur an additional $1.00 of Indebtedness
pursuant to paragraph (a) of the covenant described under "--Limitation
on Indebtedness"; and
(4) the Company shall have delivered to the Trustee an Officers' Certificate
and an Opinion of Counsel, each stating that such consolidation, merger
or transfer and such supplemental indenture (if any) comply with the
indenture.
The Company will not permit any Subsidiary Guarantor to consolidate with or
merge with or into, or convey, transfer or lease, in one transaction or a series
of transactions, all or substantially all of its assets to any Person unless:
(1) the resulting, surviving or transferee Person (if not such Subsidiary)
shall be a Person organized and existing under the laws of the
jurisdiction under which such Subsidiary was organized or under the laws
of the United States of America, or any State thereof or the District of
Columbia, and such Person shall expressly assume, by a Guaranty
Agreement, in a form satisfactory to the Trustee, all the obligations of
such Subsidiary, if any, under its Subsidiary Guaranty;
(2) immediately after giving effect to such transaction or transactions on a
pro forma basis (and treating any Indebtedness which becomes an
obligation of the resulting, surviving or transferee Person as a result
of such transaction as having been issued by such Person at the time of
such transaction), no Default shall have occurred and be continuing; and
(3) the Company delivers to the Trustee an Officers' Certificate and an
Opinion of Counsel, each stating that such consolidation, merger or
transfer and such Guaranty Agreement, if any, complies with the
indenture;
PROVIDED, HOWEVER, that the preceding restrictions will not be applicable if, in
connection with such consolidation, merger, conveyance, transfer or lease, the
Subsidiary Guarantor will be released from its obligations under the Subsidiary
Guaranty as described under "--Guaranties".
The Successor Company will be the successor to the Company and shall succeed
to, and be substituted for, and may exercise every right and power of, the
Company under the indenture, and the predecessor Company, except in the case of
a lease, shall be released from the obligation to pay the principal of and
interest on the notes.
FUTURE GUARANTORS
The Company will cause each domestic Restricted Subsidiary organized or
acquired after the Issue Date and that Incurs Indebtedness (including any
Guarantees) to execute and deliver to the Trustee a
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Guaranty Agreement pursuant to which such Restricted Subsidiary will Guarantee
payment of the Notes on the same terms and conditions as those set forth in the
indenture.
SEC REPORTS
Notwithstanding that the Company may not be subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act, the Company will file
(unless the SEC will not accept such filing) with the SEC and provide the
Trustee and Noteholders with such annual reports and such information, documents
and other reports as are specified in Sections 13 and 15(d) of the Exchange Act
and applicable to a U.S. corporation subject to such Sections, such information,
documents and other reports to be so filed and provided at the times specified
for the filings of such information, documents and reports under such Sections.
In addition, whether or not required by the SEC, we will file a copy of all
of the information and reports referred to above with the SEC for public
availability within the time periods specified in the SEC's rules and
regulations (unless the SEC will not accept such a filing).
DEFAULTS
Each of the following is an Event of Default:
(1) a default in the payment of interest or any Additional Amounts on the
notes when due, continued for 30 days;
(2) a default in the payment of principal of any note when due at its Stated
Maturity, upon optional redemption, upon required repurchase, upon
declaration or otherwise;
(3) the failure by the Company to comply with its obligations under
"--Certain Covenants--Merger and Consolidation" above;
(4) the failure by the Company to comply for 30 days after written notice
with any of its obligations in the covenants described above under
"Change of Control" (other than a failure to purchase notes) or under
"--Certain Covenants" under "--Limitation on Indebtedness", "--Limitation
on Restricted Payments", "--Limitation on Restrictions on Distributions
from Restricted Subsidiaries", "--Limitation on Sales of Assets and
Subsidiary Stock" (other than a failure to purchase notes), "--Limitation
on Affiliate Transactions", "--Limitation on the Sale or Issuance of
Capital Stock of Restricted Subsidiaries", "--Future Guarantors" or
"--SEC Reports";
(5) the failure by the Company to comply for 60 days after written notice
with its other agreements contained in the indenture;
(6) Indebtedness of the Company or any Significant Subsidiary is not paid
within any applicable grace period after final maturity or is accelerated
by the holders thereof because of a default and the total amount of such
Indebtedness unpaid or accelerated exceeds $5 million (the "cross
acceleration provision");
(7) certain events of bankruptcy, insolvency or reorganization of the
Company, a Subsidiary Guarantor or a Significant Subsidiary (the
"bankruptcy provisions");
(8) any judgment or decree for the payment of money in excess of $5 million
is entered against the Company or a Significant Subsidiary, remains
outstanding for a period of 60 consecutive days following such judgment
and is not discharged, waived or stayed within 10 days after written
notice (the "judgment default provision"); or
(9) a Subsidiary Guaranty ceases to be in full force and effect (other than
in accordance with the terms of such Subsidiary Guaranty) or a Subsidiary
Guarantor denies or disaffirms its obligations under its Subsidiary
Guaranty.
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However, a default under clauses (4), (5), (6) and (8) will not constitute
an Event of Default until the Trustee or the holders of 25% in principal amount
of the outstanding Notes notify the Company of the default and the Company does
not cure such default within the time specified after receipt of such notice.
If an Event of Default occurs and is continuing, the Trustee or the holders
of at least 25% in principal amount of the outstanding notes may declare the
principal of and accrued but unpaid interest on all the notes to be due and
payable. Upon such a declaration, such principal and interest shall be due and
payable immediately. If an Event of Default relating to certain events of
bankruptcy, insolvency or reorganization of the Company occurs and is
continuing, the principal of and interest on all the notes will IPSO FACTO
become and be immediately due and payable without any declaration or other act
on the part of the Trustee or any holders of the notes. Under certain
circumstances, the holders of a majority in principal amount of the outstanding
notes may rescind any such acceleration with respect to the notes and its
consequences.
Subject to the provisions of the indenture relating to the duties of the
Trustee, in case an Event of Default occurs and is continuing, the Trustee will
be under no obligation to exercise any of the rights or powers under the
indenture at the request or direction of any of the holders of the notes unless
such holders have offered to the Trustee reasonable indemnity or security
against any loss, liability or expense. Except to enforce the right to receive
payment of principal, premium (if any) or interest when due, no holder of a note
may pursue any remedy with respect to the indenture or the notes unless:
(1) such holder has previously given the Trustee notice that an Event of
Default is continuing;
(2) holders of at least 25% in principal amount of the outstanding Notes
have requested the Trustee to pursue the remedy;
(3) such holders have offered the Trustee reasonable security or indemnity
against any loss, liability or expense;
(4) the Trustee has not complied with such request within 60 days after the
receipt thereof and the offer of security or indemnity; and
(5) holders of a majority in principal amount of the outstanding Notes have
not given the Trustee a direction inconsistent with such request within
such 60-day period.
Subject to certain restrictions, the holders of a majority in principal amount
of the outstanding Notes are given the right to direct the time, method and
place of conducting any proceeding for any remedy available to the Trustee or of
exercising any trust or power conferred on the Trustee. The Trustee, however,
may refuse to follow any direction that conflicts with law or the indenture or
that the Trustee determines is unduly prejudicial to the rights of any other
holder of a Note or that would involve the Trustee in personal liability.
If a Default occurs, is continuing and is known to the Trustee, the Trustee
must mail to each holder of the notes notice of the Default within 90 days after
it occurs. Except in the case of a Default in the payment of principal of or
interest on any note, the Trustee may withhold notice if and so long as a
committee of its trust officers determines that withholding notice is not
opposed to the interest of the holders of the notes. In addition, we are
required to deliver to the Trustee, within 120 days after the end of each fiscal
year, a certificate indicating whether the signers thereof know of any Default
that occurred during the previous year. We are required to deliver to the
Trustee, within 30 days after the occurrence thereof, written notice of any
event which would constitute certain Defaults, their status and what action we
are taking or proposes to take in respect thereof.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the indenture may be amended with the consent
of the holders of a majority in principal amount of the notes then outstanding
(including consents obtained in connection with
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a tender offer or exchange for the notes) and any past default or compliance
with any provisions may also be waived with the consent of the holders of a
majority in principal amount of the notes then outstanding. However, without the
consent of each holder of an outstanding note affected thereby, an amendment may
not, among other things:
(1) reduce the amount of notes whose holders must consent to an amendment;
(2) reduce the rate of or extend the time for payment of interest on any
note;
(3) reduce the principal of or extend the Stated Maturity of any note;
(4) reduce the amount payable upon the redemption of any Note or change the
time at which any note may be redeemed as described under "--Optional
Redemption" above;
(5) make any note payable in money other than that stated in the note;
(6) impair the right of any holder of the notes to receive payment of
principal of and interest on such holder's notes on or after the due
dates therefor or to institute suit for the enforcement of any payment on
or with respect to such holder's notes;
(7) make any change in the amendment provisions which require each holder's
consent or in the waiver provisions;
(8) make any change in the ranking or priority of any Note that would
adversely affect the Noteholders; or
(9) make any change in any Subsidiary Guaranty that would adversely affect
the Noteholders.
Notwithstanding the preceding, without the consent of any holder of the
Notes, the Company and Trustee may amend the indenture:
(1) to cure any ambiguity, omission, defect or inconsistency;
(2) to provide for the assumption by a successor corporation of the
obligations of the Company under the indenture;
(3) to provide for uncertificated notes in addition to or in place of
certificated notes (provided that the uncertificated notes are issued in
registered form for purposes of Section 163(f) of the Code, or in a
manner such that the uncertificated notes are described in Section
163(f)(2)(B) of the Code);
(4) to add guarantees with respect to the notes and secure the notes;
(5) to add to the covenants of the Company for the benefit of the holders of
the notes or to surrender any right or power conferred upon the Company;
(6) to make any change that does not adversely affect the rights of any
holder of the notes; or
(7) to comply with any requirement of the SEC in connection with the
qualification of the Indenture under the Trust Indenture Act.
However, no amendment may be made to the subordination provisions of the
indenture that adversely affects the rights of any holder of Senior Indebtedness
then outstanding unless the holders of such Senior Indebtedness (or their
Representative) consents to such change.
The consent of the holders of the notes is not necessary under the indenture
to approve the particular form of any proposed amendment. It is sufficient if
such consent approves the substance of the proposed amendment.
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After an amendment under the indenture becomes effective, we are required to
mail to holders of the Notes a notice briefly describing such amendment.
However, the failure to give such notice to all holders of the Notes, or any
defect therein, will not impair or affect the validity of the amendment.
TRANSFER
The notes will be issued in registered form and will be transferable only
upon the surrender of the notes being transferred for registration of transfer.
We may require payment of a sum sufficient to cover any tax, assessment or other
governmental charge payable in connection with certain transfers and exchanges.
DEFEASANCE
At any time, we may terminate all our obligations under the notes and the
indenture ("legal defeasance"), except for certain obligations, including those
respecting the defeasance trust and obligations to register the transfer or
exchange of the notes, to replace mutilated, destroyed, lost or stolen notes and
to maintain a registrar and paying agent in respect of the notes.
In addition, at any time we may terminate our obligations under "--Change of
Control" and under the covenants described under "--Certain Covenants" (other
than the covenant described under "--Merger and Consolidation"), the operation
of the cross acceleration provision, the bankruptcy provisions with respect to
Significant Subsidiaries and the judgment default provision described under
"--Defaults" above and the limitations contained in clauses (3) under "--Certain
Covenants--Merger and Consolidation" above ("covenant defeasance").
We may exercise our legal defeasance option notwithstanding our prior
exercise of our covenant defeasance option. If we exercise our legal defeasance
option, payment of the notes may not be accelerated because of an Event of
Default with respect thereto. If we exercise our covenant defeasance option,
payment of the notes may not be accelerated because of an Event of Default
specified in clause (4), (6), (7) (with respect only to Significant
Subsidiaries) or (8) under "--Defaults" above or because of the failure of the
Company to comply with clause (3) under "--Certain Covenants--Merger and
Consolidation" above. If we exercise our legal defeasance option or our covenant
defeasance option, each Subsidiary Guarantor will be released from all of its
obligations with respect to its Subsidiary Guaranty and the Security Agreements.
In order to exercise either of our defeasance options, we must irrevocably
deposit in trust (the "defeasance trust") with the Trustee money or U.S.
Government Obligations for the payment of principal of and interest on the notes
to redemption or maturity, as the case may be, and must comply with certain
other conditions, including delivery to the Trustee of an Opinion of Counsel to
the effect that holders of the notes will not recognize income, gain or loss for
Federal income tax purposes as a result of such deposit and defeasance and will
be subject to Federal income tax on the same amounts and in the same manner and
at the same times as would have been the case if such deposit and defeasance had
not occurred (and, in the case of legal defeasance only, such Opinion of Counsel
must be based on a ruling of the Internal Revenue Service or other change in
applicable Federal income tax law).
CONCERNING THE TRUSTEE AND EXCHANGE AGENT
IBJ Whitehall Bank & Trust Company is to be the Trustee under the indenture,
and we have also appointed it as Registrar, Paying Agent and Exchange Agent with
regard to the notes.
The indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to engage in other
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transactions; PROVIDED, HOWEVER, if it acquires any conflicting interest it must
either eliminate such conflict within 90 days, apply to the SEC for permission
to continue or resign.
The Holders of a majority in principal amount of the outstanding notes will
have the right to direct the time, method and place of conducting any proceeding
for exercising any remedy available to the Trustee, subject to certain
exceptions. If an Event of Default occurs (and is not cured), the Trustee will
be required, in the exercise of its power, to use the degree of care of a
prudent man in the conduct of his own affairs. Subject to such provisions, the
Trustee will be under no obligation to exercise any of its rights or powers
under the indenture at the request of any Holder of notes, unless such Holder
shall have offered to the Trustee security and indemnity satisfactory to it
against any loss, liability or expense and then only to the extent required by
the terms of the indenture.
GOVERNING LAW
The indenture and the notes will be governed by, and construed in accordance
with, the laws of the State of New York without giving effect to applicable
principles of conflicts of law to the extent that the application of the law of
another jurisdiction would be required thereby.
CERTAIN DEFINITIONS
"ACQUISITION" means the acquisition of Analysis & Technology, Inc. by the
Company
"ACQUISITION CLOSING DATE" means the date on which the Company consummates
the Acquisition.
"ADDITIONAL ASSETS" means any:
(1) property, plant or equipment used in a Related Business;
(2) the Capital Stock of a Person that becomes a Restricted Subsidiary as a
result of the acquisition of such Capital Stock by the Company or another
Restricted Subsidiary; or
(3) Capital Stock constituting a minority interest in any Person that at
such time is a Restricted Subsidiary;
PROVIDED, HOWEVER, that any such Restricted Subsidiary described in
clauses (2) or (3) above is primarily engaged in a Related Business.
"AFFILIATE" of any specified Person means:
(1) any other Person, directly or indirectly, controlling or controlled by;
or
(2) under direct or indirect common control with such specified Person.
For the purposes of this definition, "control" when used with respect to any
Person means the power to direct the management and policies of such Person,
directly or indirectly, whether through the ownership of voting securities, by
contract or otherwise; and the terms "controlling" and "controlled" have
meanings correlative to the foregoing. For purposes of the covenants described
under "--Certain Covenants--Limitation on Restricted Payments", "--Certain
Covenants--Limitation on Affiliate Transactions" and "--Certain
Covenants--Limitation on Sales of Assets and Subsidiary Stock" only, "Affiliate"
shall also mean any beneficial owner (as defined in Rules 13d-3 and 13d-5 under
the Exchange Act) of Capital Stock representing 10% or more of the total voting
power of the Voting Stock (on a fully diluted basis) of the Company or of rights
or warrants to purchase such Capital Stock (whether or not currently
exercisable) and any Person who would be an Affiliate of any such beneficial
owner pursuant to the first sentence hereof.
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"ASSET DISPOSITION" means any sale, lease, transfer or other disposition (or
series of related sales, leases, transfers or dispositions) by the Company or
any Restricted Subsidiary, including any disposition by means of a merger,
consolidation or similar transaction (each referred to for the purposes of this
definition as a "disposition"), of:
(1) any shares of Capital Stock of a Restricted Subsidiary (other than
directors' qualifying shares or shares required by applicable law to be
held by a Person other than the Company or a Restricted Subsidiary);
(2) all or substantially all the assets of any division or line of business
of the Company or any Restricted Subsidiary; or
(3) any other assets of the Company or any Restricted Subsidiary outside of
the ordinary course of business of the Company or such Restricted
Subsidiary (other than, in the case of clauses (1) and (2) above and this
clause (3):
(A) a disposition by a Restricted Subsidiary to the Company or by the
Company or a Restricted Subsidiary to a Wholly Owned Subsidiary;
(B) leases of excess space in the ordinary course of business;
(C) for purposes of the covenant described under "--Certain
Covenants--Limitation on Sales of Assets and Subsidiary Stock" only,
a disposition that constitutes a Restricted Payment permitted by the
covenant described under "--Certain Covenants--Limitation on
Restricted Payments" or a Permitted Investment; and
(D) disposition of assets with a fair market value of less than
$200,000).
"ATTRIBUTABLE DEBT" in respect of a Sale/ Leaseback Transaction means, as at
the time of determination, the present value (discounted at the interest rate
borne by the notes, compounded annually) of the total obligations of the lessee
for rental payments during the remaining term of the lease included in such
Sale/ Leaseback Transaction (including any period for which such lease has been
extended).
"AVERAGE LIFE" means, as of the date of determination, with respect to any
Indebtedness, the quotient obtained by dividing:
(1) the sum of the products of the numbers of years from the date of
determination to the dates of each successive scheduled principal payment
of, or redemption or similar payment with respect to, such Indebtedness,
multiplied by the amount of such payment by
(2) the sum of all such payments.
"BANKS" means any obligee under the Credit Agreement.
"BANK INDEBTEDNESS" means all Obligations pursuant to the Credit Agreement.
"BOARD OF DIRECTORS" means the Board of Directors of the Company or any
committee thereof duly authorized to act on behalf of such Board.
"BUSINESS DAY" means each day which is not a Legal Holiday.
"CAPITAL LEASE OBLIGATIONS" means an obligation that is required to be
classified and accounted for as a capital lease for financial reporting purposes
in accordance with GAAP, and the amount of Indebtedness represented by such
obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP; and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date upon which such lease may be terminated by the lessee without payment of a
penalty.
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"CAPITAL STOCK" of any Person means any and all shares, interests, rights to
purchase, warrants, options, participations or other equivalents of or interests
in (however designated) equity of such Person, including any Preferred Stock,
but excluding any debt securities convertible into such equity.
"CODE" means the Internal Revenue Code of 1986, as amended.
"CONSOLIDATED COVERAGE RATIO" as of any date of determination means the
ratio of (x) the aggregate amount of EBITDA for the period of the most recent
four consecutive fiscal quarters for which financial statements are then
available prior to the date of such determination to (y) Consolidated Interest
Expense for such four fiscal quarters; PROVIDED, HOWEVER, that:
(1) if the Company or any Restricted Subsidiary has Incurred any Indebtedness
since the beginning of such period that remains outstanding or if the
transaction giving rise to the need to calculate the Consolidated Coverage
Ratio is an Incurrence of Indebtedness, or both, EBITDA and Consolidated
Interest Expense for such period shall be calculated after giving effect on
a pro forma basis to such Indebtedness as if such Indebtedness had been
Incurred on the first day of such period and the discharge of any other
Indebtedness repaid, repurchased, defeased or otherwise discharged with the
proceeds of such new Indebtedness as if such discharge had occurred on the
first day of such period (except that, in making such computation, the
amount of Indebtedness under any revolving credit facility outstanding on
the date of such calculation shall be computed based on (A) the average
daily balance of such Indebtedness during such four fiscal quarters or such
shorter period when such facility was outstanding or (B) if such facility
was created after the end of such four fiscal quarters, the average balance
of such Indebtedness during the period from the date of creation of such
facility to the date of the computation),
(2) if the Company or any Restricted Subsidiary has repaid, repurchased,
defeased or otherwise discharged any Indebtedness since the beginning of
such period or if any Indebtedness is to be repaid, repurchased, defeased or
otherwise discharged (in each case other than Indebtedness Incurred under
any revolving credit facility unless such Indebtedness has been permanently
repaid and has not been replaced) on the date of the transaction giving rise
to the need to calculate the Consolidated Coverage Ratio, EBITDA and
Consolidated Interest Expense for such period shall be calculated on a pro
forma basis as if such discharge had occurred on the first day of such
period and as if the Company or such Restricted Subsidiary has not earned
the interest income actually earned during such period in respect of cash or
Temporary Cash Investments used to repay, repurchase, defease or otherwise
discharge such Indebtedness,
(3) if since the beginning of such period the Company or any Restricted
Subsidiary shall have made any Asset Disposition, the EBITDA for such period
shall be reduced by an amount equal to the EBITDA (if positive) directly
attributable to the assets which are the subject of such Asset Disposition
for such period, or increased by an amount equal to the EBITDA (if
negative), directly attributable thereto for such period and Consolidated
Interest Expense for such period shall be reduced by an amount equal to the
Consolidated Interest Expense directly attributable to any Indebtedness of
the Company or any Restricted Subsidiary repaid, repurchased, defeased or
otherwise discharged with respect to the Company and its continuing
Restricted Subsidiaries in connection with such Asset Disposition for such
period (or, if the Capital Stock of any Restricted Subsidiary is sold, the
Consolidated Interest Expense for such period directly attributable to the
Indebtedness of such Restricted Subsidiary to the extent the Company and its
continuing Restricted Subsidiaries are no longer liable for such
Indebtedness after such sale),
(4) if since the beginning of such period the Company or any Restricted
Subsidiary (by merger or otherwise) shall have made an Investment in any
Restricted Subsidiary (or any person which becomes a Restricted Subsidiary)
or an acquisition of assets, including any acquisition of assets occurring
in connection with a transaction requiring a calculation to be made
hereunder, which constitutes all or
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substantially all of a business or a product line, operating unit or similar
portion of a business, EBITDA and Consolidated Interest Expense for such
period shall be calculated after giving pro forma effect thereto (including
the Incurrence of any Indebtedness) as if such Investment or acquisition
occurred on the first day of such period and
(5) if since the beginning of such period any Person (that subsequently became a
Restricted Subsidiary or was merged with or into the Company or any
Restricted Subsidiary since the beginning of such period) shall have made
any Asset Disposition, any Investment or acquisition of assets that would
have required an adjustment pursuant to clause (3) or (4) above if made by
the Company or a Restricted Subsidiary during such period, EBITDA and
Consolidated Interest Expense for such period shall be calculated after
giving pro forma effect thereto as if such Asset Disposition, Investment or
acquisition occurred on the first day of such period.
For purposes of this definition, whenever pro forma effect is to be given
under clause (4) above, the amount of income or earnings relating thereto and
the amount of Consolidated Interest Expense associated with any Indebtedness
Incurred in connection therewith, the pro forma calculations shall be determined
in good faith by a responsible financial or accounting Officer of the Company,
and such pro forma calculations shall include (A)(x) the savings in cost of
revenues that would have resulted from using the Company's or its Restricted
Subsidiaries', as applicable, actual costs for comparable goods and services
during the comparable period and (y) other savings in cost of revenues or
eliminations of selling, general and administrative expenses as determined by a
responsible financial or accounting Officer of the Company in good faith in
connection with the Company's consideration of such transaction and consistent
with the Company's experience in similar transactions less (B) the incremental
expenses that would be included in cost of revenues and selling, general and
administrative expenses that would have been incurred by the Company or its
Restricted Subsidiaries, as applicable, in the operation or ownership of such
acquired assets during such period. If any Indebtedness bears a floating rate of
interest and is being given pro forma effect, the interest of such Indebtedness
shall be calculated as if the rate in effect on the date of determination had
been the applicable rate for the entire period (taking into account any Interest
Rate Agreement applicable to such Indebtedness if such Interest Rate Agreement
has a remaining term in excess of 12 months).
"CONSOLIDATED INTEREST EXPENSE" means, for any period, the total interest
expense of the Company and its consolidated Restricted Subsidiaries, plus, to
the extent not included in such total interest expense, and to the extent
incurred by the Company or its Restricted Subsidiaries, without duplication:
(1) interest expense attributable to capital leases and the interest expense
attributable to leases constituting part of a Sale/ Leaseback
Transaction;
(2) amortization of debt discount and debt issuance cost;
(3) capitalized interest;
(4) non-cash interest expenses;
(5) commissions, discounts and other fees and charges owed with respect to
letters of credit and bankers' acceptance financing;
(6) net costs associated with Hedging Obligations (including amortization of
fees);
(7) dividends paid in cash or Disqualified Stock in respect of all Preferred
Stock of Restricted Subsidiaries and Disqualified Stock of the Company
held by Persons other than the Company or a Wholly Owned Subsidiary;
(8) interest incurred in connection with Investments in discontinued
operations;
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(9) interest actually paid by the Company or a Restricted Subsidiary under a
Guarantee of Indebtedness of any other Person; and
(10) the cash contributions to any employee stock ownership plan or similar
trust to the extent such contributions are used by such plan or trust to
pay interest or fees to any Person (other than the Company) in
connection with Indebtedness Incurred by such plan or trust; and
LESS, to the extent included in such total interest expense, the
amortization during such period of debt issuance costs; PROVIDED, HOWEVER, that
the aggregate amount of amortization relating to any such debt issuance costs
deducted in calculating Consolidated Interest Expense shall not exceed 5% of the
aggregate amount of the financing giving rise to such debt issuance costs.
"CONSOLIDATED LEVERAGE RATIO" as of any date means the ratio of (x) the
aggregate amount of Indebtedness (net of cash and marketable securities) of the
Company and its Restricted Subsidiaries as of such date of determination to (y)
the aggregate amount of EBITDA for the period of the most recent four
consecutive fiscal quarters for which financial statements are then available
prior to such date of determination, in each case with such pro forma
adjustments to consolidated Indebtedness and EBITDA as are appropriate and
consistent with the pro forma provisions set forth in the definition of
Consolidated Coverage Ratio.
"CONSOLIDATED NET INCOME" means, for any period, the net income of the
Company and its consolidated Subsidiaries; PROVIDED, HOWEVER, that there shall
not be included in such Consolidated Net Income:
(1) any net income of any Person (other than the Company) if such Person is
not a Restricted Subsidiary, except that:
(A) subject to the exclusion contained in clause (4) below, the Company's
equity in the net income of any such Person for such period shall be
included in such Consolidated Net Income up to the aggregate amount
of cash actually distributed by such Person during such period to the
Company or a Restricted Subsidiary as a dividend or other
distribution (subject, in the case of a dividend or other
distribution paid to a Restricted Subsidiary, to the limitations
contained in clause (3) below); and
(B) the Company's equity in a net loss of any such Person for such period
shall be included in determining such Consolidated Net Income;
(2) any net income (or loss) of any Person acquired by the Company or a
Subsidiary in a pooling of interests transaction for any period prior to
the date of such acquisition;
(3) any net income of any Restricted Subsidiary if such Restricted
Subsidiary is subject to restrictions, directly or indirectly, on the
payment of dividends or the making of distributions by such Restricted
Subsidiary, directly or indirectly, to the Company, except that:
(A) subject to the exclusion contained in clause (4) below, the Company's
equity in the net income of any such Restricted Subsidiary for such
period shall be included in such Consolidated Net Income up to the
aggregate amount of cash that could have been distributed by such
Restricted Subsidiary during such period to the Company or another
Restricted Subsidiary as a dividend or other distribution (subject,
in the case of a dividend or other distribution paid to another
Restricted Subsidiary, to the limitation contained in this clause);
and
(B) the Company's equity in a net loss of any such Restricted Subsidiary
for such period shall be included in determining such Consolidated
Net Income;
(4) any gain or loss realized upon the sale or other disposition of any
assets of the Company, its consolidated Subsidiaries or any other Person
(including pursuant to any sale-and-leaseback
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arrangement) which is not sold or otherwise disposed of in the ordinary
course of business and any gain or loss realized upon the sale or other
disposition of any Capital Stock of any Person;
(5) extraordinary gains or losses; and
(6) the cumulative effect of a change in accounting principles.
Notwithstanding the foregoing, for the purposes of the covenant described
under "Certain Covenants--Limitation on Restricted Payments" only, there shall
be excluded from Consolidated Net Income any dividends, repayments of loans or
advances or other transfers of assets from Unrestricted Subsidiaries to the
Company or a Restricted Subsidiary to the extent such dividends, repayments or
transfers increase the amount of Restricted Payments permitted under such
covenant pursuant to clause (a)(3)(D) thereof.
"CREDIT AGREEMENT" means (1) prior to the Acquisition Closing Date, the
Credit Agreement dated March 18, 1998, by and among the Company and Vector Data
Systems, Inc., the lenders referred to therein and Mellon Bank, N.A., as agent,
as amended, and (2) on or after the Acquisition Closing Date, the Credit
Agreement to be entered into by and among, the Company, certain of its
Subsidiaries, the lenders referred to therein, and Credit Suisse First Boston,
as agent, together with the related documents thereto (including the term loans
and revolving loans thereunder, reimbursement obligations under any letters of
credit, any guarantees and security documents), as amended, extended, renewed,
replaced, restated, supplemented or otherwise modified (in whole or in part, and
without limitation as to amount, terms, conditions, covenants and other
provisions) from time to time, and any agreement (and related document)
governing Indebtedness incurred to Refinance, in whole or in part, the
borrowings and commitments then outstanding or permitted to be outstanding under
such Credit Agreement or a successor Credit Agreement, whether by the same or
any other lender or group of lenders.
"CURRENCY AGREEMENT" means in respect of a Person any foreign exchange
contract, currency swap agreement or other similar agreement designed to protect
such Person against fluctuations in currency values.
"DEFAULT" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"DESIGNATED SENIOR INDEBTEDNESS" means:
(1) the Bank Indebtedness; and
(2) any other Senior Indebtedness of the Company which, at the date of
determination, has an aggregate principal amount outstanding of, or under
which, at the date of determination, the holders thereof are committed to
lend up to, at least $10 million and is specifically designated by the
Company in any instrument evidencing or governing such Senior
Indebtedness as "Designated Senior Indebtedness" for purposes of the
indenture.
"DISQUALIFIED STOCK" means, with respect to any Person, any Capital Stock
which by its terms (or by the terms of any security into which it is convertible
or for which it is exchangeable at the option of the holder) or upon the
happening of any event:
(1) matures or is mandatorily redeemable pursuant to a sinking fund
obligation or otherwise;
(2) is convertible or exchangeable at the option of the holder for
Indebtedness or Disqualified Stock; or
(3) is mandatorily redeemable or must be purchased upon the occurrence of
certain events or otherwise, in whole or in part;
in each case on or prior to the first anniversary of the Stated Maturity of the
notes; PROVIDED, HOWEVER, that any Capital Stock that would not constitute
Disqualified Stock but for provisions thereof giving holders
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thereof the right to require such Person to purchase or redeem such Capital
Stock upon the occurrence of an "asset sale" or "change of control" shall not
constitute Disqualified Stock if:
(1) the "asset sale" or "change of control" provisions applicable to such
Capital Stock are not more favorable to the holders of such Capital Stock
than the terms applicable to the notes and described under "--Certain
Covenants--Limitation on Sales of Assets and Subsidiary Stock" and
"--Certain Covenants--Change of Control"; and
(2) any such requirement only becomes operative after compliance with such
terms applicable to the notes, including the purchase of any notes
tendered pursuant thereto.
"EBITDA" for any period means the sum of Consolidated Net Income, plus the
following to the extent deducted in calculating such Consolidated Net Income:
(1) all income tax expense of the Company and its consolidated Restricted
Subsidiaries;
(2) Consolidated Interest Expense;
(3) depreciation and amortization expense of the Company and its
consolidated Restricted Subsidiaries (excluding amortization expense
attributable to a prepaid cash item that was paid in a prior period); and
(4) all other non-cash charges of the Company and its consolidated
Restricted Subsidiaries (excluding any such non-cash charge to the extent
that it represents an accrual of or reserve for cash expenditures in any
future period);
in each case for such period. Notwithstanding the foregoing, the provision for
taxes based on the income or profits of, and the depreciation and amortization
and non- cash charges of, a Restricted Subsidiary shall be added to Consolidated
Net Income to compute EBITDA only to the extent (and in the same proportion)
that the net income of such Restricted Subsidiary was included in calculating
Consolidated Net Income and only if a corresponding amount would be permitted at
the date of determination to be dividended to the Company by such Restricted
Subsidiary without prior approval (that has not been obtained), pursuant to the
terms of its charter and all agreements, instruments, judgments, decrees,
orders, statutes, rules and governmental regulations applicable to such
Restricted Subsidiary or its stockholders.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"EXCHANGE NOTES" means the debt securities of the Company issued pursuant to
the indenture in exchange for, and in an aggregate principal amount at maturity
equal to, the notes, in compliance with the terms of the Registration Rights
Agreement.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Issue Date, including those set forth in:
(1) the opinions and pronouncements of the Accounting Principles Board of
the American Institute of Certified Public Accountants; and
(2) statements and pronouncements of the Financial Accounting Standards
Board.
"GUARANTEE" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any Person and any
obligation, direct or indirect, contingent or otherwise, of such Person:
(1) to purchase or pay (or advance or supply funds for the purchase or
payment of) such Indebtedness or other obligation of such Person (whether
arising by virtue of partnership arrangements, or by agreements to
keep-well, to purchase assets, goods, securities or services, to
take-or-pay or to maintain financial statement conditions or otherwise);
or
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(2) entered into for the purpose of assuring in any other manner the obligee
of such Indebtedness of the payment thereof;
PROVIDED, HOWEVER, that the term "Guarantee" shall not include endorsements for
collection or deposit in the ordinary course of business. The term "Guarantee"
used as a verb has a corresponding meaning. The term "Guarantor" shall mean any
Person Guaranteeing any obligation. The Ogden Note will not be deemed to be
Guaranteed unless Anteon executes a guaranty thereof.
"GUARANTY AGREEMENT" means a supplemental indenture, in a form satisfactory
to the Trustee, pursuant to which a Subsidiary Guarantor guarantees the
Company's obligations with respect to the notes on the terms provided for in the
Indenture.
"HEDGING OBLIGATIONS" of any Person means the obligations of such Person
pursuant to any Interest Rate Agreement or Currency Agreement.
"HOLDER" or "NOTEHOLDER" means the Person in whose name a note is registered
on the Registrar's books.
"INCUR" means issue, assume, Guarantee, incur or otherwise become liable
for; PROVIDED, HOWEVER, that any Indebtedness or Capital Stock of a Person
existing at the time such Person becomes a Subsidiary (whether by merger,
consolidation, acquisition or otherwise) shall be deemed to be Incurred by such
Subsidiary at the time it becomes a Subsidiary. The term "Incurrence" when used
as a noun shall have a correlative meaning. The accretion of principal of a
non-interest bearing or other discount security shall not be deemed the
Incurrence of Indebtedness.
