EX-99.4 6 dex994.htm EXHIBIT 99.4 Exhibit 99.4

Exhibit 99.4

NCI, Inc.

Unaudited Pro Forma Condensed Consolidated Financial Statements

On June 27, 2007, NCI, Inc. (“the Company”) purchased Karta Technologies, Inc. (“Karta”). The Company paid approximately $67.6 million for Karta. The purchase price includes $64.8 million for Karta, $0.2 million for a non-compete agreement, $1.5 million as a working capital adjustment and approximately $1.1 million in transactions costs. The following unaudited pro forma condensed consolidated balance sheet as of March 31, 2007 and the unaudited pro forma condensed consolidated statements of operations for the quarter ended March 31, 2007 and the fiscal year ended December 31, 2006 give effect to the Company’s purchase of Karta. The acquisition has been accounted for using the purchase method in accordance with Statement of Financial Accounting Standards No. 141, Business Combinations.

The unaudited pro forma condensed consolidated balance sheet presents the financial position of the Company as if the acquisition of Karta occurred on March 31, 2007. The unaudited pro forma condensed consolidated statement of operations for the quarter ended March 31, 2007 has been prepared as if the acquisition occurred on January 1, 2007. The unaudited pro forma condensed consolidated statement of operations for the year ended December 31, 2006 has been prepared as if the acquisition occurred on January 1, 2006.

The unaudited pro forma adjustments are based on management’s preliminary estimates of the value of the tangible and intangible assets and liabilities acquired. As a result, the actual adjustments may differ materially from those presented in these unaudited pro forma statements. A change in the unaudited pro forma adjustments of the purchase price for the acquisition would primarily result in a reallocation affecting the value assigned to tangible and intangible assets. The income statement effect of these changes will depend on the nature and amount of the assets or liabilities adjusted.

The unaudited pro forma condensed consolidated financial statements, which have been prepared in accordance with rules prescribed by Article 11 of Regulation S-X, are provided for informational purposes only and are not necessarily indicative of the past or future results of the operations or financial position of the Company.

This information should be read in conjunction with the previously filed Current Report on Form 8-K, dated June 27, 2007 and filed with the Securities and Exchange Commission, the previously filed historical consolidated financial statements and accompanying notes of the Company contained in its Annual Report on Form 10-K for the fiscal year ended December 31, 2006, and other subsequent filings and in conjunction with the historical financial statements and accompanying notes of Karta included in this report on Form 8-K/A.

 

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NCI, INC.

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET

March 31, 2007

(amounts in thousands, except per share data)

 

     NCI    Karta    Adjustments          Pro Forma  

Assets

             

Current assets:

             

Cash and cash equivalents

   $ 8,383    $ 2,605    $ (670 )   A    $ (2,264 )
           (12,582 )   B   

Accounts receivable, net

     66,980      15,965      —            82,945  

Deferred tax assets

     1,753      —        —            1,753  

Prepaid expenses and other current assets

     1,251      1,081      (841 )   A      1,491  
                                 

Total current assets

     78,367      19,651      (14,093 )        83,925  
             

Property and equipment, net

     4,775      4,810      (3,909 )   A      5,676  

Other assets

     869      56      —            925  

Deferred tax assets, net

     528      —        —            528  

Intangible assets, net

     1,930      —        3,257     C      5,187  

Goodwill

     22,361      —        53,971     D      76,332  
                                 

Total assets

   $ 108,830    $ 24,517    $ 39,226        $ 172,573  
                                 

Liabilities and stockholders’ equity

             

Current liabilities:

             

Accounts payable

   $ 19,720    $ 1,964    $ (451 )   A    $ 21,233  

Accrued salaries and benefits

     9,257      890      —            10,147  

Other accrued expenses/liabilities

     5,100      6,753      (628 )   A      11,225  

Deferred revenue

     1,595      215      —            1,810  
                                 

Total current liabilities

     35,672      9,822      (1,079 )        44,415  
             

Line of credit

     —        3,461      (3,461 )   A      55,000  
           55,000     E   

Other liabilities

     137      132      (132 )   A      137  

Deferred rent

     3,507      —        —            3,507  
                                 

Total liabilities

     39,316      13,415      50,328          103,059  
                                 
             

