SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K/A
Amendment No. 1 to Current Report
Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
Date of Report July 15, 2003
(Date of earliest event reported) (May 1, 2003)
ENGINEERED SUPPORT SYSTEMS, INC.
MISSOURI 0-13880 43-1313242
(State of Other Jurisdiction (Commission File No.) (IRS Employer
of Incorporation) Identification No.)
201 Evans Lane, St. Louis, Missouri 63121
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (314) 553-4000
Engineered Support Systems, Inc. hereby amends the following items,
financial statements, exhibits or other portions of its Current Report,
dated May 1, 2003, on Form 8-K:
Item 7. Financial Statements and Exhibits
(a) Financial Statements of Business Acquired
(1) Audited Financial Statements of Technical and Management
Services Corporation for the year ended December 31, 2002
(b) Pro Forma Financial Information
(1) Pro Forma Condensed Statements of Income (Unaudited) for the
year ended October 31, 2002
(2) Notes to Pro Forma Condensed Statements of Income
(Unaudited) for the year ended October 31, 2002
(3) Pro Forma Condensed Statements of Income (Unaudited) for the
six months ended April 30, 2003
(4) Pro Forma Condensed Consolidated Balance Sheet (Unaudited)
as of April 30, 2003
(5) Notes to Pro Forma Condensed Financial Statements
(Unaudited) for the six months ended April 30, 2003
(c) Exhibits
23. Consent of Independent Auditors
Item 7 (a) (1) - Audited Financial Statements of Technical and Management
Services Corporation for the year ended December 31, 2002
TECHNICAL AND MANAGEMENT
SERVICES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL REPORT
DECEMBER 31, 2002
CONTENTS
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INDEPENDENT AUDITOR'S REPORT 1
-------------------------------------------------------------------------------
FINANCIAL STATEMENTS
Consolidated balance sheet 2
Consolidated statement of income 3
Consolidated statement of stockholders' equity 4
Consolidated statement of cash flows 5 - 6
Notes to consolidated financial statements 7 - 15
-------------------------------------------------------------------------------
McGladrey & Pullen
Certified Public Accountants
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Technical and Management Services Corporation
Calverton, Maryland
We have audited the accompanying consolidated balance sheet of Technical and
Management Services Corporation and subsidiaries (the Company) as of
December 31, 2002, and the related consolidated statement of income,
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 auditing standards generally
accepted in the United States of America. 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
Technical and Management Services Corporation and subsidiaries as of
December 31, 2002, and the results of their operations and their cash flows
for the year then ended in conformity with accounting principles generally
accepted in the United States of America.
/s/ McGladrey & Pullen, LLP
Bethesda, Maryland
February 8, 2003, except for the first paragraph of Note 16
as to which the date is February 18, 2003; and the second paragraph
of Note 16 as to which the date is May 1, 2003
McGladrey & Pullen, LLP is an independent member firm of
RSM International, an affiliation of independent accounting
And consulting firms.
1
TECHNICAL AND MANAGEMENT SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2002
ASSETS
-----------------------------------------------------------------------------------------
Current Assets
Cash $ 122,686
Contract receivables 36,901,982
Employee and other receivables 176,780
Prepaid expenses 215,137
Assets from discontinued operations 395,705
--------------------
TOTAL CURRENT ASSETS 37,812,290
--------------------
Property and Equipment, net 3,938,133
--------------------
Other Assets
Cash surrender value of life insurance 148,350
Other 140,040
--------------------
288,390
--------------------
$ 42,038,813
====================
LIABILITIES AND STOCKHOLDERS' EQUITY
-----------------------------------------------------------------------------------------
Current Liabilities
Disbursements in excess of available cash $ 3,609,866
Line of credit 12,460,305
Long-term debt, current maturities 196,832
Obligation under capital lease, current maturities 93,052
Accounts payable 13,373,183
Accrued expenses 2,533,904
Billings in excess of costs and anticipated profits 724,933
Deferred income taxes 642,366
Liabilities from discontinued operations 353,366
--------------------
TOTAL CURRENT LIABILITIES 33,987,807
--------------------
Long-Term Liabilities
Long-term debt, net of current maturities 1,133,858
Obligation under capital lease, net of current maturities 186,342
--------------------
1,320,200
--------------------
Commitments and Contingencies
Stockholders' Equity
Common stock, no par value; 5,250 shares authorized; 5,000 shares
issued and outstanding 1,000
Additional paid-in capital 1,039,467
Retained earnings 11,044,116
--------------------
12,084,583
Less notes receivable - officers 5,353,777
--------------------
TOTAL STOCKHOLDERS' EQUITY 6,730,806
--------------------
$ 42,038,813
====================
See Notes to Consolidated Financial Statements.
2
TECHNICAL AND MANAGEMENT SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 2002
------------------------------------------------------------------------------------------
Contract revenue $ 115,928,841
Direct expenses 89,956,877
---------------------
GROSS PROFIT 25,971,964
Operating expenses 19,306,784
---------------------
OPERATING INCOME 6,665,180
---------------------
Other income (expense):
Interest expense (685,941)
Other income 9,617
---------------------
(676,324)
---------------------
INCOME FROM CONTINUING OPERATIONS
BEFORE PROVISION FOR INCOME TAXES 5,988,856
Income tax expense 301,300
---------------------
INCOME FROM CONTINUING OPERATIONS 5,687,556
Discontinued operations
Loss from discontinued operations, net of income tax
benefit of: $71,000 (1,601,568)
---------------------
NET INCOME $ 4,085,988
=====================
See Notes to Consolidated Financial Statements.