"INDEBTEDNESS" means, with respect to any Person on any date of
determination (without duplication):
(1) the principal in respect of (A) indebtedness of such Person for money
borrowed and (B) indebtedness evidenced by notes, debentures, bonds or
other similar instruments for the payment of which such Person is
responsible or liable, including, in each case, any premium on such
indebtedness to the extent such premium has become due and payable;
(2) all Capital Lease Obligations of such Person and all Attributable Debt
in respect of Sale/ Leaseback Transactions entered into by such Person;
(3) all obligations of such Person issued or assumed as the deferred
purchase price of property, all conditional sale obligations of such
Person and all obligations of such Person under any title retention
agreement (but excluding trade accounts payable arising in the ordinary
course of business);
(4) all obligations of such Person for the reimbursement of any obligor on
any letter of credit, banker's acceptance or similar credit transaction
(other than obligations with respect to letters of credit securing
obligations (other than obligations described in clauses (1) through (3)
above) entered into in the ordinary course of business of such Person to
the extent such letters of credit are not drawn upon or, if and to the
extent drawn upon, such drawing is reimbursed no later than the tenth
Business Day following payment on the letter of credit);
(5) the amount of all obligations of such Person with respect to the
redemption, repayment or other repurchase of any Disqualified Stock or,
with respect to any Subsidiary of such Person, the liquidation preference
with respect to any Preferred Stock (but excluding, in each case, any
accrued dividends);
(6) all obligations of the type referred to in clauses (1) through (5) of
other Persons and all dividends of other Persons for the payment of
which, in either case, such Person is responsible or liable, directly or
indirectly, as obligor, guarantor or otherwise, including by means of any
Guarantee;
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(7) all obligations of the type referred to in clauses (1) through (6) of
other Persons secured by any Lien on any property or asset of such Person
(whether or not such obligation is assumed by such Person), the amount of
such obligation being deemed to be the lesser of the value of such
property or assets or the amount of the obligation so secured; and
(8) to the extent not otherwise included in this definition, Hedging
Obligations of such Person.
The amount of Indebtedness of any Person at any date shall be the outstanding
balance at such date of all unconditional obligations as described above and the
maximum liability, upon the occurrence of the contingency giving rise to the
obligation, of any contingent obligations at such date; PROVIDED, HOWEVER, that
the amount outstanding at any time of any Indebtedness issued with original
issue discount shall be deemed to be the face amount of such Indebtedness less
the remaining unamortized portion of the original issue discount of such
Indebtedness at such time as determined in accordance with GAAP. Notwithstanding
the foregoing, Indebtedness shall not include any liability for Federal, state,
local or other taxes owed or owing to any governmental entity.
"INTEREST RATE AGREEMENT" means in respect of a Person any interest rate
swap agreement, interest rate cap agreement or other financial agreement or
arrangement designed to protect such Person against fluctuations in interest
rates.
"INVESTMENT" in any Person means any direct or indirect advance, loan (other
than advances to customers in the ordinary course of business that are recorded
as accounts receivable on the balance sheet of the lender) or other extensions
of credit (including by way of Guarantee or similar arrangement) or capital
contribution to (by means of any transfer of cash or other property to others or
any payment for property or services for the account or use of others), or any
purchase or acquisition of Capital Stock, Indebtedness or other similar
instruments issued by such Person.
For purposes of the definition of "Unrestricted Subsidiary", the definition
of "Restricted Payment" and the covenant described under "--Certain
Covenants--Limitation on Restricted Payments":
(1) "Investment" shall include the portion (proportionate to the Company's
equity interest in such Subsidiary) of the fair market value of the net
assets of any Subsidiary of the Company at the time that such Subsidiary
is designated an Unrestricted Subsidiary; PROVIDED, HOWEVER, that upon a
redesignation of such Subsidiary as a Restricted Subsidiary, the Company
shall be deemed to continue to have a permanent "Investment" in an
Unrestricted Subsidiary equal to an amount (if positive) equal to (A) the
Company's "Investment" in such Subsidiary at the time of such
redesignation less (B) the portion (proportionate to the Company's equity
interest in such Subsidiary) of the fair market value of the net assets
of such Subsidiary at the time of such redesignation; and
(2) any property transferred to or from an Unrestricted Subsidiary shall be
valued at its fair market value at the time of such transfer, in each
case as determined in good faith by the Board of Directors.
"ISSUE DATE" means the date on which the notes are originally issued.
"LIEN" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"MERGER AGREEMENT" means the Agreement and Plan of Merger, dated as of March
7, 1999, by and among the Company, Buffalo Acquisition Corporation and Analysis
& Technology, Inc.
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"NET AVAILABLE CASH" from an Asset Disposition means cash payments received
therefrom (including any cash payments received by way of deferred payment of
principal pursuant to a note or installment receivable or otherwise and proceeds
from the sale or other disposition of any securities received as consideration,
but only as and when received, but excluding any other consideration received in
the form of assumption by the acquiring Person of Indebtedness or other
obligations relating to such properties or assets or received in any other
noncash form), in each case net of:
(1) all legal, title, recording or transfer tax, accounting, consulting or
similar transaction expenses, brokerage or other fees, commissions and
expenses incurred, and all Federal, state, provincial, foreign and local
taxes required to be accrued as a liability under GAAP, as a consequence
of such Asset Disposition;
(2) all payments made on any Indebtedness which is secured by any assets
subject to such Asset Disposition, in accordance with the terms of any
Lien upon or other security agreement of any kind with respect to such
assets, or which must by its terms, or in order to obtain a necessary
consent to such Asset Disposition, or by applicable law, be repaid out of
the proceeds from such Asset Disposition;
(3) all distributions and other payments required to be made to minority
interest holders in Restricted Subsidiaries as a result of such Asset
Disposition; and
(4) the deduction of appropriate amounts provided by the seller as a
reserve, in accordance with GAAP, against any liabilities associated with
the property or other assets disposed in such Asset Disposition and
retained by the Company or any Restricted Subsidiary after such Asset
Disposition.
"NET CASH PROCEEDS", with respect to any issuance or sale of Capital Stock,
means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, printing costs,
filing and listing fees, discounts or commissions and brokerage, consultant and
other fees or expenses actually incurred in connection with such issuance or
sale and net of taxes paid or payable as a result thereof.
"OBLIGATIONS" means with respect to any Indebtedness all obligations for
principal, premium, interest, penalties, fees, indemnifications, reimbursements,
and other amounts payable pursuant to the documentation governing such
Indebtedness.
"OGDEN NOTE" means the Amended and Restated, Non Negotiable, Subordinated 9%
Promissory Note due April 22, 2004 of Parent in favor of Ogden Technology
Services Corporation, dated as of October 1, 1998, in the principal amount of
$3,650,000.
"PARENT" means Azimuth Technologies, Inc., a Delaware corporation, and any
successor corporation.
"PERMITTED HOLDERS" means (i) Caxton Corporation, Frederick J. Iseman,
Steven Lefkowitz, Joseph A. Kampf, Robert A. Ferris and any other Person who is
a controlled Affiliate of any of the foregoing and any member of senior
management of the Company on the Issue Date and (ii) any Related Party of any of
the foregoing.
"PERMITTED INVESTMENT" means an Investment by the Company or any Restricted
Subsidiary in:
(1) the Company, a Restricted Subsidiary or a Person that will, upon the
making of such Investment, become a Restricted Subsidiary; PROVIDED,
HOWEVER, that the primary business of such Restricted Subsidiary is a
Related Business;
(2) another Person if as a result of such Investment such other Person is
merged or consolidated with or into, or transfers or conveys all or
substantially all its assets to, the Company or a Restricted Subsidiary;
PROVIDED, HOWEVER, that such Person's primary business is a Related
Business;
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(3) Temporary Cash Investments;
(4) receivables owing to the Company or any Restricted Subsidiary if created
or acquired in the ordinary course of business and payable or
dischargeable in accordance with customary trade terms; PROVIDED,
HOWEVER, that such trade terms may include such concessionary trade terms
as the Company or any such Restricted Subsidiary deems reasonable under
the circumstances;
(5) payroll, travel and similar advances to cover matters that are expected
at the time of such advances ultimately to be treated as expenses for
accounting purposes and that are made in the ordinary course of business;
(6) loans or advances to employees made in the ordinary course of business
consistent with past practices of the Company or such Restricted
Subsidiary;
(7) stock, obligations or securities received in settlement of debts created
in the ordinary course of business and owing to the Company or any
Restricted Subsidiary or in satisfaction of judgments;
(8) any Person to the extent such Investment represents the non-cash portion
of the consideration received for an Asset Disposition as permitted
pursuant to the covenant described under "--Certain Covenants--Limitation
on Sales of Assets and Subsidiary Stock"; and
(9) additional Investments made after the Issue Date in an aggregate amount
which, together with all other Investments made pursuant to this clause
(9) that are outstanding, do not exceed $10 million.
"PERSON" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust, unincorporated
organization, government or any agency or political subdivision thereof or any
other entity.
"PREFERRED STOCK", as applied to the Capital Stock of any Person, means
Capital Stock of any class or classes (however designated) which is preferred as
to the payment of dividends or distributions, or as to the distribution of
assets upon any voluntary or involuntary liquidation or dissolution of such
Person, over shares of Capital Stock of any other class of such Person.
"PRINCIPAL" of a note means the principal of the note plus the premium, if
any, payable on the note which is due or overdue or is to become due at the
relevant time.
"PUBLIC EQUITY OFFERING" means an underwritten primary public offering of
common stock of Parent or the Company pursuant to an effective registration
statement under the Securities Act.
"PUBLIC MARKET" means any time after (x) a Public Equity Offering has been
consummated and (y) at least 10% of the total issued and outstanding common
stock of Parent or the Company, as applicable, has been distributed by means of
an effective registration statement under the Securities Act or sales pursuant
to Rule 144 under the Securities Act.
"RATING AGENCY" means Standard & Poor's Ratings Group, Inc. and Moody's
Investors Service, Inc. or if Standard & Poor's Ratings Group, Inc. or Moody's
Investors Service, Inc. or both shall not make a rating on the notes publicly
available, a nationally recognized statistical rating agency or agencies, as the
case may be, selected by the Company (as certified by a resolution of the Board
of Directors) which shall be substituted for Standard & Poor's Ratings Group,
Inc. or Moody's Investors Service, Inc. or both, as the case may be.
"REFINANCE" means, in respect of any Indebtedness, to refinance, extend,
renew, refund, repay, replace, prepay, redeem, defease or retire, or to issue
other Indebtedness in exchange or replacement for, such indebtedness.
"Refinanced" and "Refinancing" shall have correlative meanings.
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"REFINANCING INDEBTEDNESS" means Indebtedness that Refinances any
Indebtedness of the Company or any Restricted Subsidiary existing on the Issue
Date or Incurred in compliance with the Indenture, including Indebtedness that
Refinances Refinancing Indebtedness; PROVIDED, HOWEVER, that:
(1) such Refinancing Indebtedness has a Stated Maturity no earlier than the
Stated Maturity of the Indebtedness being Refinanced;
(2) such Refinancing Indebtedness has an Average Life at the time such
Refinancing Indebtedness is Incurred that is equal to or greater than the
Average Life of the Indebtedness being Refinanced; and
(3) such Refinancing Indebtedness has an aggregate principal amount (or if
Incurred with original issue discount, an aggregate issue price) that is
equal to or less than the aggregate principal amount (or if Incurred with
original issue discount, the aggregate accreted value) then outstanding
or committed (plus fees and expenses, including any premium and
defeasance costs) under the Indebtedness being Refinanced;
PROVIDED FURTHER, HOWEVER, that Refinancing Indebtedness shall not include
(A) Indebtedness of a Subsidiary that Refinances Indebtedness of the Company or
(B) Indebtedness of the Company or a Restricted Subsidiary that Refinances
Indebtedness of an Unrestricted Subsidiary.
"REGISTRATION RIGHTS AGREEMENT" means the Registration Rights Agreement
dated May 6, 1999, among the Company, Credit Suisse First Boston Corporation,
Deutsche Bank Securities Inc. and Legg Mason Wood Walker, Incorporated.
"RELATED BUSINESS" means the business of the Company and its Restricted
Subsidiaries on the Issue Date or the Acquisition Closing Date and any business
that in the good faith judgment of the Board of Directors is related, ancillary
or complementary thereto.
"RELATED PARTY" means (1) any controlling stockholder, controlling member,
general partner, majority owned Subsidiary, or spouse or immediate family member
(in the case of an individual) of any Permitted Holder or (2) any trust,
corporation, partnership or other entity, the beneficiaries, stockholders,
partners, owners or Persons holding a controlling interest of which consist
solely of one or more Permitted Holders and/or such other Persons referred to in
the immediately preceding clause (1).
"REPRESENTATIVE" means any trustee, agent or representative (if any) for an
issue of Senior Indebtedness of the Company.
"RESTRICTED PAYMENT" with respect to any Person means:
(1) the declaration or payment of any dividends or any other distributions
of any sort in respect of its Capital Stock (including any payment in
connection with any merger or consolidation involving such Person) or
similar payment to the direct or indirect holders of its Capital Stock
(other than dividends or distributions payable solely in its Capital
Stock (other than Disqualified Stock) and dividends or distributions
payable solely to the Company or a Restricted Subsidiary, and other than
pro rata dividends or other distributions made by a Subsidiary that is
not a Wholly Owned Subsidiary to minority stockholders (or owners of an
equivalent interest in the case of a Subsidiary that is an entity other
than a corporation));
(2) the purchase, redemption or other acquisition or retirement for value of
any Capital Stock of the Company held by any Person or of any Capital
Stock of a Restricted Subsidiary held by any Affiliate of the Company
(other than a Restricted Subsidiary), including the exercise of any
option to exchange any Capital Stock (other than into Capital Stock of
the Company that is not Disqualified Stock);
(3) the purchase, repurchase, redemption, defeasance or other acquisition or
retirement for value, prior to scheduled maturity, scheduled repayment or
scheduled sinking fund payment of any
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Subordinated Obligations (other than the purchase, repurchase or other
acquisition of Subordinated Obligations purchased in anticipation of
satisfying a sinking fund obligation, principal installment or final
maturity, in each case due within one year of the date of such purchase,
repurchase or other acquisition); or
(4) the making of any Investment in any Person (other than a Permitted
Investment).
"RESTRICTED SUBSIDIARY" means any Subsidiary of the Company that is not an
Unrestricted Subsidiary.
"REVOLVING CREDIT FACILITIES" means any revolving credit facility contained
in the Credit Agreement and any other facility or financing arrangement that
Refinances or replaces, in whole or in part, any such revolving credit facility.
"SALE/LEASEBACK TRANSACTION" means an arrangement relating to property now
owned or hereafter acquired whereby the Company or a Restricted Subsidiary
transfers such property to a Person and the Company or a Restricted Subsidiary
leases it from such Person.
"SEC" means the Securities and Exchange Commission.
"SECURED INDEBTEDNESS" means any Indebtedness of the Company secured by a
Lien.
"SENIOR INDEBTEDNESS" means, with respect to any Person on any date of
determination:
(1) Indebtedness of such Person, whether outstanding on the Issue Date or
thereafter Incurred (including the Indebtedness of such Person under the
Credit Agreement or any Guarantee thereof); and
(2) accrued and unpaid interest (including interest accruing on or after the
filing of any petition in bankruptcy or for reorganization relating to
such Person whether or not post-filing interest is allowed in such
proceeding) in respect of (A) indebtedness of such Person for money
borrowed and (B) indebtedness evidenced by notes, debentures, bonds or
other similar instruments for the payment of which such Person is
responsible or liable unless, in the case of clauses (1) and (2), in the
instrument creating or evidencing the same or pursuant to which the same
is outstanding, it is provided that such obligations are subordinate in
right of payment to the notes;
PROVIDED, HOWEVER, that Senior Indebtedness shall not include:
(1) any obligation of such Person to any Subsidiary;
(2) any liability for Federal, state, local or other taxes owed or owing by
such Person;
(3) any accounts payable or other liability to trade creditors arising in
the ordinary course of business (including guarantees thereof or
instruments evidencing such liabilities);
(4) any Indebtedness of such Person (and any accrued and unpaid interest in
respect thereof) which is subordinate or junior in any respect to any
other Indebtedness or other obligation of such Person;
(5) the Ogden Note or the Techmatics Notes; or
(6) that portion of any Indebtedness which at the time of Incurrence is
Incurred in violation of the indenture.
"SENIOR SUBORDINATED INDEBTEDNESS" means (1) with respect to the Company,
the notes and any other Indebtedness of the Company that specifically provides
that such Indebtedness is to rank PARI PASSU with the notes in right of payment
and is not subordinated by its terms in right of payment to any Indebtedness or
other obligation of the Company which is not Senior Indebtedness of the Company
and (2) with respect to each Subsidiary Guarantor, its Subsidiary Guaranty of
the notes and any other Indebtedness of such Subsidiary Guarantor that
specifically provides that such Indebtedness is to rank PARI PASSU with such
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Subsidiary Guaranty in right of payment and is not subordinated by its terms in
right of payment to any Indebtedness or other obligation of such Subsidiary
Guarantor which is not Senior Indebtedness of such Subsidiary Guarantor.
"SIGNIFICANT SUBSIDIARY" means any Restricted Subsidiary that would be a
"Significant Subsidiary" of the Company within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC.
"STATED MATURITY" means, with respect to any security, the date specified in
such security as the fixed date on which the final payment of principal of such
security is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
security at the option of the holder thereof upon the happening of any
contingency unless such contingency has occurred).
"SUBORDINATED OBLIGATION" means any Indebtedness of the Company or any
Subsidiary Guarantor (whether outstanding on the Issue Date or thereafter
Incurred) which is expressly subordinate or junior in right of payment to the
notes or, in the case of a Subsidiary Guarantor, its Subsidiary Guaranty, in
each case pursuant to a written agreement to that effect.
"SUBSIDIARY" means, with respect to any Person, any corporation,
association, company, partnership or other business entity of which more than
50% of the total voting power of shares of Capital Stock or other interests
(including partnership interests) entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by:
(1) such Person;
(2) such Person and one or more Subsidiaries of such Person; or
(3) one or more Subsidiaries of such Person.
"SUBSIDIARY GUARANTOR" means each Subsidiary of the Company that Guarantees
the Company's obligations with respect to the notes pursuant to the terms of the
indenture.
"SUBSIDIARY GUARANTY" means a Guarantee by a Subsidiary Guarantor of the
Company's obligations with respect to the notes.
"TEMPORARY CASH INVESTMENTS" means any of the following:
(1) any investment in direct obligations of the United States of America or
any agency thereof or obligations guaranteed by the United States of
America or any agency thereof;
(2) investments in time deposit accounts, certificates of deposit and money
market deposits maturing within 180 days of the date of acquisition
thereof issued by a bank or trust company which is organized under the
laws of the United States of America, any state thereof or any foreign
country recognized by the United States, and which bank or trust company
has capital, surplus and undivided profits aggregating in excess of
$50,000,000 (or the foreign currency equivalent thereof) and has
outstanding debt which is rated "A" (or such similar equivalent rating)
or higher by at least one nationally recognized statistical rating
organization (as defined in Rule 436 under the Securities Act) or any
money-market fund sponsored by a registered broker dealer or mutual fund
distributor;
(3) repurchase obligations with a term of not more than 30 days for
underlying securities of the types described in clause (1) above entered
into with a bank meeting the qualifications described in clause (2)
above;
(4) investments in commercial paper, maturing not more than 90 days after
the date of acquisition, issued by a corporation (other than an Affiliate
of the Company) organized and in existence under the laws of the United
States of America or any foreign country recognized by the United
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States of America with a rating at the time as of which any investment
therein is made of "P-1" (or higher) according to Moody's Investors
Service, Inc. or "A-1" (or higher) according to Standard and Poor's
Ratings Group; and
(5) investments in securities with maturities of six months or less from the
date of acquisition issued or fully guaranteed by any state, commonwealth
or territory of the United States of America, or by any political
subdivision or taxing authority thereof, and rated at least "A" by
Standard & Poor's Ratings Group or "A" by Moody's Investors Service, Inc.
"TERM LOAN FACILITIES" means the term loan facilities contained in the
Credit Agreement and any other facility or financing arrangement that Refinances
in whole or in part any such term loan facility.
"UNRESTRICTED SUBSIDIARY" means:
(1) any Subsidiary of the Company that at the time of determination shall be
designated an Unrestricted Subsidiary by the Board of Directors in the
manner provided below; and
(2) any Subsidiary of an Unrestricted Subsidiary.
The Board of Directors may designate any Subsidiary of the Company
(including any newly acquired or newly formed Subsidiary) to be an Unrestricted
Subsidiary unless such Subsidiary or any of its Subsidiaries owns any Capital
Stock or Indebtedness of, or holds any Lien on any property of, the Company or
any other Subsidiary of the Company that is not a Subsidiary of the Subsidiary
to be so designated or another Unrestricted Subsidiary; PROVIDED, HOWEVER, that
either (A) the Subsidiary to be so designated has total assets of $1,000 or less
or (B) if such Subsidiary has assets greater than $1,000, such designation would
be permitted under the covenant described under "--Certain Covenants--Limitation
on Restricted Payments".
The Board of Directors may designate any Unrestricted Subsidiary to be a
Restricted Subsidiary; PROVIDED, HOWEVER, that immediately after giving effect
to such designation (A) the Company could Incur $1.00 of additional Indebtedness
under paragraph (a) of the covenant described under "--Certain
Covenants--Limitation on Indebtedness" and (B) no Default shall have occurred
and be continuing. Any such designation by the Board of Directors shall be
evidenced to the Trustee by promptly filing with the Trustee a copy of the
resolution of the Board of Directors giving effect to such designation and an
Officers' Certificate certifying that such designation complied with the
foregoing provisions.
"U.S. GOVERNMENT OBLIGATIONS" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable at the issuer's option.
"VOTING STOCK" of a Person means all classes of Capital Stock or other
interests (including partnership interests) of such Person then outstanding and
normally entitled (without regard to the occurrence of any contingency) to vote
in the election of directors, managers or trustees (or persons performing
similar functions) thereof.
"WHOLLY OWNED SUBSIDIARY" means a Restricted Subsidiary all the Capital
Stock of which (other than directors' qualifying shares) is owned by the Company
or one or more Wholly Owned Subsidiaries.
BOOK-ENTRY, DELIVERY AND FORM
Except as described below, we will initially issue the exchange notes in the
form of one or more registered exchange notes in global form without coupons. We
will deposit each global note on the date of the closing of this exchange offer
with, or on behalf of, The Depository Trust Company in New York, New York, and
register the exchange notes in the name of The Depository Trust Company or its
nominee, or will leave these notes in the custody of the trustee.
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THE DEPOSITORY TRUST COMPANY'S PROCEDURES
For your convenience, we are providing you with a description of the
operations and procedures of The Depository Trust Company. The operations and
procedures of The Depository Trust Company are solely within the control of its
settlement system however and may change from time to time. We are not
responsible for these operations and procedures and urge you to contact The
Depository Trust Company or its participants directly to discuss these matters.
The Depository Trust Company has advised us that it is a limited-purpose
trust company created to hold securities for its participating organizations and
to facilitate the clearance and settlement of transactions in those securities
between its participants through electronic book entry changes in the accounts
of these participants. These direct participants include securities brokers and
dealers, banks, trust companies, clearing corporations and other organizations.
Access to The Depository Trust Company's system is also indirectly available to
other entities that clear through or maintain a direct or indirect, custodial
relationship with a direct participant. The Depository Trust Company may hold
securities beneficially owned by other persons only through its participants and
the ownership interests and transfers of ownership interests of these other
persons will be recorded only on the records of the participants and not on the
records of The Depository Trust Company.
The Depository Trust Company has also advised us that, in accordance with
its procedures, (1) upon deposit of the global notes, it will credit the
accounts of the direct participants with an interest in the global notes, and
(2) it will maintain records of the ownership interests of these direct
participants in the global notes and the transfer of ownership interests by and
between direct participants. The Depository Trust Company will not maintain
records of the ownership interests of, or the transfer of ownership interests by
and between, indirect participants or other owners of beneficial interests in
the global notes. Both direct and indirect participants must maintain their own
records of ownership interests of, and the transfer of ownership interests by
and between, indirect participants and other owners of beneficial interests in
the global notes.
Investors in the global notes may hold their interests in the notes directly
through The Depository Trust Company if they are direct participants in The
Depository Trust Company or indirectly through organizations that are direct
participants in The Depository Trust Company. All interests in a global note may
be subject to the procedures and requirements of The Depository Trust Company.
The laws of some states require that some persons take physical delivery in
definitive certificated form of the securities that they own. This may limit or
curtail the ability to transfer beneficial interests in a global note to these
persons. Because The Depository Trust Company can act only on behalf of direct
participants, which in turn act on behalf of indirect participants and others,
the ability of a person having a beneficial interest in a global note to pledge
its interest to persons or entities that are not direct participants in The
Depository Trust Company or to otherwise take actions in respect of its
interest, may be affected by the lack of physical certificates evidencing the
interests.
Except as described below, owners of interests in the global notes will not
have notes registered in their names, will not receive physical delivery of
notes in certificated form and will not be considered the registered owners or
holders of these notes under the indenture for any purpose.
Payments with respect to the principal of and interest on any notes
represented by a global note registered in the name of The Depository Trust
Company or its nominee on the applicable record date will be payable by the
trustee to or at the direction of The Depository Trust Company or its nominee in
its capacity as the registered holder of the global note representing these
notes under the indenture. Under the terms of the indenture, we and the trustee
will treat the person in whose names the notes are registered, including notes
represented by global notes, as the owners of the notes for the purpose of
receiving payments and for any and all other purposes whatsoever. Payments in
respect of the principal and interest on global notes registered in the name of
The Depository Trust Company or its nominee will be
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payable by the trustee to The Depository Trust Company or its nominee as the
registered holder under the indenture. Consequently, none of Anteon, the trustee
or any of our agents, or the trustee's agents has or will have any
responsibility or liability for (1) any aspect of The Depository Trust Company's
records or any direct or indirect participant's records relating to, or payments
made on account of, beneficial ownership interests in the global notes or for
maintaining, supervising or reviewing any of The Depository Trust Company's
records or any direct or indirect participant's records relating to the
beneficial ownership interests in any global note or (2) any other matter
relating to the actions and practices of The Depository Trust Company or any of
its direct or indirect participants.
The Depository Trust Company has advised us that its current practice, upon
receipt of any payment in respect of securities such as the notes, including
principal and interest, is to credit the accounts of the relevant participants
with the payment on the payment date, in amounts proportionate to their
respective holdings in the principal amount of beneficial interest in the
security as shown on its records, unless it has reasons to believe that it will
not receive payment on the payment date. Payments by the direct and indirect
participants to the beneficial owners of interests in the global note will be
governed by standing instructions and customary practice and will be the
responsibility of the direct or indirect participants and will not be the
responsibility of The Depository Trust Company, the trustee or us.
Neither Anteon nor the trustee will be liable for any delay by The
Depository Trust Company or any direct or indirect participant in identifying
the beneficial owners of the notes and Anteon and the trustee may conclusively
rely on, and will be protected in relying on, instructions from The Depository
Trust Company for all purposes, including with respect to the registration and
delivery, and the respective principal amounts, of the notes.
Transfers between participants in The Depository Trust Company will be
effected in accordance with The Depository Trust Company's procedures, and will
be settled in same day funds.
The Depository Trust Company has advised us that it will take any action
permitted to be taken by a holder of notes only at the direction of one or more
participants to whose account The Depository Trust Company has credited the
interests in the global notes and only in respect of the portion of the
aggregate principal amount of the notes as to which the participant or
participants has or have given that direction. However, if there is an event of
default with respect to the notes, The Depository Trust Company reserves the
right to exchange the global notes for legended notes in certificated form and
to distribute them to its participants.
Although The Depository Trust Company has agreed to these procedures to
facilitate transfers of interests in the global notes among participants in The
Depository Trust Company, it is under no obligation to perform or to continue to
perform these procedures and may discontinue them at any time. None of Anteon,
the trustee or any of our or the trustee's respective agents will have any
responsibility for the performance by The Depository Trust Company and its
direct or indirect participants of their respective obligations under the rules
and procedures governing their operations.
EXCHANGE OF BOOK-ENTRY NOTES FOR CERTIFICATED NOTES
A global note will be exchangeable for definitive notes in registered
certificated form if:
(1) The Depository Trust Company notifies us that it is unwilling or unable
to continue as depository for the global notes and we fail to appoint a
successor depository within 90 days,
(2) The Depository Trust Company ceases to be a clearing agency registered
under the Exchange Act,
(3) we elect to cause the issuance of the certificated notes upon a notice
of the trustee,
(4) a default or event of default under the indenture for the notes has
occurred and is continuing, or
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(5) a request to that effect is made but only upon prior written notice
given to the trustee by or on behalf of The Depository Trust Company in
accordance with the indenture.
In all cases, certificated notes delivered in exchange for any global note
or beneficial interests in a global note will be registered in the name, and
issued in any approved denominations, requested by or on behalf of The
Depository Trust Company, in accordance with its customary procedures.
SAME DAY SETTLEMENT
We expect that the interests in the global notes will be eligible to trade
in The Depository Trust Company's Same-Day Funds Settlement System. As a result,
secondary market trading activity in these interests will settle in immediately
available funds, subject in all cases to the rules and procedures of The
Depository Trust Company and its participants. We expect that secondary trading
in any certificated notes will also be settled in immediately available funds.
PAYMENT
The indenture requires that payments in respect of the notes represented by
global notes, including principal and interest, be made by wire transfer of
immediately available funds to the accounts specified by the holder of the
global notes. With respect to notes in certificated form, we will make all
payments of principal and interest on the notes at our office or agency
maintained for that purpose within the city and state of New York. This office
will initially be the office of the paying agent maintained for that purpose. At
our option however, we may make these installments of interest by (1) check
mailed to the holders of notes at their respective addresses provided in the
register of holder of notes or (2) transfer to an account located in the United
States maintained by the payee.
YEAR 2000
The Depository Trust Company has advised us that its management is aware
that some computer applications, systems, and the like for processing data that
are dependent upon calendar dates, including dates before, on and after January
1, 2000, may encounter year 2000 problems. The Depository Trust Company has
informed its participants and other members of the financial community that it
has developed and is implementing a program so that its systems, as the same
relate to the timely payment of distributions, including principal and interest
payments, to security holders, book-entry deliveries and settlement of trades
within The Depository Trust Company, continue to function appropriately. This
program includes a technical assessment and a remediation plan, each of which is
complete. Additionally, The Depository Trust Company's plan includes a testing
phase, which is expected to be completed within the appropriate time frame.
However, The Depository Trust Company's ability to perform its services properly
is also dependent upon other parties, including issuers and their agents, as
well as third party vendors from whom The Depository Trust Company licenses
software and hardware, and third party vendors on whom The Depository Trust
Company relies for information or the provision of services, including
telecommunication and electrical utility service providers, among others. The
Depository Trust Company has informed its participants and other members of the
financial community that it is contacting and will continue to contact third
party vendors from whom The Depository Trust Company acquires services to:
- impress upon them the importance of these services being year 2000
compliant, and
- determine the extent of their efforts for year 2000 remediation and, as
appropriate, testing of their services.
In addition, The Depository Trust Company is in the process of developing
contingency plans as it deems appropriate. According to The Depository Trust
Company, the above information with respect to The Depository Trust Company has
been provided to its participants and other members of the financial community
for informational purposes only and is not intended to serve as a
representation, warranty or contract modification of any kind.
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following general discussion summarizes certain of the material U.S.
Federal income and estate tax aspects of the exchange of initial notes for
exchange notes in accordance with the exchange offer, and the ownership and
disposition of the exchange notes. This discussion is a summary for general
information only and is limited in the following ways:
- The discussion only covers holders of exchange notes that exchange initial
notes for exchange notes in accordance with the exchange offer.
- The discussion only covers holders of exchange notes that hold the
exchange notes as capital assets (that is, for investment purposes), and
that do not have a special tax status.
- The discussion covers only the general tax consequences to holders of the
exchange notes. It does not cover tax consequences that depend upon a
holder's individual tax circumstances.
- The discussion is based on current law. Changes in the law may change the
tax treatment of the exchange notes on a prospective or retroactive basis.
- The discussion does not cover state, local or foreign law.
- The discussion does not apply to holders owning 10% or more of the voting
stock of the Company, or corporate holders that are controlled foreign
corporations with respect to the Company.
We have not sought and will not seek any rulings or opinions from the
Internal Revenue Service or counsel with respect to the matters discussed below.
There can be no assurance that the Internal Revenue Service will not take
positions about the tax treatment of the exchange notes which are different from
those that we discuss.
THE FOLLOWING DISCUSSION IS FOR GENERAL INFORMATION ONLY. THE TAX TREATMENT
MAY VARY DEPENDING UPON A HOLDER'S PARTICULAR SITUATION. HOLDERS SHOULD CONSULT
THEIR OWN TAX ADVISORS AS TO THE PARTICULAR TAX CONSEQUENCES TO THEM OF THE
EXCHANGE OFFER AND THE OWNERSHIP OF THE INITIAL NOTES OR THE EXCHANGE NOTES,
INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS.
The tax consequences depend upon whether you are a U.S. holder or a non-U.S.
holder. A U.S. holder is:
- a citizen or resident of the United States;
- a corporation, partnership or other entity created or organized under U.S.
law (Federal or state);
- an estate the income of which is subject to U.S. Federal income taxation
regardless of its sources;
- a trust if a U.S. court is able to exercise primary jurisdiction over
administration of the trust and one or more U.S. persons have authority to
control all substantial decisions of the trust; or
- any other person whose worldwide income and gain is otherwise subject to
U.S. Federal income taxation on a net basis.
A non-U.S. holder is a holder that is not a U.S. holder.
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TAXATION OF HOLDERS ON EXCHANGE
The exchange of initial notes for exchange notes in accordance with the
exchange offer will not be treated as an exchange or otherwise as a taxable
event to holders. Consequently, the tax treatment to the holders on the exchange
will be as follows:
- no gain or loss will be realized by a holder upon receipt of an exchange
note;
- the holding period of the exchange note will include the holding period of
the initial note exchanged the exchange note; and
- the adjusted tax basis of the exchange note will be the same as the
adjusted tax basis of the initial note exchanged for the exchange note
immediately before the exchange.
Further, the U.S. tax consequences of ownership and disposition of any
exchange note should be the same as the U.S. tax consequences of ownership and
disposition of an initial note. See "Tax Consequences to U.S. Holders; Sale,
Exchange or Redemption of the Notes" and "Tax Consequences to Non-U.S. Holders;
Sale, Exchange or Redemption of the Notes" below.
TAX CONSEQUENCES TO U.S. HOLDERS
INTEREST
- If you are a cash method taxpayer (including most individual holders), you
must report the interest on your income when it is received by you.
- If you are an accrual method taxpayer, you must report the interest on
your income as it accrues.
REGISTERED EXCHANGE OFFER
Under certain circumstances described above, we will be required to pay
additional interest on the Notes if we fail to comply with certain of our
obligations under the Registration Rights Agreement. See "Description of the
Notes--Registered Exchange Offer; Registration Rights." Although the matter is
not free from doubt, such additional interest should be treated as a payment of
additional interest on the exchange notes for U.S. Federal income tax purposes,
with the following results:
- If you are a cash method taxpayer (including most individual holders),
such additional interest will be taxable to you as ordinary income when it
is received by you.
- If you are an accrual method taxpayer, such additional interest will be
taxable to you as ordinary income as it accrues.
It is possible, however, that the Internal Revenue Service may take a
different position, in which case you might be required to include such
additional interest in income as it accrues or becomes fixed (regardless of your
regular method of accounting).
SALE, EXCHANGE OR REDEMPTION OF THE NOTES
On a sale, exchange, retirement or other disposition of an exchange note:
- You will have taxable gain or loss equal to the difference between the tax
basis of the note and amount received on the sale, exchange, retirement or
other disposition.
- Any gain or loss will generally be capital gain or loss, and will be
long-term capital gain or loss if the Note was held for more than one
year.
