================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 8-K/A
AMENDMENT NO. 1 TO APPLICATION OR REPORT
Pursuant to Section 12, 13 or 15(d) of the
Securities Exchange Act of 1934
OCTOBER 29, 1997
---------------------------------
(Date of earliest event reported)
Commission file number 1-8533
DRS TECHNOLOGIES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-2632319
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5 SYLVAN WAY, PARSIPPANY, NEW JERSEY 07054
- - ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(973) 898-1500
--------------------------------------------------
(Registrant's telephone number, including area code)
================================================================================
<PAGE>
The Current Report on Form 8-K, dated October 29, 1997, of DRS
Technologies, Inc. (Commission File No. 1-8533) is hereby amended by filing
herewith the following financial statements and pro forma financial information:
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) Financial Statements:
Combined audited balance sheets of Applied Systems Division of Spar
Aerospace Limited and Spar Aerospace (UK) Ltd. (together, "Spar
Applied Systems") as of December 31, 1995 and 1996, and the related
combined audited statements of earnings, capital employed and retained
earnings, and cash flows for the years ended December 31, 1994, 1995
and 1996.
(b) Pro Forma Financial Information:
1. Unaudited pro forma condensed consolidated balance sheet of DRS
Technologies, Inc. and Subsidiaries and Spar Applied Systems as
of September 30, 1997.
2. Unaudited pro forma condensed consolidated statements of earnings
of DRS Technologies, Inc. and Subsidiaries and Spar Applied
Systems for the fiscal year ended March 31, 1997 and the
six-month period ended September 30, 1997.
(c) Exhibits:
Consent of KPMG, Chartered Accountants.
<PAGE>
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 thereunto duly authorized.
DRS TECHNOLOGIES, INC.
Registrant
Date: January 12, 1998 /s/ NANCY R. PITEK
----------------------------------
Nancy R. Pitek
Vice President, Finance and Treasurer
<PAGE>
ITEM 7A. FINANCIAL STATEMENTS
Combined Financial Statements of
APPLIED SYSTEMS DIVISION OF
SPAR AEROSPACE LIMITED AND
SPAR AEROSPACE (UK) LTD.
Years ended December 31, 1994, 1995 and 1996
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of DRS Technologies, Inc.
We have audited the combined balance sheets of Applied Systems Division of Spar
Aerospace Limited and Spar Aerospace (UK) Ltd. (a wholly-owned subsidiary of
Spar Aerospace Limited) as at December 31, 1995 and 1996 and the combined
statements of earnings, capital employed and retained earnings and cash flows
for the years ended December 31, 1994, 1995 and 1996. These combined financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these combined financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United States. Those standards require that we plan and perform an audit
to obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Applied Systems
Division of Spar Aerospace Limited and Spar Aerospace (UK) Ltd. as at December
31, 1995 and 1996 and the results of their operations and their cash flows for
the years ended December 31, 1994, 1995 and 1996 in conformity with United
States generally accepted accounting principles.
KPMG
Chartered Accountants
Ottawa, Canada
December 5, 1997
<PAGE>
APPLIED SYSTEMS DIVISION OF SPAR AEROSPACE
LIMITED AND SPAR AEROSPACE (UK) LTD.
Combined Balance Sheets
December 31, 1995 and 1996
(In thousands of Canadian dollars)
- - --------------------------------------------------------------------------------
1995 1996
- - --------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,798 $10,263
Accounts receivable (note 2) 12,705 7,405
Unbilled revenue 3,316 8,862
Work-in-process 1,212 358
Prepaid expenses 87 183
Deferred income taxes (note 6) 1,093 150
- - --------------------------------------------------------------------------------
20,211 27,221
Intangible asset, net (note 3) 6,472 4,391
Property, plant and equipment (note 4) 21,169 22,062
Less accumulated depreciation 17,426 18,556
- - --------------------------------------------------------------------------------
3,743 3,506
- - --------------------------------------------------------------------------------
$30,426 $35,118
================================================================================
LIABILITIES AND OWNER'S EQUITY
Current liabilities:
Accounts payable and accrued liabilities (note 5) $ 9,245 $10,916
Income taxes payable 403 1,270
Deferred revenue 4,377 6,348
- - --------------------------------------------------------------------------------
14,025 18,534
Owner's equity:
Cumulative translation adjustment (note 8) 67 382
Capital employed and retained earnings (note 7) 16,334 16,202
- - --------------------------------------------------------------------------------
16,401 16,584
- - --------------------------------------------------------------------------------
$30,426 $35,118
================================================================================
Commitments and contingencies (note 9)
Subsequent event (note 14)
See accompanying notes to combined financial statements.