3
TECHNICAL AND MANAGEMENT SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 2002
Common Stock Additional Notes
----------------------- Paid-in Retained Receivable -
Shares Issued Amount Capital Earnings Officers Total
------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 5,000 $1,000 $ 850,091 $ 9,286,581 $ - $10,137,672
Capital contributions - - 189,376 - - 189,376
Distributions - - - (2,328,453) - (2,328,453)
Reclassification of notes
receivable - officers - - - - (4,906,731) (4,906,731)
Advances to officers - - - - (447,046) (447,046)
Net income - - - 4,085,988 - 4,085,988
----------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2002 5,000 $1,000 $1,039,467 $11,044,116 $(5,353,777) $ 6,730,806
==============================================================================================
See Notes to Consolidated Financial Statements.
4
TECHNICAL AND MANAGEMENT SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2002
-------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Continuing operations
Income from continuing operations $ 5,687,556
Adjustments to reconcile income from continuing operations to
net cash provided by (used in) continuing operations:
Depreciation and amortization 446,543
Deferred income taxes 223,881
Changes in assets and liabilities
(Increase) decrease in:
Contract receivables (8,982,095)
Employee and other receivables 17,588
Prepaid expenses 35,910
Other assets (10,337)
Increase (decrease) in:
Accounts payable 5,035,589
Accrued expenses 255,160
Billings in excess of costs and anticipated profits 20,176
----------------
NET CASH PROVIDED BY CONTINUING OPERATIONS 2,729,971
----------------
Discontinued operations:
Loss from discontinued operations (1,601,568)
Adjustments to reconcile loss from discontinued operations to
net cash (used in) discontinued operations:
Depreciation and amortization 37,431
(Decrease) increase in allowance for doubtful accounts 174,000
Increase in allowance for obsolete inventory 172,000
Changes in assets and liabilities
(Increase) decrease in:
Contract receivables 70,347
Employee and other receivables 12,589
Prepaid expenses 11,300
Inventory 277,876
Other assets 1,447
Increase (decrease) in:
Accounts payable (73,945)
Accrued expenses (79,668)
Settlement payable (56,877)
----------------
NET CASH USED IN DISCONTINUED OPERATIONS (1,055,068)
----------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,674,903
----------------
(Continued)
5
TECHNICAL AND MANAGEMENT SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
YEAR ENDED DECEMBER 31, 2002
------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Continuing operations:
Purchase of property and equipment (861,423)
Loans made to officers (257,670)
Decrease (increase) in cash surrender values 82,268
----------------
NET CASH USED IN CONTINUING OPERATIONS (1,036,825)
----------------
Discontinued operations:
Purchase of property and equipment (4,746)
----------------
NET CASH USED IN DISCONTINUED OPERATIONS (4,746)
----------------
NET CASH USED IN INVESTING ACTIVITIES (1,041,571)
----------------
Cash Flows from Financing Activities
Continuing operations:
Disbursements in excess of available cash (545,380)
Net borrowings (repayments) under line of credit (1,706,772)
Principal payments on obligation under capital lease (14,955)
Principal payments on long-term debt (201,545)
Distributions to stockholders (2,328,453)
----------------
NET CASH USED IN CONTINUING OPERATIONS (4,797,105)
----------------
NET CASH USED IN FINANCING ACTIVITIES (4,797,105)
----------------
NET DECREASE IN CASH (4,163,773)
Cash:
Beginning 4,298,660
----------------
Ending $ 134,887
================
Ending cash - continuing operations $ 122,686
================
Supplemental Disclosures of Cash Flow Information:
Cash payments for interest $ 661,686
================
Cash payments for income taxes $ 800
================
Supplemental Schedule of Noncash Investing and Financing Activities:
Equipment acquired under capital lease obligation $ 294,349
================
Interest income earned on notes receivable - officers
that was contributed as capital $ 189,376
================
See Notes to Consolidated Financial Statements.
6
TECHNICAL AND MANAGEMENT SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of business: Technical and Management Services Corporation (the
------------------
Parent) and its subsidiaries (the Company), a Maryland corporation, is a
government contractor which provides primarily engineering and software
development services to the Federal government or to prime contractors of
the Federal government. The Company has a division which manufactures
engineering equipment for use by the Federal government. The Company's
majority-owned subsidiaries, Meridian Aquatic Technology L.L.C. and Marine
Environmental Solutions, L.L.C. (combined, Meridian) provide aquaculture and
biofiltration related products.
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. In addition, government
funding continues to be dependent on congressional approval of program level
funding and on contract agency approval for the Company's work. The extent
to which the Company's existing contracts will be funded in the future
cannot be determined.
