EX-99.2 5 l99483aexv99w2.txt EX-99.2 UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL EXHIBIT 99.2 UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS The following unaudited pro forma consolidated balance sheet as of September 30, 2002 and the unaudited pro forma consolidated statements of operations for the year ended December 31, 2001 and the nine months ended September 30, 2002, which we refer to as the Pro Forma Financial Information, present the pro forma effect of the acquisitions of Andrulis Corporation and HJ Ford Associates, Inc., as well as the reporting of the company's Encoder Division as a discontinued operation. The objective of Pro Forma Financial Information is to provide investors with information about the continuing impact of particular completed or probable transactions by indicating how the transactions might have affected historical financial statements had they occurred at an earlier date. On December 20, 2002, Dynamics Research Corporation (DRC) purchased all of the outstanding shares of capital stock of Andrulis Corporation. Under the terms of the stock purchase agreement, the purchase price consisted of $13.6 million in cash, subject to post-closing adjustments, and an aggregate amount of approximately $12.4 million in the form of three separate promissory notes payable, each of which were due on January 2, 2003 and bore interest at the rate of four percent per annum. In addition to the issuance of the promissory notes, DRC used existing capital resources for payment of the purchase price, as well as funds from the company's $50 million revolving credit facility (the "Revolver") with Brown Brothers Harriman & Co., under which the company has the option to elect on a fixed 30, 60 or 90-day term, an interest rate of LIBOR plus 2.0% or the prime rate on any outstanding balance. The interest rate on the Revolver at December 31, 2002 was 4.25% based on the prime rate. On October 18, 2002, the company announced that it is actively pursuing the divestiture of its Encoder Division and would report the Encoder Division as a discontinued operation, on a restated basis. On May 31, 2002, DRC completed the acquisition of HJ Ford Associates, Inc. for $10.8 million in exchange for all of the voting common stock. The company used internally generated funds for payment of the purchase price. The purchase agreement also calls for the payment by the company to the sellers of an additional $1.0 million in 2005, subject to the occurrence of certain events related to contract renewals. Should these events occur, the contingent payment will be recorded as additional purchase price. The following unaudited pro forma consolidated balance sheet as of September 30, 2002 presents, on a pro forma basis, DRC's consolidated financial position assuming the following had occurred on September 30, 2002: - The acquisition of Andrulis Corporation; - Reporting of the Encoder Division as a discontinued operation. The following unaudited pro forma consolidated statements of operations for the nine months ended September 30, 2002 and the year ended December 31, 2001 present, on a pro forma basis, DRC's consolidated results of operations assuming each of the following had occurred on January 1, 2001: - The acquisition of Andrulis Corporation; - Reporting of the Encoder Division as a discontinued operation; - The acquisition of HJ Ford Associates, Inc. The unaudited pro forma consolidated statement of operations for the year ended December 31, 2001 includes the historical statement of operations for Andrulis Corporation for its fiscal year ended September 30, 2001. The unaudited pro forma consolidated statement of operations for the nine months ended September 30, 2002 includes the historical statement of operations for Andrulis Corporation for the nine months ended September 30, 2002. Summary unaudited information of the results of operations for Andrulis for the three months ended December 31, 2001 is as follows (in thousands of dollars): Revenue $ 9,256 Operating expenses 8,962 -------- Operating income 294 Interest expense 61 -------- Income before income taxes 233 Provision for income taxes 104 -------- Net income $ 129
