EX-99.2 4 ex99p2.txt Exhibit 99.2 ------------ Pro Forma Condensed Consolidated Financial Statements for the year ended October 31, 2004 and Pro Forma Condensed Consolidated Financial Statements as of January 31, 2005 and for the Three Months Ended January 31, 2005 (Unaudited) The following pro forma condensed consolidated statements of income for the year ended October 31, 2004 and the three months ended January 31, 2005 and the pro forma condensed consolidated balance sheets as of January 31, 2005 give effect to the acquisition of Spacelink International, LLC by Engineered Support Systems, Inc. The pro forma information is based on the audited consolidated financial statements of Engineered Support Systems, Inc. as of October 31, 2004 and for the year then ended and the audited consolidated financial statements of Spacelink International, LLC as of December 31, 2004 and for the year then ended and the adjustments described in the accompanying notes to the pro forma condensed consolidated financial statements. Engineered Support Systems, Inc. Pro Forma Condensed Consolidated Statements of Income (Unaudited) For the Year Ended October 31, 2004 (In thousands, except per share amounts)
ESSI for Spacelink for Pro Forma for Year Ended Year Ended Pro Forma Year Ended 10/31/2004 12/31/2004 Adjustments 10/31/2004 ---------- ---------- ----------- ---------- Net revenues $ 883,630 $ 93,487 $ $ 977,117 Cost of revenues 660,940 74,783 735,723 ---------- ---------- -------- ---------- Gross Profit 222,690 18,704 241,394 Selling, general and administrative expense 98,042 5,584 4,243 107,869 Restructuring expense 62 62 Loss on sale of assets 1,290 1,290 ---------- ---------- -------- ---------- Income from Continuing Operations 123,296 13,120 (4,243) 132,173 Interest expense (1,215) (93) (4,387) (5,695) Interest income 353 29 382 ---------- ---------- -------- ---------- Income before income taxes 122,434 13,056 (8,630) 126,860 Income tax provision 46,525 1,682 48,207 ---------- ---------- -------- ---------- Net income $ 75,909 $ 13,056 $(10,312) $ 78,653 ========== ========== ======== ========== Basic earnings per share $ 1.95 $ 2.00 ========== ========== Diluted earnings per share $ 1.82 $ 1.87 ========== ========== Average shares outstanding: Basic 38,987 342 39,329 ========== ======== ========== Diluted 41,799 342 42,141 ========== ======== ==========
1 Engineered Support Systems, Inc. Pro Forma Condensed Consolidated Financial Statements (Unaudited) For the Year Ended October 31, 2004 (In thousands, except per share amounts) Note A - Basis of Presentation On February 7, 2005 Engineered Support Systems, Inc. (the "Company") acquired Spacelink International, LLC ("Spacelink"), which designs, integrates, operates and maintains deployed satellite and wireless networks for the U.S. Department of Defense, the U.S. intelligence community and other forward deployed federal agencies and multinational organizations worldwide. The purchase price including acquisition costs, net of $1,822 cash acquired, of $149,705 was financed with 342 shares of the Company's common stock valued at $13,243 and with $136,462 of borrowings under the Company's unsecured revolving credit facility. The unaudited pro forma condensed statements of income for the year ended October 31, 2004 present a combination of the historical statements of income for the Company and Spacelink as adjusted to reflect the purchase transaction in accordance with the purchase method of accounting and to reflect an income tax provision for Spacelink as if it were filing on a consolidated basis with the Company under the provisions of the Internal Revenue Code for the year ended October 31, 2004. A pro forma condensed statement of income is presented for the year ended October 31, 2004 as if the acquisition had occurred as of November 1, 2003. The pro forma condensed statement of income for the year ended October 31, 2004 includes the Company's results of operations for the year ended October 31, 2004 and Spacelink's audited results of operations for the year ended December 31, 2004. The unaudited pro forma results are not necessarily indicative of the combined results that would have occurred had the acquisition actually taken place on November 1, 2003, nor are they necessarily indicative of the results that may occur in the future. The pro forma financial statements should be read in conjunction with the related historical financial statements. Note B - Income Taxes Pro forma adjustments to the condensed statements of income include an income tax provision as if Spacelink had filed on a consolidated basis with the Company for the period presented using the Company's historical effective tax rate of 38%. 2 Note C - Pro Forma Adjustments The purchase price including acquisition costs, less cash acquired of $1,822, was $149,705. The purchase price for Spacelink was allocated as follows: Estimated fair value of Spacelink assets $ 29,605 Estimated fair value of Spacelink liabilities (10,274) ---------- Estimated fair value of Spacelink net assets 19,331 Excluded assets: Unbilled accounts receivable (1,600) Investments (15) Investment in Intelsat (1,632) Acquired customer-related intangibles 13,810 --------- Estimated fair value of Spacelink net assets acquired 29,894 Cost in excess of net assets acquired 121,633 --------- 151,527 Cash acquired (1,822) --------- Purchase price, net of cash acquired $ 149,705 =========