A summary of the Company's significant accounting policies follows:
Principles of consolidation: The accompanying consolidated financial
---------------------------
statements, include the accounts of the Company and its majority-owned
subsidiaries, Meridian and Log Systems, Inc. (LSI). As of December 31, 2002,
the Company owned approximately 80% of both subsidiaries. All material
inter-company transactions and balances have been eliminated in the
consolidation. The subsidiaries' equity deficit results in no minority
interest on the consolidated financial statements.
Revenue and cost recognition: The Company generates revenue under cost
----------------------------
reimbursable, time and material, and fixed price contracts. Revenue from
cost reimbursable contracts is recognized on the basis of reimbursable
contract costs incurred during the period increased by the applicable
fringe, overhead, and general and administrative expenses, plus the fee
earned. Revenue from fixed price contracts is recognized on the percentage
of completion basis. Under this method, contract revenue earned on
individual contracts is measured by the percentage relationship that
contract costs incurred bear to management's estimate of total contract
costs. Revenue from time and material contracts is recognized on the basis
of man-hours utilized, plus other reimbursable contract costs incurred
during the period.
A provision for estimated losses on uncompleted contracts is made in the
period in which such losses are determined. Change in job performance, job
conditions and estimated profitability may result in revisions to costs and
revenue, and are recognized in the period in which the revisions are
determined.
The Company recognizes revenue under its U.S. Federal government contracts
when a contract has been executed, the contract price is fixed and
determinable, delivery of the services or products has occurred, and
collectibility of the contract price is considered probable. The Company's
contracts with agencies of the U.S. Federal government are subject to
periodic funding by the respective contracting agency. Funding for a
contract may be provided in full at inception of the contract or ratably
throughout the contract as the services are provided. In evaluating the
probability of funding for purposes of assessing collectibility of the
contract price, the Company considers its previous experiences with the
customers, communications with the customers regarding funding status, and
the Company's knowledge of available funding to the contract or program. If
funding is not assessed as probable, revenue recognition is deferred until
realization is probable.
7
TECHNICAL AND MANAGEMENT SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Contract receivables: In accordance with industry practice, contract
--------------------
receivables relating to long-term contracts are classified as current, even
though a portion of these amounts are not expected to be realized within one
year.
Billed accounts receivable are carried at the amounts invoiced less an
estimate made for doubtful accounts based on a review of all outstanding
amounts on a monthly basis. Management determines the allowance for doubtful
accounts by identifying troubled accounts and using historical experience
with the customer and evaluating the customer's funding history. Billed
accounts receivable are considered past due if the invoice has been
outstanding more than 30 days. The Company does not charge interest on
accounts receivables, however, U.S. governmental agencies pay interest on
invoices outstanding more than 30 days. The Company records interest income
from U.S. governmental agencies when received. An allowance in the amount of
$240,000 at December 31, 2002, is made against receivables included with
assets from discontinued operations. Management believes that receivables
from continuing operations are fully collectible and no allowance is
necessary.
Unbilled accounts receivable consist primarily of costs incurred and accrued
fees in excess of billings and rate variances on certain cost reimbursable
contracts and are normally due within one year. These amounts will be billed
on the basis of contract terms and delivery schedules.
Both billed and unbilled receivables are written off when deemed
uncollectible. Recoveries of receivables previously written off are recorded
when received.
Inventory: Inventory is valued at the lower of cost or market, with cost
---------
determined using the average cost method. Inventory, which is included with
assets from discontinued operations, as of December 31, 2002, consists of
raw materials of $87,207, and finished goods, net of an allowance, of
$58,179. The allowance against finished goods was estimated at $287,000 at
December 31, 2002. Finished goods include an allocation of direct and
indirect costs of production.
Property and equipment: Property and equipment are stated at cost.
----------------------
Depreciation is calculated and amortized over the estimated useful lives of
the assets using accelerated and straight-line methods.
Income taxes: The Company has elected to be treated as an S-Corporation
------------
under Subchapter S of the Internal Revenue Code. Consequently, the Company
is not liable for Federal and state income taxes, except for certain states
not recognizing the S-Corporation status. Except for those states, the
stockholders, not the Company, will be liable for income taxes on the
Company's income.
Deferred income taxes for certain states are provided on a liability method,
whereby, deferred tax assets are recognized for deductible temporary
differences and operating loss and tax carryforwards, and deferred tax
liabilities are recognized for taxable temporary differences. Temporary
differences are the differences between the reported amounts of assets and
liabilities and their tax basis. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely
than not that some portion or all of the deferred tax assets will not be
realized. Deferred tax assets and liabilities are adjusted for the effects
of changes in tax laws and rates on the date of enactment.
8
TECHNICAL AND MANAGEMENT SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Estimates: The preparation of financial statements 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 revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
Financial credit risk: Substantially all of the Company's contract
---------------------
receivables and revenue are derived from prime contracts and subcontracts
with U.S. Government agencies or commercial entities. During the year ended
December 31, 2002, approximately 99% of the revenue recognized was from U.S.
Government agencies or from prime contractors to U.S. Government agencies.
All contract receivables are made on an unsecured basis.
The Company maintains its cash in bank deposit accounts, which at times, may
exceed Federally insured limits. The Company has not experienced any losses
in such accounts. The Company believes it is not exposed to any significant
credit risk on cash.