The purchase price for Andrulis Corporation has been allocated to tangible assets acquired and liabilities assumed, based on their respective fair values, with the excess allocated to goodwill and other intangible assets. DRC engaged an independent third party to estimate the fair value of the identifiable intangible assets acquired. The intangible assets that were identified were customer contracts and employment/non-competition agreements, with estimated useful lives from one to five years. Although the acquisition of HJ Ford Associates, Inc. was not deemed to be the acquisition of a business that is "significant" for purposes of Regulation S-X of the Securities Exchange Act of 1934, DRC has provided the pro forma considerations since the acquisition occurred in the pro forma period. The purchase price for HJ Ford Associates, Inc. was allocated to tangible assets acquired and liabilities assumed, based on their respective fair values, with the excess allocated to goodwill and other intangible assets. DRC engaged an independent third party to estimate the fair value of the identifiable intangible assets acquired. The intangible assets that were identified were customer contracts and employment/non-competition agreements, with estimated useful lives from two to four years. The Pro Forma Financial Information is not necessarily indicative of the results that would have actually been achieved had the transactions described above occurred on the dates indicated nor are they necessarily indicative of the results that may be achieved in the future. The pro forma adjustments are based upon available information and assumptions that the company's management believes to be reasonable under the circumstances. The unaudited pro forma consolidated statements of operations do not give effect to any potential cost savings and synergies that could result from the acquisitions included therein. The Pro Forma Financial Information should be read in conjunction with DRC's consolidated financial statements and notes to those financial statements included in the company's Annual Report on Form 10-K and Quarterly Report on Form 10-Q as previously filed with the Securities and Exchange Commission and the financial statements of Andrulis Corporation attached hereto as Exhibit 99.1. DYNAMICS RESEARCH CORPORATION UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET As of September 30, 2002 (in thousands of dollars except share and per share data)
ENCODER DIVISION AS A DISCONTINUED OPERATION ------------------------ ANDRULIS Assets DRC Adjustments(a) Sub-total ANDRULIS Adjustments Pro Forma ------ --------- -------------- --------- --------- ----------- --------- Current assets Cash and cash equivalents $ 14,749 $ -- $ 14,749 $ 768 $ (13,417)(b) $ 2,100 Receivables, net of allowances 23,804 (1,244) 22,560 8,048 -- 30,608 Unbilled expenditures and fees on contracts in process 19,475 -- 19,475 612 -- 20,087 Inventories 2,481 (2,332) 149 -- -- 149 Prepaid expenses and other current assets 3,076 (18) 3,058 531 -- 3,589 Current assets - discontinued operations -- 3,594 3,594 -- -- 3,594 --------- --------- --------- --------- --------- --------- Total current assets 63,585 -- 63,585 9,959 (13,417) 60,127 Non current assets Net property, plant and equipment 14,901 (371) 14,530 866 -- 15,396 Goodwill 5,595 -- 5,595 3,195 23,586 (b) 25,502 (2,310)(c) 913 (d) 787 (e) (6,264)(f) Intangible assets, net of amortization 1,597 -- 1,597 -- 2,670 (c) 4,267 Other noncurrent assets 250 -- 250 31 -- 281 Non current asset - discontinued operations -- 371 371 -- -- 371 --------- --------- --------- --------- --------- --------- Total non current assets 22,343 -- 22,343 4,092 19,382 45,817 --------- --------- --------- --------- --------- --------- Total assets $ 85,928 $ -- $ 85,928 $ 14,051 $ 5,965 $ 105,944 ========= ========= ========= ========= ========= ========= Liabilities and Stockholders' Equity ------------------------------------ Current liabilities Current portion of long-term debt $ 500 $ -- $ 500 $ -- $ -- $ 500 Accounts payable 11,003 (507) 10,496 1,993 -- 12,489 Accrued payroll and employee benefits 11,500 (50) 11,450 691 -- 12,141 Notes and subordinate debt payable -- -- -- 5,757 (5,757)(f) -- Promissory note payable -- 12,403 (b) 12,403 Capital lease obligations -- 93 (93)(f) -- Other accrued expenses 5,412 (44) 5,368 105 180 (b) 6,686 913 (d) 120 (c) Current deferred income taxes 1,973 -- 1,973 2,584 787 (e) 5,344 Current liabilities - discontinued operations -- 601 601 -- -- 601 --------- --------- --------- --------- --------- --------- Total current liabilities 30,388 -- 30,388 11,223 8,553 50,164 --------- --------- --------- --------- --------- --------- Capital lease obligations and notes payable -- -- -- 414 (414)(f) -- Long-term debt 8,375 -- 8,375 -- -- 8,375 Deferred income taxes 2,750 -- 2,750 -- -- 2,750 Other non current obligations -- -- -- -- 240 (c) 240 Preferred stock, par value, $.10 per share 5,000,000 shares authorized, none issued -- -- -- -- -- -- Common stock, par value, $.10 per share: Authorized - 30,000,000 shares Issued - 9,492,334 shares 949 -- 949 107 (107)(b) 949 Treasury stock - 1,379,426 shares (138) -- (138) (1,270) 1,270 (b) (138) Capital in excess of par value 33,365 -- 33,365 89 (89)(b) 33,365 Unearned compensation (849) -- (849) -- -- (849) Accumulated other comprehensive income (608) -- (608) -- -- (608) Retained earnings 11,696 -- 11,696 3,488 (3,488)(b) 11,696 --------- --------- --------- --------- --------- --------- Total stockholders' equity 44,415 -- 44,415 2,414 (2,414)(b) 44,415 --------- --------- --------- --------- --------- --------- Total liabilities and stockholders' equity $ 85,928 $ -- $ 85,928 $ 14,051 $ 5,965 $ 105,944 ========= ========= ========= ========= ========= =========
The accompanying notes are an integral part of these unaudited pro forma financial statements. DYNAMICS RESEARCH CORPORATION NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET As of September 30, 2002 The pro forma consolidated balance sheet presents the allocation of the purchase price over the estimated fair value of the acquired assets and liabilities of Andrulis Corporation as of September 30, 2002 assuming the acquisition had been consummated as of September 30, 2002. The actual purchase price allocation will be based on the fair value of the acquired assets and liabilities as of December 20, 2002. In addition, the pro forma consolidated balance sheet presents the reporting of the Encoder Division as a discontinued operation as of September 30, 2002. (a) Adjustment to reclassify the assets and liabilities associated with the Encoder Division to separate lines on the balance sheet in accordance with Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, is as follows (in thousands of dollars): Current assets - discontinued operations $3,594 Non current assets - discontinued operations 371 Current liabilities - discontinued operations 601
(b) Preliminary allocation of the total purchase price paid over the estimated fair value of the net assets of Andrulis Corporation acquired, assuming the acquisition had been consummated as of September 30, 2002 (in thousands of dollars): Cash due at closing $13,417 Promissory notes payable 12,403 Payable to Andrulis Corporation shareholders 180 ------- Total purchase price $26,000 Less unadjusted net assets at Sept. 30, 2002 2,414 ------- Adjustment to goodwill $23,586
(c) Adjustment to allocate $2,670,000 of the purchase price to identifiable intangible assets based primarily upon an estimate of the fair value of intangible assets acquired as determined by an independent third party, and to establish $360,000 of remaining obligations under non-compete agreements. (d) Adjustment to record estimated other accrued liabilities of $913,000 arising as a result of the transaction, of which $690,000 relates to planned exit costs associated with the acquired business and $223,000 relates to transaction costs. (e) Adjustment to record the estimated fair value of deferred tax liability required as a result of the Andrulis Corporation acquisition. (f) Adjustment to record the retirement of debt by the seller at closing as per the terms of the purchase agreement (in thousands of dollars): Notes payable - current $5,757 Capital lease obligations - current 93 Capital lease obligations and notes payable - long term 414 ------ Adjustment to goodwill $6,264