<PAGE>
<TABLE>
<CAPTION>
APPLIED SYSTEMS DIVISION OF SPAR AEROSPACE LIMITED AND SPAR AEROSPACE (UK) LTD.
Combined Statements of Earnings
Years ended December 31, 1994, 1995 and 1996
(In thousands of Canadian dollars)
- - ---------------------------------------------------------------------------------------------------------------
1994 1995 1996
- - ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue $52,078 $48,283 $46,133
Cost of revenue 33,975 30,434 24,391
- - ---------------------------------------------------------------------------------------------------------------
Gross profit 18,103 17,849 21,742
General, administrative and business
development (note 10) 6,079 7,702 6,969
Depreciation and amortization 2,628 2,626 3,351
Research and development 610 961 2,243
- - ---------------------------------------------------------------------------------------------------------------
9,317 11,289 12,563
- - ---------------------------------------------------------------------------------------------------------------
Operating income 8,786 6,560 9,179
Foreign exchange loss (income) (226) 93 84
Interest expense (note 7) 1,679 1,233 224
Other income (33) (102) (303)
- - ---------------------------------------------------------------------------------------------------------------
1,420 1,224 5
- - ---------------------------------------------------------------------------------------------------------------
Earnings before income taxes 7,366 5,336 9,174
Income taxes (note 6):
Current 3,391 2,959 2,920
Deferred (reduction) (489) (604) 943
- - ---------------------------------------------------------------------------------------------------------------
2,902 2,355 3,863
- - ---------------------------------------------------------------------------------------------------------------
Net earnings $ 4,464 $ 2,981 $ 5,311
- - ---------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to combined financial statements.
<PAGE>
APPLIED SYSTEMS DIVISION OF SPAR AEROSPACE
LIMITED AND SPAR AEROSPACE (UK) LTD.
Combined Statements of Capital Employed and Retained Earnings
Years ended December 31, 1994, 1995 and 1996
(In thousands of Canadian dollars)
- - --------------------------------------------------------------------------------
1994 1995 1996
- - --------------------------------------------------------------------------------
Capital employed and retained earnings,
beginning of year $19,373 $22,438 $16,334
Net transfers to parent company (1,399) (9,085) (5,443)
Net earnings 4,464 2,981 5,311
- - --------------------------------------------------------------------------------
Capital employed and retained earnings,
end of year $22,438 $16,334 $16,202
- - --------------------------------------------------------------------------------
See accompanying notes to combined financial statements.
<PAGE>
<TABLE>
APPLIED SYSTEMS DIVISION OF SPAR AEROSPACE
LIMITED AND SPAR AEROSPACE (UK) LTD.
Combined Statements of Cash Flows
Years ended December 31, 1994, 1995 and 1996
(In thousands of Canadian dollars)
- - ---------------------------------------------------------------------------------------------------------------
1994 1995 1996
- - ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities:
Net earnings $ 4,464 $ 2,981 $ 5,311
Deferred taxes (489) (604) 943
Depreciation and amortization 2,628 2,626 3,351
- - ---------------------------------------------------------------------------------------------------------------
6,603 5,003 9,605
Changes in working capital:
Accounts receivable (1,258) 2,184 5,300
Work-in-process and unbilled revenues (2,042) 2,029 (4,692)
Prepaid expenses 146 3 (96)
Accounts payable and accrued liabilities 2,359 1,516 1,671
Income taxes payable 357 6 867
Deferred revenue (1,583) 1,174 1,971
- - ---------------------------------------------------------------------------------------------------------------
(2,021) 6,912 5,021
- - ---------------------------------------------------------------------------------------------------------------
Net cash from operating activities 4,582 11,915 14,626
Investing activities:
Additions to property, plant and equipment (864) (1,867) (1,033)
Purchase of intangible assets (1,595) (174) -
- - ---------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (2,459) (2,041) (1,033)
Financing activities:
Net transfers to parent company (1,399) (9,085) (5,443)
Translation 152 (85) 315
- - ---------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (1,247) (9,170) (5,128)
- - ---------------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 876 704 8,465
Cash and cash equivalents, beginning of year 218 1,094 1,798
- - ---------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 1,094 $ 1,798 $10,263
- - ---------------------------------------------------------------------------------------------------------------
Supplemental disclosure:
Income taxes paid $ 373 $ 400 $ 418
- - ---------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to combined financial statements.