Stockholders’ equity:

             

Common stock

     254      103      (103 )   F      254  

Additional paid-in capital

     57,116      182      (182 )   F      57,116  

Retained earnings

     12,144      10,817      (1,199 )   A      12,144  
           (9,618 )   F   
                                 

Total stockholders’ equity

     69,514      11,102      (11,102 )        69,514  
                                 

Total liabilities and stockholders’ equity

   $ 108,830    $ 24,517    $ 39,226        $ 172,573  
                                 

 

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NCI, INC.

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE QUARTER ENDED

March 31, 2007

(amounts in thousands, except per share data)

 

     NCI     Karta     Adjustments          Pro Forma  

Revenue

   $ 64,291     $ 13,530     $ —          $ 77,821  

Operating costs and expenses:

           

Cost of revenue (exclusive of depreciation and amortization, shown separately below)

     55,509       8,449       —            63,958  

General and administrative expense

     3,580       3,992       69     G      7,641  

Depreciation and amortization

     370       106       (87 )   G      389  

Amortization of intangible assets

     183       —         207     H      390  
                                   

Total operating costs and expenses

     59,642       12,547       189          72,378  
                                   

Operating income

     4,649       983       (189 )        5,443  

Interest income

     142       53       (32 )   G      163  

Interest expense

     (24 )     (29 )     11     G      (1,106 )
         (1,064 )   I   

Gain on sale of assets

     —         662       (655 )   G      7  
                                   

Income before income taxes

     4,767       1,669       (1,929 )        4,507  

Income tax expense (benefit)

     1,882       45       (149 )   J      1,778  
                                   

Net income

   $ 2,885     $ 1,624     $ (1,780 )      $ 2,729  
                                   

Earnings per common and common equivalent share:

           

Basic:

           

Weighted average shares outstanding

     13,328              13,328  

Net income per share

   $ 0.22            $ 0.20  
                       

Diluted:

           

Weighted average shares and equivalent shares outstanding

     13,508              13,508  

Net income per share

   $ 0.21            $ 0.20  
                       

 

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NCI, INC.

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE YEAR ENDED

December 31, 2006

(amounts in thousands, except per share data)

 

     NCI     Karta     Adjustments          Pro Forma  

Revenue

   $ 218,340     $ 50,864     $ (74 )   K    $ 269,130  

Operating costs and expenses:

           

Cost of revenue (exclusive of depreciation and amortization, shown separately below)

     188,878       28,550       —            217,428  

General and administrative expense

     12,852       18,725       227     K      31,804  

Depreciation and amortization

     1,629       671       (135 )   K      2,165  

Amortization of intangible assets

     957       —         636     L      1,593  
                                   

Total operating costs and expenses

     204,316       47,946       728          252,990  
                                   

Operating income

     14,024       2,918       (802 )        16,140  

Interest income

     817       124       —            941  

Interest expense

     (89 )     (259 )     253     K      (4,349 )
         (4,254 )   M   
                                   

Income before income taxes

     14,752       2,783       (4,803 )        12,732  

Income tax expense (benefit)

     5,493       123       (905 )   N      4,711  
                                   

Net income

   $ 9,259     $ 2,660     $ (3,898 )        8,021  
                                   

Earnings per common and common equivalent share:

           

Basic:

           

Weighted average shares outstanding

     13,328              13,328  

Net income per share

   $ 0.69            $ 0.60  
                       

Diluted:

           

Weighted average shares and equivalent shares outstanding

     13,483              13,483  

Net income per share

   $ 0.69            $ 0.59  
                       

 

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NCI, Inc.