DYNAMICS RESEARCH CORPORATION UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS For the Nine Months Ended September 30, 2002 (in thousands of dollars except share and per share data)
ENCODER DIVISION AS A DISCONTINUED OPERATION -------------------------- HJ FORD HJ FORD DRC Adjustments(a) Sub-total 1/1/02-5/31/02 Adjustments ----------- -------------- ----------- -------------- ----------- Revenue Contract revenue $ 136,057 $ -- $ 136,057 $ 16,578 $ (3,322)(b) Product sales 12,405 (6,444) 5,961 -- -- ----------- ----------- ----------- ----------- ----------- Total revenue 148,462 (6,444) 142,018 16,578 (3,322) Costs and expenses Cost of contract revenue 116,004 -- 116,004 13,711 (3,322)(b) Cost of product sales 10,493 (6,630) 3,863 -- -- Amortization of intangible assets 203 -- 203 -- 206 (c) Selling, engineering and administrative expenses 13,182 (733) 12,449 2,399 -- ----------- ----------- ----------- ----------- ----------- Total operating costs and expenses 139,882 (7,363) 132,519 16,110 (3,116) ----------- ----------- ----------- ----------- ----------- Operating income 8,580 919 9,499 468 (206) Other income 60 -- 60 52 -- Interest income (expense), net (186) -- (186) 8 (308)(e) ----------- ----------- ----------- ----------- ----------- Income from continuing operations before provision for income taxes 8,454 919 9,373 528 (514) Provision for income taxes 3,371 374 3,745 211 (201)(f) ----------- ----------- ----------- ----------- ----------- Income from continuing operations 5,083 545 5,628 317 (313) Loss from discontinued operations, net of tax expense of $374 -- (545) (545) -- -- ----------- ----------- ----------- ----------- ----------- Net income $ 5,083 $ -- $ 5,083 $ 317 $ (313) =========== =========== =========== =========== =========== Earnings per share Per common share - basic Income from continuing operations $ 0.64 $ 0.07 $ 0.71 Loss from discontinued operations, net of tax -- (0.07) (0.07) ----------- ----------- ----------- Net income $ 0.64 $ -- $ 0.64 =========== =========== =========== Per common share - diluted Income from continuing operations $ 0.57 $ 0.06 $ 0.63 Loss from discontinued operations, net of tax -- (0.06) (0.06) ----------- ----------- ----------- Net income $ 0.57 $ -- $ 0.57 =========== =========== =========== Weighted average shares outstanding Weighted average shares outstanding - basic 7,928,678 7,928,678 7,928,678 Dilutive effect of options 991,685 991,685 991,685 ----------- ----------- ----------- Weighted average shares outstanding - diluted 8,920,363 8,920,363 8,920,363 =========== =========== ===========
ANDRULIS Sub-total ANDRULIS Adjustments Pro Forma ----------- ----------- ----------- ----------- Revenue Contract revenue $ 149,313 $ 27,311 $ -- $ 176,624 Product sales 5,961 -- -- 5,961 ----------- ----------- ----------- ----------- Total revenue 155,274 27,311 182,585 Costs and expenses Cost of contract revenue 126,393 18,216 -- 144,609 Cost of product sales 3,863 -- -- 3,863 Amortization of intangible assets 409 211 616 (d) 1,236 Selling, engineering and administrative expenses 14,848 8,336 -- 23,184 ----------- ----------- ----------- ----------- Total operating costs and expenses 145,513 26,763 616 172,892 ----------- ----------- ----------- ----------- Operating income 9,761 548 (616) 9,693 Other income 112 5 -- 117 Interest income (expense), net (486) (268) (512)(e) (1,266) ----------- ----------- ----------- ----------- Income from continuing operations before provision -- for income taxes 9,387 285 (1,128) 8,544 Provision for income taxes 3,755 160 (497)(f) 3,418 ----------- ----------- ----------- ----------- Income from continuing operations 5,632 125 (631) 5,126 ----------- Loss from discontinued operations, net of tax -- expense of $374 (545) -- -- (545) ----------- ----------- ----------- ----------- Net income $ 5,087 $ 125 $ (631) $ 4,581 =========== =========== =========== =========== Earnings per share Per common share - basic Income from continuing operations $ 0.65 Loss from discontinued operations, net of tax (0.07) ----------- Net income $ 0.58 =========== Per common share - diluted Income from continuing operations $ 0.57 Loss from discontinued operations, net of tax (0.06) ----------- Net income $ 0.51 =========== Weighted average shares outstanding Weighted average shares outstanding - basic 7,928,678 Dilutive effect of options 991,685 ----------- Weighted average shares outstanding - diluted 8,920,363 ===========