- If you sell the exchange note between interest payment dates, a portion of
the amount you receive reflects interest that has accrued on the exchange
note but has not yet been paid by the sale date. That amount is treated as
ordinary interest income and not as sale proceeds.
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<PAGE>
- You will not have any taxable gain or loss if the notes are exchanged for
exchange notes in the Registered Exchange Offer. You will have the same
basis and holding period in the exchange notes as you had in the notes.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Under the tax rules concerning information reporting to the Internal Revenue
Service:
- We are required to provide information to the Internal Revenue Service
concerning interest and redemption proceeds we pay to you on exchange
notes held by you, unless an exemption applies.
- Similarly, unless an exemption applies, you are required to provide us
with a correct taxpayer identification number for our use in reporting
information to the Internal Revenue Service. If you are an individual,
this is your social security number. You are also required to comply with
other Internal Revenue Service requirements concerning information
reporting.
- If you are subject to these requirements but do not comply, we are
required to withhold 31% of all amounts payable to you on the exchange
notes (including principal payments). If we do withhold part of a payment,
you may use the withheld amount as a credit against your Federal income
tax liability.
- All U.S. holders that are individuals are subject to these requirements.
Certain U.S. holders, including all corporations, tax-exempt organizations
and individual retirement accounts, are exempt from these requirements.
TAX CONSEQUENCES TO NON-U.S. HOLDERS
WITHHOLDING TAXES
If you are a non-U.S. holder, payments of principal and interest on the
exchange notes generally will not be subject to U.S. withholding taxes. However,
in order for the exemption from withholding taxes to apply, you must meet the
following requirements:
- As the beneficial owner of an exchange note, you must provide a statement
to the effect that you are not a U.S. holder. This statement is generally
made on Internal Revenue Service Form W-8. You should consult your own tax
advisor about the specific method to satisfy this requirement.
- You must not be a bank that is making a loan in the ordinary course of its
business.
Non-U.S. holders that do not qualify for exemption from withholding
generally will be subject to withholding of U.S. Federal income tax at a rate of
30%, or lower applicable treaty rate.
New Treasury regulations generally effective for payments made after
December 31, 1999 provide alternative methods for satisfying the certification
requirements described above. The Internal Revenue Service recently issued a
notice announcing the intent of the Treasury Department and the Internal Revenue
Service to amend these regulations so that they normally will not apply to
payments made before January 1, 2001. These regulations also will require, in
the case of notes held by a foreign partnership, that the certification be
provided by the partners rather than by the foreign partnership and that the
partnership provide specified information, including a U.S. taxpayer
identification number.
SALE, EXCHANGE OR REDEMPTION OF THE NOTES
If you sell an exchange note or it is redeemed, you will not be subject to
U.S. Federal income tax on any gain unless either of the following applies:
- The gain is connected with a trade or business that you conduct in the
U.S.
131
<PAGE>
- You are an individual and are present in the U.S. for at least 183 days
during the year in which you dispose of the note, and certain other
conditions are satisfied.
U.S. TRADE OR BUSINESS
If you hold an exchange note in connection with a trade or business that you
are conducting in the U.S.:
- Any interest on the Note, and any gain from disposing of the exchange
note, generally will be subject to income tax as if you were a U.S.
holder.
- Any interest and gain will be exempt from U.S. withholding tax as
discussed above as long as you submit to us a proper form, generally
Internal Revenue Service Form 4224, that includes certain required
information. You should consult your own tax advisor about how to satisfy
this requirement. The procedures for satisfying this requirement will
change on January 1, 2000.
- If you are a corporation, you may be subject to a branch profits tax on
your earnings that are connected with your U.S. trade or business,
including earnings from the exchange note. This tax is 30%, but may be
reduced or eliminated by an applicable income tax treaty.
ESTATE TAXES
If you are an individual non-U.S. holder, the exchange note will not be
subject to U.S. estate tax when you die. However, this rule only applies if, at
the time of your death, payments on the exchange note would not have been
connected to a trade or business that you were conducting in the U.S.
INFORMATION REPORTING AND BACKUP WITHHOLDING
U.S. rules concerning information reporting and backup withholding are
described above. You automatically avoid these requirements when you provide the
tax certifications needed to avoid withholding tax on interest, as described
above (unless we know, or an intermediate entity knows, that the certification
is false). See "Withholding Taxes" above.
Similarly, if you dispose of an exchange note through a broker:
- You must provide the broker appropriate certification of your non-U.S.
status to avoid information reporting and backup withholding.
- If you do not provide such certification, and you use the U.S. office of a
broker, you may be subject to information reporting and backup
withholding.
- If you do not provide such certification, and you use the non-U.S. office
of a broker, you will not be subject to backup withholding. However, you
may be subject to information reporting depending on whether the broker
has certain connections to the U.S.
You should consult your tax advisor about the tax rules concerning
information reporting requirements and backup withholding.
THE ABOVE SUMMARY DOES NOT DISCUSS ALL ASPECTS OF U.S. FEDERAL INCOME
TAXATION THAT MAY BE RELEVANT TO A PARTICULAR HOLDER OF EXCHANGE NOTES OR
INITIAL NOTES IN LIGHT OF THAT HOLDER'S PARTICULAR CIRCUMSTANCES AND INCOME TAX
SITUATION. HOLDERS OF NOTES SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE
SPECIFIC CONSEQUENCES TO THEM OF THE EXCHANGE OFFER AND THE OWNERSHIP OF THE
INITIAL NOTES OR THE EXCHANGE NOTES, INCLUDING THE APPLICATION AND EFFECT OF
STATE, LOCAL, FOREIGN AND OTHER TAX LAWS, OR SUBSEQUENT REVISIONS OF THESE TAX
LAWS.
132
<PAGE>
PLAN OF DISTRIBUTION
Each broker-dealer that receives exchange notes for its own account pursuant
to the exchange offer in exchange for initial notes acquired by such
broker-dealer as a result of market making or other trading activities may be
deemed to be an "underwriter" within the meaning of the Securities Act and,
therefore, must deliver a prospectus meeting the requirements of the Securities
Act in connection with any resales, offers to resell or other transfers of the
exchange notes received by it in connection with the exchange offer.
Accordingly, each such broker-dealer must acknowledge that it will deliver a
prospectus meeting the requirements of the Securities Act in connection with any
resale of such exchange notes. The letter of transmittal states that by
acknowledging that it will deliver and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of exchange notes received in exchange for initial notes where such
initial notes were acquired as a result of market-making activities or other
trading activities.
We will not receive any proceeds from any sale of exchange notes by
broker-dealers. Exchange notes received by broker-dealers for their own account
pursuant to the exchange offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the exchange notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such exchange notes. Any
broker-dealer that resells exchange notes that were received by it for its own
account pursuant to the exchange offer and any broker or dealer that
participates in a distribution of such exchange notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit of any
such resale of exchange notes and any commissions or concessions received by any
such persons may be deemed to be underwriting compensation under the Securities
Act. The letter of transmittal states that by acknowledging that it will deliver
and by delivering a prospectus, a broker-dealer will not be deemed to admit that
it is an "underwriter" within the meaning of the Securities Act.
133
<PAGE>
LEGAL MATTERS
Paul, Weiss, Rifkind, Wharton & Garrison, New York, New York, has passed
upon specific legal matters, including specific tax matters, with respect to the
notes.
EXPERTS
The consolidated financial statements and schedule of Anteon Corporation and
subsidiaries (Successor) as of December 31, 1998 and 1997, and for the years
ended December 31, 1998 and 1997, and for the period from April 1, 1996 to
December 31, 1996, and the financial statements and schedule of Ogden
Professional Services Corporation (Predecessor) for the period from January 1,
1996 to March 31, 1996, have been included herein and in the registration
statement in reliance upon the reports of KPMG LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
The audited consolidated financial statements of Techmatics, Inc. as of June
30, 1997 included in this registration statement have been audited by Grant
Thornton LLP, independent certified public accountants, to the extent and for
the period indicated in their report thereon. Such consolidated financial
statements have been included in reliance upon the report of Grant Thornton LLP.
The audited consolidated financial statements of Techmatics, Inc. as of and
for the years ended June 30, 1996 and 1995 included in this registration
statement have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and are included
herein in reliance upon the authority of said firm as experts in giving said
reports.
The consolidated financial statements of Analysis & Technology, Inc. and
subsidiaries as of March 31, 1999 and 1998, and for each of the years in the
three-year period ended March 31, 1999, have been included herein and in the
registration statement in reliance upon the report of KPMG LLP, independent
certified public accountants, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
Until June 23, 1999, A&T was subject to the informational requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act") and, in
accordance therewith, filed reports, proxy statements and other information with
the Commission. We are not currently subject to the informational requirements
of the Exchange Act. Under the indenture relating to the Notes, we have agreed
to file (subject to acceptance) annual, quarterly and special reports and other
information with the Commission. You may read and copy any reports or other
information filed by us or A&T at the Commission's public reference room at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. You may
call the Commission at 1-800-SEC-0330 for further information contained in the
public reference room. The filings of Anteon and A&T with the Commission will
also be available to the public from commercial document retrieval services and
at the Commission's Web site at "http://www.sec.gov."
The reports, proxy statements and other information concerning A&T through
June 23, 1999 also can be inspected and copied at the offices of the National
Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C.
20006, which supervises the Nasdaq National Market on which A&T's common stock
is traded.
In addition, you may request a copy of any of these filings, at no cost, by
writing or telephoning us at the following address or telephone number:
Anteon Corporation
3211 Jermantown Road, Suite 700
Fairfax, Virginia 22030-2801
(703) 246-0200
Attention: General Counsel
134
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GLOSSARY OF TERMS
BACKLOG--Backlog represents orders under prime contracts with the Federal
government and subcontracts under Federal government prime contracts. Contract
backlog is based on management's estimate of future revenues to be derived from
existing contracts. There are no assurances that all of such backlog will be
recognized as revenue. Funded backlog consists of the aggregate dollar portion
of our contracts for which funding has been contractually authorized by the
government and earmarked for expenditure under such contracts.
CAS--Federal law requires certain government contractors and subcontractors
to comply with prescribed Cost Accounting Standards and to disclose in writing
and follow consistently their cost accounting practices. The DCAA uses the CAS
when auditing costs incurred by contractors in the performance of government
contracts.
C(4)I--Command, control, computers, communications and intelligence systems.
C(4)ISR--Command, control, computers, communications, intelligence,
surveillance and reconnaissance services.
CMOS--The Cargo Movement Operations System is a logistics system to automate
the tracking of all equipment and cargo movement operations for the Air Force.
This system is one of the largest open systems within the Department of Defense,
and the first standard Air Force client/server application to be installed.
COTS--Commercial off-the-shelf hardware and software products which are,
unlike customized systems, more open, modular and scaleable, less costly and in
some instances better suited to meet the needs of the Federal government.
DCAA--The Defense Contract Audit Agency performs all contract auditing for
the Department of Defense and provides financial and accounting advice to
government contracting officers who execute and administer government contracts.
The DCAA is involved in virtually every phase of the procurement process, from
the pre-award survey of contractor capability to the audit of final costs
claimed on completion of cost-reimbursement contracts. The federal government
has the right to audit a company for three years after the final payment for
compliance with contract terms.
FAR--The Federal Acquisition Regulations, which regulate almost all aspects
governing the formation, administration and performance of U.S. Federal
government contracts.
FEMA--The Federal Emergency Management Agency works in coordination with
state and local government to provide a national response to emergencies (I.E.,
a tornado, hurricane, earthquake or fire). FEMA responds to emergencies and, if
required, allocates Federal funds to help repair or replace property damage or
assist victims.
GSA--The General Services Administration acts as a program administrator
and, in order for a company to provide services under a GSA contract, the
company must be pre-qualified and selected by the GSA.
GSA ADVANTAGE!--GSA ADVANTAGE! is an internet-based electronic ordering
system used by government purchasing officials to buy goods and services from
GSA Schedules.
GSA SCHEDULES--The GSA awards indefinite quantity fixed price contracts to
contractors for stated periods of time, through which individual agencies may
place orders, receive shipments from and make payments directly to contractors.
The contracts are awarded under either the sealed-bid method or the negotiated
method of procurement and are placed on "lists," or schedules, according to the
product/ service type. These schedules identify the supplies and services
available to authorized government agencies by contract and include the names,
addresses, and phone numbers of the GSA Schedule
135
<PAGE>
contractors. The Automated Data Processing schedule provides for the procurement
of mainframe and minicomputers, peripherals, software, supplies, and recently
services. Contractors authorized to participate in the GSA Schedule program are
eligible to market products and services to a broad range of Federal government
customers.
IDIQ--Indefinite Delivery, Indefinite Quantity type contracts are generally
contracts for which the exact times and/or quantities of future deliveries are
not known at the time of contract award. Apart from a small minimum purchase
obligation by the government, an IDIQ contract provides no firm commitment of
work to be ordered by the government.
ITMRA--The Information Technology Management Reform Act of 1996. This
statute changed the Federal government's process of procuring information
technology by (i) placing increased attention on the cost effectiveness of
information technology and return on investment and performance and (ii) making
individual agencies accountable and responsible of oversight for information
technology budgets.
LOCE--The Linked Operations/Intelligence Centers Europe Program is a program
which provides a common view of intelligence derived from multiple sources for
the United States, NATO and UN peacekeeping forces in Europe. Near-real time
intelligence is available through such technology as imagery, shared early
warning systems, and interfaces with other U.S. and NATO systems.
NEMIS--The National Emergency Management Information System, developed by
Anteon for FEMA, is an enterprise-wide management information system that
enables the White House to effectively monitor and mobilize multiple agencies
and financial resources in response to national emergencies.
NUWC--Naval Undersea Warfare Center.
RECOMPETE--A recompete is a competitive government procurement for products
and/or services for which one or more competing contractors are or were
incumbent contractor(s) under an expiring or expired contract that required
services substantially similar to those which are the subject of the new
procurement.
RFP--A Request for Proposal is a detailed document used in the procurement
process by government agencies to solicit offers from interested contractors.
The RFP typically contains a description of the scope of work to be performed by
(or that may be ordered from) the contractor to be awarded the contract and sets
forth the terms and conditions that will form part of the resulting contract.
The RFP includes a description of the evaluation criteria to be used by the
procuring agency, usually focused on price, past performance and
technical/management plan. The government may unilaterally accept offers made by
contractors pursuant to an RFP without further negotiations.
TASK ORDER--is a contract order issued by a government agency under an
umbrella contract vehicle such as an IDIQ contract. The task order is separately
priced and contains a description of services to be performed and a defined
period of performance.
TC-AIMS--The Transportation Coordination Automated Information Movement
Systems contract, the purpose of which is to reduce the number of duplicative
transportation systems within the armed forces. The TC-AIMS system will be based
on the CMOS system.
136
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
ANTEON CORPORATION
Unaudited Condensed Consolidated Balance Sheet as of June 30, 1999......................................... F-3
Unaudited Condensed Consolidated Statements of Income for the six months ended June 30, 1999 and 1998...... F-4
Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 1999 and
1998..................................................................................................... F-5
Notes to Unaudited Condensed Consolidated Financial Statements............................................. F-6
Report of KPMG LLP, Independent Auditors................................................................... F-11
Consolidated Balance Sheets as of December 31, 1998 and 1997............................................... F-12
Consolidated Statements of Income for the successor years ended December 31, 1998 and 1997, the successor
period April 1, 1996 to December 31, 1996 and the predecessor period January 1, 1996 to March 31, 1996... F-13
Consolidated Statements of Stockholders' Equity for the successor years ended December 31, 1998 and 1997,
the successor period April 1, 1996 to December 31, 1996 and the predecessor period January 1, 1996 to
March 31, 1996........................................................................................... F-14
Consolidated Statements of Cash Flows for the successor years ended December 31, 1998 and 1997, the
successor period April 1, 1996 to December 31, 1996 and the predecessor period January 1, 1996 to March
31, 1996................................................................................................. F-15
Notes to Consolidated Financial Statements................................................................. F-17
TECHMATICS, INC.
Unaudited Consolidated Balance Sheet as of March 31, 1998.................................................. F-37
Unaudited Consolidated Statements of Earnings for the nine months ended March 31, 1998
and 1997................................................................................................. F-38
Unaudited Consolidated Statements of Cash Flows for the nine months ended
March 31, 1998 and 1997.................................................................................. F-39
Notes to Unaudited Consolidated Financial Statements....................................................... F-40
Report of Grant Thornton LLP, Independent Auditors......................................................... F-41
Consolidated Balance Sheet as of June 30, 1997............................................................. F-42
Consolidated Statement of Earnings for the year ended June 30, 1997........................................ F-43
Consolidated Statement of Changes in Stockholders' Equity for the year ended June 30, 1997................. F-44
Consolidated Statement of Cash Flows for the year ended June 30, 1997...................................... F-45
Notes to Consolidated Financial Statements................................................................. F-46
Report of Arthur Andersen LLP, Independent Auditors........................................................ F-53
Consolidated Balance Sheets as of June 30, 1996 and 1995................................................... F-54
Consolidated Statements of Income for the years ended June 30, 1996 and 1995............................... F-55
Consolidated Statements of Changes in Stockholders' Equity for the years ended June 30, 1996 and 1995...... F-56
Consolidated Statements of Cash Flows for the years ended June 30, 1996 and 1995........................... F-57
Notes to Consolidated Financial Statements................................................................. F-58
</TABLE>
F-1
<PAGE>
<TABLE>
<S> <C>
ANALYSIS & TECHNOLOGY, INC.
Report of KPMG LLP, Independent Auditors............................................. F-64
Consolidated Balance Sheets as of March 31, 1999 and 1998............................ F-65
Consolidated Statements of Earnings for each of the the years in the three-year
period ended March 31, 1999........................................................ F-66
Consolidated Statements of Shareholders' Equity for each of the years in the
three-year period ended March 31, 1999............................................. F-67
Consolidated Statements of Cash Flows for each of the years in the three-year period
ended March 31, 1999............................................................... F-68
Notes to Consolidated Financial Statements........................................... F-69
</TABLE>
F-2
<PAGE>
ANTEON CORPORATION AND SUBSIDIARIES
(A MAJORITY-OWNED SUBSIDIARY OF AZIMUTH TECHNOLOGIES, INC.)
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<S> <C>
ASSETS
Current assets
Cash and cash equivalents.................. $ 2,764
Accounts receivable, net................... 98,942
Prepaid expenses and other current
assets................................... 4,753
--------
Total current assets................... 106,459
--------
Due from parent.............................. 7,017
Property and equipment, net of accumulated
depreciation and amortization.............. 19,286
Goodwill, net of accumulated amortization.... 132,532
Investments.................................. 10,533
Other assets, net............................ 11,280
--------
Total assets........................... $ 287,107
--------
--------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................... $ 17,525
Accrued expenses........................... 33,468
Notes payable.............................. 8,998
Other current liabilities, net............. 2,866
--------
Total current liabilities.............. 62,857
Revolving Credit Facility.................... 13,000
Term Loan Facility........................... 60,000
Senior subordinated notes payable............ 100,000
Mortgage note payable........................ 1,726
Noncurrent deferred tax liabilities, net..... 1,379
Other long-term liabilities.................. 206
--------
Total Liabilities...................... 239,168
--------
Minority interest in subsidiary.............. 53
--------
Stockholders' equity
Common stock, $0.05 par value, 4,415,460
shares authorized, 3,557,672 shares
issued and outstanding................... 178
Additional paid-in-capital................. 40,751
Accumulated other comprehensive income..... 1,972
Retained earnings.......................... 4,985
--------
Total stockholders' equity............. 47,886
--------
Commitments and contingencies................
Total liabilities and stockholders'
equity............................... $ 287,107
--------
--------
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
F-3
<PAGE>
ANTEON CORPORATION AND SUBSIDIARIES
(A MAJORITY-OWNED SUBSIDIARY OF AZIMUTH TECHNOLOGIES, INC.)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
Revenues............................................................................... $ 145,609 $ 108,196
Costs of revenues...................................................................... 128,576 96,139
---------- ----------
Gross profit..................................................................... 17,033 12,057
---------- ----------
Operating expenses:
General and administrative expenses.................................................. 8,907 6,203
Amortization of noncompete agreements................................................ 454 76
Goodwill amortization................................................................ 1,024 751
Cost of acquisitions................................................................. -- 18
---------- ----------
Total operating expenses......................................................... 10,385 7,048
---------- ----------
Operating income................................................................. 6,648 5,009
---------- ----------
Interest expense, net of interest income of $812 and $82............................... 5,500 1,736
Minority interest in earnings of subsidiary............................................ 17 14
---------- ----------
Income before provision for income taxes and extraordinary item........................ 1,131 3,259
Provision for income taxes............................................................. 597 1,310
---------- ----------
Net income before extraordinary item............................................. 534 1,949
---------- ----------
Extraordinary item--loss on early extinguishment of debt, net of
income taxes of $309................................................................. 463 --
---------- ----------
Net income............................................................................. $ 71 $ 1,949
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
F-4
<PAGE>
ANTEON CORPORATION AND SUBSIDIARIES
(A MAJORITY-OWNED SUBSIDIARY OF AZIMUTH TECHNOLOGIES, INC.)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------
<S> <C> <C>
1999 1998
--------- ---------
Cash flows from operating activities.......................................................... $ 71 $ 1,949
Net income..................................................................................
Adjustments to reconcile net income to net cash provided by (used for) operating activities:
Extraordinary loss........................................................................ 772 --
Depreciation and amortization of property and equipment................................... 996 501
Goodwill amortization..................................................................... 1,024 751
Amortization of noncompete agreements..................................................... 454 76
Amortization of deferred financing and contract costs..................................... 102 683
Deferred income taxes..................................................................... 38 151
Minority interest in earnings (losses) of subsidiary...................................... 17 --
Changes in assets and liabilities, net of acquired assets and liabilities................. 2,203 (13,537)
--------- ---------
Net cash provided by (used in) operating activities..................................... 9,602 (9,426)
--------- ---------
Cash flows from investing activities:
Purchase of property and equipment.......................................................... (1,255) (1,164)
Acquisition of A&T, net of cash acquired.................................................... (115,446) --
Acquisition of Techmatics, net of cash acquired............................................. -- (28,558)
Purchases of investments.................................................................... (1,939) --
Other, net.................................................................................. (30) 116
--------- ---------
Net cash used in investing activities................................................. (118,670) (29,606)
--------- ---------
Cash flows from financing activities:
Proceeds from bank notes payable............................................................ 212,000 158,104
Principal payments on bank notes payable.................................................... (209,400) (117,100)
Proceeds from issuance of common stock...................................................... 22,536 18
Issuance of senior subordinated notes payable............................................... 100,000 --
Principal payments on notes payable......................................................... (4,925) --
Deferred financing costs.................................................................... (8,535) (987)
--------- ---------
Net cash provided by financing activities............................................. 111,676 40,035
--------- ---------
Net increase in cash and cash equivalents............................................. 2,608 1,003
Cash and cash equivalents, beginning of period................................................ 156 652
--------- ---------
Cash and cash equivalents, end of period...................................................... $ 2,764 $ 1,655
--------- ---------
--------- ---------
Supplemental disclosure of cash flow information:
Interest paid................................................................................. $ 4,856 $ 2,075
Income taxes paid............................................................................. 25 230
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
F-5
<PAGE>
ANTEON CORPORATION AND SUBSIDIARIES
(A MAJORITY-OWNED SUBSIDIARY OF AZIMUTH TECHNOLOGIES, INC.)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(1) BASIS OF PRESENTATION
The unaudited interim financial information as of June 30, 1999, and for the
six months ended June 30, 1999 and 1998, has been prepared in accordance with
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 six months ended
June 30, 1999 may not be indicative of the results of operations for the year
ending 1999 or any future period. This financial information should be read in
conjunction with the Company's audited consolidated financial statements and
footnotes thereto.
(2) SENIOR SUBORDINATED NOTES OFFERING AND RELATED TRANSACTIONS
On May 11, 1999, the Company completed an offering of $100 million of its
12% Senior Subordinated Notes due 2009 (the "Notes"). The Notes are unsecured
and are guaranteed by all of the Company's current and future domestic
subsidiaries. The Notes require semi-annual interest payments beginning on
November 15, 1999 through maturity on May 15, 2009. The Notes may be redeemed at
the option of the Company after May 15, 2004 upon the payment of certain
redemption premiums, although up to 25% of the Notes can be redeemed prior to
May 15, 2002 with the proceeds of certain equity offerings and upon the payment
of certain redemption premiums. The Notes contain various restrictive covenants,
including limitations on the incurrence of additional indebtedness, restrictions
and limitations on dividends paid to the Company's parent, Azimuth Technologies,
Inc., and restrictions and limitations on the sales of certain assets, among
others. The Notes also require the maintanence of certain ratios.
Concurrent with the offering of the Notes, the Company's parent, Azimuth
Technologies, Inc., invested an additional $22.5 million in the Company's common
stock (the "Equity Contribution").
During June 1999, the Company obtained a new bank credit facility (the "New
Credit Facility") with a syndicate of banks, which includes a revolving line of
credit (the "Revolving Credit Facility") and a term loan facility (the "Term
Loan Facility"). The Revolving Credit Facility has maximum borrowings of up to
$120 million, as determined based on a portion of eligible accounts receivable,
and bears interest at varying rates based on LIBOR plus a margin determined
using Anteon's ratio of net debt to EBITDA (as defined in the New Credit
Facility) and matures on June 23, 2005. As of June 30, 1999, the outstanding
balance on the Revolving Credit Facility was $13.0 million. The Term Loan
Facility consists of a term loan of $60 million bearing interest at varying
rates based on LIBOR plus a margin determined using Anteon's ratio of net debt
to EBITDA (as defined in the New Credit Facility). Principal payments on the
Term Loan Facility commence on a quarterly basis after June 23, 2001, with $15
million due at maturity on June 23, 2005. The New Credit Facility is secured by
substantially all of the tangible and intangible assets of Anteon and the
Guarantor Subsidiaries (see note 5).
The proceeds from the Notes, the Equity Contribution, and the New Credit
Facility were used, along with other available cash to acquire all of the
outstanding stock of Analysis & Technology, Inc. and repay all outstanding
amounts on the Company's previous bank line of credit. Deferred financing fees
of $772 associated with the previous bank line of credit were written off during
the six months ended June 30, 1999 and have been recognized as an extraordinary
item.
F-6
<PAGE>
ANTEON CORPORATION AND SUBSIDIARIES
(A MAJORITY-OWNED SUBSIDIARY OF AZIMUTH TECHNOLOGIES, INC.)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
(3) ACQUISITION OF ANALYSIS & TECHNOLOGY, INC.
On June 23, 1999, the Company acquired all of the outstanding stock of
Analysis & Technology, Inc. ("A&T"), a provider of system and engineering
technologies, technology-based training systems, and information technologies to
the U.S. Government and commercial industry. The acquisition was accounted for
using the purchase method whereby the net tangible and identifiable intangible
assets acquired and liabilities assumed were recognized at their estimated fair
market values at the date of combination. These estimates were based on
preliminary appraisals and other studies that will be completed during the
remainder of 1999. Goodwill resulting from the combination is being amortized on
a straight-line basis over thirty years.
The total purchase price paid, including transaction costs, of approximately
$115.4 million, was preliminarily allocated to the assets and liabilities
acquired as follows (in thousands):
<TABLE>
<S> <C>
Accounts receivable............................................... $ 30,910
Prepaid expenses and other current assets......................... 951
Property and equipment............................................ 14,129
Other assets...................................................... 1,606
Goodwill.......................................................... 83,490
Accounts payable and accrued expenses............................. (13,499)
Deferred tax liabilities, net..................................... (64)
Mortgage note payable............................................. (2,077)
---------
Total consideration........................................... $ 115,446
---------
---------
</TABLE>
Transaction costs of approximately $4.4 million were incurred in connection
with the acquisition, including approximately $1.1 million to Caxton-Iseman
Capital, Inc., the majority shareholder of the Company's parent, Azimuth
Technologies, Inc.
The following unaudited pro forma summary presents consolidated information
as if the acquisition of A&T had occurred as of January 1, 1998. The pro forma
summary is provided for informational purposes only and is based on historical
information that does not necessarily reflect actual results that would have
occurred nor is it necessarily indicative of future results of operations of the
combined entity:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------
1999 1998
--------- ---------
<S> <C> <C>
Total revenues $ 235,706 $ 193,093
Total expenses.......................................................... (236,711) (193,185)
--------- ---------
Net loss before extraordinary items................................... (1,005) (92)
--------- ---------
Net loss................................................................ (1,005) (555)
--------- ---------
--------- ---------
</TABLE>
(4) COMPREHENSIVE INCOME
Comprehensive income for the six months ended June 30, 1999 and 1998 was
$1,840,000 and $1,949,000, respectively.
F-7
<PAGE>
ANTEON CORPORATION AND SUBSIDIARIES
(A MAJORITY-OWNED SUBSIDIARY OF AZIMUTH TECHNOLOGIES, INC.)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
(5) ARRANGEMENT WITH CAXTON-ISEMAN CAPITAL, INC.
Effective June 1, 1999, the Company entered into an arrangement with
Caxton-Iseman Capital, Inc., the majority shareholder of the Company's parent,
Azimuth Technologies, Inc., whereby the Company is required to pay annual
management fees to Caxton-Iseman Capital, Inc. Prior to the completion of the
acquisition of A&T, the annual management fee was $500,000 and covered the
period beginning January 1, 1999. For periods subsequent to the acquisition of
A&T, the annual management fee is $1 million. For the six months ended June 30,
1999, the Company recognized $250,000 of management fee expense under the
arrangement. Also under the arrangement, the Company paid Caxton-Iseman Capital,
Inc. a transaction fee of approximately $1.1 million in connection with the
acquisition of A&T.