Notes to Unaudited Pro Forma Consolidated Financial Statements

Balance Sheet

 

A. This adjustment reflects the removal of a related party entity contained within the consolidated Karta Technologies, Inc. (Karta) financial statements that was required to be included in Karta’s financials under FIN 46, Variable Interest Entities. The affiliate owned a building where Karta was the primary tenant. NCI did not acquire the building or the affiliate.

 

B. This adjustment reflects the cash paid by the Company representing the purchase price of the acquisition plus costs associated with the transaction. The total purchase price of $67.6 million includes payments to Karta shareholders of $66.4 million and transaction costs of approximately $1.2 million. This transaction took place June 27, 2007 when the Company’s cash balance was greater than the March 31, 2007 cash balance. At no time did the Company overdraw its available cash balance.

 

C. This adjustment reflects the preliminary identified intangibles valuation.

 

          (all amounts in thousands)

Acquired Intangible

   Estimated Useful Life    Preliminary Purchase Price
Allocation

Contract backlog

   8.5 years    $ 2,700

Non-Compete

   5.0 years      250

Software

   1.5 years      116

Trade name

   0.5 years      191
         
      $ 3,257
         

 

D. This adjustment reflects the recording of goodwill as a result of the acquisition. The goodwill adjustment is detailed below and is calculated as the excess of purchase price, including transaction costs, over the estimated fair value of the net assets acquired. Goodwill will not be amortized in accordance with Financial Accounting Standard No. 142, Goodwill and Other Intangible Assets, but will be subject to annual impairment tests.

 

     Amounts
(in thousands)

Purchase price

   $ 66,431

Transaction costs

     1,151
      
     67,582

Less:

  

Net assets acquired

     10,354

Identified intangible assets (preliminary)

     3,257
      
     13,611
      

Goodwill

   $ 53,971
      

 

E. This adjustment reflects the loan borrowings in conjunction with the Karta acquisition.

 

F. This adjustment reflects the elimination of Karta’s accounts in consolidation and adjusts historical cost to estimated fair value as of March 31, 2007.

Statement of Operations, For the Quarter Ended March 31, 2007

 

G. This adjustment reflects the removal of the consolidated related party entity. Karta financial statements include a related entity that was not acquired with Karta Technologies, Inc. The related entity is a building owned by the previous owner of Karta and was required to be consolidated with Karta under FIN 46.

 

H. This adjustment reflects the amortization of identified acquired intangibles with finite useful lives adjustment, based on preliminary purchase price allocation (See Note C above).

 

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NCI, Inc.

Notes to Unaudited Pro Forma Consolidated Financial Statements

 

I. This adjustment reflects the interest expense for the funds borrowed and forgone interest adjustment on the funds used by the Company for the acquisition of Karta. NCI used approximately $12.6 million of its cash on hand and borrowed approximately $55.0 million on its line of credit. The interest rates used are those rates that were in effect as of the date of the transaction.

 

Item Generating Adjustment

  

Amount

(in thousands)

   Interest Rate  

Cash paid - Interest income forgone

   $ 12,582    4.0 %

Amount borrowed - Interest expense generated

     55,000    6.82 %

 

J. This adjustment reflects the application of the Company’s 39.5% effective tax rate for 2007.

Statement of Operations, For the Year Ended December 31, 2006

 

K. This adjustment reflects the removal of the consolidated related party entity. Karta financial statements include a related entity that was not acquired with Karta Technologies, Inc. The related entity is a building owned by the previous owner of Karta and was required to be consolidated with Karta under FIN 46.

 

L. This adjustment reflects the amortization of identified acquired intangibles with finite useful lives adjustment, based on preliminary purchase price allocation (See Note C above).

 

M. This adjustment reflects the interest expense for the funds borrowed and forgone interest adjustment on the funds used by the Company for the acquisition of Karta. NCI used approximately $12.6 million of its cash on hand and borrowed approximately $55.0 million on its line of credit. The interest rates used are those rates that were in effect as of the date of the transaction (See Note I above).

 

N. This adjustment reflects the application of the Company’s 38.8% effective tax rate for 2006.

 

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