NOTE 2. CONTRACT RECEIVABLES
Contract receivables at December 31, 2002, consist of the following:
---------------------------------------------------------------------------
Billed $ 32,361,269
Unbilled - costs and fees in excess of billings 4,540,713
--------------------
$ 36,901,982
====================
Contract receivables include approximately $945,000 related to a claim filed
by the Company with the U.S. Army. The total amount of the claim filed is
approximately $1,195,000. The Company's legal counsel has reviewed the
claim, and represents that, in their opinion, the amount of the claim is
reasonably estimated and the likelihood of recovery of the amount claimed is
probable.
NOTE 3. NOTES RECEIVABLE - OFFICERS
The Company has revolving notes receivable outstanding from the officers of
the Company. The notes are due May 8, 2007. Interest is accrued at 3.25% per
annum for the year ended December 31, 2002. Interest terms of the notes were
amended to reflect current market conditions. The balance outstanding as of
December 31, 2002, was $4,740,018, plus accrued interest income of $613,759.
Interest income from officers for the year ended December 31, 2002, was
$189,376. The notes receivable balances were reclassified from "Other
Assets" to "Contra-Equity" in 2002 as a result of the contemplated sale of
the Company described in Note 16. Accordingly, the 2002 interest income of
$189,376 accrued on the notes was recorded as additional paid-in capital.
The officers intend to satisfy the notes, along with accrued interest,
through distributions immediately prior to the completion of the sales
transaction. (See Note 16)
9
TECHNICAL AND MANAGEMENT SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
NOTE 4. CASH SURRENDER VALUE
The Company has certain rights through collateral assignments in two
split-dollar life insurance policies of $4,000,000 per stockholder. The
policies are owned by the officers with the officers assigning these rights
to the Company. The Company pays the premiums on split-dollar life insurance
policies. As a result of the assignments, the Company has a secured interest
in the cash surrender value of the policies to the extent of the premiums
paid. The cash surrender value on these policies amounted to $148,350 as of
December 31, 2002, which is less than cumulative premiums paid. Any change
in the cash surrender value is netted against the amount expensed for
premiums paid.
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 2002, consists of the following:
Accumulated
Estimated Depreciation/ Depreciation/
Asset Category Useful Lives Cost Amortization Amortization
--------------------------------------------------------------------------------------------------------------------
Furniture, equipment, and software 3 - 7 years $ 4,762,157 $ 365,335 $ 3,159,814
Leasehold improvements 3 - 7 years 69,650 1,938 39,013
Building and improvements 7 - 40 years 2,370,163 70,642 559,255
Land 30 years 302,053 - -
Automobiles 5 years 145,742 8,386 28,338
Other Various 92,364 242 17,576
---------------------------------------------------------
$ 7,742,129 $ 446,543 $ 3,803,996
=========================================================
NOTE 6. LINE OF CREDIT
The Company maintains a line of credit agreement with a financing
institution whereby, the Company may borrow up to 90% and 80% of eligible
Government and commercial receivables, respectively, up to $22,000,000
through March 31, 2003 and $17,000,000, thereafter. Interest is payable
monthly and accrues at the borrowers option of prime or LIBOR plus the
applicable margin. The interest rate was 4.50% at December 31, 2002. The
agreement also provides a facility whereby; the Company can fix a certain
amount of principal to accrue interest at the LIBOR rate which was 4.19% at
December 31, 2002. The agreement is secured by a blanket lien on all of the
Company's assets. At December 31, 2002, the amount outstanding under the
agreement was $12,460,305. The agreement expires in September 2003 and
requires the Company to maintain certain financial covenants.
10
TECHNICAL AND MANAGEMENT SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
NOTE 7. CAPITAL LEASE OBLIGATION
The Company leases purchased software under a capital lease expiring in
October 2005. Future minimum lease payments under the capital lease,
together with the net present value of the minimum lease payments as of
December 31, 2002, are as follows:
Years ending December 31,
------------------------------------------------------------------------------
2003 $ 107,811
2004 107,811
2005 89,842
-------------------
Total minimum lease payments 305,464
Less amount representing interest 26,070
-------------------
Present value minimum lease payments $ 279,394
===================
NOTE 8. LONG-TERM DEBT
Long-term debt as of December 31, 2002, consists of the following notes
payable:
---------------------------------------------------------------------------------------------------
Mortgage payable to First Citizens Bank of Polson, monthly payments of
$2,978, including interest at no more or less than 1% from the previous
period, 9.25% at December 31, 2002, due September 2009. $ 175,662
Mortgage payable to First Interstate Bank, monthly payments
of $444, including interest at 7.60%, due October 2008. 25,625
Note payable to First Interstate Bank, monthly payments
of $2,675, including interest at 8.15%, due April 2009. 115,892
Note payable to Ronan State Bank, monthly payments of
$12,810, including interest at 5.75%, due November 2004. 298,056
Note payable to CB&T Bank of Middle Georgia, monthly
payments of $7,004, including interest at 7.50%, due
September 2004. 715,455
-------------------
$ 1,330,690
===================
11
TECHNICAL AND MANAGEMENT SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
NOTE 8. LONG-TERM DEBT (CONTINUED)
Maturities of long-term debt as of December 31, 2002, are due in future
years as follows:
Years ending December 31,
---------------------------------------------------------------------------
2003 $ 196,832
2004 906,532
2005 52,964
2006 58,448
2007 50,488
Thereafter 65,426
-------------------
$ 1,330,690
===================
NOTE 9. SETTLEMENT PAYABLE
Marine Environmental Solutions, LLC, an 80% owned subsidiary of the parent,
entered into a settlement agreement in January 2001 related to a violation
of a purchase agreement/consulting agreement initiated in October 1994. The
agreement is guaranteed by the parent. The total settlement amount is
$300,000 which was payable in 50 equal monthly installments of $5,600 with
an additional $20,000 included with the first installment.