<PAGE>
APPLIED SYSTEMS DIVISION OF SPAR AEROSPACE
LIMITED AND SPAR AEROSPACE (UK) LTD.
Notes to Combined Financial Statements
Years ended in December 31, 1994, 1995 and 1996
(In thousands of Canadian dollars)
- - --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(a) Description of business:
Applied Systems Division of Spar Aerospace Limited and Spar Aerospace
(UK) Ltd. operate in the defence electronics industry in Canada and
the UK in three principal product and service areas: Flight Safety
Systems; Naval Communications; and, Advanced Manufacturing.
The Flight Safety Systems products include Deployable Flight Incident
Recorders (DFIRS), cockpit voice recorders and Emergency Avionic
Systems (EAS).
The Naval Communications products consist primarily of shipboard
internal communication systems.
The Advanced Manufacturing services provide build to print
manufacturing for low volume, high complexity circuit and assemblies
for space and defence applications.
(b) Basis of presentation:
The accompanying financial statements combine the accounts of Applied
Systems Division of Spar Aerospace Limited and Spar Aerospace (UK)
Ltd., a wholly-owned subsidiary of Spar Aerospace Limited, a publicly
owned Canadian advanced technology company. These combined financial
statements have been prepared by management in accordance with
generally accepted accounting principles in the United States for
purpose of inclusion in a filing document with the Securities and
Exchange Commission in the United States related to the acquisition
described in note 14. All significant intercompany transactions and
balances have been eliminated upon combination. The combination of
Applied Systems Division of Spar Aerospace Limited and Spar Aerospace
(UK) Ltd. is herein referred to as the Company.
Certain expenses which were previously incurred by Spar Aerospace
Limited on behalf of the Company have been reflected in these
financial statements as if the Company had been a separate legal
entity (see notes 6, 7,10 and 11).
<PAGE>
APPLIED SYSTEMS DIVISION OF SPAR AEROSPACE
LIMITED AND SPAR AEROSPACE (UK) LTD.
Notes to Combined Financial Statements, page 2
Years ended in December 31, 1994, 1995 and 1996
(In thousands of Canadian dollars)
- - --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued):
(c) Revenue recognition:
Revenues related to long-term contracts are accrued using the
percentage of completion method as the work is performed. Revenue
recognized in excess of billings is reflected as unbilled revenue.
Billings in excess of revenue recognized are reflected as deferred
revenue. Provision is made for the total anticipated loss when the
estimate of total costs on a contract indicates a loss. Revisions in
cost and profit estimates during the course of the work are reflected
in the period in which the need for the revision becomes known. Some
contracts contain incentive and/or penalty provisions based on
performance relative to established targets. Such awards or penalties
are included in revenue or cost estimates when amounts can be
reasonably estimated.
All other revenue is recognized at the time products are shipped or
services are rendered to the customer.
(d) Cash and cash equivalents:
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.
(e) Research and development costs:
Research and development costs are expensed as incurred.
(f) Work-in-process:
Work-in-process is carried at the lower of cost of components,
purchased parts, direct labour plus an applicable share of overhead
expense properly chargeable to production or net realizable value.
(g) Property, plant and equipment:
Property, plant and equipment is recorded at cost and depreciated over
the estimated useful life using the straight-line method. The ranges
of estimated useful lives are: building and building improvements, 20
years; office furnishings, computers, machinery and equipment, 3-10
years; and, leasehold improvements over the term of the lease plus
renewal options, if applicable.
<PAGE>
APPLIED SYSTEMS DIVISION OF SPAR AEROSPACE
LIMITED AND SPAR AEROSPACE (UK) LTD.
Notes to Combined Financial Statements, page 3
Years ended in December 31, 1994, 1995 and 1996
(In thousands of Canadian dollars)
- - --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued):
(h) Impairment of long-lived and intangible assets:
The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of, on January 1, 1996. This Statement requires that
long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Recoverability
of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future net cash flows expected to be
generated by the asset. If such assets are considered to be impaired,
the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceed the fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell. Adoption of this Statement
did not have a material impact on the Company's financial position,
results of operations or liquidity.
(i) Income taxes:
The Company accounts for income taxes by the asset and liability
method under SFAS 109, Accounting for Income Taxes. Under this method,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the
enactment date. Valuation allowances are established when necessary to
reduce deferred tax assets to the amounts expected to be realized.