(6) DOMESTIC SUBSIDIARIES SUMMARIZED FINANCIAL INFORMATION
Under the terms of the Notes, the Company's wholly-owned domestic
subsidiaries (the "Subsidiary Guarantors") are guarantors of the Notes. Such
guarantees are full, unconditional and joint and several. Separate unaudited
condensed financial statements of the Subsidiary Guarantors are not presented
because the Company's management has determined that they would not be material
to investors. The following supplemental financial information sets forth, on a
combined basis, condensed balance sheets, statements of operations and
statements of cash flows information for the Subsidiary Guarantors, the
Company's non-guarantor subsidiaries and for the Company.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
--------------------------------------------------------------------
CONSOLIDATED
ANTEON GUARANTOR NON-GUARANTOR ELIMINATION ANTEON
CONDENSED CONSOLIDATED BALANCE SHEET CORPORATION SUBSIDIARIES SUBSIDIARIES ENTRIES CORPORATION
----------- ----------- --------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Cash....................................... $ 2,572 $ (470) $ 662 $ -- $ 2,764
Receivables................................ 39,920 58,760 262 -- 98,942
Other current assets....................... 2,909 1,680 164 -- 4,753
Property and equipment, net................ 2,316 16,909 61 -- 19,286
Due from parent............................ 7,017 -- -- -- 7,017
Investment in and advances to
subsidiaries............................. 48,669 225 (225) (48,669) --
Goodwill, net.............................. 132,532 -- -- -- 132,532
Investments................................ 10,533 -- -- -- 10,533
Other long-term assets..................... 8,168 3,104 8 -- 11,280
----------- ----------- ------ ----------- ------------
Total assets........................... $ 254,636 $ 80,208 $ 932 $ (48,669) $ 287,107
----------- ----------- ------ ----------- ------------
----------- ----------- ------ ----------- ------------
Indebtedness............................... 181,647 2,077 -- -- 183,724
Accounts payable........................... 13,539 3,691 295 -- 17,525
Accrued expenses........................... 15,059 18,157 252 -- 33,468
Other current liabilities.................. 315 2,324 227 -- 2,866
Other long-term liabilities................ 1,047 463 75 -- 1,585
----------- ----------- ------ ----------- ------------
Total liabilities...................... 211,607 26,712 849 -- 239,168
Minority interest in subsidiary............ -- -- 53 -- 53
Total stockholders' equity................. 43,029 53,496 30 (48,669) 47,886
----------- ----------- ------ ----------- ------------
Total liabilities and stockholders'
equity................................... $ 254,636 $ 80,208 $ 932 $ (48,669) $ 287,107
----------- ----------- ------ ----------- ------------
----------- ----------- ------ ----------- ------------
</TABLE>
F-8
<PAGE>
ANTEON CORPORATION AND SUBSIDIARIES
(A MAJORITY-OWNED SUBSIDIARY OF AZIMUTH TECHNOLOGIES, INC.)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
(6) DOMESTIC SUBSIDIARIES SUMMARIZED FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STATEMENT OF
OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues................................... $ 94,117 $ 50,020 $ 1,775 $ (303) $ 145,609
Cost of revenues........................... 85,518 41,717 1,644 (303) 128,576
----------- ----------- ------ ----------- ------------
Gross profit............................... 8,599 8,303 131 -- 17,033
Total operating expenses................... 5,513 4,798 74 -- 10,385
----------- ----------- ------ ----------- ------------
Operating income........................... 3,086 3,505 57 -- 6,648
Interest expense (income), net............. 5,536 (46) 10 -- 5,500
Minority interest.......................... -- -- 17 -- 17
----------- ----------- ------ ----------- ------------
Income (loss) before provision for income
taxes and extraordinary item............. (2,450) 3,551 30 -- 1,131
Provision (benefit) for income taxes....... (574) 1,141 30 -- 597
----------- ----------- ------ ----------- ------------
Net income before extraordinary item....... (1,876) 2,410 -- -- 534
Extraordinary loss, net of tax............. 463 -- -- -- 463
----------- ----------- ------ ----------- ------------
Net income (loss).......................... $ (2,339) $ 2,410 $ -- $ -- $ 71
----------- ----------- ------ ----------- ------------
----------- ----------- ------ ----------- ------------
</TABLE>
F-9
<PAGE>
ANTEON CORPORATION AND SUBSIDIARIES
(A MAJORITY-OWNED SUBSIDIARY OF AZIMUTH TECHNOLOGIES, INC.)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
(6) DOMESTIC SUBSIDIARIES SUMMARIZED FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 1999
-----------------------------------------------------
CONSOLIDATED
ANTEON GUARANTOR NON- GUARANTOR ANTEON
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS CORPORATION SUBSIDIARIES SUBSIDIARIES CORPORATION
----------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
Net income (loss).......................................... $ (2,327) $ 2,382 $ 16 $ 71
Adjustments to reconcile change in net income (loss) to net
cash provided by operations:
Extraordinary loss..................................... 772 -- -- 772
Depreciation and amortization.......................... 407 576 13 996
Goodwill amortization.................................. 1,024 -- -- 1,024
Amortization of noncompetes............................ 454 -- -- 454
Amortization of deferred financing and contract costs.. 102 -- -- 102
Deferred income taxes.................................. -- -- 38 38
Minority interest in earnings of subsidiary............ -- 17 -- 17
Changes in assets and liabilities, net of acquired
assets and liabilities............................... 8,641 (2,918) 405 6,128
----------- ----------- ------ ------------
Net cash provided by operating activities............ $ 9,073 $ 57 $ 472 $ 9,602
----------- ----------- ------ ------------
Cash flows from investing activities:
Purchases of property and equipment.................... $ (926) $ (294) $ (35) $ (1,255)
Acquisition of A&T, net of cash acquired............... (115,446) -- -- (115,446)
Purchases of investments............................... (1,930) -- (9) (1,939)
Other, net............................................. (30) -- -- (30)
----------- ----------- ------ ------------
Net cash used in investing activities................ $(118,332) $ (294) $ (44) $ (118,670)
----------- ----------- ------ ------------
Cash flow from financing activities
Proceeds from bank notes payable....................... $ 212,000 $ -- $ -- (212,000)
Principal payments on bank notes payable............... (209,400) -- -- (209,400)
Issuance of senior subordinated notes payable.......... 100,000 -- -- 100,000
Principal payments on notes payable.................... (4,925) -- -- (4,925)
Proceeds from issuance of common stock................. 22,536 -- -- 22,536
Deferred financing costs............................... (8,535) -- -- (8,535)
----------- ----------- ------ ------------
Net cash provided by financing activities............ $ 111,676 $ -- $ -- $ 111,676
----------- ----------- ------ ------------
Net increase (decrease) in cash and cash equivalents....... 2,417 (237) 428 2,608
Cash and cash equivalents beginning of year................ 155 (234) 235 156
----------- ----------- ------ ------------
Cash and cash equivalents end of year...................... $ 2,572 $ (471) $ 663 $ 2,764
----------- ----------- ------ ------------
----------- ----------- ------ ------------
</TABLE>
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STATEMENT OF
OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998
-----------------------------------------------------
<S> <C> <C> <C> <C>
Revenues................................................... $ 92,836 $ 14,102 $ 1,258 $ 108,196
Cost of revenues........................................... 83,485 11,589 1,065 96,139
----------- ----------- ------ ------------
Gross profit............................................... 9,351 2,513 193 12,057
Total operating expenses................................... 5,057 1,883 108 7,048
----------- ----------- ------ ------------
Operating income (loss).................................... 4,294 630 85 5,009
Interest expense (income) net.............................. 1,770 (26) (8) 1,736
Minority interest.......................................... -- -- 14 14
----------- ----------- ------ ------------
Income before provision for income taxes................... 2,524 656 79 3,259
Provision for income taxes................................. 1,037 252 21 1,310
----------- ----------- ------ ------------
Net income................................................. $ 1,487 $ 404 $ 58 $ 1,949
----------- ----------- ------ ------------
----------- ----------- ------ ------------
</TABLE>
F-10
<PAGE>
ANTEON CORPORATION AND SUBSIDIARIES
(A MAJORITY-OWNED SUBSIDIARY OF AZIMUTH TECHNOLOGIES, INC.)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
(6) DOMESTIC SUBSIDIARIES SUMMARIZED FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 1998
-------------------------------------------------------
CONSOLIDATED
ANTEON GUARANTOR NON- GUARANTOR ANTEON
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW CORPORATION SUBSIDIARIES SUBSIDIARIES CORPORATION
----------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Net income................................................. $ 1,471 406 72 1,949
Adjustments to reconcile change in net income to net cash
provided by (used in) operations:
Depreciation and amortization.......................... 386 69 46 501
Goodwill amortization.................................. 751 -- -- 751
Amortization of noncompete agreements.................. 76 -- -- 76
Amortization of deferred financing and contract costs.. 683 -- -- 683
Deferred income taxes.................................. -- 137 14 151
Changes in assets and liabilities, net of acquired assets
and liabilities.......................................... (13,993) (151) 607 (13,537)
Net cash provided by (used in) operating activities........ $ (10,626) $ 461 $ 739 $ (9,426)
----------- ----- ----- ------------
Cash flows from investing activities:
Purchases of property and equipment.................... (961) (84) (119) (1,164)
Acquisition of Techmatics, net of cash................. (28,558) -- -- (28,558)
Other.................................................. 116 -- -- 116
----------- ----- ----- ------------
Net cash used in investing activities...................... $ (29,403) $ (84) $ (119) $ (29,606)
Cash flow from financing activities:
Proceeds from bank notes payable....................... $ 158,104 $ -- $ -- $ 158,104
Principal payments on bank notes payable............... (117,100) -- -- (117,100)
Proceeds from issuance of common stock................. 18 -- -- 18
Deferred financing fees................................ (987) -- -- (987)
----------- ----- ----- ------------
Net cash provided by financing activities.................. $ 40,035 $ -- $ -- $ 40,035
----------- ----- ----- ------------
Net increase in cash and cash equivalents.................. 6 377 620 1,003
Cash and cash equivalents beginning of year................ 830 (195) 17 652
----------- ----- ----- ------------
Cash and cash equivalents end of year...................... $ 836 $ 182 $ 637 $ 1,655
----------- ----- ----- ------------
----------- ----- ----- ------------
</TABLE>
F-11
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Anteon Corporation and subsidiaries:
We have audited the accompanying consolidated balance sheets of Anteon
Corporation (a majority-owned subsidiary of Azimuth Technologies, Inc.) and
subsidiaries (Successor) as of December 31, 1998 and 1997, and the related
consolidated statements of income, stockholders' equity and cash flows for the
years ended December 31, 1998 and 1997 and for the period from April 1, 1996 to
December 31, 1996 (Successor periods), and the statements of income,
stockholder's equity and cash flows of Ogden Professional Services Corporation
(an indirect wholly owned subsidiary of Ogden Corporation) (Predecessor) for the
period from January 1, 1996 to March 31, 1996 (Predecessor period). These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with 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 aforementioned Successor consolidated financial
statements present fairly, in all material respects, the financial position of
Anteon Corporation and subsidiaries as of December 31, 1998 and 1997 and the
results of their operations and their cash flows for the Successor periods, in
conformity with generally accepted accounting principles. Further, in our
opinion, the aforementioned Predecessor financial statements present fairly, in
all material respects, the results of operations and cash flows of Ogden
Professional Services Corporation for the Predecessor period, in conformity with
generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, effective
April 1, 1996, Azimuth Technologies, Inc. acquired all of the outstanding stock
of Ogden Professional Services Corporation in a business combination accounted
for as a purchase. As a result of the acquisition, the financial information for
the period after the acquisition is presented on a different cost basis than
that for the period before the acquisition and, therefore, is not comparable.
KPMG LLP
McLean, Virginia
February 19, 1999, except as to note 13,
which is as of April 14, 1999
F-12
<PAGE>
ANTEON CORPORATION AND SUBSIDIARIES
(A MAJORITY-OWNED SUBSIDIARY OF AZIMUTH TECHNOLOGIES, INC.)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---------- ---------
<S> <C> <C>
(IN THOUSANDS, EXCEPT
SHARE DATA)
ASSETS
Current assets:
Cash and cash equivalents................................................................. $ 156 652
Accounts receivable, net.................................................................. 68,053 29,405
Income tax receivable..................................................................... 2,138 --
Inventory, net............................................................................ -- 2,759
Prepaid expenses and other current assets................................................. 3,209 1,818
Deferred tax assets, net.................................................................. -- 1,110
---------- ---------
Total current assets.................................................................. 73,556 35,744
Due from parent............................................................................. 6,625 1,045
Property and equipment, at cost, net of accumulated depreciation and amortization of $2,940
and $1,562................................................................................ 4,537 1,585
Goodwill, net of accumulated amortization of $2,909 and $1,088.............................. 50,036 30,034
Investments................................................................................. 5,973 --
Other assets, net........................................................................... 2,441 164
---------- ---------
Total assets.......................................................................... $ 143,168 68,572
---------- ---------
---------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................................................... $ 12,582 12,630
Accrued expenses.......................................................................... 23,338 9,347
Bank notes payable, current portion....................................................... -- 2,000
Subordinated notes payable, current portion............................................... 967 --
Deferred tax liabilities, net............................................................. 1,542 --
Other current liabilities................................................................. 966 --
---------- ---------
Total current liabilities............................................................. 39,395 23,977
Bank notes payable, less current portion.................................................... 70,400 22,100
Subordinated notes payable, less current portion............................................ 8,335 --
Noncurrent deferred tax liabilities, net.................................................... 311 462
Other long-term liabilities................................................................. 985 1,205
---------- ---------
Total liabilities..................................................................... 119,426 47,744
---------- ---------
Minority interest in subsidiary............................................................. 37 12
---------- ---------
Stockholders' equity:
Common stock, $0.05 par value, 3,415,460 shares authorized, 2,975,009 and 2,973,269 shares
issued and outstanding as of December 31, 1998 and 1997, respectively................... 149 149
Additional paid-in capital................................................................ 18,243 18,221
Accumulated other comprehensive income.................................................... 399 --
Retained earnings......................................................................... 4,914 2,446
---------- ---------
Total stockholders' equity............................................................ 23,705 20,816
---------- ---------
Commitments and contingencies
Total liabilities and stockholders' equity............................................ $ 143,168 68,572
---------- ---------
---------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-13
<PAGE>
ANTEON CORPORATION AND SUBSIDIARIES
(A MAJORITY-OWNED SUBSIDIARY OF AZIMUTH TECHNOLOGIES, INC.)
CONSOLIDATED STATEMENTS OF INCOME
SUCCESSOR YEARS ENDED DECEMBER 31, 1998 AND 1997 AND THE SUCCESSOR PERIOD FROM
APRIL 1, 1996
TO DECEMBER 31, 1996; PREDECESSOR PERIOD FROM JANUARY 1, 1996 TO MARCH 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
SUCCESSOR
PERIOD FROM PREDECESSOR
APRIL 1, PERIOD FROM
SUCCESSOR SUCCESSOR 1996 JANUARY 1,
YEAR ENDED YEAR ENDED TO 1996
DECEMBER DECEMBER DECEMBER TO
31, 31, 31, MARCH 31,
1998 1997 1996 1996
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Revenues................................... $ 249,776 $ 176,292 $ 109,780 $ 32,046
Costs of revenues.......................... 221,588 159,539 100,426 29,218
----------- ----------- ----------- -------------
Gross profit......................... 28,188 16,753 9,354 2,828
----------- ----------- ----------- -------------
Operating expenses:
General and administrative expenses...... 15,286 8,061 4,616 2,071
Amortization of noncompete agreements.... 530 2,286 1,714 --
Goodwill amortization.................... 1,814 742 346 --
Costs of acquisitions.................... 115 584 -- --
----------- ----------- ----------- -------------
Total operating expenses............. 17,745 11,673 6,676 2,071
----------- ----------- ----------- -------------
Operating income..................... 10,443 5,080 2,678 757
Interest expense, net of interest income of
$136, $48, $31,and $0.................... 5,597 2,365 1,455 --
Minority interest in earnings of
subsidiary............................... 25 13 -- --
----------- ----------- ----------- -------------
Income before provision for income taxes... 4,821 2,702 1,223 757
Provision for income taxes................. 2,353 1,063 416 303
----------- ----------- ----------- -------------
Net income........................... $ 2,468 $ 1,639 $ 807 $ 454
----------- ----------- ----------- -------------
----------- ----------- ----------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-14
<PAGE>
ANTEON CORPORATION AND SUBSIDIARIES
(A MAJORITY-OWNED SUBSIDIARY OF AZIMUTH TECHNOLOGIES, INC.)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
SUCCESSOR YEARS ENDED DECEMBER 31, 1998 AND 1997 AND THE SUCCESSOR PERIOD FROM
APRIL 1, 1996
TO DECEMBER 31, 1996; PREDECESSOR PERIOD FROM JANUARY 1, 1996 TO MARCH 31, 1996
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
----------------------- PAID-IN COMPREHENSIVE RETAINED
SHARES AMOUNT CAPITAL INCOME EARNINGS TOTAL
---------- ----------- ----------- --------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT SHARE DATA)
PREDECESSOR
Balance, January 1, 1996.......................... 2,973,269 $ 149 $ 7,726 -- $ 21,533 $ 29,408
Net income........................................ -- -- -- -- 454 454
---------- ----- ----------- ----- --------- ---------
Balance, March 31,1996............................ 2,973,269 $ 149 $ 7,726 -- $ 21,987 $ 29,862
---------- ----- ----------- ----- --------- ---------
---------- ----- ----------- ----- --------- ---------
SUCCESSOR
Initial capitalization by Azimuth Technologies,
Inc............................................. 2,973,269 $ 149 $ 18,221 $ -- $ -- $ 18,370
Net income........................................ -- -- -- -- 807 807
---------- ----- ----------- ----- --------- ---------
Balance, December 31, 1996........................ 2,973,269 149 18,221 -- 807 19,177
Net income........................................ -- -- -- -- 1,639 1,639
---------- ----- ----------- ----- --------- ---------
Balance, December 31, 1997........................ 2,973,269 149 18,221 -- 2,446 20,816
Exercise of stock options......................... 1,740 -- 22 -- -- 22
Unrealized gains on investments................... -- -- -- 392 -- 392
Foreign currency translation...................... -- -- -- 7 -- 7
Net income........................................ -- -- -- -- 2,468 2,468
---------- ----- ----------- ----- --------- ---------
Comprehensive income.............................. -- -- -- 399 2,468 2,867
---------- ----- ----------- ----- --------- ---------
Balance, December 31, 1998........................ 2,975,009 $ 149 $ 18,243 $ 399 $ 4,914 $ 23,705
---------- ----- ----------- ----- --------- ---------
---------- ----- ----------- ----- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-15
<PAGE>
ANTEON CORPORATION AND SUBSIDIARIES
(A MAJORITY-OWNED SUBSIDIARY OF AZIMUTH TECHNOLOGIES, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
SUCCESSOR YEARS ENDED DECEMBER 31, 1998 AND 1997 AND THE SUCCESSOR PERIOD FROM
APRIL 1, 1996
TO DECEMBER 31, 1996; PREDECESSOR PERIOD FROM JANUARY 1, 1996 TO MARCH 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
SUCCESSOR
PERIOD FROM PREDECESSOR
SUCCESSOR SUCCESSOR APRIL 1, 1996 PERIOD FROM
YEAR ENDED YEAR ENDED TO JANUARY 1, 1996
DECEMBER 31, DECEMBER 31, DECEMBER 31, TO
1998 1997 1996 MARCH 31, 1996
------------ ------------- ------------- ---------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income.......................................... $ 2,468 $ 1,639 $ 807 $ 454
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation and amortization of property and
equipment..................................... 1,837 895 667 229
Goodwill amortization........................... 1,814 742 346 --
Amortization of noncompete agreements........... 530 2,286 1,714 --
Amortization of deferred financing and contract
costs......................................... 1,420 1,209 468 157
Inventory obsolescence reserve.................. 500 -- -- --
Loss on disposal of property and equipment...... -- 21 -- --
Deferred income taxes........................... 2,501 (943) 416 --
Minority interest in earnings (losses) of
subsidiary.................................... 25 (13) -- --
Changes in assets and liabilities, net of
acquired liabilities:
Decrease (increase) in accounts receivables... (15,559) 10,086 2,051 (1,130)
Increase in income tax receivable............. (2,138) -- -- --
Decrease (increase) in inventory.............. 2,259 (2,759) -- --
Increase in due from parent................... (730) (531) (514) --
Increase in prepaid expenses and other current
assets...................................... (2,088) (518) (318) (671)
(Increase) decrease in other assets........... 556 414 732 --
(Decrease) increase in accounts payable and
accrued expenses............................ (2,230) 1,566 221 3,024
Increase in other liabilities................. 495 -- 929 161
------------ ------------- ------------- -------
Net cash provided by (used in) operating
activities................................ (8,340) 14,094 7,519 2,224
------------ ------------- ------------- -------
Cash flows from investing activities:
Purchases of property and equipment................. (2,089) (817) (376) (211)
Acquisition of the Company, net of cash acquired.... -- -- (35,808) --
Acquisition of Vector Data Systems, net of cash
acquired.......................................... -- (17,239) -- --
Acquisition of Techmatics, net of cash acquired..... (27,612) -- -- --
Purchases of investments............................ (5,574) -- -- --
Other, net.......................................... (113) -- -- --
------------ ------------- ------------- -------
Net cash used in investing activities....... (35,388) (18,056) (36,184) (211)
------------ ------------- ------------- -------
Cash flows from financing activities:
Proceeds from bank notes payable.................... 278,500 199,300 29,100 --
Initial capitalization.............................. -- -- 9,869 --
Principal payments on bank notes payable............ (232,200) (194,800) (9,500) --
Principal payments on Techmatics obligations........ (2,075) -- -- --
Proceeds from issuance of common stock.............. 22 -- -- --
Deferred financing costs............................ (1,015) -- (690) --
Transfers to Ogden, net............................. -- -- -- (1,079)
------------ ------------- ------------- -------
Net cash provided by (used in) financing
activities................................ 43,232 4,500 28,779 (1,079)
------------ ------------- ------------- -------
Net (decrease) increase in cash and cash
equivalents............................... (496) 538 114 934
Cash and cash equivalents, beginning of period........ 652 114 -- 1,785
------------ ------------- ------------- -------
Cash and cash equivalents, end of period.............. $ 156 $ 652 $ 114 $ 2,719
------------ ------------- ------------- -------
------------ ------------- ------------- -------
Supplemental disclosure of cash flow information:
Interest paid....................................... $ 5,721 $ 1,684 $ 1,100 $ --
Income taxes paid................................... 1,784 1,154 -- --
------------ ------------- ------------- -------
------------ ------------- ------------- -------
</TABLE>
F-16
<PAGE>
ANTEON CORPORATION AND SUBSIDIARIES
(A MAJORITY-OWNED SUBSIDIARY OF AZIMUTH TECHNOLOGIES, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
SUCCESSOR YEARS ENDED DECEMBER 31, 1998 AND 1997 AND THE SUCCESSOR PERIOD FROM
APRIL 1, 1996
TO DECEMBER 31, 1996; PREDECESSOR PERIOD FROM JANUARY 1, 1996 TO MARCH 31, 1996
(IN THOUSANDS)
Supplemental disclosure of noncash investing and financing activities:
As of September 30, 1998, the Company reached a settlement on the
arbitration proceedings related to the purchase of the Company from Ogden
Professional Services Corporation (note 1). The reduction of $4.85 million
of the consideration paid for the Company was recognized as a reduction of
the Ogden debt at the Azimuth level and the goodwill from the Anteon
acquisition.
In connection with the Techmatics acquisition (note 3), the Company assumed
$10 million of subordinated notes payable discounted as of the date of
acquisition to approximately $8,880,000. In May 1998, the Company assumed $4
million of future income tax obligations of the former shareholders of
Techmatics discounted to approximately $3.762 million as of the date of
acquisition. In addition, the Company entered into two-year noncompete
agreements valued at $2.85 million with certain executives of Techmatics
discounted to approximately $2.654 million as of the date of acquisition.
See accompanying notes to consolidated financial statements.
F-17
<PAGE>
ANTEON CORPORATION AND SUBSIDIARIES
(A MAJORITY-OWNED SUBSIDIARY OF AZIMUTH TECHNOLOGIES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(1) ORGANIZATION AND BUSINESS
Anteon Corporation ("Anteon" or the "Company") was acquired by Azimuth
Technologies, Inc. ("Azimuth") (formerly CIC Technologies, Inc.) effective April
1, 1996. Azimuth acquired all of the outstanding stock of Ogden Professional
Services Corporation, a wholly owned subsidiary of Ogden Technology Services
Corporation and an indirectly wholly owned subsidiary of Ogden Corporation
(collectively, "Ogden"). Upon completion of the acquisition, Ogden Professional
Services Corporation was renamed Anteon Corporation. The consideration paid by
Azimuth to Ogden was approximately $45.2 million, consisting of approximately
$36.7 million cash and a note payable to Ogden from Azimuth for $8.5 million.
The acquisition of Anteon was accounted for using the purchase method whereby
the net tangible and identifiable intangible assets acquired and liabilities
assumed were recognized at estimated fair market value as of the date of the
combination.
The total purchase price paid, including transaction costs, of approximately
$47.1 million was allocated to the assets and liabilities acquired as follows
(in thousands):
<TABLE>
<S> <C>
Cash and cash equivalents......................................................... $ 2,719
Accounts receivable............................................................... 38,591
Property and equipment............................................................ 1,633
Noncompete agreement.............................................................. 4,000
Other assets...................................................................... 3,230
Goodwill.......................................................................... 13,907
Accounts payable and accrued expenses............................................. (16,937)
---------
Total consideration......................................................... $ 47,143
---------
---------
</TABLE>
Subsequent to the date of the closing of the Anteon acquisition and in
accordance with the stock purchase agreement, the Company filed a demand for
arbitration against Ogden seeking refund of a portion of the purchase price. As
of September 30, 1998, the arbitration proceedings were settled and resulted in
a reduction of $4.85 million of the purchase price paid to Ogden in the 1996
acquisition of Anteon. The settlement was recognized as a reduction of the note
payable for Azimuth to Ogden and goodwill from the Anteon acquisition.
The Company provides professional information technology, systems and
software development, high technology research, and engineering services
primarily to the U.S. government and its agencies.
The Company is subject to all of the risks associated with conducting
business with the U.S. federal government, including the risk of contract
terminations at the convenience of the government, and including government
funding limitations.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The consolidated financial statements as of and for the years ended December
31, 1998 and 1997 and for the period from April 1, 1996 to December 31, 1996
represent the Company's financial position, results of operations and cash flows
subsequent to its acquisition by Azimuth. The financial statements for the
period from January 1, 1996 to March 31, 1996 represent the results of
operations and cash flows of Ogden
F-18
<PAGE>
ANTEON CORPORATION AND SUBSIDIARIES
(A MAJORITY-OWNED SUBSIDIARY OF AZIMUTH TECHNOLOGIES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
Professional Services Corporation. The financial information for the period
after the acquisition is presented on a different cost basis than that for the
period before the acquisition and, therefore, is not comparable. All material
intercompany transactions and accounts have been eliminated in consolidation.
The consolidated financial statements as of December 31, 1998 and 1997 also
include the assets and liabilities of Vector Data Systems, Inc. and its
majority-owned subsidiary, Vector Data Systems (U.K.) Limited, and Anteon's
wholly-owned subsidiaries, Anteon VDS-Korea (Korea) Limited and Vector Data
Systems Australia Pty. Ltd. (Australia), and their results of operations and
cash flows for the year ended December 31, 1998 and for the period August 29,
1997 to December 31, 1997, subsequent to its acquisition by the Company (see
note 3).
The consolidated financial statements as of December 31, 1998 also include
the assets and liabilities of Techmatics, Inc. and its results of operations and
cash flows for the period May 29, 1998 to December 31, 1998, subsequent to its
acquisition by the Company (see note 3).
(B) CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all cash balances and highly liquid
investments that have original maturities of three months or less.
(C) INVENTORY
Inventory consists of computer hardware and software products and is stated
at the lower of cost or market, on a first-in, first-out basis. The Company
established reserves for obsolete inventory of $500,000 and $0 as of December
31, 1998 and 1997, respectively.
(D) PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, or fair value if acquired through
a purchase business combination. For financial reporting purposes, depreciation
and amortization is provided using the straight-line method over the estimated
useful lives of the assets as follows:
<TABLE>
<S> <C>
Computer hardware and software............ 3 to 5 years
Furniture and equipment................... 5 to 7 years
shorter of estimated useful life or
Leasehold improvements.................... lease term
</TABLE>
(E) INVESTMENTS
The Company accounts for investments in debt and marketable equity
securities depending on the purpose of the investment. The Company's only
investment as of December 31, 1998 consists entirely of marketable equity
securities. Since the Company does not hold this investment principally for the
purpose of selling the investment in the near term, the Company classifies the
securities as available-for-sale. Accordingly, this investment is recognized at
fair market value and any unrealized gains (losses) are recognized as a
component of stockholders' equity. As of December 31, 1998, the aggregate fair
market value of the investments was $5,978,000, resulting in an unrealized gain
of $392,000.
F-19
<PAGE>
ANTEON CORPORATION AND SUBSIDIARIES
(A MAJORITY-OWNED SUBSIDIARY OF AZIMUTH TECHNOLOGIES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
(F) DEFERRED FINANCING COSTS
Costs associated with obtaining the Company's financing arrangements have
been deferred and are amortized over the term of the financing arrangements
using a method that approximates the effective interest method.
(G) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company follows the provisions of Statement of Financial Accounting
Standards No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND
LONG-LIVED ASSETS TO BE DISPOSED OF ("SFAS No. 121"). This Statement requires
that long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceed the fair values of
the assets.
(H) GOODWILL
The excess of the cost over the fair value of net tangible and identifiable
intangible assets acquired in purchase business combinations (goodwill) is
amortized on a straight-line basis over periods of 20 to 30 years. The Company
evaluates the recoverability of its goodwill annually in accordance with the
provisions of SFAS No. 121.
(I) OTHER INTANGIBLE ASSETS
The Company amortizes, on a straight-line basis, the allocated cost of
noncompete agreements entered into in connection with business combinations.
(J) REVENUE RECOGNITION
The Company provides professional services under long-term contracts,
primarily with the U.S. government. Revenues for cost-reimbursement contracts
are recorded on the basis of direct and indirect costs incurred and a ratable
portion of fee. Revenues under time-and-materials contracts are recorded at the
contracted rates as the labor hours and other direct costs are incurred.
Revenues under fixed-price contracts are recognized using the
percentage-of-completion method based on costs incurred in relation to total
estimated costs. Anticipated losses on contracts are recognized as soon as they
become known. Revenues from sales of products are generally recognized upon
acceptance by the customer, which is typically within thirty days of shipment.
(K) COSTS OF ACQUISITIONS
Costs incurred on successful acquisitions are capitalized as a cost of the
acquisition, while costs incurred by the Company for unsuccessful or
discontinued acquisition opportunities are expensed as incurred.
F-20
<PAGE>
ANTEON CORPORATION AND SUBSIDIARIES
(A MAJORITY-OWNED SUBSIDIARY OF AZIMUTH TECHNOLOGIES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
(L) INCOME TAXES
The Company is currently included in the consolidated income tax returns of
Azimuth. Prior to April 1, 1996, the Company was included in the consolidated
income tax returns of Ogden. However, the Company prepares its provisions for
income taxes as if it filed its income tax returns separately. The Company
calculates its income tax provision using the asset and liability method. Under
the asset and liability method, deferred income taxes are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts and the tax bases of existing assets and liabilities.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
taxes of a change in tax rates is recognized in income in the period that
includes the enactment date.
(M) FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS
The balance sheets of Vector Data Systems (U.K.) Limited, Anteon VDS (Korea)
Limited and Vector Data Systems Australia Pty. Ltd. (Australia) Limited are
translated to U.S. dollars for consolidated financial statement purposes using
the current exchange rates in effect as of year end. The revenue and expense
accounts of foreign subsidiaries are converted using a weighted average exchange
rate during the period. Gains and losses resulting from such translations are
included in accumulated comprehensive income in stockholders' equity. Gains and
losses from transactions denominated in foreign currencies are included in
current period income.
(N) ACCOUNTING FOR DEFERRED CONTRACT COSTS
During 1998, the Company adopted the provisions of Statement of Position No.
98-5, REPORTING ON THE COSTS OF START-UP ACTIVITIES ("SOP 98-5"), which requires
costs of start-up activities, including precontract costs, to be expensed as
incurred. During 1994 and 1995, the Company capitalized certain precontract
costs associated with two of its significant contracts (Capzone/Paczone
contracts). The remaining balances of the precontract costs were written-off
during 1998 in implementing SOP 98-5. The adoption of SOP 98-5 did not have a
material impact on the Company's financial position or results of operations.
(O) ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation plans using the intrinsic
value based method of accounting prescribed by APB Opinion No. 25, ACCOUNTING
FOR STOCK ISSUED TO EMPLOYEES; however, 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 had been applied.
(P) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of accounts receivable, accounts payable and accrued
liabilities approximate their fair market values as of December 31, 1998 and
1997 due to the relatively short duration of these financial instruments. The
carrying amounts of the Company's indebtedness approximate their fair values as
of December 31, 1998 and 1997 as they bear interest rates that approximate
market.
F-21
<PAGE>
ANTEON CORPORATION AND SUBSIDIARIES
(A MAJORITY-OWNED SUBSIDIARY OF AZIMUTH TECHNOLOGIES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
(Q) USE OF 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.
(R) RECLASSIFICATIONS
Certain reclassifications have been made to the 1997 and 1996 consolidated
financial statements to conform to the 1998 consolidated financial statement
presentation.
(3) ACQUISITIONS
(A) VECTOR DATA SYSTEMS, INC.
On August 29, 1997, the Company acquired all of the outstanding stock of
Vector Data Systems, Inc., as well as Vector's eighty percent interest in Vector
Data Systems (UK) Limited (collectively, "Vector"). The consideration paid by
Anteon to the former shareholders of Vector was approximately $19 million in
cash financed through borrowings under an existing revolving line of credit with
a financial institution (see note 7). Additional consideration of up to $6
million may be paid by the Company and is contingent upon Vector meeting certain
revenue and gross profit thresholds for 1998 and 1999. The maximum additional
consideration that could be paid to Vector for meeting or exceeding all of the
specified thresholds would be up to $3 million per year for 1998 and 1999.
Vector did not meet the revenue and gross profit thresholds in 1998. The
acquisition of Vector was accounted for using the purchase method whereby the
net tangible and identifiable intangible assets acquired and liabilities assumed
were recognized at their estimated fair market values as of the date of the
combination. Additional consideration earned by Vector would be accounted for by
the Company as an increase of goodwill from the combination.
The total purchase price paid, including transaction costs, of approximately
$19.5 million, was allocated to the assets and liabilities acquired as follows
(in thousands):
<TABLE>
<S> <C>
Cash and cash equivalents.......................................... $ 2,306
Accounts receivable................................................ 2,951
Prepaid expenses and other current assets.......................... 50
Property and equipment............................................. 340
Deferred tax assets, net........................................... 121
Goodwill........................................................... 17,215
Accounts payable and accrued expenses.............................. (3,414)
Minority interest.................................................. (24)
---------
Total consideration.......................................... $ 19,545
---------
---------
</TABLE>
Vector also provides professional information technology, systems and
software development, high technology research, and engineering services
primarily to the U.S. government and its agencies.
The following unaudited pro forma summary presents consolidated information
as if the Vector acquisition had occurred at April 1, 1996, the date of the
acquisition of Anteon by Azimuth. The pro forma
F-22
<PAGE>
ANTEON CORPORATION AND SUBSIDIARIES
(A MAJORITY-OWNED SUBSIDIARY OF AZIMUTH TECHNOLOGIES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
summary is provided for informational purposes only and is based on historical
information that does not necessarily reflect actual results that would have
occurred nor is it necessarily indicative of future results of operations of the
combined entity:
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 1,
1996
YEAR ENDED TO
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Total revenues................................................... $ 191,343 133,212
Total expenses................................................... 190,161 132,367
------------ ------------
Net income................................................. $ 1,182 845
------------ ------------
------------ ------------
</TABLE>
(B) TECHMATICS, INC.
On May 29, 1998, the Company acquired all of the outstanding stock of
Techmatics, Inc. ("Techmatics"), a subchapter S corporation. The consideration
paid by Anteon to the former shareholders and option holders of Techmatics was
approximately $31 million in cash, $27 million due at closing and financed
through an existing revolving line of credit with a financial institution (see
note 7), $4 million in cash payable in two non-interest bearing installments
payable no later than April 1, 1999, and $10 million in subordinated notes
payable. Additional consideration of up to $6.25 million may be paid by the
Company but is contingent upon Techmatics meeting certain operating profit
thresholds for its fiscal year ending June 30, 1999 or the year ending December
31, 1999 depending on the date chosen by Anteon. Interest at rates of 6 percent
per year and 7.5 percent per year accrue beginning September 30, 1999 and April
1, 2000, respectively, on the amount of contingent consideration to be paid
based on either the June 30, 1999 financial results or the December 31, 1999
financial results, respectively, whichever is chosen as the measurement date by
Anteon. The acquisition of Techmatics was accounted for using the purchase
method whereby the net tangible and identifiable intangible assets acquired and
liabilities assumed were recognized at their estimated fair market value as of
the date of combination. Additional consideration earned by Techmatics would be
accounted for by the Company as an increase of goodwill from the combination.
The total purchase price paid, including transaction costs, of approximately
$40.3 million, was allocated to the assets and liabilities acquired as follows
(in thousands):
<TABLE>
<S> <C>
Cash and cash equivalents......................................... $ 845
Accounts receivable............................................... 23,089
Prepaid expenses and other current assets......................... 168
Property and equipment............................................ 2,416
Other long-term assets............................................ 337
Noncompete agreements............................................. 2,850
Goodwill.......................................................... 26,779
Accounts payable and accrued expenses............................. (15,134)
Long-term debt.................................................... (786)
Other liabilities................................................. (251)
---------
Total consideration......................................... $ 40,313
---------
---------
</TABLE>
F-23
<PAGE>
ANTEON CORPORATION AND SUBSIDIARIES
(A MAJORITY-OWNED SUBSIDIARY OF AZIMUTH TECHNOLOGIES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
In conjunction with the purchase agreement, the Company entered into
noncompete agreements for approximately $2,850,000, payable over a three-year
period and discounted to $2,654,000 as of the date of acquisition, with three
employees of Techmatics. In addition, the Company assumed certain tax
obligations of the former shareholders of Techmatics amounting to $4,000,000
payable over the two-year period ended May 31, 1999, and discounted to
$3,762,000 as of the date of acquisition.
Techmatics also provides professional information technology, systems and
software development, high technology research, and engineering services
primarily to the U.S. government and its agencies.
The following unaudited pro forma summary presents consolidated information
as if the Techmatics acquisition had occurred at January 1, 1997. The pro forma
summary is provided for informational purposes only and is based on historical
information that does not necessarily reflect actual results that would have
occurred nor is it necessarily indicative of future results of operations of the
combined entity:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
Total revenues................................................... $ 282,539 239,284
Total expenses................................................... 279,970 239,073
------------ ------------
Net income................................................. $ 2,569 211
------------ ------------
------------ ------------
</TABLE>
(4) ACCOUNTS RECEIVABLE
The components of accounts receivable as of December 31, 1998 and 1997, are
as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Billed and billable...................................................... $ 67,018 27,496
Unbilled................................................................. 3,114 4,896
Retainages due upon contract completion.................................. 1,380 1,007
Allowance for doubtful accounts.......................................... (3,459) (3,994)
--------- ---------
Total.............................................................. $ 68,053 29,405
--------- ---------
--------- ---------
</TABLE>
Unbilled costs and fees and retainages billable upon completion of contracts
are amounts due primarily within one year and will be billed on the basis of
contract terms and delivery schedules.
The accuracy and appropriateness of the Company's direct and indirect costs
and expenses under its government contracts, and therefore its accounts
receivable recorded pursuant to such contracts, are subject to extensive
regulation and audit, including by the U.S. Defense Contract Audit Agency
("DCAA") or by other appropriate agencies of the U.S. government. Such agencies
have the right to challenge the Company's cost estimates or allocations with
respect to any government contract. Additionally, a substantial portion of the
payments to the Company under government contracts are provisional payments that
are subject to potential adjustment upon audit by such agencies. In the opinion
of management, any adjustments likely to result from inquiries or audits of its
contracts would not have a material adverse impact on the Company's financial
condition or results of operations.