The settlement liability was discounted over the term of the agreement at
the Company's approximate borrowing rate at January 2001 which was estimated
as 10%. The discounted settlement liability, which is included with
liabilities from discontinued operations, was $124,779 at December 31, 2002.
The settlement liability with accrued interest was fully paid in February
2003.
NOTE 10. INCOME TAXES
For states not recognizing the S-Corporation status, the Company accounts
for income taxes under the Statement of Financial Accounting Standards No.
109, Accounting for Income Taxes, which requires a liability for measuring
deferred tax assets and liabilities based on temporary differences existing
at the balance sheet date, using enacted tax rates in effect when those
differences are expected to reverse.
For Meridian, each investor's allocated share of the LLC income or loss is
reported in each investor's individual income tax return. LSI, however, is
subject to both federal and state corporate income taxes as it is not taxed
under the provisions of the Subchapter S of the Internal Revenue Code.
The provision for state income taxes charged to operations for the year
ended December 31, 2002, consists of the following:
-----------------------------------------------------------------------------
Current tax expense $ 6,400
Deferred tax expense 223,900
--------------------
INCOME TAX EXPENSE $ 230,300
====================
12
TECHNICAL AND MANAGEMENT SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
NOTE 10. INCOME TAXES (CONTINUED)
-------------------------------------------------------------------------
Income tax expense from continuing operations $ 301,300
Income tax benefit from discontinued operations (71,000)
-------------------
$ 230,300
===================
Deferred tax liabilities and assets at December 31, 2002, consist of the
following:
-------------------------------------------------------------------------
Deferred tax assets:
Accounts payable $ 484,665
Accrued expenses 81,943
Net operating loss carryforwards 18,345
-------------------
584,953
-------------------
Deferred tax liabilities:
Contract receivables (1,209,566)
Prepaid expenses (5,438)
Property and equipment (12,315)
-------------------
(1,227,319)
-------------------
$ (642,366)
===================
The deferred tax amounts mentioned above have been classified on the
accompanying balance sheet at December 31, 2002, as a net current liability.
The 2001 and 2000 net operating losses for tax purposes of approximately $1
million and $1.1 million, respectively, were carried forward to reduce 2002
taxable income to $0. The remaining net operating loss of approximately
$500,000 can be carried forward through 2021 and applied to reduce future
taxable income in the states that do not recognize the S-Corporation status.
NOTE 11. PENSION PLAN
The Company has adopted a 401(k) plan covering all eligible employees
meeting age and length-of-service requirements. Eligible employees electing
to participate may contribute a portion of their compensation to the plan on
a pretax basis up to the percentage allowable under Internal Revenue Code
regulations. The Company's contribution varies based upon the employee's
contribution but does not exceed 4% of annual compensation. Participants are
fully vested in the contributions after three years of service. Employer
contributions under the 401(k) plan was $142,798 for the year ended December
31, 2002.
13
TECHNICAL AND MANAGEMENT SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
NOTE 12. LEASING ARRANGEMENTS
The Company leases certain office space and office equipment under various
noncancelable operating leases expiring at various dates through August 2019.
The leases are subject to increases in operating expenses and real estate
taxes. Rent expense charged to operations for the year ended December 31,
2002, was $2,049,434.
Future minimum lease payments as of December 31, 2002, are as follows:
Years ending December 31,
----------------------------------------------------------------------------
2003 $ 1,305,340
2004 639,693
2005 146,386
2006 116,519
2007 21,044
-------------------
$ 2,228,982
===================
NOTE 13. SELF-INSURANCE
The Company has a partially self-insured group medical plan under which
active employees and dependents are eligible for coverage. The liability to
the Company is limited to a maximum of $50,000 for each insured person per
contract year. The stop loss insurance covers any claims in excess of the
$50,000 limit. The health insurance expense incurred for the year ended
December 31, 2002, was $2,260,977.
NOTE 14. DISCONTINUED OPERATIONS
During the year ended December 31, 2002, the Company's management and owners
have committed to plans to sell their majority-owned subsidiaries, Meridian
Aquatic Technology L.L.C. and Marine Environmental Solutions, L.L.C.
(combined, Meridian). Meridian is available for immediate sale in its
present condition and there is an active program to locate a buyer. Meridian
is being actively marketed for sale at a price that is reasonable in
relation to its current market value. Management feels that the sale of
Meridian is probable within one year and represent that it is unlikely that
significant changes to the plan will be made or that the plan will be
withdrawn. In the event that a suitable buyer is not identified within one
year, the owners and management have committed to shut down the
subsidiaries' operations. In the circumstance of a sale of Meridian, the
operations and cash flows of the subsidiaries will be eliminated from the
ongoing operations of the Company and the Company will not have any
significant continuing involvement in the operations of Meridian after the
sale transaction except within the ordinary course of business.