The tax basis of the acquired assets and liabilities equals the financial statement values as a result of the Company's tax election to treat the stock purchase as an asset purchase. As a result of the acquisition, net interest expense has been increased by $4,387 for the year ended October 31, 2004 based on an interest rate of 3.215%. The effect on net income of a 1/8% variance in interest rates is $237 for the year ended October 31, 2004. A pro forma adjustment was made to increase selling, general and administrative expense by $4,243 for amortization of acquired customer-related intangibles. See further discussion of these acquired intangible assets in Note D to the Pro Forma Condensed Financial Statements for the three months ended January 31, 2005. The income tax provision has been adjusted to reflect the estimated income tax effects of pro forma adjustments and the effect of reflecting income tax for Spacelink as described in Note B. These adjustments to the pro forma income statements were computed assuming the transaction was consummated at the beginning of the period presented. Spacelink historical results include $1,076 of one-time bonus expenses and $938 of transaction costs. Note D - Stock Split On April 15, 2005, the Company effected a three-for-two stock split in the form of a 50% stock dividend. All share and per share amounts in this report have been adjusted to reflect this stock split. 3 Engineered Support Systems, Inc. Pro Forma Condensed Consolidated Statements of Income (Unaudited) For the Three Months Ended January 31, 2005 (In thousands, except per share amounts)
ESSI for Spacelink for Pro Forma for Three Months Three Months Three Months Ended Ended Pro Forma Ended 1/31/2005 12/31/2004 Adjustments 1/31/2005 --------- ---------- ----------- --------- Net revenues $ 233,533 $ 23,603 $ $ 257,136 Cost of revenues 175,989 22,604 198,593 ---------- ---------- ---------- ---------- Gross Profit 57,544 999 58,543 Selling, general and administrative expense 24,553 1,564 1,061 27,178 Loss on sale of assets 1 1 ---------- ---------- ---------- ---------- Income from Continuing Operations 32,990 (565) (1,061) 31,364 Interest expense (7) (11) (1,097) (1,115) Interest income 261 18 279 ---------- ---------- ---------- ---------- Income before income taxes 33,244 (558) (2,158) 30,528 Income tax provision 12,633 (1,032) 11,601 ---------- ---------- ---------- ---------- Net income $ 20,611 $ (558) $ (1,126) $ 18,927 ========== ========== ========== ========== Basic earnings per share $ 0.51 $ 0.47 ========== ========== Diluted earnings per share $ 0.48 $ 0.44 ========== ========== Average shares outstanding Basic 40,241 342 40,583 ========== ========== ========== Diluted 42,522 342 42,864 ========== ========== ==========
4 Engineered Support Systems, Inc. Pro Forma Condensed Consolidated Balance Sheets (Unaudited) January 31, 2005 (In thousands, except per share amounts)
ESSI at Spacelink at Pro Forma Pro Forma 1/31/2005 12/31/2004 Adjustments at 1/31/2005 --------- ---------- ----------- ------------ Cash and cash equivalents $ 10,334 $ 25 $ (1,822) $ 8,537 Accounts receivable 128,885 21,990 150,875 Contracts in process and inventories 73,107 1,981 (1,600) 73,488 Deferred income taxes 6,921 6,921 Other current assets 11,098 790 (15) 11,873 --------- --------- --------- --------- Total Current Assets 230,345 24,786 (3,437) 251,694 Property, plant and equipment, net 48,379 3,172 51,551 Goodwill 191,422 121,633 313,055 Acquired intangibles 43,304 13,810 57,114 Deferred income taxes 2,097 2,097 Other assets 13,905 1,647 (1,632) 13,920 --------- --------- --------- --------- Total Assets $ 529,452 $ 29,605 $ 130,374 $ 689,431 ========= ========= ========= ========= Notes payable $ $ $ 136,462 $ 136,462 Current maturities on long-term debt 371 371 Accounts payable 63,044 3,915 66,959 Other current liabilities 44,241 5,283 49,524 --------- --------- --------- --------- Total Current Liabilities 107,656 9,198 136,462 253,316 --------- Long-term debt 1,005 1,005 Additional minimum pension liability 28,237 28,237 Other liabilities 14,126 1,076 15,202 Shareholders' Equity 378,428 19,331 (19,331) 391,671 13,243 --------- --------- --------- --------- Total Liabilities & Shareholders' Equity $ 529,452 $ 29,605 $ 130,374 $ 689,431 ========= ========= ========= =========