F-24
<PAGE>
ANTEON CORPORATION AND SUBSIDIARIES
(A MAJORITY-OWNED SUBSIDIARY OF AZIMUTH TECHNOLOGIES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
(5) PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31, 1998 and
1997 (in thousands):
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Computer hardware and software............................................. $ 6,165 2,664
Furniture and equipment.................................................... 1,111 356
Leasehold improvements..................................................... 201 127
--------- ---------
7,477 3,147
Less--accumulated depreciation and amortization............................ (2,940) (1,562)
--------- ---------
$ 4,537 1,585
--------- ---------
--------- ---------
</TABLE>
(6) ACCRUED EXPENSES
The components of accrued expenses as of December 31, 1998 and 1997 are as
follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Accrued payroll and related benefits....................................... $ 10,923 5,758
Accrued subcontractor costs................................................ 4,693 1,823
Accrued additional consideration for Techmatics acqusition................. 2,940 --
Accrued legal.............................................................. 949 691
Accrued interest........................................................... 748 513
Other accrued expenses..................................................... 3,085 562
--------- ---------
$ 23,338 9,347
--------- ---------
--------- ---------
</TABLE>
(7) INDEBTEDNESS
(A) BANK LOAN AGREEMENT
Concurrent with the Anteon acquisition, the Company entered into a Business
Loan and Security Agreement (the "Bank Loan Agreement") with two commercial
banks. Under the terms of the Bank Loan Agreement, the Company entered into
promissory notes for an aggregate available financing facility of $38 million.
Concurrent with the Vector acquisition, the Bank Loan Agreement was amended (the
"Amended Bank Loan Agreement") whereby the financial institution increased the
promissory notes by $6 million for an aggregate available facility of $44
million. The facility was comprised of revolving promissory notes for aggregate
borrowings of up to $22 million based on a portion of eligible billed accounts
receivable (Facility A); revolving promissory notes for aggregate borrowings of
up to $16 million based on a portion of eligible unbilled accounts receivable
(Facility B); and term promissory notes for an aggregate of $6 million (Facility
C). The available facility limits on the Facility A and Facility B promissory
notes were approximately $17,760,000 and $10,860,000, respectively, as of
December 31, 1997. As of March 18, 1998, this Bank Loan Agreement was terminated
and replaced by a $125 million Credit Agreement as discussed below.
Prior to the Vector acquisition, interest on Facility A accrued at either
the prime rate plus 0.25 percent or the LIBOR Rate plus 2.5 percent. Under the
Amended Bank Loan Agreement, the interest rate on Facility A varied based on the
Company's ratio of debt to earnings before income taxes, depreciation and
F-25
<PAGE>
ANTEON CORPORATION AND SUBSIDIARIES
(A MAJORITY-OWNED SUBSIDIARY OF AZIMUTH TECHNOLOGIES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
amortization, calculated quarterly. Interest was payable on a quarterly basis.
During the years ended December 31, 1998 and 1997, interest on Facility A ranged
from 8.13 percent to 8.75 percent and 7.19 percent to 8.75 percent,
respectively. For the period April 1, 1996 through December 31, 1996, the
interest rate ranged from 8.03 percent to 8.5 percent.
Facility B accrued interest at either the prime rate plus 0.75 percent or
the LIBOR rate plus 3 percent and was payable on a quarterly basis. Interest
rates charged on Facility B ranged from 9.0 percent to 9.25 percent and 9.0
percent to 9.25 percent, respectively, during the years ended December 31, 1998
and 1997 and from 8.53 percent to 9.0 percent for the period from April 1, 1996
to December 31, 1996.
Facility C accrued interest at either the prime rate plus 1.25 percent or
the LIBOR rate plus 3.5 percent and was payable on a quarterly basis. Principal
amounts were due in equal quarterly installments of $500,000. Beginning in April
1997, additional principal amounts could also be due on the Facility C
promissory notes based on certain excess eligible billed accounts receivable
and/or excess cash flows, as defined in the Amended Bank Loan Agreement. No such
additional principal amounts became due during 1998 or 1997. Interest rates
charged on Facility C ranged from 9.22 percent to 9.75 percent and 9.0 percent
to 9.25 percent, respectively, during the years ended December 31, 1998 and 1997
and from 9.03 percent to 9.5 percent for the period from April 1, 1996 to
December 31, 1996.
As of December 31, 1998 and 1997, the outstanding amounts under the Bank
Loan Agreement are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Facility A.............................................................. $ -- 14,700
Facility B.............................................................. -- 6,400
Facility C.............................................................. -- 3,000
--------- ---------
$ -- 24,100
--------- ---------
--------- ---------
</TABLE>
Total interest expense incurred on these financial arrangements was
approximately $1,079,000 and $1,891,000, respectively, for the years ended
December 31, 1998 and 1997 and $1,382,000 for the period from April 1 1996 to
December 31, 1996 to December 31, 1996. Upon termination of this Bank Loan
Agreement, all principal and interest due on the existing Facilities A, B and C
was paid in full.
The bank notes were secured by certain assets of the Company and certain
assets of Vector. Vector's security interest was limited to its obligations
under these bank notes. The terms of the Amended Bank Loan Agreement restricted
the ability of the Company to pay dividends, although the Company could have
declared dividends payable to Azimuth in order for Azimuth to pay required
interest payments on certain of its long-term debt.
During 1997, the Company wrote off the remaining balance of deferred
financing costs of approximately $522,000 upon the effective date of the Amended
Bank Loan Agreement. This amount is recorded in interest expense in the
consolidated statement of income for the year ended December 31, 1997.
(B) CREDIT AGREEMENT
On March 18, 1998, the Company entered into a Credit Agreement (the "Credit
Agreement") with six commercial banks. Under the terms of the Credit Agreement,
the Company entered into promissory notes for an aggregate available financing
facility of $125 million. The new credit facility is comprised of a
F-26
<PAGE>
ANTEON CORPORATION AND SUBSIDIARIES
(A MAJORITY-OWNED SUBSIDIARY OF AZIMUTH TECHNOLOGIES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
revolving credit facility for aggregate borrowings of up to $75 million, based
on a portion of eligible billed accounts receivable and a portion of eligible
unbilled accounts receivable (Revolving Facility); and an acquisition credit
facility for aggregate borrowings of up to $50 million (Acquisition Facility).
The Revolving Facility and the Acquisition Facility both mature on March 18,
2003.
Under the Credit Agreement, the interest rate on the Revolving Facility
varies based on Anteon's ratio of debt to earnings before income taxes,
depreciation and amortization, calculated quarterly. Interest is payable on a
quarterly basis. During the year ended December 31, 1998, interest on the
Revolving Facility ranged from 7.8125 percent to 8.75 percent.
The interest rate on the Acquisition Facility varies using a
performance-based interest rate schedule measured using the Company's ratio of
debt-to-earnings before income taxes, depreciation and amortization and is
calculated quarterly. Interest is payable on a quarterly basis. Interest rates
charged on the Acquisition Facility ranged from 7.5 percent to 9.25 percent
during the year ended December 31, 1998.
As of December 31, 1998, the outstanding amounts under the Credit Agreement
are as follows (in thousands):
<TABLE>
<CAPTION>
1998
---------
<S> <C>
Revolving Facility................................................................. $ 35,400
Acquisition Facility............................................................... 35,000
---------
$ 70,400
---------
---------
</TABLE>
The remaining available facility limits on the Revolving Facility and
Acquisition Facility promissory notes were approximately $11.8 million and $15
million, respectively, as of December 31, 1998.
Total interest expense incurred on the Revolving and Acquisition Facilities
arrangements for the year ending December 31, 1998 was approximately $3,475,000.
The Revolving Facility is secured by certain assets of the Company and
certain assets of its subsidiaries. The subsidiaries' security interest is
limited to its obligations under these bank notes. The terms of the Credit
Agreement restrict the ability of the Company to pay dividends, although Anteon
may declare dividends payable to Azimuth in order to pay required payments on
certain of its long-term debt.
Deferred financing costs of approximately $874,000 relating to the Credit
Agreement are included in other assets in the accompanying consolidated balance
sheet as of December 31, 1998.
(C) SUBORDINATED NOTES PAYABLE
In connection with the purchase of Techmatics, the Company entered into
subordinated promissory notes with the Techmatics shareholders and option
holders as of the date of acquisition in the principal amount of $10,000,000,
discounted as of the date of acquisition to approximately $8,880,000.
The notes are to be paid in two installments with one-tenth of the total
amount payable due May 31, 1999 and the remaining nine-tenths due May 31, 2000.
Interest accrues beginning May 31, 1999 at 6 percent per year on four-ninths of
the principal amount outstanding. All overdue amounts accrue interest at 7.5
percent per year.
This debt is subordinate to the $125 million Credit Agreement.
F-27
<PAGE>
ANTEON CORPORATION AND SUBSIDIARIES
(A MAJORITY-OWNED SUBSIDIARY OF AZIMUTH TECHNOLOGIES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
Total interest expense incurred on the subordinated notes payable for the
year ended December 31, 1998 was approximately $423,000.
(D) FUTURE MATURITIES
Scheduled future maturities under the Company's indebtedness are as follows
(in thousands):
<TABLE>
<S> <C>
YEAR ENDING DECEMBER 31,
1999....................................................... $ 967
2000....................................................... 8,335
2001....................................................... --
2002....................................................... --
2003....................................................... 70,400
Thereafter................................................. --
---------
Total.................................................. $ 79,702
---------
---------
</TABLE>
(E) INTEREST RATE SWAP AGREEMENTS
The Company has entered into interest rate swap agreements to reduce the
impact of changes in interest rates on its Credit Agreement. At December 31,
1998, the Company had outstanding interest rate swap agreements with commercial
banks having a total notional principal amount of $15 million. Those swap
agreements effectively changed the Company's interest rate exposure for $5
million based on a May 1998 swap agreement, $5 million based on a June 1998 swap
agreement, and $5 million based on a September 1998 swap agreement on its $125
million Credit Agreement due March 13, 2003 to fixed rates of 5.8 percent, 5.75
percent and 5.02 percent, respectively. The interest rate swap agreements mature
as of December 31, 2002, December 31, 2003 and September 25, 2003, respectively.
The differential to be paid or received is accrued as interest rates change and
is recognized over the life of the agreements. The Company is exposed to credit
loss in the event of nonperformance by the other parties to the interest rate
swap agreements; however, the Company does not anticipate nonperformance by the
counterparties.
F-28
<PAGE>
ANTEON CORPORATION AND SUBSIDIARIES
(A MAJORITY-OWNED SUBSIDIARY OF AZIMUTH TECHNOLOGIES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(8) INCOME TAXES
The provisions for income taxes for the years ended December 31, 1998 and
1997, and the periods from April 1, 1996 to December 31, 1996 and January 1,
1996 to March 31, 1996, consist of the following (in thousands):
<TABLE>
<CAPTION>
SUCCESSOR
SUCCESSOR SUCCESSOR PERIOD FROM PREDECESSOR
YEAR ENDED YEAR ENDED APRIL 1, 1996 PERIOD FROM
DECEMBER DECEMBER TO JANUARY 1, 1996
31, 31, DECEMBER 31, TO
1998 1997 1996 MARCH 31, 1996
----------- ----------- ------------- ---------------
<S> <C> <C> <C> <C>
Current (benefit)
provision:
Federal.................. $ (115) $ 1,618 $ -- $ 235
State.................... (16) 290 -- 68
Foreign.................. 68 (19) -- --
----------- ----------- ----- -----
Total current
provision.......... (63) 1,889 -- 303
----------- ----------- ----- -----
Deferred provision
(benefit):
Federal.................. 2,067 (708) 360 --
State.................... 380 (118) 56 --
Foreign.................. (31) -- -- --
----------- ----------- ----- -----
Total current
provision
(benefit).......... 2,416 (826) 416 --
----------- ----------- ----- -----
Total income tax
provision.......... $ 2,353 $ 1,063 $ 416 $ 303
----------- ----------- ----- -----
----------- ----------- ----- -----
</TABLE>
The income tax provisions for the years ended December 31, 1998 and 1997,
and the periods from April 1, 1996 to December 31, 1996 and January 1, 1996 to
March 31, 1996 are different from that computed using the statutory U.S. federal
income tax rate of 34 percent as set forth below (in thousands):
<TABLE>
<CAPTION>
SUCCESSOR
SUCCESSOR SUCCESSOR PERIOD FROM PREDECESSOR
YEAR ENDED YEAR ENDED APRIL 1, 1996 PERIOD FROM
DECEMBER DECEMBER TO JANUARY 1, 1996
31, 31, DECEMBER 31, TO
1998 1997 1996 MARCH 31, 1996
----------- ----------- ------------- ---------------
<S> <C> <C> <C> <C>
Expected tax expense
computed at federal
rate..................... $ 1,648 $ 914 $ 416 $ 257
State taxes, net of federal
benefit.................. 197 111 37 46
Nondeductible expenses..... 42 9 18 --
Goodwill amortization...... 333 20 -- --
Foreign losses............. 123 9 -- --
Other...................... 10 -- (55) --
----------- ----------- ----- -----
$ 2,353 $ 1,063 $ 416 $ 303
----------- ----------- ----- -----
----------- ----------- ----- -----
</TABLE>
F-29
<PAGE>
ANTEON CORPORATION AND SUBSIDIARIES
(A MAJORITY-OWNED SUBSIDIARY OF AZIMUTH TECHNOLOGIES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
The tax effect of temporary differences that give rise to the deferred tax
assets and deferred tax liabilities as of December 31, 1998 and 1997, are
presented below (in thousands):
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Deferred tax assets:
Accrued expenses......................................................... $ 1,662 2,812
Intangible assets, due to differences in amortization.................... 2,791 1,581
Accounts receivable allowances........................................... 686 165
Property and equipment, due to differences in depreciation............... -- 142
--------- ---------
Total deferred tax assets............................................ 5,139 4,700
--------- ---------
Deferred tax liabilities:
Deductible goodwill, due to differences in amortization.................. 3,582 2,185
Revenue recognition differences.......................................... 3,332 1,860
Property and equipment, due to differences in depreciation............... 17 --
Other.................................................................... 61 7
--------- ---------
Total deferred tax liabilities....................................... 6,992 4,052
--------- ---------
Deferred tax assets (liabilities), net............................... $ (1,853) 648
--------- ---------
--------- ---------
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
asset will be realized. The ultimate realization of the deferred tax asset is
dependent upon the generation of future taxable income during the periods in
which temporary differences become deductible. Management considers scheduled
reversals of deferred tax liabilities, projected future taxable income, and tax
planning strategies that can be implemented by the Company in making this
assessment. Based upon the level of historical taxable income, scheduled
reversal of deferred tax liabilities, and projections of future taxable income
over the periods in which the temporary differences become deductible based on
available tax planning strategies, management presently believes that it is more
likely than not that the Company will realize all of the benefits of these
deductible differences and, accordingly, has established no valuation allowance
against the deferred tax assets as of December 31, 1998 or 1997.
(9) EMPLOYEE BENEFIT PLANS
Employees of the Company may participate in 401(k) retirement savings plans,
whereby employees may elect to make contributions pursuant to a salary reduction
agreement upon meeting eligibility requirements. Participants may contribute up
to 15 percent of salary in any calendar year to these Plans, provided that
amounts in total do not exceed certain statutory limits. The Company matches up
to 50 percent of the first 6 percent of a participant's contributions subject to
certain limitations. The Company made contributions to these plans of
approximately $1,995,000, $1,207,000, $819,000, and $282,000 for the years ended
December 31, 1998 and 1997, and the periods from April 1, 1996 to December 31,
1996 and January 1, 1996 to March 31, 1996, respectively.
Effective January 1, 1999, a defined contribution plan previously
established at the subsidiary level was merged into the Anteon plan.
F-30
<PAGE>
ANTEON CORPORATION AND SUBSIDIARIES
(A MAJORITY-OWNED SUBSIDIARY OF AZIMUTH TECHNOLOGIES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
Techmatics sponsors a defined health and welfare plan that provides health,
dental and short-term disability benefits for all eligible full-time employees
of Techmatics. The plan is self-insured and has specific employee stop-loss
coverage insurance of $50,000 and aggregate stop-loss coverage insurance which
is calculated based on monthly participation in the plan. Contributions to the
plan are made by both Techmatics and the employees and are maintained in a trust
fund intended to qualify as a tax-exempt Voluntary Employees' Beneficiary Trust
within the meaning of Section 501(c)(9) of the U.S. Internal Revenue Code.
Contributions by Techmatics are based upon estimates and on actual amounts of
claims processed. From the date of acquisition of Techmatics by the Company to
December 31, 1998, Techmatics made contributions to the plan of approximately
$879,000.
(10) EMPLOYEE STOCK OPTION PLAN
In February 1997, the Board of Directors approved the adoption of the Anteon
Corporation Omnibus Stock Plan (the Plan). At the discretion of the Board of
Directors, the Plan permits the granting of stock options, stock appreciation
rights, restricted or unrestricted stock awards, and/or phantom stock to
employees or directors of the Company. As of December 31, 1998, an aggregate of
325,000 shares of Anteon's common stock was reserved for issuance under the
Plan.
The exercise price of stock options granted is determined by the Board of
Directors but is not to be less than the fair value of the underlying shares of
common stock at the grant date.
For stock options granted to employees, 20 percent of the shares subject to
the options vest on the first anniversary of the grant date and an additional 20
percent vest on each succeeding anniversary of the grant date. The employees
have a period of three years from the vesting date to exercise the option to
purchase shares of the Company's common stock. In 1997, the Board of Directors
approved that 20 percent of the options issued on the August 1, 1997 grant date
vest immediately.
For stock options granted to directors of the Company, 33 1/3 percent of the
shares subject to the options vest on the first anniversary of the grant date
and an additional 33 1/3 percent vest on the two succeeding anniversaries of the
grant date. The directors have a period of two years from the vesting date to
exercise the option to purchase shares of the Company's common stock.
During 1998 and 1997, the Company granted stock options under this Plan for
151,450 and 171,630 shares, respectively, of the Company's common stock at
exercise prices ranging from $26.90 per share to
F-31
<PAGE>
ANTEON CORPORATION AND SUBSIDIARIES
(A MAJORITY-OWNED SUBSIDIARY OF AZIMUTH TECHNOLOGIES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
$37.30 per share and $6.75 per share to $18.37 per share, respectively. The
following tables summarize information regarding options under the Company's
stock option plans:
<TABLE>
<CAPTION>
WEIGHTED OUTSTANDING
AVERAGE AND
NUMBER OPTION PRICE EXERCISE EXERCISABLE
OF SHARES PER SHARE PRICE SHARES
--------- --------------- ----------- -----------
<S> <C> <C> <C> <C>
Outstanding at April 1, 1996 and December
31, 1996............................... -- $ -- $ -- $ --
Granted.............................. 171,630 6.75-$18.37 8.42 --
Exercised............................ -- -- -- --
Cancelled or expired................. (6,200) 6.75-$18.37 11.44 --
--------- --------------- ----------- -----------
Outstanding at December 31, 1997......... 165,430 6.75-$18.37 8.32 19,325
Granted.............................. 151,450 26.90-$37.30 36.80 --
Exercised............................ (1,740) 6.75-$18.37 13.43 --
Cancelled or expired................. (10,600) 6.75-$37.30 14.74 --
--------- --------------- ----------- -----------
Outstanding at December 31, 1998......... 304,540 $ 6.75-$37.30 $ 22.17 52,209
--------- --------------- ----------- -----------
--------- --------------- ----------- -----------
</TABLE>
Option and weighted average price information by price group is as follows:
<TABLE>
<CAPTION>
SHARES OUTSTANDING EXERCISABLE SHARES
------------------------------------- ------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER EXERCISE REMAINING NUMBER EXERCISE
OF SHARES PRICE LIFE OF SHARES PRICE
--------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
December 31, 1997:
$6.75................................ 143,130 $ 6.75 7.5 19,325 $ 6.75
$18.37............................... 22,300 $ 18.37 7.8 -- --
December 31, 1998:
$6.75................................ 139,090 $ 6.75 6.5 49,909 $ 6.75
$18.37 to $26.90..................... 16,500 $ 18.89 6.8 2,300 $ 18.37
$32.17 to $37.30..................... 148,950 $ 36.93 7.7 -- --
</TABLE>
The Company applies APB No. 25 and related interpretations in accounting for
the Plan. Adoption of the fair market value provisions prescribed in SFAS No.
123 is optional with respect to stock-based compensation to employees; however,
pro forma disclosures are required as if the Company adopted the fair value
recognition requirements under SFAS No. 123.
Had compensation cost for the Company's 1998 and 1997 grants under the Plan
been determined consistent with the fair market value provisions prescribed in
SFAS No. 123, the Company's pro forma net income for the years ended December
31, 1998 and 1997 would approximate $2,224,000 and $1,586,000, respectively,
using an expected option life of 7 years, dividend yield rate and volatility
rate of 0 percent, respectively, and a risk-free interest rate of 4.73 and 5.77
percent, respectively. The effects of applying SFAS No. 123 in this pro forma
disclosure are not indicative of future amounts.
F-32
<PAGE>
ANTEON CORPORATION AND SUBSIDIARIES
(A MAJORITY-OWNED SUBSIDIARY OF AZIMUTH TECHNOLOGIES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
(11) COMPREHENSIVE INCOME
During 1998, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 130, REPORTING COMPREHENSIVE INCOME ("SFAS No. 130").
SFAS No. 130 requires the display of comprehensive income, which includes the
Company's unrealized gains (losses) on investments and the accumulated foreign
currency translation adjustment. The Company has presented comprehensive income
as a component of the accompanying consolidated statements of stockholders'
equity. There were no unrealized gains (losses) on investments as of December
31, 1997 or 1996. During the year ended December 31, 1998, $392,000 of
unrealized gains on investments was recognized. The amount of accumulated
foreign currency translation adjustment was approximately $7,000 and $0 as of
December 31, 1998 or 1997, respectively.
(12) COMMITMENTS AND CONTINGENCIES
(A) LEASES
The Company leases facilities under operating leases expiring at various
dates through 2010. As of December 31, 1998, the aggregate minimum annual
rental commitments under noncancelable operating leases are as follows (in
thousands):
<TABLE>
<S> <C>
1999............................................................... $ 4,047
2000............................................................... 3,280
2001............................................................... 2,203
2002............................................................... 1,876
2003............................................................... 1,900
Thereafter......................................................... 13,172
---------
Total minimum lease payments................................. $ 26,478
---------
---------
</TABLE>
Rent expense under all operating leases for the year ended December 31, 1998
and 1997, and the periods from April 1, 1996 to December 31, 1996 and
January 1, 1996 to March 31, 1996 was approximately $5,644,000, $3,368,000,
$1,988,000, and $646,000, respectively.
(B) LEGAL PROCEEDINGS
The Company is involved in various legal proceedings in the ordinary course
of business. Management of the Company and its legal counsel cannot
currently predict the outcome of these matters, but do not believe that they
will have a material impact on the Company's financial position or results
of operations.
(C) MANAGEMENT FEES
During the year ended December 31, 1998, the Company incurred $400,000 of
management fees with Caxton-Iseman Capital, Inc., the majority shareholder
of Azimuth. No such fees were incurred in 1997 and 1996. Future management
fees due to Caxton-Iseman Capital, Inc. will be based upon the level of
advisory services provided to the Company.
F-33
<PAGE>
ANTEON CORPORATION AND SUBSIDIARIES
(A MAJORITY-OWNED SUBSIDIARY OF AZIMUTH TECHNOLOGIES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
(13) DOMESTIC SUBSIDIARIES SUMMARIZED FINANCIAL INFORMATION
As of April 1999, the Company is contemplating participating in a private
debt offering for up to $120,000,000 in Senior Subordinated Notes (the "Notes").
Under the current structure of the Notes, the Company's wholly-owned domestic
subsidiaries would be guarantors (the "Subsidiary Guarantors") of the Notes.
Such guarantees are full, unconditional and joint and several. Separate
financial statements of the Subsidiary Guarantors are not presented because the
Company's management has determined that they would not be material to
investors. The following supplemental financial information sets forth, on a
combined basis, balance sheets, statements of operations and statements of cash
flows information for the Subsidiary Guarantors, the Company's non-guarantor
subsidiaries and for the Company.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1998
--------------------------------------------------------------------
CONSOLIDATED
ANTEON GUARANTOR NON-GUARANTOR ELIMINATION ANTEON
CONDENSED CONSOLIDATED BALANCE SHEET CORPORATION SUBSIDIARIES SUBSIDIARIES ENTRIES CORPORATION
----------- ----------- --------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Cash....................................... $ 154 $ (233) $ 235 $ -- $ 156
Receivables................................ 37,955 29,908 190 -- 68,053
Other current assets....................... 4,558 573 216 -- 5,347
Property and equipment, net................ 2,076 2,422 39 -- 4,537
Due from parent............................ 6,625 -- -- -- 6,625
Investment in and advances to
subsidiaries............................. 21,177 (4,009) 222 (17,390) --
Other long-term assets..................... 57,686 752 12 -- 58,450
----------- ----------- ------ ----------- ------------
Total assets........................... $ 130,231 $ 29,413 $ 914 $ (17,390) $ 143,168
----------- ----------- ------ ----------- ------------
----------- ----------- ------ ----------- ------------
Indebtedness............................... 79,702 -- -- -- 79,702
Accounts payable........................... 9,910 2,394 278 -- 12,582
Accrued expenses........................... 15,904 7,138 296 -- 23,338
Other current liabilities.................. 2,444 64 -- -- 2,508
Other long-term liabilities................ 1,033 226 37 -- 1,296
----------- ----------- ------ ----------- ------------
Total liabilities...................... 108,993 9,822 611 -- 119,426
Minority interest in subsidiary............ -- 37 -- -- 37
Total stockholders' equity................. 21,238 19,554 303 (17,390) 23,705
----------- ----------- ------ ----------- ------------
Total liabilities and stockholders'
equity................................... $ 130,231 $ 29,413 $ 914 $ (17,390) $ 143,168
----------- ----------- ------ ----------- ------------
----------- ----------- ------ ----------- ------------
<CAPTION>
CONDENSED CONSOLIDATED STATEMENT OF
OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues................................... $ 186,995 $ 60,534 $ 2,376 $ (129) $ 249,776
Cost of revenues........................... 168,210 51,279 2,007 92 221,588
----------- ----------- ------ ----------- ------------
Gross profit............................... 18,785 9,255 369 (221) 28,188
Total operating expenses................... 11,748 5,873 345 (221) 17,745
----------- ----------- ------ ----------- ------------
Operating income........................... 7,037 3,382 24 -- 10,443
Interest expense (income), net............. 5,637 (13) (27) -- 5,597
Minority interest.......................... -- 25 -- -- 25
----------- ----------- ------ ----------- ------------
Income before provision for income taxes... 1,400 3,370 51 -- 4,821
Provision for income taxes................. 677 1,663 13 -- 2,353
----------- ----------- ------ ----------- ------------
Net income................................. $ 723 $ 1,707 $ 38 $ -- $ 2,468
----------- ----------- ------ ----------- ------------
----------- ----------- ------ ----------- ------------
</TABLE>
F-34
<PAGE>
ANTEON CORPORATION AND SUBSIDIARIES
(A MAJORITY-OWNED SUBSIDIARY OF AZIMUTH TECHNOLOGIES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1998
-----------------------------------------------------
CONSOLIDATED
ANTEON GUARANTOR NON- GUARANTOR ANTEON
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS CORPORATION SUBSIDIARIES SUBSIDIARIES CORPORATION
----------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
Net income................................................. $ 723 $ 1,707 $ 38 $ 2,468
Adjustments to reconcile change in net income to net cash
provided by (used for) operations:
Depreciation and amortization.......................... 898 877 62 1,837
Goodwill amortization.................................. 1,814 -- -- 1,814
Amortization of noncompetes............................ 530 -- -- 530
Amortization of deferred financing and contract costs.. 1,420 -- -- 1,420
Inventory obsolence reserve............................ 500 -- -- 500
Deferred income taxes.................................. 2,501 -- -- 2,501
Minority interest in earnings of subsidiary............ -- 25 -- 25
Changes in assets and liabilities:
Due from parent...................................... (730) -- -- (730)
(Increase) decrease in accounts receivable........... (15,996) 673 (236) (15,559)
Increase in income tax receivable.................... (2,138) -- -- (2,138)
Decrease in inventory................................ 2,259 -- -- 2,259
Increase in prepaid and other assets................. (446) (821) (265) (1,532)
Increase (decrease) in accounts payable and accrued
expenses........................................... (105) (2,678) 553 (2,230)
Increase (decrease) in other term liabilities........ 1,419 (843) (81) 495
----------- ----------- ----- ------------
Net cash provided by (used in) operating activities.. $ (7,351) $ (1,060) $ 71 $ (8,340)
----------- ----------- ----- ------------
Cash flows from investing activities:
Purchases of property and equipment.................... (1,402) (609) (78) (2,089)
Acquisition of Techmatics, net of cash acquired........ (30,532) 845 -- (29,687)
Purchases of investments............................... (5,574) -- -- (5,574)
Other, net............................................. (113) -- -- (113)
----------- ----------- ----- ------------
Net cash provided by (used in) investing
activities......................................... $ (37,621) $ 236 $ (78) $ (37,463)
----------- ----------- ----- ------------
Cash flow from financing activities
Proceeds from bank notes payable....................... 278,500 -- -- 278,500
Principal payments on bank notes payable............... (232,200) -- -- (232,200)
Intial Capitalization of Vecter Korea.................. (195) -- 195 --
Initial Capitalization of Vecter Australia............. (30) -- 30 --
Proceeds from issuance of common stock................. 22 -- -- 22
Deferred financing costs............................... (1,015) -- -- (1,015)
----------- ----------- ----- ------------
Net cash provided by financing activities............ $ 45,082 $ -- $ 225 $ 45,307
----------- ----------- ----- ------------
Net increase (decrease) in cash............................ 110 (824) 218 (496)
Cash, beginning of year.................................... 44 591 17 652
----------- ----------- ----- ------------
Cash, end of year.......................................... $ 154 $ (233) $ 235 $ 156
----------- ----------- ----- ------------
----------- ----------- ----- ------------
</TABLE>
F-35
<PAGE>
ANTEON CORPORATION AND SUBSIDIARIES
(A MAJORITY-OWNED SUBSIDIARY OF AZIMUTH TECHNOLOGIES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
------------------------------------------------------------------------
CONSOLIDATED
ANTEON GUARANTOR NON-GUARANTOR ELIMINATION ANTEON
CONDENSED CONSOLIDATED BALANCE SHEET CORPORATION SUBSIDIARIES SUBSIDIARIES ENTRIES CORPORATION
----------- ------------- ----------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Cash....................................... $ 44 $ 591 $ 17 $ -- $ 652
Receivables................................ 25,764 2,882 175 584 29,405
Other current assets....................... 5,649 44 (5) (1) 5,687
Property and equipment, net................ 1,300 275 10 -- 1,585
Due from parent............................ 1,045 -- -- -- 1,045
Other long-term assets..................... 30,198 -- -- -- 30,198
Investment in subsidiaries................. 3,130 -- -- (3,130) --
----------- ------ ----- ----------- ------------
Total assets........................... $ 67,130 $ 3,792 $ 197 $ (2,547) $ 68,572
----------- ------ ----- ----------- ------------
----------- ------ ----- ----------- ------------
Debt....................................... 24,100 -- -- -- 24,100
Accounts payable........................... 12,028 (110) 10 702 12,630
Accrued expenses........................... 8,860 477 10 -- 9,347
Other long-term liabilities................ 1,637 31 118 (119) 1,667
----------- ------ ----- ----------- ------------
Total liabilities...................... 46,625 398 138 583 47,744
Minority interest in subsidiary............ -- 12 -- -- 12
Total stockholders' equity................. 20,505 3,382 59 (3,130) 20,816
----------- ------ ----- ----------- ------------
Total liabilities and stockholders'
equity................................... $ 67,130 $ 3,792 $ 197 $ (2,547) $ 68,572
----------- ------ ----- ----------- ------------
----------- ------ ----- ----------- ------------
<CAPTION>
CONDENSED CONSOLIDATED STATEMENT OF
OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues................................... $ 170,736 $ 5,330 $ 226 -- $ 176,292
Cost of revenues........................... 154,968 4,263 308 -- 159,539
----------- ------ ----- ----------- ------------
Gross profit............................... 15,768 1,067 (82) -- 16,753
Total operating expenses................... 11,294 379 -- -- 11,673
----------- ------ ----- ----------- ------------
Operating income (loss).................... 4,474 688 (82) -- 5,080
Interest expense (income) net.............. 2,372 (6) (1) -- 2,365
Minority interest.......................... -- 13 13
----------- ------ ----- ----------- ------------
Income before provision for income taxes... 2,102 681 (81) -- 2,702
Provision for income taxes................. 824 271 (32) -- 1,063
----------- ------ ----- ----------- ------------
Net income................................. $ 1,278 $ 410 $ (49) $ $ 1,639
----------- ------ ----- ----------- ------------
----------- ------ ----- ----------- ------------
</TABLE>
F-36
<PAGE>
ANTEON CORPORATION AND SUBSIDIARIES
(A MAJORITY-OWNED SUBSIDIARY OF AZIMUTH TECHNOLOGIES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
-------------------------------------------------------
CONSOLIDATED
ANTEON GUARANTOR NON- GUARANTOR ANTEON
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOW CORPORATION SUBSIDIARIES SUBSIDIARIES CORPORATION
----------- ----------- --------------- ------------
<S> <C> <C> <C> <C>
Net income (loss).......................................... $ 1,278 410 (49) 1,639
Adjustments to reconcile change in net income (loss) to net
cash provided by operations:
Minority interest in earnings of subsidiaries.......... -- (13) -- (13)
Depreciation and amortization.......................... 843 42 10 895
Goodwill amortization.................................. 742 -- -- 742
Amortization of noncompete agreements.................. 2,286 -- -- 2,286
Amortization of deferred financing and contract costs.. 1,209 -- -- 1,209
Loss on disposal of equipment.......................... 16 5 -- 21
Deferred income taxes.................................. (943) -- -- (943)
Changes in assets and liabilities:
Due from parent........................................ (531) -- -- (531)
(Increase) decrease in accounts receivable............. 8,322 1,939 (175) 10,086
Decrease in inventory.................................. (2,759) -- -- (2,759)
(Increase) decrease in prepaid and other assets........ (245) (279) 6 (518)
Decrease in other assets............................... 414 -- -- 414
Increase (decrease) in accounts payable and accrued
expenses............................................. 3,403 (1,857) 20 1,566
Increase (decrease) in other term liabilities.......... (378) 274 104 --
----------- ----------- ----- ------------
Net cash provided by operating activities.................. $ 13,657 $ 521 $ (84) $ 14,094
----------- ----------- ----- ------------
Cash flows from investing activities:
Purchases of property and equipment.................... (796) (1) (20) (817)
Acquisition of Vector Data, net of cash................ (17,239) -- -- (17,239)
----------- ----------- ----- ------------
Net cash used in investing activities...................... $ (18,035) $ (1) $ (20) $ (18,056)
Cash flow from financing activities
Proceeds from bank notes payable....................... 199,300 -- -- 199,300
Principal payments on bank notes payable............... (194,800) -- -- (194,800)
Initial Capitalization of Vector U.K................... -- (121) 121 --
----------- ----------- ----- ------------
Net cash provided by financing activities.................. $ 4,500 $ (121) $ 121 $ 4,500
----------- ----------- ----- ------------
Net increase (decrease) in cash............................ 122 399 17 538
Cash, beginning of year.................................... (78) 192 -- 114
----------- ----------- ----- ------------
Cash, end of year.......................................... $ 44 $ 591 $ 17 $ 652
----------- ----------- ----- ------------
----------- ----------- ----- ------------
</TABLE>
F-37
<PAGE>
TECHMATICS, INC.