14
TECHNICAL AND MANAGEMENT SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
NOTE 14. DISCONTINUED OPERATIONS (CONTINUED)
A summary of the net assets and results of operations of Meridian as of and
for the year ended December 31, 2002, is as follows:
----------------------------------------------------------------------------
Current assets $ 395,705
Current liabilities (3,503,769)
----------------
(3,108,064)
Amount due to parent eliminated in consolidation 3,150,403
----------------
NET ASSETS $ 42,339
================
Sales revenue $ 663,263
================
Loss from discontinued operations $ (1,601,568)
================
Included in the loss from discontinued operations are eliminations of net
expenses arising from intercompany transactions. The total net expenses
eliminated were $364,542 for the year ended December 31, 2002. The loss from
discontinued operations, exclusive of the eliminations, is $1,966,110 for
the year ended December 31, 2002.
NOTE 15. CONTINGENCIES
Contract costs, including indirect costs, are subject to audit by agencies
of the U.S. Government. Upon certification of final audited costs,
applicable unbilled contract costs are adjusted to reflect the amounts due
to or from the government and are billed.
The Company's indirect cost rates have been audited and approved for 1997
and prior years. Management believes that the audits of the indirect cost
rates for 1998 through 2002 will not result in material adjustments, if any,
to the Company's results of operations or financial position. As such, no
provision has been made in the financial statements for any adjustments that
may result from the audits.
The Company has disputed a claim made by a taxation authority. The Company
has retained legal counsel and has vigorously protested the claims made.
Legal counsel believes that the outcome could result in a potential
liability up to approximately $112,000 plus interest computed at 15% per
year. The amount of the liability, if any, could not presently be
determined.
NOTE 16. SALE OF COMPANY
On February 18, 2003, the Company signed a letter of intent to sell 100% of
the outstanding common stock. On May 1, 2003, Engineered Support Systems,
Inc. acquired the outstanding stock of the Company.
15
Item 7 (b) (1) - Pro Forma Condensed Statements of Income (Unaudited) for
the year ended October 31, 2002
Engineered Support Systems, Inc.
Pro Forma Condensed Statements of Income (Unaudited)
For the Year Ended October 31, 2002
(In thousands, except per share amounts)
ESSI for TAMSCO Pro Forma
Year for Year for Year
Ended Ended Pro Forma Ended
10/31/02 12/31/02 Adjustments 10/31/02
--------- ----------- ------------- ----------
Net revenues $407,945 $115,929 $ $523,874
Cost of revenues 312,767 101,409 414,176
--------- ----------- ------------- ----------
Gross profit 95,178 14,520 $109,698
Selling, general and administrative expense 45,145 7,845 58 53,048
Restructuring expense 1,441 1,441
--------- ----------- ------------- ----------
Operating income from continuing operations 48,592 6,675 (58) 55,209
Net interest expense 3,239 686 712 4,637
Gain on sale of assets 7 7
--------- ----------- ------------- ----------
Income from continuing operations 45,360 5,989 (770) 50,579
Income tax provision 17,694 301 1,731 19,726
--------- ----------- ------------- ----------
Net income from continuing operations $ 27,666 $ 5,688 $ (2,501) $ 30,853
========= =========== ============= ==========
Basic earnings from continuing operations per share $ 1.78 $ 1.98
========= ==========
Diluted earnings from continuing operations per share $ 1.71 $ 1.90
========= ==========
Average shares outstanding:
Basic 15,582 15,582
========= ==========
Diluted 16,209 16,209
========= ==========
See notes to pro forma condensed statements of income.
Item 7 (b) (2) - Notes to Pro Forma Condensed Statements of Income (Unaudited)
for the year Ended October 31, 2002
Engineered Support Systems, Inc.
Pro Forma Condensed Statements of Income (Unaudited)
For the Year Ended October 31, 2002
(In thousands, except per share amounts)
Note A - Basis of Presentation
On May 1, 2003, Engineered Support Systems, Inc. (the Company) acquired the
outstanding stock of Technical and Management Services Corporation (TAMSCO),
a provider of information technology logistics and digitization services and
a designer and integrator of telecommunications systems primarily for the
U.S. Department of Defense. The purchase price including acquisition costs,
net of $146 cash acquired, of $64.7 million was financed with an unsecured
revolving credit facility as provided for under the terms of a new credit
agreement dated April 23, 2003.
The unaudited pro forma condensed statements of income for the year ended
October 31, 2002 present a combination of the historical statements of
income for the Company and TAMSCO as adjusted to reflect the purchase
transaction in accordance with the purchase method of accounting and to
reflect an income tax provision for TAMSCO 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, 2002. A pro forma condensed
statement of income is presented for the year ended October 31, 2002 as if
the acquisition had occurred as of November 1, 2001.