The accompanying notes are an integral part of these unaudited pro forma financial statements. DYNAMICS RESEARCH CORPORATION UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS For the Year Ended December 31, 2001 (in thousands of dollars except share and per share data)
ENCODER DIVISION AS A DISCONTINUED OPERATION -------------------------- HJ FORD DRC Adjustments(a) Sub-total HJ FORD Adjustments ----------- ----------- ----------- ----------- ----------- Revenue Contract revenue $ 179,350 $ -- $ 179,350 $ 38,419 $ (7,505)(b) Product sales 21,762 (10,848) 10,914 -- -- ----------- ----------- ----------- ----------- ----------- Total revenue 201,112 (10,848) 190,264 38,419 (7,505) Costs and expenses Cost of contract revenue 155,394 -- 155,394 31,759 (7,505)(b) Cost of product sales 16,548 (10,735) 5,813 -- -- Amortization of intangible assets -- -- -- -- 545 (c) Selling, engineering and administrative expenses 17,301 (1,157) 16,144 5,578 -- ----------- ----------- ----------- ----------- ----------- Total operating costs and expenses 189,243 (11,892) 177,351 37,337 (6,960) ----------- ----------- ----------- ----------- ----------- Operating income 11,869 1,044 12,913 1,082 (545) Other income (expense), net (193) -- (193) 141 -- Interest expense, net (744) -- (744) (17) (383)(e) ----------- ----------- ----------- ----------- ----------- Income from continuing operations before provision for income taxes 10,932 1,044 11,976 1,206 (928) Provision for income taxes 4,449 425 4,874 491 (378)(f) ----------- ----------- ----------- ----------- ----------- Income from continuing operations 6,483 619 7,102 715 (550) Gain on disposal of discontinued operations, net of tax expense of $43 62 -- 62 -- -- Loss from discontinued operations, net of tax expense of $425 -- (619) (619) -- -- ----------- ----------- ----------- ----------- ----------- Net income $ 6,545 $ -- $ 6,545 $ 715 $ (550) =========== =========== =========== =========== =========== Earnings per share Per common share - basic Income from continuing operations $ 0.84 $ 0.08 $ 0.92 Gain on disposal of discontinued operations, net of tax 0.01 -- 0.01 Loss from discontinued operations, net of tax (0.08) (0.08) ----------- ----------- ----------- Net income $ 0.85 -- $ 0.85 =========== =========== =========== Per common share - diluted Income from continuing operations $ 0.80 $ 0.08 $ 0.88 Gain on disposal of discontinued operations, net of tax 0.01 -- 0.01 Loss from discontinued operations, net of tax (0.08) (0.08) ----------- ----------- ----------- Net income $ 0.81 -- $ 0.81 =========== =========== =========== Weighted average shares outstanding Weighted average shares outstanding - basic 7,674,608 7,674,608 7,674,608 Dilutive effect of options 414,477 414,477 414,477 ----------- ----------- ----------- Weighted average shares outstanding - diluted 8,089,085 8,089,085 8,089,085 =========== =========== ===========
ANDRULIS Sub-total ANDRULIS Adjustments Pro Forma ----------- ----------- ----------- ----------- Revenue Contract revenue $ 210,264 $ 21,357 $ -- $ 231,621 Product sales 10,914 -- -- 10,914 ----------- ----------- ----------- ----------- Total revenue 221,178 21,357 -- 242,535 Costs and expenses Cost of contract revenue 179,648 20,297 -- 199,945 Cost of product sales 5,813 -- -- 5,813 Amortization of intangible assets 545 85 1,018 (d) 1,648 Selling, engineering and administrative expenses 21,722 -- -- 21,722 ----------- ----------- ----------- ----------- Total operating costs and expenses 207,728 20,382 1,018 229,128 ----------- ----------- ----------- ----------- Operating income 13,450 975 (1,018) 13,407 Other income (expense), net (52) -- -- (52) Interest expense, net (1,144) (103) (937)(e) (2,184) ----------- ----------- ----------- ----------- Income from continuing operations before provision for income taxes 12,254 872 (1,955) 11,171 Provision for income taxes 4,987 