5 Engineered Support Systems, Inc. Pro Forma Condensed Consolidated Financial Statements (Unaudited) For the Three Months Ended January 31, 2005 (In thousands, except per share amounts) Note A - Basis of Presentation On February 7, 2005 Engineered Support Systems, Inc. (the "Company") acquired Spacelink International, LLC ("Spacelink"), which designs, integrates, operates and maintains deployed satellite and wireless networks for the U.S. Department of Defense, the U.S. intelligence community and other forward deployed federal agencies and multinational organizations worldwide. The purchase price including acquisition costs, net of $1,822 cash acquired, of $149,705 was financed with 342 shares of the Company's common stock valued at $13,243 and with $136,462 of borrowings under the Company's unsecured revolving credit facility. The unaudited pro forma condensed statements of income for the three months ended January 31, 2005 present a combination of the historical statements of income for the Company and Spacelink as adjusted to reflect the purchase transaction in accordance with the purchase method of accounting and to reflect an income tax provision for Spacelink as if it were filing on a consolidated basis with the Company under the provisions of the Internal Revenue Code for the year ended October 31, 2004. A pro forma condensed statement of income is presented for the three months ended January 31, 2005 as if the acquisition had occurred as of November 1, 2003. The pro forma condensed statement of income for the three months ended January 31, 2005 includes the Company's results of operations for the three months ended January 31, 2005 and Spacelink's unaudited results of operations for the three months ended December 31, 2004. The unaudited pro forma results are not necessarily indicative of the combined results that would have occurred had the acquisition actually taken place on November 1, 2003, nor are they necessarily indicative of the results that may occur in the future. The pro forma financial statements should be read in conjunction with the related historical financial statements. Note B - Income Taxes Pro forma adjustments to the condensed statements of income include an income tax provision as if Spacelink had filed on a consolidated basis with the Company for the period presented using the Company's historical effective tax rate of 38%. 6 Note C - Pro Forma Adjustments The purchase price including acquisition costs, less cash acquired of $1,822, was $149,705. The purchase price for Spacelink was allocated as follows: Estimated fair value of Spacelink assets $ 29,605 Estimated fair value of Spacelink liabilities (10,274) --------- Estimated fair value of Spacelink net assets 19,331 Excluded assets: Unbilled accounts receivable (1,600) Investments (15) Investment in Intelsat (1,632) Acquired customer-related intangibles 13,810 --------- Estimated fair value of Spacelink net assets acquired 29,894 Cost in excess of net assets acquired 121,633 --------- 151,527 Cash acquired (1,822) --------- Purchase price, net of cash acquired $ 149,705 =========
The tax basis of the acquired assets and liabilities equals the financial statement values as a result of the Company's tax election to treat the stock purchase as an asset purchase. As a result of the acquisition, net interest expense has been increased by $1,097 for the three months ended January 31, 2005 based on an interest rate of 3.215%. The effect on net income of a 1/8% variance in interest rates is $43 for the three months ended January 31, 2005. A pro forma adjustment was made to increase selling, general and administrative expense by $1,061 for amortization of acquired customer-related intangibles. See further discussion of these acquired intangible assets in Note D below. The income tax provision has been adjusted to reflect the estimated income tax effects of pro forma adjustments and the effect of reflecting income tax for Spacelink as described in Note B. These adjustments to the pro forma income statements were computed assuming the transaction was consummated at the beginning of the period presented. Spacelink historical results include $1,076 of one-time bonus expenses and $938 of transaction costs. Note D - Balance Sheet Purchase Accounting Adjustments Included in the October 31, 2004 pro forma condensed consolidated balance sheet is a purchase accounting adjustment for cost in excess of net assets acquired of $121,633 (goodwill). The Company has completed its evaluation of the fair value of identifiable intangible assets and has included $13,810 of acquired customer-related intangibles on the January 31, 2005 pro forma condensed consolidated balance sheet. These acquired customer-related intangibles have a weighted average amortization period of 3.7 years. Additional purchase accounting adjustments to the pro forma condensed consolidated balance sheet include a $136,462 increase in notes payable and a $1,822 decrease in cash and cash equivalents necessary to finance the acquisition. Assets specifically excluded from the transaction include $1,600 of contracts in process and inventories, $15 of other current assets and $1,632 of other non-current assets. Shareholder's equity has been reduced by $19,331 related to Spacelink and has been increased by $13,243 representing 228 shares of the Company's common stock provided as consideration. Note E - Stock Split On April 15, 2005, the Company effected a three-for-two stock split in the form of a 50% stock dividend. All share and per share amounts in this report have been adjusted to reflect this stock split. 7