The pro forma condensed statement of income for the year ended October 31,
2002 includes the Company's results of operations for the year ended October
31, 2002 and TAMSCO's audited results of operations for the year ended
December 31, 2002. The historical statement of income for TAMSCO does not
include the discontinued operations of its majority-owned subsidiaries,
Meridian Aquatic Technology L.L.C. and Marine Environmental Solutions
L.L.C., which are excluded from the purchase transaction. In addition,
direct expenses and operating expenses as presented in TAMSCO's audited
results for the year ended December 31, 2002 have been reclassified as cost
of revenues and selling, general and administrative expense in the pro forma
condensed statements of income in order to conform to ESSI's historical
presentation.
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, 2001, 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 TAMSCO had filed on a consolidated basis with the
Company for the period presented using the Company's historical effective
tax rate of 39%.
Note C - Pro Forma Adjustments
The purchase price, including acquisition costs and less cash acquired of
$146, was $64,717. The purchase price for TAMSCO was allocated as follows:
Estimated fair value of TAMSCO assets $ 38,069
Estimated fair value of TAMSCO liabilities 33,377
---------
Estimated fair value of TAMSCO net assets 4,692
Deferred income tax liability not assumed 640
---------
Estimated fair value of TAMSCO net asset acquired 5,332
Cost in excess of net assets acquired 59,531
---------
64,863
Cash acquired 146
---------
Purchase price, net of cash acquired $ 64,717
=========
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.
Pro forma adjustments to the condensed pro forma income statement for the
year ended October 31, 2002 relate to the following items. Selling, general
and administrative expense has been increased by $58 for the amortization of
loan fees (over a 4-year period).
Concurrent with the acquisition, the company entered into a new credit
agreement with various financial institutions. This agreement provides for a
$125 million revolving credit facility with an option for the Company to
increase borrowings under the facility to $200 million. Effective borrowing
rates under the new credit agreement are lower than historical borrowing
rates for the year ended October 31, 2002. As a result of the acquisition,
net interest expense has been increased by $712 for the year ended October
31, 2002. The effect on net income of a 1/8% variance in interest rates is
$92 for the year ended October 31, 2002.
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 TAMSCO 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.
Item 7 (b) (3) - Pro Forma Condensed Statements of Income (Unaudited) for
the six months ended April 30, 2003
Engineered Support Systems, Inc.
Pro Forma Condensed Statements of Income (Unaudited)
For the Six Months Ended April 30, 2003
(In thousands, except per share amounts)
ESSI TAMSCO Pro Forma
for Six for Six for Six
Months Months Months
Ended Ended Pro Forma Ended
4/30/03 4/30/03 Adjustments 4/30/03
---------- ----------- -------------- ------------
Net revenues $246,720 $79,954 $ $326,674
Cost of revenues 189,791 69,268 259,059
---------- ----------- -------------- ------------
Gross profit 56,929 10,686 67,615
Selling, general and administrative expense 27,374 4,863 19 32,256
Restructuring expense 1,193 1,193
---------- ----------- -------------- ------------
Operating income from continuing operations 28,362 5,823 (19) 34,166
Net interest expense 630 407 707 1,744
Gain on sale of assets 6 6
---------- ----------- -------------- ------------
Income from continuing operations 27,738 5,416 (726) 32,428
Income tax provision 10,818 1,829 12,647
---------- ----------- -------------- ------------
Net income from continuing operations $ 16,920 $ 5,416 $ (2,555) $ 19,781
========== =========== ============== ============
Basic earnings from continuing operations per share $ 1.06 $ 1.24
========== ============
Diluted earnings from continuing operations per share $ 1.00 $ 1.17
========== ============
Average shares outstanding:
Basic 15,995 15,995
========== ============
Diluted 16,926 16,926
========== ============
See notes to pro forma condensed financial statements.
Item 7 (b) (4) - Pro Forma Condensed Consolidated Balance Sheet (Unaudited)
as of April 30, 2003
Engineered Support Systems, Inc.
Pro Forma Condensed Consolidated Balance Sheet (Unaudited)
April 30, 2003
(In thousands, except per share amounts)
Pro Forma
ESSI TAMSCO Adjustments Pro Forma
------------ ------------ -------------- -----------
ASSETS
Current Assets:
Cash and cash equivalents $ 14,943 $ 146 $(14,000) $ 1,089
Accounts receivable 46,357 28,224 74,581
Contracts in process and inventories 23,290 6,119 29,409
Deferred income taxes 6,660 6,660
Other current assets 6,798 585 1,996 9,379
------------ ------------ -------------- -----------
Total current assets 98,048 35,074 (12,004) $121,118
Property, plant and equipment 44,963 2,975 47,938
Goodwill 108,452 59,531 167,983
Deferred income taxes 6,885 6,885
Other assets 21,481 20 21,501
------------ ------------ -------------- -----------
Total Assets $279,829 $38,069 $ 47,527 $365,425
============ ============ ============== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable $ 15,000 $13,997 $ 53,671 $ 82,668
Current maturities of long-term debt 812 (812)
Accounts payable 29,548 13,897 43,445
Deferred income taxes 640 (640)
Other current liabilities 40,001 3,782 43,783
------------ ------------ -------------- -----------
Total current liabilities 84,549 33,128 52,219 169,896
Additional minimum pension liability 20,334 20,334
Other liabilities 14,723 249 14,972
Shareholders' Equity
Common stock 170 1 (1) 170
Additional paid-in capital 100,330 644 (644) 100,330
Retained earnings 101,887 4,047 (4,047) 101,887
Accumulated other comprehensive loss (14,098) (14,098)
------------ ------------ -------------- -----------
188,289 4,692 (4,692) 188,289
Less treasury stock at cost 28,066 28,066
------------ ------------ -------------- -----------
160,223 4,692 (4,692) 160,223
------------ ------------ -------------- -----------
Total Liabilities and Shareholders' Equity $279,829 $38,069 $ 47,527 $365,425
============ ============ ============== ===========
See notes to condensed pro forma financial statements.