Applied Systems Division of Spar Aerospace Limited's operations are
included in Spar Aerospace Limited's income tax return. Spar Aerospace
Limited's income tax provision has been allocated to Applied Systems
Division as if Applied Systems Division filed separate income tax
returns. As there has been no formal tax sharing arrangement between
Spar Aerospace Limited and the Applied Systems Division, the
Division's current income tax liability has been reflected as a
capital transaction. Spar Aerospace (UK) Ltd.'s current income tax
liability has been reflected as income taxes payable.
<PAGE>
APPLIED SYSTEMS DIVISION OF SPAR AEROSPACE
LIMITED AND SPAR AEROSPACE (UK) LTD.
Notes to Combined Financial Statements, page 4
Years ended in December 31, 1994, 1995 and 1996
(In thousands of Canadian dollars)
- - --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued):
(j) Pension costs and obligations:
Spar Aerospace Limited provides pension benefits in the form of a
defined benefit pension plan (the "pension plan"). Pension costs
attributable to the Company have been reflected in these financial
statements as detailed in note 11.
Current service costs under the pension plan are charged to operations
as services are rendered, based on annual actuarial valuations
performed using the projected benefit method prorated on services and
management's best estimate assumptions of the rate of return on pension
plan assets, rate of salary increases and various other factors
including mortality rates, terminations, and retirement ages. The
valuation of pension fund assets is based on market-related values,
which spread unrealized gains and losses over five years.
Any adjustments to pension costs are amortized, on a diminishing
balance basis, over the expected average remaining service lives of the
employee groups covered by the plans.
(k) Foreign exchange:
Transactions in foreign currencies are translated into Canadian dollars
at the approximate prevailing rate at the time of the transaction.
The operations of Spar Aerospace (UK) Ltd. are translated from the
local (functional) currency in accordance with Statement of Financial
Accounting Standard No. 52 to Canadian dollars. The rates of exchange
at each balance sheet date are used for translating the balance sheets
and a simple average rate of exchange is used for translating the
statements of earnings. Gains or losses resulting from these
translation adjustments are included in the accompanying combined
balance sheets as a separate component of shareholders' equity.
(l) Fair value of financial instruments:
Cash, accounts receivable and accounts payable and accrued liabilities
reported in the combined financial statements approximate their fair
value given the relatively short periods to maturity of these
instruments.
No fair value has been established for the due to related party given
the absence of a market to trade this instrument and the absence of
repayment terms.
<PAGE>
APPLIED SYSTEMS DIVISION OF SPAR AEROSPACE
LIMITED AND SPAR AEROSPACE (UK) LTD.
Notes to Combined Financial Statements, page 5
Years ended in December 31, 1994, 1995 and 1996
(In thousands of Canadian dollars)
- - --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued):
(m) Use of 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, liabilities,
revenues and expenses. Actual results could differ from those
estimates.
2. ACCOUNTS RECEIVABLE:
The components of accounts receivable are as follows:
----------------------------------------------------------------------
1995 1996
----------------------------------------------------------------------
Trade receivables $11,073 $6,081
Customer holdbacks 1,632 1,324
----------------------------------------------------------------------
$12,705 $7,405
======================================================================
The allowance for doubtful accounts was $Nil in 1995 and 1996.
Customer holdbacks amounting to $536 as of December 31, 1995 and 1996 will
be received in 1998.
3. INTANGIBLE ASSET:
The intangible asset consists primarily of amounts paid under a technology
transfer agreement which are carried at cost, unless in management's view
such costs are not recoverable through future contracts.
The intangible asset is amortized based on a percentage of the revenues
recognized for contracts on which the related technology is utilized.
Amortization expense related to intangible assets have amounted to $794,
$496 and $1,989 in 1994, 1995 and 1996, respectively. In 1996, due to a
revision in the total projected revenues attributed to this technology, the
estimated remaining useful life of the intangible asset was reduced.
<PAGE>
APPLIED SYSTEMS DIVISION OF SPAR AEROSPACE
LIMITED AND SPAR AEROSPACE (UK) LTD.
Notes to Combined Financial Statements, page 6
Years ended in December 31, 1994, 1995 and 1996
(In thousands of Canadian dollars)
- - --------------------------------------------------------------------------------
4. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment at December 31 is summarized as follows:
---------------------------------------------------------------------
1995 1996
---------------------------------------------------------------------
Building and building improvements $ 1,055 $ 1,230
Office furnishings 1,039 1,085
Machinery and equipment 13,946 14,301
Computer equipment 4,320 4,605
Leasehold improvements 809 841
---------------------------------------------------------------------
$21,169 $22,062
=====================================================================
Depreciation of property, plant and equipment amounted to $1,834, $2,130
and $1,362 in 1994, 1995 and 1996, respectively.
5. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
---------------------------------------------------------------------
1995 1996
---------------------------------------------------------------------
Trade payables $ 3,103 $ 5,451
Accrued employee vacation expense 581 564
Provision for employee severance costs 993 749
Provision for possible losses 1,100 700
Other accrued liabilities 1,739 1,922
Warranty provision 1,729 1,530
---------------------------------------------------------------------
$ 9,245 $10,916
=====================================================================
<PAGE>
APPLIED SYSTEMS DIVISION OF SPAR AEROSPACE
LIMITED AND SPAR AEROSPACE (UK) LTD.
Notes to Combined Financial Statements, page 7
Years ended in December 31, 1994, 1995 and 1996
(In thousands of Canadian dollars)
- - --------------------------------------------------------------------------------
6. INCOME TAXES:
For the years ended December 31, 1994, 1995 and 1996, the Company has
computed its income taxes in accordance with the provisions of SFAS 109 as
if it had been operating as a stand-alone entity. The significant
components of the provision for income taxes include the following:
--------------------------------------------------------------------------
1994 1995 1996
--------------------------------------------------------------------------
Current:
Canada $3,018 $2,559 $2,502
UK 373 400 418
Deferred (reduction):
Canada (489) (604) 96
UK- - 847
--------------------------------------------------------------------------
Total tax provision $2,902 $2,355 $3,863
==========================================================================
Income taxes differ from the amounts computed by applying the Canadian
federal and provincial income tax rate of 44.6% to income before income
taxes as a result of the following:
--------------------------------------------------------------------------
1994 1995 1996
--------------------------------------------------------------------------
Income tax provision at Canadian statutory rates $3,285 $2,379 $4,091
Manufacturing and processing reduction (387) (263) (497)
UK rate differential (171) (120) (575)
Permanent differences 297 379 970
Investment tax credit (51) (61) (175)
Other (71) 41 49
--------------------------------------------------------------------------
$2,902 $2,355 $3,863
==========================================================================
<PAGE>
APPLIED SYSTEMS DIVISION OF SPAR AEROSPACE
LIMITED AND SPAR AEROSPACE (UK) LTD.
Notes to Combined Financial Statements, page 8
Years ended in December 31, 1994, 1995 and 1996
(In thousands of Canadian dollars)
- - --------------------------------------------------------------------------------
6. INCOME TAXES (continued):
The tax effects of temporary differences that give rise to significant
components of the deferred tax assets and liabilities include the
following:
------------------------------------------------------------------------
1995 1996
------------------------------------------------------------------------
Deferred tax assets:
Tax basis of property and equipment
in excess of book value $ 348 $ 311
Warranty provision 257 273
Profits on long-term contracts recorded
on the percentage of completion method 862 361
Other 3 3
------------------------------------------------------------------------
Total deferred tax asset $1,470 $ 948
========================================================================
Unbilled gross profit in inventory $ (316) $(623)
Investment tax credit (61) (175)
------------------------------------------------------------------------
Total deferred tax liability $ (377) $(798)
========================================================================
Net deferred tax asset $1,093 $ 150
========================================================================
7. CAPITAL EMPLOYED AND RETAINED EARNINGS:
Capital employed and retained earnings comprise the parent company's
investment in the net assets of its Applied Systems Division and the
retained earnings of Spar Aerospace (UK) Ltd. Such investment includes the
effects of intercompany transactions with the corporate office of Spar
Aerospace Limited, which consists of purchases of goods and services
necessary for the Company to carry on its day to day activities and include
telecommunication, payroll and corporate accounting, legal support and
marketing services. No interest expense had been charged by related
parties. This represents a significant source of funding which, if the
Company had been a stand-alone entity, would have been financed at fair
market rates of interest. To better reflect the Company's actual cost of
doing business, interest expense has been imputed on the average
outstanding balance in the amount of $1,679 in 1994, $1,233 in 1995 and
$224 in 1996. The monthly average of the Bank of Canada's prime rate was
used to impute the interest expense (7.15% in 1994, 8.65% in 1995 and 6.06%
in 1996).
<PAGE>
APPLIED SYSTEMS DIVISION OF SPAR AEROSPACE
LIMITED AND SPAR AEROSPACE (UK) LTD.