UNAUDITED CONSOLIDATED BALANCE SHEET
MARCH 31, 1998
<TABLE>
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS
Cash................................................................................... $ 691,656
Accounts receivable:
Billed............................................................................... 15,321,788
Unbilled............................................................................. 5,323,289
Prepaid expenses and other............................................................. 810,362
Notes receivable from employees........................................................ 302,725
----------
TOTAL CURRENT ASSETS..................................................................... 22,449,820
PROPERTY AND EQUIPMENT
Computer equipment..................................................................... 4,954,820
Furniture and equipment................................................................ 1,907,799
Real property.......................................................................... 155,517
Leasehold improvements................................................................. 251,752
Automobiles............................................................................ 60,529
----------
7,330,417
Less accumulated depreciation and amortization......................................... (4,959,689)
----------
PROPERTY AND EQUIPMENT, NET.............................................................. 2,370,728
NONCURRENT ASSETS
Other assets........................................................................... 1,191,226
Net assets of discontinued operations.................................................. 430,496
----------
TOTAL ASSETS............................................................................. $26,442,270
----------
----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Line of credit......................................................................... $1,856,400
Accounts payable....................................................................... 2,989,550
Accrued expenses....................................................................... 6,779,167
State income taxes payable............................................................. 66,426
----------
TOTAL CURRENT LIABILITIES................................................................ 11,691,543
----------
DEFERRED RENT, net of current portion.................................................... 35,932
DEFERRED STATE INCOME TAXES.............................................................. 101,382
OTHER LONG-TERM LIABILITIES.............................................................. 1,273,992
----------
TOTAL LIABILITIES........................................................................ 13,102,849
COMMITMENTS AND CONTINGENCIES............................................................
STOCKHOLDERS' EQUITY
Common stock
Class A, voting, $0.01 par value, 2,500,000 shares authorized, 1,463,334 shares
issued and outstanding.............................................................. 14,633
Class A, nonvoting, $0.01 par value, 7,500,000 shares authorized, 658,066 shares
issued and outstanding.............................................................. 6,580
Additional paid-in capital............................................................. 473,924
Retained earnings...................................................................... 12,844,284
----------
TOTAL STOCKHOLDERS' EQUITY............................................................... 13,339,421
----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............................................... $26,442,270
----------
----------
</TABLE>
The accompanying notes are an integral part of these unaudited statements.
F-38
<PAGE>
TECHMATICS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31,
-----------------------------
<S> <C> <C>
1998 1997
------------- --------------
<CAPTION>
CONTRACT REVENUES.................................................................. $ 51,389,599 $ 39,683,673
<S> <C> <C>
CONTRACT AND ADMINISTRATIVE COSTS.................................................. 48,068,972 37,587,445
------------- --------------
3,320,627 2,096,228
INTEREST EXPENSE, net of interest income of $0 and $104,391 for the nine months
ended March 31, 1998 and 1997, respectively....................................... (195,505) 98,020
------------- --------------
EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES............................ 3,125,122 2,194,248
PROVISION FOR INCOME TAXES......................................................... -- --
------------- --------------
NET EARNINGS FROM CONTINUING OPERATIONS............................................ 3,125,122 2,194,248
DISCONTINUED OPERATIONS:
Loss from operations of TIAC..................................................... -- (1,509,885)
------------- --------------
NET EARNINGS....................................................................... $ 3,125,122 $ 684,363
------------- --------------
------------- --------------
</TABLE>
The accompanying notes are an integral part of these unaudited statements.
F-39
<PAGE>
TECHMATICS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31,
----------------------------
1998 1997
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings from continuing operations........................................... $ 3,125,122 $ 2,194,248
Loss from operations of discontinued subsidiary................................... -- (1,509,885)
------------- -------------
Net earnings...................................................................... 3,125,122 684,363
Adjustments to reconcile net earnings to net cash provided by operating activities
Depreciation and amortization................................................... 866,245 956,723
Changes in assets and liabilities
Increase in accounts receivable............................................... (4,761,127) (602,742)
Decrease (increase) in prepaid expenses and other assets...................... (78,980) 659,034
Decrease in other assets...................................................... 140,460 102,164
Decrease in net assets of discontinued operations............................. 130,933 --
Decrease in accounts payable.................................................. (599,228) (1,302,419)
Increase in accrued expenses.................................................. 1,902,047 837,009
(Decrease) increase in state income taxes payable............................. 36 (35,000)
Decrease in long-term deferred rent........................................... (8,185) (58,205)
Increase in other long-term liabilities....................................... 148,575 179,286
------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES........................................... 865,898 1,420,213
------------- -------------
CASH FLOWS USED IN INVESTING ACTIVITIES
Purchases of property and equipment............................................... (544,322) (1,472,244)
Distributions on note receivable.................................................. (302,725) --
Proceeds from sale of investments................................................. -- 2,287,484
Purchases of investments, net..................................................... -- --
------------- -------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES................................. (847,047) 815,240
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (repayments) under line-of-credit agreement........................ 329,600 1,665,100
Proceeds from exercise of stock options........................................... -- 38,171
Repurchase of common stock........................................................ -- (69,723)
Distribution to shareholders...................................................... -- (2,545,000)
Dividends paid to shareholders.................................................... -- (1,250,000)
------------- -------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES................................. 329,600 (2,161,452)
------------- -------------
NET INCREASE IN CASH................................................................ 348,451 74,001
CASH AT BEGINNING OF PERIOD......................................................... 343,205 117,730
------------- -------------
CASH AT END OF PERIOD............................................................... $ 691,656 $ 191,731
------------- -------------
------------- -------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for--
Income taxes.................................................................... $ -- $ 35,000
------------- -------------
------------- -------------
Interest........................................................................ $ 195,277 $ 29,901
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these unaudited statements.
F-40
<PAGE>
TECHMATICS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
NOTE 1--UNAUDITED INTERIM FINANCIAL INFORMATION
The unaudited consolidated balance sheet, statements of earnings and cash
flows as of March 31, 1998 and for the nine months ended March 31, 1998 and 1997
have been prepared in accordance with generally accepted accounting principles
for interim financial information. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the interim period are
not necessarily indicative of the results that may be expected for any future
period, including the year ending June 30, 1998.
NOTE 2--INCOME TAXES
Through March 31, 1998, the Company continued its election to be treated as
an S Corporation for federal and certain state income tax purposes. Accordingly,
the accompanying unaudited consolidated statements of earnings show no provision
for federal income taxes. State income taxes in those states that do not
recognize the Company's S Corporation status were not significant.
NOTE 3--SUBSEQUENT EVENT--DISCONTINUED OPERATIONS OF TECHMATICS INFORMATION
ALLIANCE AND COMMUNICATIONS (TIAC)
On July 1, 1997, the Company adopted a formal plan to discontinue the
operations of Techmatics Information Alliance and Communications (TIAC). TIAC
was a provider of information services to commercial customers, principally
related to the Internet. Certain assets were sold for cash to an unrelated third
party. Other assets were liquidated in the ordinary course of business. Assets
disposed of consisted primarily of accounts receivable, supplies and equipment.
The results of operations of TIAC for the nine months ended March 31, 1997
have been reported as discontinued operations. Net sales for TIAC for the nine
months ended March 31, 1998 and 1997 were $0 and approximately $690,000,
respectively.
NOTE 4--SUBSEQUENT EVENT
Effective May 29, 1998, all of the Company's outstanding common stock was
acquired by Anteon Corporation, a privately-held company that provides
professional services primarily to the U.S. Government and its agencies.
F-41
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
TECHMATICS, Inc.
We have audited the accompanying consolidated balance sheet of TECHMATICS,
Inc., and subsidiary as of June 30, 1997, and the related consolidated
statements of income, changes in stockholders' equity and cash flows for the
year then ended. 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 audit.
We conducted our audit 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 audit provides 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 TECHMATICS,
Inc., and subsidiary as of June 30, 1997, and the results of its operations and
its cash flows for the year then ended in conformity with generally accepted
accounting principles.
Grant Thornton LLP
Vienna, Virginia
August 8, 1997 (except for Note C,
as to which the date is August 31, 1997)
F-42
<PAGE>
TECHMATICS, INC.
CONSOLIDATED BALANCE SHEET
JUNE 30, 1997
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS
Cash................................................................................... $ 343,205
Accounts receivable
Billed............................................................................... 12,598,142
Unbilled............................................................................. 3,285,808
Prepaid expenses and other............................................................. 617,653
Notes receivable from employees........................................................ 113,729
----------
TOTAL CURRENT ASSETS..................................................................... 16,958,537
PROPERTY AND EQUIPMENT
Computer equipment..................................................................... 4,539,084
Furniture and equipment................................................................ 1,809,120
Real property.......................................................................... 155,517
Leasehold improvements................................................................. 375,952
----------
6,879,673
Less accumulated depreciation and amortization......................................... (4,187,022)
----------
PROPERTY AND EQUIPMENT, NET.............................................................. 2,692,651
NONCURRENT ASSETS
Other assets........................................................................... 1,331,686
Net assets of discontinued operations.................................................. 708,324
----------
TOTAL ASSETS............................................................................. $21,691,198
----------
----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Line of credit......................................................................... $1,526,800
Accounts payable....................................................................... 3,588,778
Accrued expenses....................................................................... 4,877,120
State income taxes payable............................................................. 66,390
----------
TOTAL CURRENT LIABILITIES................................................................ 10,059,088
DEFERRED RENT, net of current portion.................................................... 44,117
DEFERRED STATE INCOME TAXES.............................................................. 101,382
OTHER LONG-TERM LIABILITIES.............................................................. 1,125,417
----------
TOTAL LIABILITIES........................................................................ 11,330,004
COMMITMENTS AND CONTINGENCIES............................................................
STOCKHOLDERS' EQUITY
Common stock
Class A, voting, $0.01 par value, 2,500,000 shares authorized, 1,463,334 shares
issued and outstanding.............................................................. 14,633
Class A, nonvoting, $0.01 par value, 7,500,000 shares authorized, 658,066 shares
issued and outstanding.............................................................. 6,580
Additional paid-in capital........................................................... 473,924
Retained earnings.................................................................... 9,866,057
----------
TOTAL STOCKHOLDERS' EQUITY............................................................... 10,361,194
----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............................................... $21,691,198
----------
----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-43
<PAGE>
TECHMATICS, INC.
CONSOLIDATED STATEMENT OF EARNINGS
YEAR ENDED JUNE 30, 1997
<TABLE>
<S> <C>
CONTRACT REVENUE............................................................... $56,676,949
CONTRACT AND ADMINISTRATIVE COSTS.............................................. 52,882,124
----------
3,794,825
INTEREST INCOME, net of interest expense of $29,901............................ 78,300
OTHER EXPENSES................................................................. (308,594)
----------
EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES........................ 3,564,531
PROVISION FOR INCOME TAXES..................................................... 29,278
----------
NET EARNINGS FROM CONTINUING OPERATIONS........................................ 3,535,253
DISCONTINUED OPERATIONS
Loss from operations of TIAC, net of income taxes of $27,235................. (2,231,731)
Loss on disposal of TIAC, including provision of operating losses of $149,459
during phase-out period, net of income tax benefit of $9,385............... (786,596)
----------
NET EARNINGS................................................................... $ 516,926
----------
----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-44
<PAGE>
TECHMATICS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEAR ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
COMMON STOCK
-------------------------------------------
VOTING NONVOTING ADDITIONAL
--------------------- -------------------- PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS TOTAL
---------- --------- --------- --------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30,
1996.................... 1,463,334 $ 14,633 616,526 $ 6,165 $ 384,630 $ 13,189,301 $ 13,594,729
Exercise of Stock
Options................. -- -- 60,540 605 114,424 -- 115,029
Stock Repurchased and
Canceled................ -- -- (19,000) (190) (25,130) (45,170) (70,490)
Distributions to
Shareholders............ -- -- -- -- -- (2,545,000) (2,545,000)
Dividends Paid........... -- -- -- -- -- (1,250,000) (1,250,000)
Net Income............... -- -- -- -- -- 516,926 516,926
---------- --------- --------- --------- ----------- ------------- -------------
Balance at June 30,
1997.................... 1,463,334 $ 14,633 658,066 $ 6,580 $ 473,924 $ 9,866,057 $ 10,361,194
---------- --------- --------- --------- ----------- ------------- -------------
---------- --------- --------- --------- ----------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-45
<PAGE>
TECHMATICS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED JUNE 30, 1997
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings from continuing operations....................................... $3,535,253
Loss from operations of discontinued subsidiary, TIAC......................... (2,231,731)
Loss on disposal of subsidiary................................................ (786,596)
----------
Net earnings.................................................................. 516,926
----------
Adjustments to reconcile net earnings to net cash provided by operating
activities
Loss on disposal of property and equipment.................................. 7,274
Depreciation and amortization............................................... 1,200,685
Provision for deferred state income taxes................................... (4,990)
Changes in assets and liabilities
Increase in accounts receivable........................................... (2,238,902)
Decrease in prepaid expenses and other assets............................. 386,059
Decrease in other assets.................................................. 3,552
Increase in net assets of discontinued operations......................... (53,398)
Increase in accounts payable.............................................. 1,327,301
Increase in accrued expenses.............................................. 1,054,482
Decrease in state income taxes payable.................................... (732)
Decrease in long-term deferred rent....................................... (14,088)
Increase in other long-term liabilities................................... 230,625
----------
Total Adjustments............................................................... 1,897,868
----------
NET CASH PROVIDED BY OPERATING ACTIVITIES....................................... 2,414,794
----------
CASH FLOWS USED IN INVESTING ACTIVITIES
Purchases of property and equipment........................................... (2,322,816)
Repayments on note receivable................................................. (7,193)
Proceeds from sale of investments............................................. 2,351,093
----------
NET CASH USED IN INVESTING ACTIVITIES........................................... 21,084
----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under line-of-credit agreement................................. $1,526,800
Proceeds from exercise of stock options....................................... 151,654
Repurchase of common stock.................................................... (70,490)
Distribution to shareholders.................................................. (2,545,000)
Dividends paid to shareholders................................................ (1,250,000)
----------
NET CASH USED IN FINANCING ACTIVITIES........................................... (2,187,036)
----------
NET INCREASE IN CASH............................................................ 248,842
CASH AT BEGINNING OF YEAR....................................................... 94,363
----------
CASH AT END OF YEAR............................................................. $ 343,205
----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for--
Income taxes................................................................ $ 35,000
----------
Interest.................................................................... $ 29,901
----------
----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-46
<PAGE>
TECHMATICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
TECHMATICS, Inc. (the Company), was incorporated March 15, 1982, under the
laws of the Commonwealth of Virginia for the purpose of engaging in a consulting
business. The Company specializes in engineering, management, and information
technology services primarily for agencies of the U.S. government. Services are
also provided to commercial enterprises.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
TECHMATICS, Inc., and its wholly owned subsidiary. Material intercompany
accounts and transactions have been eliminated.
REVENUE FROM CONTRACTS
Most of the Company's revenue is generated from cost-plus fixed fee level of
effort contracts, which require the Company to perform agreed-upon amounts of
labor hours within specified categories and skill levels. In return, the Company
receives reimbursement of its direct and indirect costs of contract performance,
within stipulated limits, plus a negotiated fixed fee representing the Company's
gross profit. Revenue derived from this type of contract totaled 86% of revenue
for fiscal year 1997 and is recognized on the basis of reimbursable costs
incurred plus a pro rata portion of fees earned.
Revenue on time-and-materials contracts totaled 6% of revenue for fiscal
year 1997 and is recognized on the basis of direct-labor hours and reimbursable
materials costs incurred. Revenue on fixed-price contracts totaled 8% of revenue
for fiscal year 1997 and is recorded on the percentage-of-completion method
based upon costs incurred in relation to total estimated costs. Losses are
recorded in full when determinable.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Expenditures for maintenance,
repairs, and improvements which do not materially extend the useful lives of
assets are expensed as incurred. The Company depreciates its property and
equipment using primarily the straight-line method based on estimated useful
lives of assets. Certain computer equipment is depreciated using accelerated
methods. Leasehold improvements are amortized over the shorter of the terms of
the respective leases or the estimated useful lives. Estimated useful lives of
property and equipment and leasehold improvements are as follows:
<TABLE>
<S> <C>
Computer equipment.......................... 3-5 years
Furniture and equipment..................... 4-5 years
Lesser of lease term or useful
Leasehold improvements...................... life
Real property............................... 30 years
</TABLE>
INCOME TAXES
The accompanying consolidated financial statements are presented on the
accrual basis of accounting, which recognizes income when earned and recognizes
costs and expenses when incurred, as required by generally accepted accounting
principles. However, for tax reporting purposes, the Company computes its
F-47
<PAGE>
TECHMATICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
income or loss on the cash basis, wherein income is recognized when collected in
cash, and costs and expenses are recognized as cash is paid.
The Company has elected S corporation status for federal and certain state
income tax purposes. Under such election, the taxable income or loss of the
Company is apportioned among the Company's stockholders, based upon their
percentage of ownership during the year, and included in the individual tax
returns of the stockholders. Therefore, the accompanying consolidated statement
of earnings shows no provision by the Company for federal income taxes. For the
year ended June 30, 1997, the Company has recorded a provision of $29,278, for
income taxes, in certain states that do not recognize the Company's S status or
in which the Company chose not to elect S status.
The Company intends to terminate its S election effective January 1, 1998.
If the Company had elected to terminate the S status at June 30, 1997, the
Company would have recorded a one-time charge against income from continuing
operations of approximately $4,000,000. The charge will reflect a deferred
income tax liability arising as a result of cumulative differences between
financial statement and income tax reporting, principally relating to the
adjustments from the accrual method to the cash method of accounting.
USE OF ESTIMATES IN PREPARING FINANCIAL STATEMENTS
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenue and expenses during the reporting period. Loss on discontinued
operations of the subsidiary (see Note C) includes estimated costs to dispose of
the subsidiary during the phase-out period, net of any income tax benefits
resulting from the discontinuance of operations. Actual results could differ
from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
At June 30, 1997, the Company's carrying value of financial instruments
approximated fair value. Carrying amounts for accounts receivable, notes
receivable, accounts payable, line of credit and deferred income taxes
approximate fair value because of the short maturity of such instruments.
NOTE B--UNBILLED ACCOUNTS RECEIVABLE
Unbilled accounts receivable represent revenue recognized for work performed
but not billed at year-end. Unbilled amounts at June 30, 1997, are expected to
be billed in 1997 and thereafter. Amounts
F-48
<PAGE>
TECHMATICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
NOTE B--UNBILLED ACCOUNTS RECEIVABLE (CONTINUED)
expected to be collected after 1997 have been classified as current assets in
accordance with industry practice. Unbilled amounts consist of the following as
of June 30, 1997:
<TABLE>
<S> <C>
Billings in progress............................................ $1,324,107
Fee retentions.................................................. 974,222
Costs in excess of provisional billing rates.................... 450,284
Costs incurred and fees recorded on existing contracts prior to
execution of contract modification............................ 1,248,994
---------
3,997,607
Less allowance for doubtful accounts............................ (711,799)
---------
$3,285,808
---------
---------
</TABLE>
Certain unbilled receivables are not billable until a review of costs
incurred is performed by the Defense Contract Audit Agency (DCAA). Amounts
included in unbilled accounts receivable expected to be collected within one
year totaled $2,573,101 at June 30, 1997.
NOTE C--INVESTMENT IN AFFILIATE
In May 1995, the Company formed TECHMATICS Information Alliance and
Communications (TIAC), a Virginia limited liability company. TIAC provides
customers with information services, principally related to the Internet. The
Company invested $100,000 in the purchase of a 78% interest in TIAC, and agreed
to advance working capital funds as required by TIAC. In accordance with
generally accepted accounting principles, a minority interest in TIAC is not
recorded, as losses related to the minority interest exceed its equity in TIAC.
On July 1, 1997, the Company adopted a formal plan to discontinue the
operations of TIAC. On August 31, 1997, the Company disposed of TIAC. Assets
disposed of consisted primarily of accounts receivable; supplies; and property,
plant and equipment.
As of August 8, 1997, the operations are in the process of termination.
Certain assets were sold for cash to an unrelated third party. The remaining
assets and liabilities are being liquidated in the normal course of business.
The Company had guaranteed a lease for space in which TIAC conducted its
operations. The remaining obligations under the original terms of the lease are
approximately $478,000, payable monthly through February 28, 2001. The Company
has entered into a sublease for the space and has recognized a loss of
approximately $118,000, representing the difference between the Company's
obligation on the lease and the estimated future income from the sublease.
Additionally, in connection with the discontinuation of operations and
resulting employment terminations, the Company has accrued $155,000 of severance
pay.
The loss arising from the discontinued operations is $786,596 (net of income
tax benefit of $9,385) representing the loss on sale and liquidation of assets
of TIAC, and a provision of $149,459 for operating losses during the phase-out
period from July 1, 1997, through August 31, 1997.
F-49
<PAGE>
TECHMATICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
NOTE C--INVESTMENT IN AFFILIATE (CONTINUED)
Operating results of TIAC for the year ended June 30, 1997, are shown
separately in the accompanying statements of earnings.
Net sales of TIAC for 1997 were $812,239. The amounts are not included in
net sales in the accompanying income statements.
Assets and liabilities of TIAC consisted of the following at June 30, 1997:
<TABLE>
<S> <C>
Cash.............................................................. $ 63,147
Accounts receivable............................................... 264,366
Prepaids and other................................................ 56,882
Deferred tax benefit.............................................. 29,616
Net property, plant and equipment................................. 390,284
Other noncurrent assets........................................... 11,177
---------
Total assets.................................................. 815,472
---------
Accounts payable.................................................. 30,147
Accrued expenses.................................................. 20,102
Other noncurrent liabilities...................................... 56,899
---------
Total liabilities............................................. 107,148
---------
Net assets disposed of............................................ $ 708,324
---------
---------
</TABLE>
Assets are shown at their expected net realizable values; short-term notes
payable are shown at their face amounts.
Net assets to be disposed of, at expected net realizable values, have been
separately classified in the accompanying balance sheet at June 30, 1997.
F-50
<PAGE>
TECHMATICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
NOTE D--STOCKHOLDERS' EQUITY AND STOCK OPTIONS
STOCK OPTIONS
The Company has an employee stock option plan for key employees. The plan
was adopted in 1993, replacing a similar plan previously in effect since 1989.
Shares optioned under both the 1989 and 1993 plans are nonvoting common stock,
par value of $0.01 each. The 1993 plan provides for the issuance of a maximum of
1,300,000 shares. The Company values options at book value which approximates
market.
<TABLE>
<CAPTION>
SHARES UNDER EXERCISE
OPTION PRICE
------------- -------------
<S> <C> <C>
Balance, June 30, 1996.......................................... 467,190 $ 1.90 - 4.00
Granted....................................................... -- --
Exercised..................................................... (60,540) 1.90 - 1.90
Canceled...................................................... (33,200) 1.90 - 4.00
-------------
Balance, June 30, 1997.......................................... 373,450 $ 2.59 - 4.00
------------- -------------
------------- -------------
</TABLE>
As of June 30, 1997, 140,330 options are exercisable.
STOCK REPURCHASE AGREEMENT
Common stock is subject to a stock repurchase agreement whereby the Company
has the right of first refusal for any stock offered for sale by a stockholder
or upon termination of employment or death of a stockholder.
NOTE E--LINE OF CREDIT AND BANKING ARRANGEMENTS
The Company maintains a line of credit for borrowings of up to $8,000,000.
Principal is payable upon demand and interest is calculated using the 30-day
LIBOR rate plus 225 basis points. The LIBOR rate was 7.94% at June 30, 1997.
Borrowings are collateralized by accounts receivable. As of June 30, 1997, the
Company had drawn $1,526,800 on the line of credit, net of repayments.
The Company's principal disbursing accounts are maintained on a zero-balance
basis, wherein the bank invests any balances on hand daily in short-term
securities. In the event that checks presented for payment exceed available
balances, the bank advances necessary funds pursuant to the line-of-credit
agreement. As of June 30, 1997 the Company had issued checks in the aggregate
amounts of approximately $1,446,000 which amounts are classified as accounts
payable in the accompanying consolidated balance sheets.
F-51
<PAGE>
TECHMATICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
NOTE F--ACCRUED EXPENSES
Accrued expenses consist of the following at June 30, 1997:
<TABLE>
<S> <C>
Salaries and related expenses................................... $1,466,614
Accrued vacation................................................ 1,469,536
Accrued 401(k) contribution expenses............................ 281,456
Accrued subcontractor costs..................................... 664,700
Health claims................................................... 106,852
Deferred rent, current portion.................................. 5,000
Estimated expenses on disposal of discontinued operations....... 587,050
Other accrued expenses.......................................... 295,912
---------
$4,877,120
---------
---------
</TABLE>
NOTE G--COMMITMENTS AND CONTINGENCIES
CONTRACTS
Substantially all payments to the Company under cost-reimbursable contracts
and subcontracts are provisional reimbursements of claimed cost and the pro rata
portion of the fixed fee thereon. Eligibility of the costs for reimbursement is
subject to annual audits by the DCAA. Audits of fiscal years 1994 through 1996
have not been finalized, and the audit of fiscal year 1997 has not yet begun.
Management believes resolution of the audits will have no material effect
upon the financial position of the Company or the results of future operations.
LEASE COMMITMENTS
The Company is obligated as lessee under certain noncancelable operating
leases, primarily for office space required by its Northern Virginia
headquarters and principal operating locations.
Future minimum rent payments under the leases consist of the following:
<TABLE>
<CAPTION>
CONTINUING DISCONTINUED
YEAR ENDING JUNE 30, OPERATIONS OPERATIONS
- ----------------------------------------------------------------- ------------- ------------
<S> <C> <C>
1998............................................................. $ 3,288,378 $ 22,670
1999............................................................. 3,246,829 --
2000............................................................. 3,133,822 --
2001............................................................. 3,037,693 --
2002............................................................. 2,918,882 --
Thereafter....................................................... 153,001 --
------------- ------------
$ 15,778,605 $ 22,670
------------- ------------
------------- ------------
</TABLE>
The leases for office space allow for annual rent adjustments based on the
change in the U.S. Consumer Price Index and additional rent assessments as
specified in the lease terms.
F-52
<PAGE>
TECHMATICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
NOTE G--COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company subleases part of its office space to a related party under a
sublease agreement. Rent expense totaled $2,742,228 for 1997.
NOTE H--BENEFIT PLANS
Eligible employees of the Company may participate in a 401(k) savings plan
whereby employees may elect to make contributions pursuant to a salary reduction
agreement upon meeting age and length-of-service requirements. The directors, at
their discretion, elected to contribute to the 401(k) savings plan approximately
$436,000 for the plan year ended December 31, 1996. The Company accrued a
liability of approximately $281,000 for the period from January 1, 1997, through
June 30, 1997.
The Company has adopted a deferred compensation plan which provides
retirement and death benefits to certain officers of the Company. The plan is
funded by split-dollar life insurance policies for which the Company makes the
payments. In return, the officer, who is the owner of the policy, assigns
certain rights in the policy to secure the payments made by the Company, and the
Company is to receive a return of its funds before other benefits are paid.
Accordingly, the Company has recorded deposits of $1,115,000 at June 30, 1997.
The Company expects to pay out the amount of the deposits, when returned by
the insurance company in the future, to the officers covered as deferred
compensation, and intends to fund the plan for the required number of years. In
the event the Company were to discontinue funding the plan, some or all the
deposit may not be realized, depending on the cash surrender value of the
policies. The cash surrender value of the policies at June 30, 1997, was
$664,800.
The plan premium paid by the Company is recorded as a deposit with a
corresponding deferred compensation liability recorded at the present value of
the future benefits to be paid by the Company. In computing the present value of
the future benefits, the discount rate used is equal to the interest rate as
determined by the Secretary of the Treasury at fiscal year-end. At the end of
the plan period, the aggregate amount accrued will be equal to the present value
of the benefits expected to be provided to the employees.
The plan premiums of $228,000 were paid for the year ended June 30, 1997.
The deferred compensation liability accrued was $1,115,000 for the year ended
June 30, 1997.
NOTE I--RELATED PARTY TRANSACTIONS
The Company leases office space to a corporation, the owner of which is a
director of the Company. Total lease payments received under the lease amounted
to approximately $44,000 in 1997. Sublease income received by the Company is
recorded as a reduction to rent expense. The Company also has various contracts
and subcontracts with the same corporation. Costs paid to the related party
totaled approximately $372,200 in 1997.
The Company has a computer purchase program under which it makes
noninterest-bearing loans between $500 and $3,000 to employees for the purchase
of computer equipment and related items. The loans are repayable through payroll
deduction over a maximum of three years. As of June 30, 1997, aggregate
outstanding balances of such loans totaled approximately $231,600. The amount
currently due is included in "notes receivable from employees" and the long-term
portion is included in "other assets" in the accompanying balance sheet.
F-53
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
TECHMATICS, Inc.:
We have audited the accompanying consolidated balance sheets of TECHMATICS,
Inc. (a Virginia corporation), and subsidiary as of June 30, 1996 and 1995, and
the related consolidated statements of income, changes in stockholders' equity
and cash flows for the years then ended. 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 an 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 financial statements referred to above present fairly,
in all material respects, the financial position of TECHMATICS, Inc., and
subsidiary as of June 30, 1996 and 1995, and the results of its operations and
its cash flows for the years then ended, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Washington, D.C.
August 6, 1996 (except with respect to the matter discussed in
Note 10, as to which the date is July 1, 1997)
F-54
<PAGE>
TECHMATICS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash............................................................................. $ 94,363 $ 62,254
Investments...................................................................... 2,351,093 --
Accounts receivable-
Billed......................................................................... 12,802,214 15,265,709
Unbilled (Note 2).............................................................. 842,834 1,431,288
Prepaid expenses and other....................................................... 1,003,712 434,867
Notes receivable from employees (Note 9)......................................... 106,536 127,565
------------- -------------
Total current assets......................................................... 17,200,752 17,321,683
------------- -------------
PROPERTY AND EQUIPMENT:
Computer equipment............................................................... 2,846,234 2,372,709
Furniture and equipment.......................................................... 1,351,250 1,197,900
Real property.................................................................... 155,517 155,517
Leasehold improvements........................................................... 172,102 163,809
Automobiles...................................................................... 39,028 --
------------- -------------
Total cost................................................................... 4,564,131 3,889,935
Less- Accumulated depreciation and amortization.................................. (2,986,337) (2,117,093)
------------- -------------
Net property and equipment................................................... 1,577,794 1,772,842
------------- -------------
OTHER ASSETS....................................................................... 1,335,238 1,132,242
Net assets of discontinued operations (Note 10).................................... 654,926 --
------------- -------------
TOTAL ASSETS....................................................................... $ 20,768,710 $ 20,226,767
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................................. $ 2,261,477 $ 2,740,239
Accrued expenses (Note 4)........................................................ 3,786,013 1,874,834
Line of credit (Note 5).......................................................... -- 1,260,000
Deferred revenue................................................................. -- 21,104
Deferred state income taxes...................................................... 67,122 --
------------- -------------
Total current liabilities.................................................... 6,114,612 5,896,177
------------- -------------
Deferred state income taxes........................................................ 106,372 162,940
Deferred rent, net of current portion.............................................. 58,205 131,615
Other long-term liabilities........................................................ 894,792 690,329
------------- -------------
Total liabilities............................................................ 7,173,981 6,881,061
------------- -------------
Commitments and contingencies (Note 6)
STOCKHOLDERS' EQUITY:
Common stock (Note 7):
Class A, voting, $0.01 par value, 2,500,000 shares authorized, 1,463,334 and
1,530,000 shares issued and outstanding, respectively........................ 14,633 15,300
Class A, nonvoting, $0.01 par value, 7,500,000 shares authorized, 616,526 and
574,186 shares issued and outstanding, respectively.......................... 6,165 5,742
Additional paid-in capital..................................................... 384,630 587,701
Retained earnings.............................................................. 13,189,301 12,736,963
------------- -------------
Total stockholders' equity................................................... 13,594,729 13,345,706
------------- -------------
Total liabilities and stockholders' equity................................... $ 20,768,710 $ 20,226,767
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of this statement.
F-55
<PAGE>
TECHMATICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED JUNE 30, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Contract revenues.................................................................. $ 47,022,093 $ 45,235,967
Contract and administrative costs.................................................. 44,652,528 42,951,736
------------- -------------
Income from continuing operations............................................ 2,369,565 2,284,231
Interest income, net of interest expense of $8,504 and $1,486 in 1996 and 1995..... 187,052 188,250
Other expenses..................................................................... -- (40,955)
------------- -------------
Income from continuing operations before state income taxes.................. 2,556,617 2,431,526
Provision for state income taxes, deferred......................................... (35,797) (32,484)
------------- -------------
Net income from continuing operations........................................ $ 2,520,820 $ 2,399,042
Discontinued Operations (Note 10)
Loss from operations of TIAC, net of income tax benefit of $25,243........... (2,068,482) --
------------- -------------
Net income......................................................................... $ 452,338 $ 2,399,042
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of this statement.
F-56
<PAGE>
TECHMATICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1996 AND 1995
<TABLE>
<CAPTION>
COMMON STOCK
-------------------------------------------
VOTING NONVOTING ADDITIONAL
--------------------- -------------------- PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS TOTAL
---------- --------- --------- --------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1994.............. 1,530,000 $ 15,300 455,356 $ 4,554 $ 505,780 $ 10,913,238 $ 11,438,872
Exercise of stock options......... -- -- 127,780 1,278 91,402 -- 92,680
Stock repurchased and canceled.... -- -- (8,950) (90) (9,481) (18,085) (27,656)
Dividends paid.................... -- -- -- -- -- (557,232) (557,232)
Net income........................ -- -- -- -- -- 2,399,042 2,399,042
---------- --------- --------- --------- ---------- ------------- -------------
Balance, June 30, 1995.............. 1,530,000 15,300 574,186 5,742 587,701 12,736,963 13,345,706
---------- --------- --------- --------- ---------- ------------- -------------
Exercise of stock options......... -- -- 51,040 510 65,878 -- 66,388
Stock repurchased and canceled.... (66,666) (667) (8,700) (87) (268,949) -- (269,703)
Net income........................ -- -- -- -- -- 452,338 452,338
---------- --------- --------- --------- ---------- ------------- -------------
Balance, June 30, 1996.............. 1,463,334 $ 14,633 616,526 $ 6,165 $ 384,630 $ 13,189,301 $ 13,594,729
---------- --------- --------- --------- ---------- ------------- -------------
---------- --------- --------- --------- ---------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of this statement.
F-57
<PAGE>
TECHMATICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income from continuing operations............................................. $ 2,546,063 $ --
Loss from operations of discontinued subsidiary, TIAC (Note 10)................... (2,093,725) --
------------- -------------
Net income........................................................................ 452,338 2,399,042
Adjustments to reconcile net income to net cash provided by operating activities-
Depreciation and amortization................................................. 875,277 687,961
Provision for deferred state income taxes..................................... 10,554 32,484
Loss on disposal of property and equipment.................................... 1,691 --
Decrease (increase) in accounts receivable.................................... 3,051,949 (2,431,156)
Increase in prepaid expenses and other current assets......................... (697,625) (44,625)
Increase in other assets...................................................... (84,188) (595,340)
Increase in net assets of discontinued operations............................. (601,277) --
Increase in accounts payable and accrued expenses............................. 1,499,896 257,563
Increase (decrease) in deferred rent.......................................... 58,205 (90,857)
(Decrease) increase in deferred revenue....................................... (21,104) 21,104
Increase in other long-term liabilities....................................... 72,849 226,544
------------- -------------
Net cash provided by operating activities................................... 4,618,565 462,720
------------- -------------
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment............................................... $ (733,879) $ (1,150,789)
Repayments (loans) on note receivable............................................. 7,486 (30,677)
Purchases of investments, net..................................................... (2,351,093) --
------------- -------------
Net cash used in investing activities....................................... $ (3,077,486) $ (1,181,466)
------------- -------------
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (repayments) borrowings under line of credit.................................. ($ 1,260,000) 1,260,000
Proceeds from issuance of common stock............................................ 66,388 92,680
Repurchase of common stock........................................................ (269,703) (27,656)
Dividends paid to shareholders.................................................... -- (557,232)
------------- -------------
Net cash (used in) provided by financing activities......................... $ (1,463,315) $ 767,792
------------- -------------
------------- -------------
NET INCREASE IN CASH................................................................ 77,764 49,046
CASH, BEGINNING OF YEAR............................................................. 16,599 13,208
------------- -------------
CASH, END OF YEAR................................................................... $ 94,363 $ 62,254
------------- -------------
------------- -------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for-
Income taxes.................................................................... $ -- $ 628
------------- -------------
------------- -------------
Interest........................................................................ $ 8,504 $ 1,486
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of this statement.