390 (830)(f) 4,547 ----------- ----------- ----------- ----------- Income from continuing operations 7,267 482 (1,125) 6,624 Gain on disposal of discontinued operations, net of tax 62 -- -- 62 expense of $43 Loss from discontinued operations, net of tax (619) -- -- (619) expense of $425 ----------- ----------- ----------- ----------- Net income $ 6,710 $ 482 $ (1,125) $ 6,067 =========== =========== =========== =========== Earnings per share Per common share - basic Income from continuing operations $ 0.86 Gain on disposal of discontinued operations, net of tax 0.01 Loss from discontinued operations, net of tax (0.08) ----------- Net income $ 0.79 =========== Per common share - diluted Income from continuing operations $ 0.82 Gain on disposal of discontinued operations, net of tax 0.01 Loss from discontinued operations, net of tax (0.08) ----------- Net income $ 0.75 =========== Weighted average shares outstanding Weighted average shares outstanding - basic 7,674,608 Dilutive effect of options 414,477 ----------- Weighted average shares outstanding - diluted 8,089,085 ===========
The accompanying notes are an integral part of these unaudited pro forma financial statements DYNAMICS RESEARCH CORPORATION NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS For the Year Ended December 31, 2001 and the Nine Months Ended September 30, 2002 For the Year Ended December 31, 2001 (a) Adjustment to remove all revenue and expenses associated with the Encoder Division from continuing operations and classify them as a loss from discontinued operations as required under SFAS No. 144. (b) Adjustment to eliminate the revenue and cost of revenue associated with DRC's subcontractor relationship with HJ Ford Associates, Inc. during the year 2001. (c) Adjustment to record the amortization expense related to intangible assets associated with customer contracts and non-compete agreements, with lives from two to fours years, that were recorded in conjunction with the acquisition of HJ Ford Associates, Inc. (d) Adjustment to record the incremental amortization expense related to the intangible assets associated with customer contracts and non-compete agreements, with lives from two to three years, that were recorded in conjunction with the acquisition of Andrulis Corporation. (e) Adjustment to record the incremental interest cost, estimated based on the interest rate on the promissory notes issued to the Andrulis' shareholders, the interest rate on the company's revolving line of credit and interest income foregone on DRC's money market accounts, associated with the acquisitions of HJ Ford Associates, Inc. and Andrulis Corporation. (f) Adjustment to record the income tax provision at DRC's consolidated effective income tax rate of approximately 40.7%. For the Nine Months Ended September 30, 2002 (a) Adjustment to remove all revenue and expenses associated with the Encoder Division from continuing operations and classify them as a loss from discontinued operations as required under SFAS No. 144. (b) Adjustment to eliminate the revenue and expense associated with DRC's subcontractor relationship with HJ Ford Associates, Inc. during the first nine months of 2002. (c) Adjustment to record the amortization expense related to intangible assets associated with customer contracts and non-compete agreements with lives from two to four years that were recognized in conjunction with the acquisition of HJ Ford Associates, Inc. (d) Adjustment to record the incremental amortization expense related to the intangible assets associated with customer contracts and non-compete agreements, with lives from two to three years, that were recognized in conjunction with the acquisition of Andrulis Corporation. (e) Adjustment to record the incremental interest cost, estimated based on the interest rate on the promissory notes issued to Andrulis' shareholders, the interest rate on the company's revolving line of credit and interest income foregone on DRC's money market accounts, associated with the acquisitions of HJ Ford Associates, Inc. and Andrulis Corporation. (f) Adjustment to record the income tax provision at DRC's consolidated effective income tax rate of approximately 40%.