Notes to Combined Financial Statements, page 9
Years ended in December 31, 1994, 1995 and 1996
(In thousands of Canadian dollars)
- - --------------------------------------------------------------------------------
7. CAPITAL EMPLOYED AND RETAINED EARNINGS (continued):
Because the Company's operations are conducted as a division of Spar
Aerospace Limited, and not as a distinct legal entity, there are no
customary equity and capital accounts for Applied Systems Division of Spar
Aerospace Limited. The Company's operations are funded by means of
intercompany accounts with Spar Aerospace Limited. Transactions and other
charges and credits between the Company and Spar Aerospace Limited are more
fully described above in this note and in note 1(i), 6, 10 and 11.
8. CUMULATIVE TRANSLATION ADJUSTMENT:
------------------------------------------------------------------------
1995 1996
------------------------------------------------------------------------
Balance, beginning of year $152 $ 67
Adjustment arising on translation of foreign operations
financial statements to Canadian dollars (85) 315
------------------------------------------------------------------------
Balance, end of year $ 67 $382
========================================================================
9. COMMITMENTS AND CONTINGENCIES:
At December 31, 1996, the Company was party to operating leases
(principally for administration and engineering facilities) with minimum
rental payments as follows:
1997 $552
1998 281
----------------------------------------------------------------
$833
================================================================
Rent expenses of $397 in 1994, $509 in 1995 and $526 in 1996 and are
included in general, administrative and business development expenses.
The Company receives assistance from the Federal Government for research
and development activities which is applied to reduce the cost of the
related expenditures. Government assistance in the amount of $3,893 is
repayable through royalties in the event the related research and
development projects are successfully commercialized. The royalties are
calculated on the basis of 2 to 3% of total related sales and continue in
effect until the assistance received has been repaid or until the
technology ceases to contribute to commercialization of related products.
<PAGE>
APPLIED SYSTEMS DIVISION OF SPAR AEROSPACE
LIMITED AND SPAR AEROSPACE (UK) LTD.
Notes to Combined Financial Statements, page 10
Years ended in December 31, 1994, 1995 and 1996
(In thousands of Canadian dollars)
- - --------------------------------------------------------------------------------
10. GENERAL, ADMINISTRATIVE AND BUSINESS DEVELOPMENT EXPENSES:
General, administrative and business development expenses include charges
made to Applied Systems Division of Spar Aerospace Limited for expenses
incurred on its behalf by Spar Aerospace Limited. Management believes that
the charges made for 1995 and 1996, reflected in these financial
statements, are reasonable and approximate the expenses that Applied
Systems Division of Spar Aerospace Limited would have incurred had it been
operating as a stand-alone entity. These charges amounted to $469 in 1996
and $562 in 1995 and included telecommunication, payroll and corporate
accounting, legal support and marketing expenses.
In 1994, charges made to Applied Systems Division of Spar Aerospace Limited
by Spar Aerospace Limited were not representative of actual expenses
incurred by the Corporate office. For this reason, an adjustment was made
to better reflect Applied Systems Division of Spar Aerospace Limited's
actual cost of doing business. The estimated costs reflected in these
financial statements amount to $515 based on the average of 1995 and 1996
costs. Management believes that this estimate is reasonable and
approximates the expenses that Applied Systems Division of Spar Aerospace
Limited would have incurred in 1994 had it been operating as a stand-alone
entity.
11. PENSION COSTS AND OBLIGATIONS:
Certain employees of Applied Systems Division of Spar Aerospace Limited
participate in a defined benefit pension plan sponsored by Spar Aerospace
Limited. The plan is funded by Spar Aerospace Limited in accordance with
the independent actuarial valuations. The plan assets are invested
primarily in publicly traded equity and fixed income securities. Retirement
benefits are based on various factors, including remuneration and years of
service.
Based on actuarial valuations dated January 1, 1996, the estimated present
value of accrued pension obligations allocated to Applied Systems Division
of Spar Aerospace Limited was $843, $1,083 and $1,357 for 1994, 1995 and
1996, respectively. The market value of the plan assets available to
discharge these obligations was at least equal to the accrued pension
obligations as at December 31, 1994, 1995 and 1996. For the purposes of
measuring the accrued pension obligation, the discount rate was assumed to
be 8.5%, the rate of return on the plan assets was assumed to be 8.5%, and
the rate of annual compensation increase was assumed at 5%.
The net expense in respect of all pension and retirement plans was $74, $83
and $93 in 1994, 1995 and 1996, respectively.
<PAGE>
APPLIED SYSTEMS DIVISION OF SPAR AEROSPACE
LIMITED AND SPAR AEROSPACE (UK) LTD.