F-58
<PAGE>
TECHMATICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION
TECHMATICS, Inc. (the "Company"), was incorporated on March 15, 1982, under
the laws of the Commonwealth of Virginia for the purpose of engaging in a
consulting business. The Company specializes in engineering, management and
information technology services for the United States Navy and other customers.
REVENUES FROM CONTRACTS
The preponderance of the Company's revenue is generated from cost-plus fixed
fee contracts. This type of contract provides for the Company to perform
agreed-upon numbers of labor hours within specified categories and skill levels.
In return, the Company receives reimbursement of its direct and indirect costs
of contract performance, within stipulated limitations, plus a negotiated fixed
fee that represents the Company's gross profit. Revenue derived from this type
of contract, 89 and 91 percent of total revenue for fiscal years 1996 and 1995,
respectively, is recognized on the basis of reimbursable costs incurred plus a
pro rata portion of fees earned.
Revenue on time-and-material contracts (9 and 8 percent of total revenue for
fiscal years 1996 and 1995, respectively) is recognized on the basis of
direct-labor hours and reimbursable materials costs incurred. Revenue on
fixed-price contracts (2 and 1 percent of total revenue for fiscal years 1996
and 1995, respectively) is recorded on the percentage-of-completion method based
upon costs incurred in relation to total estimated costs. Losses are recorded in
full when they become determinable.
In 1995, one of the Company's U.S. government contracts represented 11
percent of total revenues.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Expenditures for maintenance,
repairs and improvements which do not materially extend the useful lives of the
assets are expensed as incurred. The Company depreciates its property and
equipment primarily using the straight-line method based on the estimated useful
lives of the assets. Certain computer equipment is depreciated using accelerated
methods. Leasehold improvements are amortized over the shorter of the terms of
the respective leases or the estimated useful lives. Estimated useful lives of
property and equipment and leasehold improvements are as follows:
<TABLE>
<S> <C>
Computer equipment.................. 3-5 years
Furniture and equipment............. 4-5 years
Lesser of lease term or useful
Leasehold improvements.............. life
Real property....................... 30 years
Automobiles......................... 5 years
</TABLE>
INCOME TAXES
The accompanying financial statements are presented on the accrual basis of
accounting. This method recognizes income when earned and recognizes costs and
expenses when incurred, as is required by generally accepted accounting
principles. For tax reporting purposes, however, the Company computes its income
or loss on the cash basis, wherein income is recognized when collected in cash
and costs and expenses are recognized as cash is paid therefor.
F-59
<PAGE>
TECHMATICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF JUNE 30, 1996 AND 1995
The Company has elected to be treated as a "Subchapter S" corporation for
Federal and state income tax purposes. Under this election, the taxable income
or loss of the Company for fiscal year is apportioned among the Company's
stockholders, based upon their percentage ownership during the year, and
included in the individual tax returns of the stockholders. For this reason, the
accompanying Consolidated Statement of Income shows no provision by the Company
for Federal income taxes. For fiscal years 1996 and 1995, the Company has
recorded a $10,554 and $32,484 provision, respectively, for state income taxes,
because certain states do not recognize the Company's "Subchapter S" corporation
status.
Differences existing between net income for financial reporting purposes and
for income tax purposes are caused primarily by the use of the cash versus
accrual method of accounting and accelerated depreciation methods for tax
purposes.
SHORT-TERM INVESTMENTS
Short-term investments consist primarily of U.S. Treasury Bills and are
stated at market which was identical to cost at June 30, 1996. In accordance
with Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," the investments are
classified as available-for-sale at year-end. There were no significant realized
or unrealized gains or losses on these investments during the year.
USE OF ESTIMATES
The preparation of the 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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
At June 30, 1996 and 1995, the Company's carrying value of financial
instruments approximated fair value. Carrying amounts for accounts receivable,
notes receivable, accounts payable, line of credit and deferred income taxes
approximated fair value due to the short maturity of these instruments.
F-60
<PAGE>
TECHMATICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF JUNE 30, 1996 AND 1995
2. UNBILLED ACCOUNTS RECEIVABLE:
Unbilled accounts receivable represent revenues recognized for work
performed but not billed at year-end. The balances consist of the following as
of June 30:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Billings in progress.............................................. $ 415,753 $ 900,580
Fee retentions.................................................... 715,710 799,728
Costs in excess of provisional billing rates...................... 362,564 175,980
Costs incurred and fees recorded on existing contracts prior to
execution of contract modifications............................. 60,606 129,740
------------ ------------
1,554,633 2,006,028
Less- Reserve for uncollectible accounts.......................... (711,799) (574,740)
------------ ------------
Total....................................................... $ 842,834 $ 1,431,288
------------ ------------
------------ ------------
</TABLE>
Certain unbilled receivables are not billable until a review of costs
incurred is performed by the Defense Contract Audit Agency (the "DCAA," see Note
6). The amounts included in unbilled accounts receivable which are expected to
be collected within a year equal $476,359 and $1,030,320 at June 30, 1996 and
1995, respectively.
3. INVESTMENT IN AFFILIATE:
In May 1995, the Company formed a Virginia Limited Liability Company named
"Techmatics Information Alliance and Communications, LLC" (the "LLC"). The LLC
was formed to provide its customers with information services, principally
related to the Internet. The Company invested $100,000 in the purchase of a 78%
interest in the LLC and agreed to advance working capital funds as required by
the LLC. In accordance with generally accepted accounting standards, a minority
interest in the LLC is not recorded, as losses related to the minority interest
exceeded its equity in the LLC. See Note 10 for discontinued operations
discussion.
4. ACCRUED EXPENSES:
Accrued expenses consist of the following at June 30:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Salaries and related expenses..................................... $ 1,396,828 $ 90,804
Accrued vacation.................................................. 1,324,685 1,087,097
Accrued 401(k) contribution expenses.............................. 246,467 257,359
Health claims..................................................... 631,019 290,081
Deferred rent, current portion.................................... 60,000 60,000
Other accrual expenses............................................ 127,104 89,493
------------ ------------
$ 3,786,013 $ 1,874,834
------------ ------------
------------ ------------
</TABLE>
F-61
<PAGE>
TECHMATICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF JUNE 30, 1996 AND 1995
5. LINE OF CREDIT AND BANKING ARRANGEMENTS:
The Company has a $8,000,000 bank line-of-credit agreement. The principal is
payable upon demand and interest is calculated using the 30 day LIBOR rate plus
225 basis points and are collateralized by accounts receivable. As of June 30,
1996, the Company had not drawn on the line-of-credit.
The Company's principal disbursing accounts are maintained on a zero-balance
basis, wherein the bank invests any balances on hand at the close of a business
day in short-term securities. In the event that checks presented for payment
exceed available balances, the bank advances necessary funds pursuant to the
line-of-credit agreement described in the preceding paragraph. As of June 30,
1996, the Company had issued checks in the aggregate amount of approximately
$1,676,000, which had not been presented for payment; the corresponding amount
as of June 30, 1995, was $2,218,000. These amounts are classified as accounts
payable in the accompanying balance sheet for each of the respective dates.
6. COMMITMENTS AND CONTINGENCIES:
CONTRACTS
Substantially all payments to the Company under cost-reimbursable contracts
and subcontracts are provisional reimbursements of claimed cost and the pro rata
portion of fixed fee thereon. Eligibility of these costs for reimbursement is
subject to annual audits by the DCAA. The audits through June 30, 1989, have
been finalized. Audit procedures for fiscal years 1990 through 1993 have been
completed by the DCAA and the results thereof are in the process of negotiation
and final settlement between the Company and the government. Audits of fiscal
years 1994 through 1996 costs have not as yet begun.
Management believes that resolution of these audits will not have a material
effect upon the financial position of the Company or the results of future
operations.
LEASE COMMITMENTS
The Company is obligated as lessee under certain noncancelable operating
leases, primarily for the office space required by its Northern Virginia
headquarters and principal operating locations.
Future minimum rent payments required under such leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30,
<S> <C>
1997........................................................................... $ 2,409,539
1998........................................................................... 2,160,098
1999........................................................................... 2,132,118
2000........................................................................... 2,125,829
2001........................................................................... 2,106,061
Thereafter..................................................................... 1,953,392
-------------
$ 12,887,037
-------------
-------------
</TABLE>
The leases for office space allow for annual rent adjustments based on the
change in the U.S. Consumer Price Index and additional rent assessments as
specified in the lease terms.
The Company subleases part of its office space to a related party under a
sublease agreement. See Note 9 for sublease income received by the Company for
1996 and 1995.
F-62
<PAGE>
TECHMATICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF JUNE 30, 1996 AND 1995
Rent expense for all operating leases, net of sublease payments, totaled
$2,442,844 and $2,338,829 in 1996 and 1995, respectively.
7. STOCKHOLDERS' EQUITY AND STOCK OPTIONS:
STOCK OPTIONS
The Company has an employee stock option plan for key employees. It was
adopted in 1993, replacing a similar plan that had previously been in effect
since 1989. The shares optioned under both the 1989 and the 1993 plan are
nonvoting common stock, par value of $0.01 each. The 1993 plan provides for the
issuance of a maximum of 1,300,000 shares.
<TABLE>
<CAPTION>
SHARES UNDER EXERCISE
OPTION PRICE
------------- -----------
<S> <C> <C>
Balance, June 30, 1994................................................................ 343,980 $ 0.10-2.85
Granted............................................................................. 179,800 3.09-3.40
Exercised........................................................................... (127,780) 0.10-1.90
Canceled............................................................................ (3,020) 2.59-3.09
------------- -----------
Balance, June 30, 1995................................................................ 392,980 $ 1.35-3.40
Granted............................................................................. 151,000 3.63-4.00
Exercised........................................................................... (51,040) 1.35-1.90
Canceled............................................................................ (25,750) 2.59-3.63
------------- -----------
Balance, June 30, 1996................................................................ 467,190 $ 1.90-4.00
------------- -----------
------------- -----------
</TABLE>
As of June 30, 1996, 46,840 options under the plan are exercisable.
STOCK REPURCHASE AGREEMENT
Common stock is subject to a stock repurchase agreement, whereby the Company
has a right of first refusal for any stock offered for sale by a stockholder or
upon termination of employment or death of a stockholder. The Company will be
reimbursed for premiums paid for certain life insurance policies covering five
of its stockholders.
8. 401(K) SAVINGS PLAN:
Eligible employees of the Company may participate in a 401(k) savings plan,
whereby the employees may elect to make contributions pursuant to a salary
reduction agreement upon meeting age and length-of-service requirements. The
directors, at their discretion, elected to contribute to the 401(k) savings plan
approximately $342,000 for the plan year ending December 31, 1995. The Company
accrued a liability of approximately $246,000 for the period from January 1,
1996 through June 30, 1996.
9. RELATED-PARTY TRANSACTIONS:
The Company leases office space to a corporation, the owner of which is a
director of the Company. Total lease payments received under this lease amounted
to approximately $55,000 in 1996 and 1995. Sublease income received by the
Company is recorded as a reduction to rent expense. The Company also
F-63
<PAGE>
TECHMATICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF JUNE 30, 1996 AND 1995
has various contracts and subcontracts with this same corporation. Costs paid to
this related party were approximately $225,370 and $736,000 in 1996 and 1995,
respectively.
The Company has a computer purchase program, under which it makes
noninterest bearing loans of between $500 and $3,000 to employees for the
purchase of computer equipment and related items. These loans are repayable
through payroll deduction over a maximum of three years. As of June 30, 1996,
the aggregate outstanding balance of such loans was approximately $207,000 and
at June 30, 1995, it was approximately $230,000. The amount currently due is
included in "notes receivable from employees" and the long-term portion is
included in "other assets" in the accompanying balance sheet.
10. SUBSEQUENT EVENT:
On July 1, 1997, the Company adopted a formal plan to discontinue the
operations of the LLC. The LLC is a provider of information services to
commercial customers (not governmental contractors) and constitutes a separate
business segment of the Company. Certain assets were sold for cash to an
unrelated party. Other assets were liquidated in the ordinary course of
business. Assets disposed of consisted primarily of accounts receivable,
supplies and equipment.
Net sales for the LLC for fiscal years 1996 and 1995 were approximately
$300,000 and $0, respectively. The accompanying consolidated statement of income
reflects the discontinued operations for fiscal year 1996 in order to be
comparable to the fiscal year 1997 presentation.
F-64
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Analysis & Technology, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Analysis &
Technology, Inc. and Subsidiaries as of March 31, 1999 and 1998, and the related
consolidated statements of earnings, changes in shareholders' equity, and cash
flows for each of the years in the three-year period ended March 31, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with 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 Analysis &
Technology, Inc. and Subsidiaries as of March 31, 1999 and 1998 and the results
of their operations and their cash flows for each of the years in the three-year
period ended March 31, 1999 in conformity with generally accepted accounting
principles.
KPMG LLP
Providence, Rhode Island
April 30, 1999
F-65
<PAGE>
ANALYSIS & TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF MARCH 31,
----------------------------
<S> <C> <C>
ASSETS 1999 1998
------------- -------------
Current assets:
Cash and cash equivalents........................................................ $ -- $ 953,677
Contract receivables (note 3).................................................... 28,776,154 25,637,041
Notes and other receivables...................................................... 1,014,563 665,497
Prepaid expenses................................................................. 1,319,468 831,928
------------- -------------
Total current assets........................................................... 31,110,185 28,088,143
------------- -------------
Property, buildings and equipment, net (notes 4 and 5)............................. 15,010,949 14,886,072
------------- -------------
Other assets:
Goodwill, net of accumulated amortization (note 4)............................... 17,042,357 15,401,697
Product development costs, net of accumulated amortization (note 4).............. 399,976 301,993
Deferred Compensation Plan investments (note 2).................................. 7,407,832 3,467,388
Notes receivable................................................................. 361,855 538,933
Deposits and other assets........................................................ 913,658 504,508
Deferred income taxes (note 6)................................................... 1,498,984 420,480
------------- -------------
27,624,662 20,634,999
------------- -------------
Total assets................................................................... $ 73,745,796 $ 63,609,214
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt (note 5).................................. $ 345,338 $ 328,646
Accounts payable................................................................. 994,716 439,209
Accrued expenses (note 9)........................................................ 12,538,505 11,350,703
Dividends payable................................................................ -- 765,668
Deferred income taxes (note 6)................................................... 1,306,246 749,238
------------- -------------
Total current liabilities...................................................... 15,184,805 13,633,464
Long-term debt, excluding current installments (note 5)............................ 1,816,488 2,161,083
Other long-term liabilities (note 2)............................................... 8,523,091 3,467,513
------------- -------------
Total liabilities.............................................................. 25,524,384 19,262,060
------------- -------------
Commitments and contingencies (notes 3, 8, and 10)
Shareholders' equity (notes 7 and 8):
Common stock, $.083 stated value. Authorized 11,250,000 shares; issued and
outstanding 3,673,114 shares in 1999 and 3,614,537 shares in 1998.............. 306,093 301,212
Treasury stock held by deferred compensation plan, 45,867 shares and 0 shares in
1999 and 1998, respectively, at cost........................................... (459,229) --
Accumulated other comprehensive loss............................................. (8,592) --
Additional paid-in capital....................................................... 8,393,463 8,927,905
Retained earnings................................................................ 39,989,677 35,118,037
------------- -------------
Total shareholders' equity..................................................... 48,221,412 44,347,154
------------- -------------
Total liabilities and shareholders' equity..................................... $ 73,745,796 $ 63,609,214
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-66
<PAGE>
ANALYSIS & TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
----------------------------------------------
<S> <C> <C> <C>
1999 1998 1997
-------------- -------------- --------------
Revenue......................................................... $ 170,354,893 $ 159,956,294 $ 142,547,174
Costs and expenses.............................................. 160,074,537 152,011,128 135,777,206
-------------- -------------- --------------
Operating earnings........................................ 10,280,356 7,945,166 6,769,968
-------------- -------------- --------------
Other expense (income):
Interest expense.............................................. 488,987 296,209 397,417
Interest income............................................... (138,803) (125,200) (77,803)
Equity in income of joint venture............................. -- (16,969) (90,445)
Gain on sale of joint venture................................. -- (1,591,483) --
Other, net.................................................... 1,179,470 1,038,798 728,281
-------------- -------------- --------------
1,529,654 (398,645) 957,450
-------------- -------------- --------------
Earnings before income taxes.............................. 8,750,702 8,343,811 5,812,518
Income taxes (note 6)........................................... 3,879,062 4,152,247 2,436,982
-------------- -------------- --------------
Net earnings................................................ $ 4,871,640 $ 4,191,564 $ 3,375,536
-------------- -------------- --------------
-------------- -------------- --------------
Basic earnings per common share............................. $ 1.34 $ 1.19 $ 0.96
-------------- -------------- --------------
-------------- -------------- --------------
Diluted earnings per common share........................... $ 1.20 $ 1.07 $ 0.93
-------------- -------------- --------------
-------------- -------------- --------------
Weighted average shares outstanding (notes 2 and 7)
Basic......................................................... 3,633,115 3,530,006 3,499,742
-------------- -------------- --------------
-------------- -------------- --------------
Diluted....................................................... 4,023,837 3,849,242 3,609,210
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-67
<PAGE>
ANALYSIS & TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1999, 1998, AND 1997
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK OTHER
---------------------- ADDITIONAL COMPREHENSIVE TOTAL
STATED PAID-IN RETAINED TREASURY EARNINGS SHAREHOLDERS'
SHARES VALUE CAPITAL EARNINGS STOCK (LOSS) EQUITY
---------- ---------- ------------ ------------- ----------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at March 31,
1996................... 3,660,455 305,038 9,964,210 29,010,141 -- -- 39,279,389
Proceeds from sale of
common stock........... 46,776 3,898 290,912 -- -- -- 294,810
Repurchase and retirement
of common stock........ (263,550) (21,962) (2,297,238) -- -- -- (2,319,200)
Net earnings............. -- -- -- 3,375,536 -- -- 3,375,536
Tax benefit of stock
options exercised...... -- -- 51,502 -- -- -- 51,502
Cash dividends declared--
$.20 per share......... -- -- -- (693,536) -- -- (693,536)
---------- ---------- ------------ ------------- ----------- -------------- -------------
Balances at March 31,
1997................... 3,443,681 286,974 8,009,386 31,692,141 -- -- 39,988,501
Proceeds from sale of
common stock........... 263,806 21,984 1,651,832 -- -- -- 1,673,816
Repurchase and retirement
of common stock........ (92,950) (7,746) (1,329,812) -- -- -- (1,337,558)
Net earnings............. -- -- -- 4,191,564 -- -- 4,191,564
Tax benefit of stock
options exercised...... -- -- 596,499 -- -- -- 596,499
Cash dividends declared--
$.21 per share......... -- -- -- (765,668) -- -- (765,668)
---------- ---------- ------------ ------------- ----------- -------------- -------------
Balances at March 31,
1998................... 3,614,537 301,212 8,927,905 35,118,037 -- -- 44,347,154
Proceeds from sale of
common stock........... 101,477 8,456 437,968 -- -- -- 446,424
Repurchase and retirement
of common stock........ (42,900) (3,575) (832,365) -- -- -- (835,940)
Deferred compensation
plan transition
differential net of tax
benefit................ -- -- (398,700) -- -- -- (398,700)
Treasury stock held by
deferred compensation
plan................... -- -- -- -- (459,229) -- (459,229)
Net earnings............. -- -- -- 4,871,640 -- -- 4,871,640
Currency translation
adjustment............. -- -- -- -- -- (8,592) (8,592)
---------- ---------- ------------ ------------- ----------- -------------- -------------
Comprehensive earnings... -- -- -- 4,871,640 -- (8,592) 4,863,048
---------- ---------- ------------ ------------- ----------- -------------- -------------
Tax benefit of stock
options exercised...... -- -- 258,655 -- -- -- 258,655
---------- ---------- ------------ ------------- ----------- -------------- -------------
Balances at March 31,
1999................... 3,673,114 $ 306,093 $ 8,393,463 $ 39,989,677 $ (459,229) (8,592) $ 48,221,412
---------- ---------- ------------ ------------- ----------- -------------- -------------
---------- ---------- ------------ ------------- ----------- -------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-68
<PAGE>
ANALYSIS & TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
----------------------------------
<S> <C> <C> <C>
1999 1998 1997
---------- ---------- ----------
Operating activities:
Net earnings.............................................................. $4,871,640 $4,191,564 $3,375,536
Adjustments to reconcile net earnings to net cash provided by continuing
operations:
Gain on sale of joint venture......................................... -- (1,591,483) --
Equity in income of joint venture..................................... -- (16,969) (90,445)
Write-off of product development costs................................ -- 280,555 --
Currency translation adjustment....................................... (8,592) -- --
Depreciation and amortization of property, buildings, and equipment... 2,337,947 2,379,912 2,528,929
Amortization of goodwill.............................................. 1,006,553 724,003 562,257
Amortization of product development costs............................. 174,773 162,447 113,908
Provision for deferred income taxes................................... (264,301) (537,216) (744,685)
Loss on sale of equipment............................................. 82,846 108,563 243,832
Gain on sale of marketable securities................................. -- -- (35,268)
Decrease (increase) in:
Contract, notes and other receivables............................... (3,311,101) 1,054,340 3,535,670
Prepaid expenses.................................................... (487,540) 405,847 858,565
Other assets........................................................ (868,870) (472,760) (526,977)
Increase (decrease) in:
Accounts payable and accrued expenses............................... 2,002,096 661,164 173,527
Other long-term liabilities......................................... 594,726 424,037 (486,839)
---------- ---------- ----------
Net cash provided by continuing operations.......................... 6,130,177 7,774,004 9,508,010
Net cash used for discontinued operations........................... -- -- (400,000)
---------- ---------- ----------
Net cash provided by operating activities........................... 6,130,177 7,774,004 9,108,010
---------- ---------- ----------
Investing activities:
Additions to property, buildings, and equipment........................... (2,507,668) (3,030,794) (2,327,142)
Product development costs................................................. (272,756) (130,668) (315,866)
Proceeds from sale of equipment........................................... 14,888 10,695 20,991
Proceeds from sale of joint venture....................................... -- 3,000,000 --
Proceeds from sale of marketable securities............................... -- -- 205,603
Acquisition of business units (net of cash acquired)...................... (2,835,234) (8,976,384) (4,932,757)
---------- ---------- ----------
Net cash used for investing activities.............................. (5,600,770) (9,127,151) (7,349,171)
---------- ---------- ----------
Financing activities:
Repayments of long-term borrowings........................................ (327,903) (312,956) (278,009)
Repurchase of common stock................................................ (835,940) (1,337,558) (2,319,200)
Proceeds from sale of common stock........................................ 446,427 1,673,816 294,810
Dividends paid............................................................ (765,668) (693,536) (658,881)
---------- ---------- ----------
Net cash used for financing activities.............................. (1,483,084) (670,234) (2,961,280)
---------- ---------- ----------
Decrease in cash and cash equivalents..................................... (953,677) (2,023,381) (1,202,441)
Cash and cash equivalents:
Beginning of year....................................................... 953,677 2,977,058 4,179,499
---------- ---------- ----------
End of year............................................................. $ -- $ 953,677 $2,977,058
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-69
<PAGE>
ANALYSIS & TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) DESCRIPTION OF BUSINESS, ACQUISITIONS, AND DIVESTITURES
Analysis & Technology, Inc. (A&T) initially provided tactical analysis to
the Office of Naval Research and sonar analysis to the Naval Underwater Systems
Center, now known as the Naval Undersea Warfare Center. During the past 30
years, A&T and Subsidiaries (the Company) have grown to provide system and
engineering technologies, technology-based training systems, and information
technologies for the military, civil government agencies, and private industry.
The Company has the following wholly-owned subsidiaries:
- Interactive Media Corp. (Interactive Media) which designs and implements
training programs for commercial and government customers;
- Analysis & Technology Australia Pty. Ltd. which provides training systems
and software development services in Australia. Analysis & Technology
International Corporation and Numerical Decisions, Inc. are subsidiaries
formed by the Company to perform international work but are not currently
operational.
The Company typically performs its Department of Defense services under cost
reimbursement contracts whereby the U.S. Government reimburses the Company for
contracted costs and pays a fee. In fiscal 1999, 1998, and 1997, the amount of
the Company's non-defense revenue was $34.6 million, $30.1 million, and $23.7
million, respectively.
The Company has made the following acquisitions accounted for as purchases:
On September 30, 1998, the Company acquired certain assets of Information
Technology Solutions, Inc. of Virginia for $775,000. Total goodwill of $598,000
was recorded in connection with this acquisition and is being amortized over 20
years.
On November 14, 1997, the Company acquired all of the stock of UP, Inc.
("UP") of Herndon, Virginia, for $5.3 million in cash plus related expenses. UP
provides technology-based interactive multimedia training to clients in
telecommunications, financial services and other industries. UP was merged into
Interactive Media upon acquisition. During fiscal 1999, under the terms of the
UP purchase agreement, the Company made a contingent payment to the former
owners of UP of $1.6 million. Goodwill totaling $6.3 million was recorded in
connection with this acquisition and is being amortized over 20 years. In
connection with the acquisition of UP, assets acquired and liabilities assumed
were as follows:
<TABLE>
<S> <C>
Assets: $2,457,020
Goodwill: $6,276,601
Liabilities: $1,702,566
</TABLE>
In fiscal 1998, the Company also acquired: certain assets of Command
Control, Inc. ("CCI") related to CCI's command, control, computers,
communications and intelligence ("C(4)I") service business; Interactive Media
Solutions, Inc. ("IAM"), a northern California-based interactive multimedia
training supplier; Cambridge Acoustical Associates, Inc. ("CAA") of Medford,
Massachusetts, which specializes in dynamics of submerged structures, acoustic
analysis, and passive and active noise control; and the assets and rights
relating to the overhauling and repairing surface and electronic warfare
business of Dalco Electronics Corporation, of Virginia Beach, Virginia. Total
goodwill of $2.0 million was recorded in connection with these acquisitions and
is being amortized over 20 years.
On July 26, 1996, the Company acquired all of the stock of Vector Research
Company, Inc. (Vector) of Rockville, Maryland for approximately $6.5 million in
cash plus related expenses and assumption of tax
F-70
<PAGE>
ANALYSIS & TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) DESCRIPTION OF BUSINESS, ACQUISITIONS, AND DIVESTITURES (CONTINUED)
liabilities. Vector provides engineering and technical services to U.S. Navy
customers. Goodwill totaling approximately $3.5 million was recorded in
connection with this acquisition and is being amortized over 20 years. In
connection with the acquisition of Vector Research Company, Inc., assets
acquired and liabilities assumed were as follows:
<TABLE>
<S> <C>
Assets: $4,472,752
Goodwill: $3,480,220
Liabilities: $1,541,835
</TABLE>
On July 18, 1997, the company sold its interest in Automation Software,
Incorporated to its joint venture partner, Brown & Sharpe Manufacturing Co.
(NYSE:BNS) of Kingston, Rhode Island for $3.0 million. Net cash proceeds from
the sale were $1.8 million, and as a result of the company's investment of
approximately $1.4 million in the joint venture as of the date of the sale, a
net after-tax gain of $405 thousand was recognized in the quarter ended
September 30, 1997.
On March 8, 1999, the Company and Anteon Corporation (Anteon) entered into a
definitive merger agreement under which Anteon will acquire all the outstanding
shares of the Company for $26.00 a share and the Company will become a wholly
owned subsidiary of Anteon. Anteon, based in Fairfax, Virginia, is a privately
held corporation that provides information technology, systems engineering and
technology solutions to customers throughout the United States and
internationally. The transaction is conditioned on the approval of the holders
of two-thirds of the Company's common stock as well as on customary regulatory
approvals and other closing conditions. The merger is expected to close by June
30, 1999.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies of the
Company:
- PRINCIPLES OF CONSOLIDATION--The consolidated financial statements include
the accounts of A&T and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
- CASH EQUIVALENTS--For financial statement purposes, the Company considers
all investments with original maturities of three months or less at the
time of purchase to be cash equivalents.
- FAIR VALUE OF FINANCIAL INSTRUMENTS--The carrying amounts of the Company's
financial instruments including cash, accounts receivable, accounts
payable, accrued expenses and dividends payable approximate fair value due
to the short term nature of these instruments. The carrying value of notes
and other receivables and long term debt approximate fair value based on
the instruments' interest rate, terms, maturity date, and collateral, if
any, in comparison to the Company's incremental borrowing rate for similar
financial instruments.
- DEPRECIATION AND AMORTIZATION--Property, buildings, and equipment are
stated at cost. Depreciation of buildings and equipment is provided over
the estimated useful lives of the respective assets using the
straight-line method. Leasehold improvements are amortized over the
shorter of the lease term or the life of the asset.
- LONG-LIVED ASSETS--Long-lived assets and certain identifiable intangibles
are reviewed for impairment, based upon undiscounted future cash flows,
and appropriate losses are recognized whenever the carrying amount of an
asset may not be recovered in accordance with Statement of Financial
F-71
<PAGE>
ANALYSIS & TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Accounting Standards No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED
ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF.
- GOODWILL--Goodwill relating to the Company's acquisitions represents the
excess of cost over the fair value of net assets acquired and is amortized
on a straight-line basis over periods ranging from two to thirty years.
Determination of the straight-line period is dependent on the nature of
the operations acquired. The Company evaluates the recoverability of
goodwill on a periodic basis to assure that changes in facts and
circumstances do not suggest that recoverability has been impaired. This
analysis relies on a number of factors, including operating results,
business plans, budgets, economic projections, and changes in management's
strategic direction or market emphasis. The test of recoverability for
goodwill is a comparison of the unamortized balance to expected cumulative
(undiscounted) operating income of the acquired business or enterprise
over the remaining portion of the amortization period. If the book value
of goodwill exceeds undiscounted future operating income, the writedown is
computed as the excess of the unamortized balance of the asset over the
present value of operating income discounted at the Company's weighted
average cost of capital over the remaining amortization period.
- PRODUCT DEVELOPMENT COSTS--Product development costs represent
expenditures for the development of software products that have been
capitalized in accordance with Statement of Financial Accounting Standards
No. 86, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE TO BE SOLD, LEASED,
OR OTHERWISE MARKETED. Amortization is computed on an individual product
basis and is the greater of (a) the ratio of current gross revenues for a
product to the total of current and anticipated future gross revenues for
that product or (b) the amount computed using the straight-line method
over the remaining economic useful life of the product. The Company is
currently using economic lives ranging from two to five years for all
capitalized product development costs. Amortization of product development
costs begins when the software product is available for general release to
customers.
- ACCOUNTING FOR STOCK-BASED COMPENSATION--The Company applies APB Opinion
No. 25 and related Interpretations in accounting for its stock option
plans. In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION. Statement 123 addresses the accounting for the
cost of stock-based compensation, such as stock options, and permits
either expensing the cost of stock-based compensation over the vesting
period or disclosing in the financial statement footnotes what this
expense would have been. This cost would be measured at the grant date
based upon estimated fair values, using option pricing models. The Company
adopted the disclosure alternative of Statement 123.
- REVENUE RECOGNITION--Revenue from contract services is earned under
cost-reimbursement, time and material, and fixed-price contracts. Revenue
under cost-reimbursement contracts is recognized as costs are incurred and
under time and materials contracts as time is spent and as materials costs
are incurred. Revenue under fixed price contracts is recognized on the
percentage of completion basis. The majority of the Company's
cost-reimbursement contracts are either cost-plus-fixed-fee or
cost-plus-hourly-fee contracts. The contracts may either require the
Company to work on defined tasks or deliver a specific number of hours of
service. In either case, costs are reimbursed up to the contract-
authorized cost ceiling as they are incurred. If a contracted task has not
been completed or the specific number of hours of service has not been
delivered at the time the authorized cost is expended, the Company may be
required to complete the work or provide additional hours. The
F-72
<PAGE>
ANALYSIS & TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Company will be reimbursed for the additional costs but may not receive an
additional fee or the fee may be prorated proportionately to the number of
hours actually provided. Revenue under fixed price contracts, including
applicable fees and estimated profits, is recorded on the percentage of
completion basis. If estimates indicate a probable ultimate loss on a
contract, provision is made immediately for the entire amount of the
estimated future loss. Profit and losses accrued include the cumulative
effect of changes in prior periods' cost estimates.
- EARNINGS PER SHARE--The Company calculates earnings per share (EPS) in
accordance with the provisions of Statement of Financial Accounting
Standards No. 128, EARNINGS PER SHARE. Statement 128 requires the
disclosure of basic EPS, which is computed by dividing income available to
common shareholders by the weighted average number of common shares
outstanding at the end of the period. Diluted EPS, which gives effect to
all dilutive potential common shares outstanding, is also required.
The following table reconciles net earnings to net earnings available to
common shareholders and basic weighted average number of shares to diluted
weighted average shares outstanding for the years ending March 31, 1999, 1998,
and 1997. Net earnings attributable to subsidiary stock options represents the
allocation of Integrated Performance Decisions (IPD), a former subsidiary of the
Company through August 1998, and Interactive Media Corp. (IMC) earnings to
holders of potentially dilutive options on IPD stock and IMC stock held by IPD
and IMC employees (see footnote 7).
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Weighted average shares outstanding..................................... 3,633,115 3,530,006 3,499,742
Net effect of dilutive stock options based on the treasury stock method
using the average market price........................................ 390,722 319,236 109,468
------------ ------------ ------------
Total................................................................... 4,023,837 3,849,242 3,609,210
------------ ------------ ------------
------------ ------------ ------------
Net earnings............................................................ $ 4,871,640 $ 4,191,564 $ 3,375,536
Net effect of earnings attributable to subsidiary stock options......... (42,708) (85,050) (33,407)
------------ ------------ ------------
Net earnings available to common shareholders........................... $ 4,828,932 $ 4,106,514 $ 3,342,129
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
Options to purchase 15,000, 1,000 and 500 shares of common stock at $21.06,
$21.88 and $22.00, respectively, per share were outstanding during fiscal 1999
but were not included in the computation of diluted EPS because the options'
exercise price was greater than the average market price of common shares.
- DEFERRED COMPENSATION PLAN--The Company maintains a deferred compensation
plan for certain officers, directors, and salaried employees. The plan is
funded primarily through employee pre-tax contributions. The participants
in the plan bear the risk of market value fluctuations of the underlying
assets.