Item 7 (b) (5) - Notes to Pro Forma Condensed Financial Statements (Unaudited)
for the six months ended April 30, 2003
Engineered Support Systems, Inc.
Pro Forma Condensed Statements of Income (Unaudited)
For the Six Months Ended April 30, 2003
(In thousands, except per share amounts)
Note A - Basis of Presentation
On May 1, 2003, Engineered Support Systems, Inc. (the Company) acquired the
outstanding stock of Technical and Management Services Corporation (TAMSCO),
a provider of information technology logistics and digitization services and
a designer and integrator of telecommunications systems primarily for the
U.S. Department of Defense. The purchase price including acquisition costs,
net of $146 cash acquired, of $64.7 million was financed with an unsecured
revolving credit facility as provided for under the terms of a new credit
agreement dated April 23, 2003.
The unaudited pro forma condensed statements of income for the six months
ended April 30, 2003 present a combination of the historical statements of
income for the Company and TAMSCO as adjusted to reflect the purchase
transaction in accordance with the purchase method of accounting and to
reflect an income tax provision for TAMSCO 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, 2002. A pro forma condensed
statement of income is presented for the six months ended April 30, 2003 as
if the acquisition had occurred as of November 1, 2001.
The pro forma condensed statements of income for the six months ended April
30, 2003 include the unaudited results of operations for the Company and
TAMSCO for this period. A pro forma condensed consolidated balance sheet is
presented as of April 30, 2003, which includes the TAMSCO balance sheet as
of that date. The historical statements of income and the balance sheet for
TAMSCO do not include the discontinued operations of its majority owned
subsidiaries, Meridian Aquatic Technology L.L.C. and Marine Environmental
Solutions L.L.C., which are excluded from the purchase transaction. In order
to compile the results of operations and balance sheet for TAMSCO for the
six months ended April 30, 2003, a detailed review of TAMSCO's internal
accounting records was performed.
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, 2001, 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 TAMSCO had filed on a consolidated basis with the
Company for the period presented using the Company's historical effective
tax rate of 39%.
Note C - Pro Forma Adjustments for Six Month Statements of Income
The purchase price, including acquisition costs and less cash acquired of
$146, was $64,717. The purchase price for TAMSCO was allocated as follows:
Estimated fair value of TAMSCO assets $ 38,069
Estimated fair value of TAMSCO liabilities 33,377
---------
Estimated fair value of TAMSCO assets 4,692
Deferred income tax liability not assumed 640
---------
Estimated fair value of TAMSCO net assets acquired 5,332
Cost in excess of net assets acquired 59,531
---------
64,863
Cash acquired 146
---------
Purchase price, net of cash acquired $ 64,717
=========
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.
Pro forma adjustments to the condensed pro forma income statement for the
six months ended April 30, 2003 relate to the following items. Selling,
general and administrative expense has been increased by $19 for the
amortization of loan fees (over a 4-year period).
Concurrent with the acquisition, the company entered into a new credit
agreement with various financial institutions. This agreement provides for a
$125 million revolving credit facility with an option for the Company to
increase borrowings under the facility to $200 million. Effective borrowing
rates under the new credit agreement are higher than historical borrowing
rates for the six months ended April 30, 2003. As a result of the
acquisition, net interest expense has been increased by $707 for the six
months ended April 30, 2003. The effect on net income of a 1/8% variance in
interest rates is $37 for the six months ended April 30, 2003.
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 TAMSCO 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.
Note D - Balance Sheet Purchase Accounting Adjustments
Included in the April 30, 2003 pro forma condensed consolidated balance
sheet is a purchase accounting adjustment for cost in excess of net assets
acquired of $59,531. The Company has not completed its evaluation of the
fair value of identifiable intangible assets and has included total cost in
excess of net assets acquired in goodwill on the April 30, 2003 pro forma
condensed consolidated balance sheet. Additional purchase accounting
adjustments to the pro forma condensed consolidated balance sheet include a
$53,671 increase in notes payable and a $14,000 decrease in cash and cash
equivalents necessary to finance the acquisition and to retire $812 in
TAMSCO term debt. A receivable from the sellers of $1,996 has been
established related to certain estimated purchase price adjustments as set
forth in the final purchase agreement. Deferred income taxes related to
TAMSCO in the amount of $640 will not be assumed by Company.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ENGINEERED SUPPORT SYSTEMS, INC.
Date: July 15, 2003 BY: /s/ Gary C. Gerhardt
----------------------- ------------------------------------------
Gary C. Gerhardt
Vice Chairman and Chief Financial Officer