Notes to Combined Financial Statements, page 11
Years ended in December 31, 1994, 1995 and 1996
(In thousands of Canadian dollars)
- - --------------------------------------------------------------------------------
12. RISK CONCENTRATION:
The Company derived 45%, 37% and 20% of its revenues for 1994, 1995 and
1996 respectively, directly or indirectly from defense industry contracts
with the Canadian government.
The Company derived 6%, 12% and 12% of its revenues for 1994, 1995 and 1996
respectively, directly or indirectly from defense industry contracts with
the United States government.
The Company has $7,957 and $4,047 receivable from seven significant
customers as of December 31, 1995 and 1996, respectively.
13. INFORMATION ABOUT FOREIGN OPERATIONS:
The table below provides information pertaining to the Company's operations
by geographic area. Intersegment sales, eliminated in combination, were not
significant.
----------------------------------------------------------------------
Canada U.K. Total
----------------------------------------------------------------------
Revenues:
1996 $36,005 $10,128 $46,133
1995 44,893 3,390 48,283
1994 48,315 3,763 52,078
Earnings before income taxes:
1996 5,333 3,841 9,174
1995 4,169 1,167 5,336
1994 6,146 1,220 7,366
Identifiable assets:
1996 23,349 11,769 35,118
1995 27,445 2,981 30,426
14. SUBSEQUENT EVENT:
On October 28, 1997, DRS Technologies, Inc. purchased from Spar Aerospace
Limited, the business as described in note 1(a), represented by these
financial statements for cash totalling $48,150 (which included $8,150 for
cash acquired in connection with this transaction), subject to certain
working capital adjustments.
<PAGE>
ITEM 7B. PRO FORMA FINANCIAL INFORMATION
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES,
SPAR APPLIED SYSTEMS
Pro Forma Financial Information (Unaudited)
The following unaudited pro forma financial information is based on the
historical consolidated financial statements of DRS Technologies, Inc. and
Subsidiaries ("DRS") and the combined historical financial statements of the
Applied Systems Division of Spar Aerospace Limited and Spar Aerospace (UK), Ltd.
(together, "Spar Applied Systems"), giving effect to the acquisition by DRS of
the net assets of the Applied Systems Division and 100% of the stock of Spar
Aerospace (UK), Ltd. on October 29, 1997.
Headquartered in Kanata, Ontario, Canada, and now operating under the name DRS
Flight Safety and Communications, Spar Applied Systems has been an international
provider of aviation and defense systems for over 30 years. It designs,
manufactures and markets sophisticated flight safety systems, naval
communications systems and other advanced electronics for government and
commercial customers around the world. It also provides custom manufacturing
services for complex electronic assemblies and systems. Spar Applied Systems is
a global supplier of deployable aircraft locator beacons and flight data
recorder systems that store critical data for accident investigation and
aircraft safety analysis. Its shipboard communications systems integrate
Commercial Off-The-Shelf (COTS)-based computing and telecommunications equipment
for military requirements.
The following unaudited pro forma condensed consolidated financial statements
(the "pro forma financial statements") have been prepared using the assumption
that, with respect to the unaudited pro forma condensed consolidated balance
sheet, the transaction occurred on September 30, 1997, and with respect to the
unaudited pro forma condensed consolidated statements of earnings, the
transaction occurred on April 1, 1996. These pro forma financial statements also
reflect giving effect to the transaction under the purchase method of
accounting, based on assumptions and adjustments described in the accompanying
notes to the pro forma financial statements. However, actual purchase accounting
adjustments may differ based on, among other factors, the final allocation of
purchase price to the assets acquired and liabilities assumed. Foreign currency
translations have been completed based on the prevailing rates in effect for the
periods presented. Certain accounts in the Spar Applied Systems historical
financial statements have been reclassified to conform to the DRS financial
statement presentation.
It should be understood that these pro forma financial statements do not
necessarily reflect the actual consolidated financial position or results of
operations of the combined entities since, among other factors, actual expenses
may be lower or higher than amounts assumed or estimated. The unaudited pro
forma financial statements may not be indicative of the results that actually
would have occurred if the transaction had taken place on the dates indicated
nor do they represent a basis of assessing future performance. The pro forma
financial statements should be read in conjunction with the historical
consolidated financial statements of DRS and Spar Applied Systems.