During the year ended March 31, 1999, the Company adopted the provisions of
the Emerging Issues Task Force Issue 97-14, ACCOUNTING FOR DEFERRED COMPENSATION
ARRANGEMENTS WHERE AMOUNTS EARNED ARE HELD IN A RABBI TRUST AND INVESTED. EITF
97-14 requires deferred compensation plan sponsors to consolidate the accounts
of the deferred compensation plan with the accounts of the Company and to
account for the assets and liabilities of the deferred compensation plan in
accordance with other relevant accounting pronouncements. Accordingly, the
company has recorded all non-employer debt and equity
F-73
<PAGE>
ANALYSIS & TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
securities of the deferred compensation plan in the accompanying March 31, 1999
consolidated balance sheet at fair value, in accordance with Statement of
Financial Accounting Standards Statement No. 115, ACCOUNTING FOR CERTAIN
INVESTMENTS IN DEBT AND EQUITY SECURITIES. A&T common stock owned by the
deferred compensation plan has been recorded as treasury stock at its historical
cost, with the difference between historical cost and fair value as of the
implementation date of EITF 97-14 recorded as a transition differential within
additional paid-in capital, in accordance with EITF 97-14. The deferred
compensation liability is recorded at an amount equal to the fair value of all
assets held by the deferred compensation plan.
Investment securities held by the deferred compensation plan at March 31,
1999 consist of A&T's common stock and other investments, and are classified as
trading securities. Trading securities are bought and held principally for the
purpose of selling them in the near term. Trading securities are recorded at
fair value in the consolidated financial statements, with all unrealized holding
gains and losses recorded currently in earnings.
- USE OF ESTIMATES--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ
from reported results using those estimates.
(3) CONTRACT RECEIVABLES
Contract receivables are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
U.S. Government Customers:
Amounts due currently--prime contractor........................................ $ 12,904,485 $ 10,439,279
Amounts due currently--subcontractor........................................... 8,729,701 7,719,819
Retainage...................................................................... 848,303 740,043
------------- -------------
22,482,489 18,899,141
------------- -------------
Commercial customers:
Amounts due currently.......................................................... 4,493,374 4,950,970
------------- -------------
Unbilled contracts in process:
Fixed-price contracts in progress, net of progress billings.................... 320,902 642,060
Revenues recorded on work performed pursuant to customer authorization but
prior to execution of contractual documents or modifications................. 1,479,389 1,144,870
------------- -------------
1,800,291 1,786,930
------------- -------------
$ 28,776,154 $ 25,637,041
------------- -------------
------------- -------------
</TABLE>
The Government retains a portion of the fee earned by the Company
(retainage) until contract completion and final audit by the Defense Contract
Audit Agency (DCAA). It is estimated that approximately $386,000 of retainage at
March 31, 1999 will be collected within one year; the remainder will be
collected in later years as DCAA completes its audits.
F-74
<PAGE>
ANALYSIS & TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) CONTRACT RECEIVABLES (CONTINUED)
All unbilled contract receivables, net of retainage, are expected to be
billed and collected within one year.
(4) NON-CURRENT ASSETS
A summary of property, buildings, and equipment follows:
<TABLE>
<CAPTION>
USEFUL LIFE 1999 1998
------------- ------------- -------------
<S> <C> <C> <C>
Land............................................ -- $ 595,869 $ 376,839
Buildings....................................... 31 years 11,525,027 11,554,841
Equipment....................................... 3-12 years 23,374,591 21,780,638
Leasehold improvements.......................... 1-5 years 3,000,134 2,510,210
------------- -------------
38,495,621 36,222,528
Less accumulated depreciation and
amortization.................................. (23,484,672) (21,336,456)
------------- -------------
$ 15,010,949 $ 14,886,072
------------- -------------
------------- -------------
</TABLE>
Goodwill as of March 31, 1999 and 1998 was $17,042,357 and $15,401,697, net
of accumulated amortization of $4,297,031 and $3,290,478, respectively. The
amount of goodwill added in fiscal 1999 and 1998 was $2,647,213 and $6,662,112,
respectively. Amortization expense was $1,006,553 in fiscal 1999, $724,003 in
fiscal 1998, and $562,257 in fiscal 1997.
Product development costs at March 31, 1999 and 1998 were $399,976 and
$301,993, net of accumulated amortization of $636,592 and $461,819,
respectively. The amount of product development costs capitalized was $272,756
in fiscal 1999, and $130,668 in fiscal 1998. Amortization expense was $174,773
in fiscal 1999, $162,447 in fiscal 1998, and $113,908 in fiscal 1997. In
addition, previously capitalized costs totaling $280,555 were written off in
fiscal 1998.
F-75
<PAGE>
ANALYSIS & TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Mortgage payable to Fleet Bank bearing interest at 7.97%, due in monthly installments
of principal of $11,500 plus associated interest through September1, 2001, secured
by certain land and buildings with a depreciated cost of $2,730,846................. $ 353,869 $ 491,865
Mortgage payable to Fleet Bank bearing interest at 8.29%, due in monthly installments
of principal and interest of $20,048 through January 1, 2007, secured by certain
land and buildings with a depreciated cost of $2,468,231............................ 1,487,327 1,597,058
Mortgage payable to Chelsea Groton Bank bearing interest at 9.25%, due in monthly
installments of principal and interest of $4,477 through March 2004, secured by
certain land and buildings.......................................................... 200,067 233,588
Small Business Administration loan bearing interest at 8.5%, due in monthly
installments of principal and interest of $4,923 through May 2001................... 120,563 167,218
------------ ------------
Total long-term debt.............................................................. 2,161,826 2,489,729
Less current installments of long-term debt........................................... 345,338 328,646
------------ ------------
Total long-term debt, excluding current installments.............................. $ 1,816,488 $ 2,161,083
------------ ------------
------------ ------------
</TABLE>
The Company has a $20,000,000 revolving credit and term loan agreement that
expires on June 30, 2000. Amounts drawn against the line of credit may be
converted into a term loan at the Company's discretion at any time prior to the
expiration of the loan agreement. If converted, the term loan would be payable
in 20 substantially equal quarterly installments. The alternate rates of
interest for the term loan from which the Company can choose are the bank's base
rate, the bank's certificate of deposit rate plus 1%, or LIBOR plus 3/4%. There
is a commitment fee of 1/2% per annum on the average daily balance of the unused
portion of the first $5,000,000 of the commitment and 1/4% per annum on the
remaining unused portion of the commitment, payable quarterly. As of March 31,
1999 and 1998 the Company did not have any funds borrowed under its revolving
credit agreement.
The revolving credit and term loan agreement places certain restrictions on
encumbering the Company's assets, incurring additional debt, and disposing of
any significant assets. It also requires that the Company maintain at least
$10,000,000 in working capital (excluding deferred income taxes), net worth of
at least $42,000,000, a debt-to-net-worth ratio of less than 2.5 to 1.0, an
interest coverage ratio of not less than two times interest paid or accrued, and
a debt service ratio of not less than 1.2 to 1.0. As of March 31, 1999, the
Company was in compliance with these covenants.
Under current agreements, principal payments due on long-term debt during
each of the five fiscal years subsequent to March 31, 1999 are as follows:
$345,338 in 2000, $364,157 in 2001, $278,580 in 2002, $202,862 in 2003 and
$970,151 in 2004.
The Company paid $488,987, $296,209, and $397,417 in interest on all debts
in fiscal 1999, 1998, and 1997, respectively.
F-76
<PAGE>
ANALYSIS & TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) INCOME TAXES
Total income tax expense for the years ended March 31, 1999, 1998, and 1997
consisted of the following:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------------ ----------- ------------
<S> <C> <C> <C>
1999:
Federal............................................ $ 3,351,177 $ (236,914) 3,114,263
State.............................................. 792,186 (30,528) 761,658
Foreign............................................ -- 3,141 3,141
------------ ----------- ------------
Total.............................................. $ 4,143,363 $ (264,301) $ 3,879,062
------------ ----------- ------------
------------ ----------- ------------
1998:
Federal............................................ $ 3,792,827 $ (510,774) $ 3,282,053
State.............................................. 896,636 (34,925) 861,711
Foreign............................................ -- 8,483 8,483
------------ ----------- ------------
Total.............................................. $ 4,689,463 $ (537,216) $ 4,152,247
------------ ----------- ------------
------------ ----------- ------------
1997:
Federal............................................ $ 2,583,180 $ (507,257) $ 2,075,923
State.............................................. 598,487 (157,198) 441,289
Foreign............................................ -- (80,230) (80,230)
------------ ----------- ------------
Total.............................................. $ 3,181,667 $ (744,685) $ 2,436,982
------------ ----------- ------------
------------ ----------- ------------
</TABLE>
Income tax expense from continuing operations differed from the amount
computed by applying the U.S. federal income tax rate of 34% to earnings before
income taxes as a result of the following:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Computed expected tax expense from continuing
operations........................................ $ 2,975,239 $ 2,836,896 $ 1,976,256
Increase (decrease) in income taxes resulting from:
Amortization of goodwill........................ 251,942 178,153 139,220
Gain on sale of joint venture................... -- 478,896 --
Equity in joint venture......................... -- -- (30,751)
State income taxes (net of valuation allowance
and federal income tax benefit)............... 502,694 568,729 291,251
Change in valuation allowance, exclusive of
state tax..................................... -- -- (118,500)
Other (net)..................................... 149,187 89,573 179,506
------------ ------------ ------------
$ 3,879,062 $ 4,152,247 $ 2,436,982
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-77
<PAGE>
ANALYSIS & TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities as of March 31,
1999 and 1998 are presented below:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Deferred tax assets:
Uncollected receivables that are not yet deductible for tax purposes............... $ 461,136 $ 520,363
Compensated absences, principally due to accrual for financial reporting
purposes......................................................................... 1,251,881 961,786
Deferred compensation.............................................................. 4,068,408 1,267,066
Net operating loss carryforwards................................................... 191,596 203,345
----------- -----------
Total gross deferred tax assets................................................ 5,973,021 2,952,560
Less valuation allowance........................................................... 80,355 80,355
----------- -----------
Net deferred tax assets........................................................ 5,892,666 2,872,205
----------- -----------
Deferred tax liabilities:
Tax depreciation in excess of financial statement Depreciation..................... (1,101,723) (800,325)
Capitalized software product development costs..................................... (193,982) (101,085)
Unbilled contract revenue.......................................................... (2,866,559) (2,027,937)
Deferred compensation.............................................................. (1,251,642) --
Other.............................................................................. (286,022) (271,616)
----------- -----------
Total gross deferred tax liabilities........................................... (5,699,928) (3,200,963)
----------- -----------
Net deferred tax asset (liability)............................................. $ 192,738 $ (328,758)
----------- -----------
----------- -----------
</TABLE>
At March 31, 1999, the Company had federal and state net operating loss
carryforwards of approximately $206,000 and $1,370,000, respectively. Such
carryforwards have various expiration dates and begin to expire in the year
ended March 31, 2000. For financial purposes, a valuation allowance of $80,355
has been recognized to offset the deferred tax asset related to the portion of
the state net operating losses which the Company believes will more likely than
not expire unutilized.
Management has evaluated the remaining temporary differences and concluded
that it is more likely than not that the Company will have sufficient taxable
income, of an appropriate character within the carryback and carryforward period
permitted by current tax law, to allow for the utilization of the deductible
amounts generating the deferred tax assets and, therefore, no valuation
allowance is required as of March 31, 1999 and 1998.
The Company made federal and state income tax payments of $3,538,312,
$3,568,245, and $2,707,724, during fiscal 1999, 1998, and 1997, respectively.
(7) STOCK OPTIONS
A&T has granted common stock options to certain key employees under its
stock option plans. All plans provide that the fair value upon which option
exercise prices are based shall be the average of the high and low sale prices
of the Company's common stock as reported on the NASDAQ National Market System
on the day the option is granted. Options awarded vest at a rate of 20%
annually, commencing on the date of award.
F-78
<PAGE>
ANALYSIS & TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) STOCK OPTIONS (CONTINUED)
The transactions under the Company's stock option plans for the years ended
March 31, 1999, 1998, and 1997 are summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------------------------- ----------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C>
WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
---------- ----------------- ---------- ----------------- --------- -----------------
Outstanding at beginning of
year.......................... 869,079 $ 10.39 907,017 $ 8.39 898,820 $ 8.22
Granted......................... 191,209 $ 18.98 299,875 $ 13.31 78,600 $ 9.38
Exercised....................... (111,507) $ 8.54 (317,076) $ 7.48 (51,269) $ 6.63
Canceled or expired............. (24,690) $ 11.71 (20,737) $ 9.66 (19,134) $ 9.51
---------- ------ ---------- ------ --------- -----
Outstanding at end of year...... 924,091 $ 11.59 869,079 $ 10.39 907,017 $ 8.39
---------- ------ ---------- ------ --------- -----
---------- ------ ---------- ------ --------- -----
Exercisable at end of year...... 570,447 476,953 649,008
---------- ---------- ---------
---------- ---------- ---------
Shares reserved at end of
year.......................... 1,014,362 975,869 952,370
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
The following table summarizes information about stock options outstanding
at March 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER REMAINING EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE PRICE
- --------------------------------------- ----------- ------------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
$6.50--$9.46........................... 328,066 2.71 $ 7.83 280,087 $ 7.58
$9.67--$10.50.......................... 174,275 3.32 $ 9.86 154,235 $ 9.88
$12.96--$22.00......................... 421,750 5.56 $ 15.23 136,125 $ 14.50
----------- -----------
$6.50--$22.00.......................... 924,091 4.13 $ 11.59 570,447 $ 9.86
----------- -----------
----------- -----------
</TABLE>
Had compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant date for awards under those
plans consistent with the requirements of Statement of Financial Accounting
Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, the Company's net
income and earnings per share would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net earnings $ 4,871,640 $ 4,191,564 $ 3,375,536
As reported......................................................... $ 4,320,328 $ 3,721,101 $ 3,151,392
Pro forma...........................................................
Basic earnings per share $ 1.34 $ 1.19 $ 0.96
As reported......................................................... $ 1.19 $ 1.05 $ 0.90
Pro forma...........................................................
Diluted earnings per share $ 1.20 $ 1.07 $ 0.93
As reported......................................................... $ 1.06 $ 0.94 $ 0.86
Pro forma...........................................................
</TABLE>
F-79
<PAGE>
ANALYSIS & TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) STOCK OPTIONS (CONTINUED)
The fair value of each stock option grant has been estimated on the date of
grant using the Black-Scholes option pricing model with the following weighted-
average assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C> <C>
Risk-free interest rate................................................. 5.34% 6.23% 6.26%
Expected life (years)................................................... 5.8 5.7 5.1
Expected volatility..................................................... 35.10% 34.52% 32.78%
Expected dividend yield................................................. 0.0% 1.0% 2.0%
</TABLE>
The weighted-average fair values of options at the date of grant were $7.87,
$5.29, and $3.19 during fiscal 1999, 1998, and 1997, respectively.
In addition, the Company can grant stock options to certain key employees of
Interactive Media Corp., a subsidiary of the Company, to purchase up to 20.2% of
IMC's authorized common stock. The price of the options as of the date of award
and subsequent valuation is based on a calculation considering book value per
share and an earnings factor. Approximately 88% of the available options have
been granted to date; none have been exercised.
(8) EMPLOYEE BENEFIT PLANS
The Company's Savings and Investment Plan is a discretionary contribution
plan as defined in the Internal Revenue Code, Section 401(a)(27). The plan
covers substantially all of the Company's full-time employees. The Company's
contributions are made at the discretion of the Board of Directors for any plan
year. For the plan years ended December 31, 1998, 1997, and 1996, the Company
matched up to 50% of a participant's contribution of up to a maximum of 6% of
the participant's compensation, depending on the business unit to which the
participant was assigned. The Company's matching contributions to this plan were
$2,907,818 $1,847,496, and $1,767,992 for the years ended March 31, 1999, 1998,
and 1997, respectively. One of the investment options available under the
Company's Savings and Investment Plan is the purchase of the Company's common
stock. The Plan owned 179,896, 151,191, and 126,626 shares of common stock of
the Company at March 31, 1999, 1998, and 1997, respectively.
The A&T Employee Stock Ownership Plan (ESOP) covers substantially all
full-time employees. Contributions to the plan are made at the discretion of the
Board of Directors for any plan year. The Company's contributions to the plan
amounted to $109,900, $101,600, and $112,000 for fiscal 1999, 1998, and 1997,
respectively. The plan owned 521,594, 532,694, and 571,319 shares of common
stock of the Company at March 31, 1999, 1998, and 1997, respectively, and all
shares are allocated to the participants of the ESOP and are included in
outstanding shares of common stock.
F-80
<PAGE>
ANALYSIS & TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Accrued vacation............................................... $ 4,829,431 $ 4,671,092
Accrued compensation and related taxes......................... 4,725,621 3,987,617
Accrued benefits............................................... 2,034,693 1,953,372
Accrued income taxes payable................................... 462,312 190,625
Other.......................................................... 486,448 547,997
------------- -------------
$ 12,538,505 $ 11,350,703
------------- -------------
------------- -------------
</TABLE>
(10) COMMITMENTS AND CONTINGENCIES
The Company occupies certain office facilities and uses certain equipment
under lease agreements with terms that range from two to six years. Many of the
leases have renewal options with similar terms. All of these agreements are
accounted for as operating leases. Minimum lease payments for which the Company
is obligated are as follows (the amounts are net of certain maintenance
expenses, insurance, and taxes):
<TABLE>
<CAPTION>
YEARS ENDING MARCH 31:
- -------------------------------------------------------------------------------
<S> <C>
2000........................................................................... $ 5,146,021
2001........................................................................... 4,249,620
2002........................................................................... 2,918,974
2003........................................................................... 1,594,740
2004........................................................................... 582,780
-------------
Total minimum lease payments................................................... $ 14,492,135
-------------
-------------
</TABLE>
Lease expense amounted to approximately $5,534,000, $5,776,000, and
$5,138,000, in fiscal 1999, 1998, and 1997, respectively.
The U.S. Government has the right to audit and make retroactive adjustments
under certain contracts. Audits through March 31, 1997 have been completed. In
the opinion of management, adjustments, if any, resulting from audits for the
years ended March 31, 1998 and 1999 will not have a material effect on the
Company's consolidated financial statements.
In addition, government funding continues to be dependent on congressional
approval of program level funding and on contracting agency approval for the
Company's work. The extent to which backlog will be funded in the future cannot
be determined.
Under the terms of the Design Systems & Services, Inc. purchase agreement
executed in fiscal 1995, the Company is committed to make contingent payments up
to $400,000 to the former owner of the company. Contingent payments are based on
15% of revenues derived from sales of a ship design software product made
between the purchase date and April 30, 1999. The Company made contingent
payments to the former owner totaling $48,155 and $66,682 during fiscal 1999 and
fiscal 1998, respectively.
Under the terms of the UP purchase agreement, if the aggregate net profit of
Interactive Media for the eight fiscal quarters ending September 30, 1999 ("the
Second Determination Date") is greater than
F-81
<PAGE>
ANALYSIS & TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(10) COMMITMENTS AND CONTINGENCIES (CONTINUED)
two times the combined cumulative net profit of Interactive Media and UP for the
four quarters ending September 30, 1997, the Company is obligated to pay to the
former owners of UP 81,100 shares of Interactive Media stock, or cash of
$2,250,000, or a combination of stock and cash which together equal the
appraised value of the contingent stock payment at the Second Determination
Date. However, the former owners of UP may not elect to receive an aggregate
amount of cash in excess of $2,250,000. If at the Second Determination Date, the
net profit of Interactive Media for the eight fiscal quarters ending September
30, 1999 is equal to or greater than 75%, but less than or equal to 100%, of two
times the combined cumulative net profit of Interactive Media and UP for the
four quarters ending September 30, 1997, the Company will be obligated to pay
the former owners of UP 40,550 shares of Interactive Media stock, or cash of
$1,125,000, or a combination of stock and cash which together equal the
appraised value of the contingent stock payment at the determination date.
However, the former owners of UP may not elect to receive an aggregate amount of
cash in excess of $1,125,000. If the merger with Anteon Corporation is
completed, under the terms of the UP purchase agreement the contingent payment
due to the former owners of UP, Inc. on September 30, 1999 would be payable upon
closing.
In fiscal 1997, the Company received $450,000 under the terms of a
development agreement with the Connecticut Department of Economic Development to
fund technology-based training development. Under the terms of the agreement,
the Company is required to pay royalties equal to 3% of gross sales of
technology-based training products initiated in Connecticut. Royalty payments
will be deemed to be paid in full when royalty payments are equal to a return on
investment of 15% and the Company has maintained a Connecticut presence. Under
the terms of the agreement, the Company made royalty payments totaling $63,000
in fiscal 1999 and $75,085 in fiscal 1998.
In fiscal 1995 and 1996, the Company received $200,000 under the terms of a
development agreement executed in October 1994 with a state-financed
corporation, Connecticut Innovations, Inc. (CII), to assist in funding the
development of commercial imaging processing products and services. Effective
November 30, 1998, CII and the Company terminated the Development Agreement. As
of the date of termination, CII had advanced to the Company $200,000 in
development funds and the Company had reimbursed CII $42,035 under terms of that
Development Agreement. Under the termination agreement, the Company assigned all
rights related to the commercial imaging products developed under the agreement
to CII, and CII released the Company from any further obligation to reimburse
CII for any Development Funds advanced by CII to the Company.
The Company may from time to time be involved in various claims and legal
actions arising in the ordinary course of business. In the opinion of
management, the ultimate disposition of these matters will not have a material
adverse effect on the Company's consolidated financial position or results of
operations.
(11) SEGMENT REPORTING
The Company operates principally in two segments, Engineering and
Information Technologies (Engineering/IT), and technology-based training, which
it develops through its wholly owned subsidiary, Interactive Media Corp.
(Interactive Media). The Engineering/IT segment serves primarily the needs of
the Department of Defense while the Interactive Media segment targets both
government and commercial customers. The Company's management measures
performance based upon each segment's operating earnings. Total revenue by
segment includes both sales to unaffiliated customers, as reported in the
Company's consolidated statements of earnings, and intersegment sales.
F-82
<PAGE>
ANALYSIS & TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) SEGMENT REPORTING (CONTINUED)
The following table presents information about the Company's segments for
the years ended March 31, 1999 and 1998:
<TABLE>
<CAPTION>
INTERACTIVE
MARCH 31, 1999 ENGINEERING/IT MEDIA ELIMINATIONS CONSOLIDATED
- ----------------------------------------------- -------------- ---------------- ------------- --------------
<S> <C> <C> <C> <C>
Sales to unaffiliated customers................ $ 144,247,951 $ 26,106,942 -- $ 170,354,893
-------------- ---------------- ------------- --------------
Intersegment sales............................. 1,629,664 144,581 (1,774,245) --
-------------- ---------------- ------------- --------------
$ 145,877,615 $ 26,251,523 $ (1,774,245) $ 170,354,893
-------------- ---------------- ------------- --------------
-------------- ---------------- ------------- --------------
Operating earnings............................. $ 8,821,279 $ 1,459,077 $ -- $ 10,280,356
-------------- ---------------- ------------- --------------
Interest expense............................. 488,987
--------------
Interest income.............................. (138,803)
--------------
Other, net................................... 1,179,470
--------------
1,529,654
--------------
Earnings before income taxes................. $ 8,750,702
--------------
Depreciation expense........................... $ 1,774,641 $ 563,306 $ 2,337,947
-------------- ---------------- --------------
-------------- ---------------- --------------
Capital expenditures........................... $ 2,092,883 $ 414,785 $ 2,507,668
-------------- ---------------- --------------
-------------- ---------------- --------------
Amortization expense........................... $ 797,931 $ 383,395 $ 1,181,326
-------------- ---------------- --------------
-------------- ---------------- --------------
Identifiable assets at March 31, 1999.......... $ 59,225,782 $ 14,520,014 -- $ 73,745,796
-------------- ---------------- ------------- --------------
-------------- ---------------- ------------- --------------
</TABLE>
<TABLE>
<CAPTION>
INTERACTIVE
MARCH 31, 1998 ENGINEERING/IT MEDIA ELIMINATIONS CONSOLIDATED
- ----------------------------------------------- -------------- ---------------- ------------- --------------
<S> <C> <C> <C> <C>
Sales to unaffiliated customers................ $ 139,823,861 $ 20,132,433 -- $ 159,956,294
Intersegment sales............................. 1,100,771 45,550 (1,146,321) --
-------------- ---------------- ------------- --------------
$ 140,924,632 $ 20,177,983 $ (1,146,321) $ 159,956,294
-------------- ---------------- ------------- --------------
-------------- ---------------- ------------- --------------
Operating earnings............................. $ 6,862,631 $ 1,082,535 -- $ 7,945,166
-------------- ---------------- ------------- --------------
Interest expense............................. 296,209
Interest income.............................. (125,200)
Equity in income of joint venture............ (16,969)
Gain on sale of joint venture................ (1,591,483)
Other, net................................... 1,038,798
--------------
(398,645)
--------------
Earnings before income taxes................... $ 8,343,811
--------------
--------------
Depreciation expense........................... $ 1,943,011 $ 436,901 $ 2,379,912
-------------- ---------------- --------------
-------------- ---------------- --------------
Capital expenditures........................... $ 2,545,451 $ 485,343 $ 3,030,794
-------------- ---------------- --------------
-------------- ---------------- --------------
Amortization expense........................... $ 753,332 $ 133,118 $ 886,450
-------------- ---------------- --------------
-------------- ---------------- --------------
Identifiable assets at March 31, 1998.......... $ 50,202,241 $ 13,406,973 -- $ 63,609,214
-------------- ---------------- ------------- --------------
-------------- ---------------- ------------- --------------
</TABLE>
F-83
<PAGE>
ANALYSIS & TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(12) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following summarizes quarterly results of operations for the years ended
March 31, 1999 and 1998:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
QUARTER ENDED: JUNE 30 SEPTEMBER 30 DECEMBER 31 MARCH 31 TOTAL
- -------------------------------------------------- --------- ------------ ------------ ----------- ----------
FISCAL 1999
Revenues........................................ $ 41,320 $ 41,132 $ 42,219 $ 45,684 $ 170,355
Operating earnings.............................. 2,469 2,402 2,683 2,726 10,280
Net earnings.................................... 1,168 1,158 1,223 1,323 4,872
Earnings per share:
Basic......................................... $ 0.32 $ 0.32 $ 0.34 $ 0.36 $ 1.34
Diluted....................................... $ 0.28 $ 0.29 $ 0.31 $ 0.32 $ 1.20
FISCAL 1998
Revenues........................................ $ 37,450 $ 38,157 $ 40,773 $ 43,576 $ 159,956
Operating earnings.............................. 1,843 1,448 2,307 2,347 7,945
Net earnings.................................... 916 1,084 1,071 1,121 4,192
Earnings per share:
Basic......................................... $ 0.27 $ 0.31 $ 0.30 $ 0.31 $ 1.19
Diluted....................................... $ 0.25 $ 0.28 $ 0.27 $ 0.27 $ 1.07
</TABLE>
F-84
<PAGE>
ANTEON CORPORATION
EXCHANGE OFFER FOR $100,000,000
OF ITS 12% SENIOR SUBORDINATED
NOTES DUE 2009
---------------------
PROSPECTUS
AUGUST 27, 1999
---------------------
No person has been authorized to give any information or to make any
representations other than those contained in this prospectus, and, if given or
made, such information or representations must not be relied upon as having been
authorized. This prospectus does not constitute an offer to sell or the
solicitation of an offer to buy any securities other than the securities to
which it relates or an offer to sell or the solicitation of an offer to buy such
securities in any circumstances in which such offer or solicitation is unlawful.
Neither the delivery of this prospectus nor any sale made hereunder shall, under
any circumstances, create any implication that there has been no change in the
affairs of Anteon Corporation since the date hereof or that the information
contained herein is correct as of any time subsequent to its date.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The laws of the Commonwealth of Virginia pursuant to which the Company is
incorporated permit it to indemnify its officers and directors against certain
liabilities with the approval of its shareholders. The articles of incorporation
of the Company, which have been approved by its shareholders, provide for the
indemnification of each director and officer (including former directors and
officers and each person who may have served at the request of the Company as a
director or officer of any other legal entity and, in all such cases, his or her
heirs, executors and administrators) against liabilities (including expenses)
reasonably incurred by him or her in connection with any actual or threatened
action, suit or proceeding to which he or she may be made party by reason of his
or her being or having been a director or officer of the Company, except in
relation to any action, suit or proceeding in which he or she has been adjudged
liable because of willful misconduct or a knowing violation of the criminal law.
The Company has purchased officers' and directors' liability insurance
policies. Within the limits of their coverage, the policies insure (1) the
directors and officers of the Company against certain losses resulting from
claims against them in their capacities as directors and officers to the extent
that such losses are not indemnified by the Company and (2) the Company to the
extent that it indemnifies such directors and officers for losses as permitted
under the laws of Virginia.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The Exhibit Index beginning on page E-1 is hereby incorporated by reference.
ITEM 22. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(a) That, for purposes of determining any liability under the Securities
Act, each filing of the registrant's annual report pursuant to Section 13(a) or
15(d) of the Exchange Act of 1934 that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial BONA FIDE offering thereof.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(c) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11 or 13 of this form, within one business day of receipt of such
request, and to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in documents filed
subsequent to the effective date of the registration statement through the date
of responding to the request.
(d) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-1
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York, on August 27, 1999.
ANTEON CORPORATION
BY: /S/ CARLTON B. CRENSHAW
-----------------------------------------
Carlton B. Crenshaw
Senior Vice President and
Chief Financial and Administrative Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
President and Chief
* Executive Officer and
- ------------------------------ Director (Principal August 27, 1999
Joseph M. Kampf Executive Officer)
Senior Vice President and
/s/ CARLTON B. CRENSHAW Chief Financial and
- ------------------------------ Administrative Officer August 27, 1999
Carlton B. Crenshaw (Principal Financial and
Accounting Officer)
* Chairman of the Board and
- ------------------------------ Director August 27, 1999
Frederick J. Iseman
* Director
- ------------------------------ August 27, 1999
Thomas M. Cogburn
* Director
- ------------------------------ August 27, 1999
Gilbert F. Decker
Director
- ------------------------------
Robert A. Ferris
* Director
- ------------------------------ August 27, 1999
Paul Kaminski
* Director
- ------------------------------ August 27, 1999
Steven M. Lefkowitz
Director
- ------------------------------
Joseph Maurelli
<TABLE>
<S> <C>
*By: /s/ CARLTON B. CRENSHAW
-------------------------------
Carlton B. Crenshaw
Attorney-in-Fact
</TABLE>
II-2
<PAGE>
ANTEON CORPORATION AND SUBSIDIARIES
SCHEDULE IX - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING OF COSTS AND OTHER END OF
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- ----------------------------------------------- ------------- --------------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
OGDEN PROFESSIONAL SERVICES CORPORATION:
PERIOD FROM JANUARY 1, 1996 TO MARCH 31, 1996
Allowance for doubtful accounts.............. 6,582 410 6,992
ANTEON CORPORATION:
PERIOD FROM APRIL 1, 1996 TO DECEMBER 31, 1996
Allowance for doubtful accounts.............. 6,992 (2,726) 4,267
YEAR ENDED DECEMBER 31, 1997
Allowance for doubtful accounts.............. 4,267 304(a) (1,004) 3,667
YEAR ENDED DECEMBER 31, 1998
Allowance for doubtful accounts.............. 3,567 840(a) (948) 3,459
</TABLE>
- --------------------------
(a) Reserve established by acquired company prior to acquisition by Anteon.
S-1
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION PAGE
- --------- ----------------------------------------------------------------------------------------------- ---------
<C> <S> <C>
2.1 Agreement and Plan of Merger, dated as of June 7, 1999, by and among the Company, Buffalo
Acquisition Corporation and Analysis & Technology, Inc. (incorporated by reference to Exhibit Z
to A&T's Current Report on Form 8-K filed on June 9, 1999 (Commission File No. 0-14161)).
3.1* Articles of Incorporation.
3.2* By-laws.
4.1* Indenture, dated as of May 11, 1999, by and among the Company, Vector Data Systems, Inc.,
Techmatics, Inc. and IBJ Whitehall Bank & Trust Company, as trustee.
4.2* Registration Rights Agreement, dated May 6, 1999, by and among the Company, Vector Data
Systems, Inc., Techmatics, Inc., Credit Suisse First Boston Corporation, Deutsche Bank
Securities, Inc. and Legg Mason Wood Walker, Incorporated.
5.1* Opinion of Paul, Weiss, Rifkind, Wharton & Garrison re legality.
8.1* Opinion of Paul, Weiss, Rifkind, Wharton & Garrison re tax matters.
10.1* Stock Purchase Agreement, dated August 29, 1997, by and among the Company, Vector Data Systems,
Inc. and the shareholders of Vector Data Systems, Inc. signatories thereto.
10.2* Agreement and Plan of Merger, dated May 13, 1998, by and among the Company, TM Acquisition
Corp., Techmatics, Inc. and certain shareholders of Techmatics, Inc. signatories thereto.
10.3* Purchase Agreement, dated May 6, 1999, by and among the Company, Vector Data Systems, Inc.,
Techmatics, Inc., and Credit Suisse First Boston Corporation, Deutsche Bank Securities Inc. and
Legg Mason Wood Walker, Incorporated, as initial purchasers.
10.4* Credit Agreement, dated as of June 23, 1999, among the Company, Credit Suisse First Boston,
Mellon Bank, N.A., Deutsche Bank AG and the lenders named therein.
10.5* Pledge Agreement, dated as of June 23, 1999, among the Company, Azimuth Technologies, Inc.,
Analysis & Technology, Inc., Interactive Media Corp., Techmatics, Inc., Vector Data Systems,
Inc. and Mellon Bank, N.A.
10.6* Indemnity, Subrogation and Contribution Agreement, dated as of June 23, 1999, among the
Company, Analysis & Technology, Inc., Interactive Media Corp., Techmatics, Inc., Vector Data
Systems, Inc. and Mellon Bank, N.A.
10.7* Subsidiary Guarantee Agreement, dated as of June 23, 1999, among Analysis & Technology, Inc.,
Interactive Media Corp., Techmatics, Inc., Vector Data Systems, Inc. and Mellon Bank, N.A.
10.8* Security Agreement, dated as of June 23, 1999, among the Company, Analysis & Technology, Inc.,
Interactive Media Corp., Techmatics, Inc., Vector Data Systems, Inc. and Mellon Bank, N.A.
10.9* Fee Agreement, dated as of June 1, 1999, between the Company and Caxton-Iseman Capital, Inc.
10.10* Company Amended and Restated Omnibus Stock Plan.
12.1* Computation of ratio of earnings to fixed charges.
21.1* Subsidiaries of the Company.
23.1** Consent of KPMG LLP, independent accountants.
23.2* Consent of Arthur Andersen LLP, independent accountants.
23.3* Consent of Grant Thornton LLP, independent accountants.
23.4* Consents of Paul, Weiss, Rifkind, Wharton & Garrison (included in Exhibit 5.1 and Exhibit 8.1).
</TABLE>
E-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION PAGE
- --------- ----------------------------------------------------------------------------------------------- ---------
<C> <S> <C>
24.1* Power of Attorney (included on signature page).
25.1* Statement of eligibility of IBJ Whitehall Bank & Trust Company.
27.1* Financial Data Schedule.
99.1* Form of Letter of Transmittal.
99.2* Form of Notice of Guaranteed Delivery.
</TABLE>
- ------------------------
* Previously filed.
** Filed herewith.
E-2