<PAGE>
<TABLE>
DRS TECHNOLOGIES, INC & SUBSIDIARIES
AND SPAR APPLIED SYSTEMS
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
<CAPTION>
HISTORICAL
----------------------------------------- PRO FORMA
DRS SPAR APPLIED SYSTEMS PRO FORMA CONSOLIDATED
------------------ -------------------- ADJUSTMENTS ------------------
September 30, 1997 June 30, 1997 ADD (DEDUCT) September 30, 1997
------------------ -------------------- ------------ ------------------
<S> <C> <C> <C> <C>
Assets
Current Assets:
Cash $ 7,435,000 7,417,000 - $ 14,852,000
Accounts receivable, net 29,747,000 5,466,000 - 35,213,000
Inventories, net of progress payments 27,901,000 3,200,000 - 31,101,000
Prepaid expenses and other current assets 1,369,000 35,000 - 1,404,000
------------ ---------- ---------- ------------
Total current assets 66,452,000 16,118,000 - 82,570,000
Property, plant and equipment, at cost 50,915,000 16,082,000 (13,787,000)(2) 53,210,000
Less accumulated depreciation and -
amortization (30,342,000) 13,787,000) 13,787,000(2) (30,342,000)
------------ ---------- ---------- ------------
Net equipment and improvements 20,573,000 2,295,000 - 22,868,000
Intangible assets 15,247,000 - 21,042,000(6) 36,289,000
Less accumulated amortization (5,286,000) - - (5,286,000)
------------ ---------- ---------- ------------
Net intangible assets 9,961,000 - 21,042,000 31,003,000
Other assets 6,190,000 3,017,000 - 9,207,000
------------ ---------- ---------- ------------
$103,176,000 21,430,000 21,042,000 $145,648,000
============ ========== ========== ============
See accompanying notes to unaudited pro forma condensed financial statements.
</TABLE>
<PAGE>
<TABLE>
DRS TECHNOLOGIES, INC & SUBSIDIARIES
AND SPAR APPLIED SYSTEMS
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
<CAPTION>
HISTORICAL
----------------------------------------- PRO FORMA
DRS SPAR APPLIED SYSTEMS PRO FORMA CONSOLIDATED
------------------ -------------------- ADJUSTMENTS ------------------
September 30, 1997 June 30, 1997 ADD (DEDUCT) September 30, 1997
------------------ -------------------- ------------ ------------------
<S> <C> <C> <C> <C>
Liabilities and Stockholders' Equity
Current liabilities:
Current installments - long term debt $ 7,256,000 - - $ 7,256,000
Other current liabilities 27,710,000 8,609,000 (1,517,000)(4) 34,802,000
------------ ---------- ---------- ------------
Total current liabilities 34,966,000 9,187,000 (3,358,000) 42,058,000
Long-term debt, excluding current installments 25,507,000 - 35,380,000 (6) 60,887,000
Deferred income taxes 3,367,000 - - 3,367,000
Other liabilities 3,337,000 - - 3,337,000
------------ ---------- ---------- ------------
Total liabilities 67,177,000 11,701,000 33,863,000 109,649,000
-
Stockholders' equity:
Common stock 60,000 - - 60,000
Additional paid-in capital 14,629,000 - - 14,629,000
Retained earnings 23,495,000 12,821,000 (12,821,000)(5) 23,495,000
------------ ---------- ---------- ------------
38,184,000 12,821,000 (12,821,000) 38,184,000
Treasury stock, at cost (1,561,000) - - (1,561,000)
Unamortized restricted stock compensation (624,000) - - (624,000)
------------ ---------- ---------- ------------
Net stockholders' equity 35,999,000 12,821,000 (12,821,000) 35,999,000
------------ ---------- ---------- ------------
$103,176,000 21,430,000 21,042,000 $145,648,000
============ ========== ========== ============
See accompanying notes to unaudited pro forma condensed financial statements.
</TABLE>
<PAGE>
<TABLE>
DRS TECHNOLOGIES, INC & SUBSIDIARIES
AND SPAR APPLIED SYSTEMS
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF EARNINGS
<CAPTION>
HISTORICAL
-------------------------------------- PRO FORMA
DRS SPAR APPLIED SYSTEMS CONSOLIDATED
----------------- -------------------- PRO FORMA -----------------
Fiscal Year Ended Year Ended ADJUSTMENTS Fiscal Year Ended
March 31, 1997 December 31, 1996 ADD (DEDUCT) March 31, 1997
----------------- -------------------- ------------ -----------------
<S> <C> <C> <C> <C>
Revenues $ 143,578,000 33,829,000 (4,717,000)(3),(4) $ 172,690,000
Costs and expenses (130,996,000) (27,098,000) (564,000)(5),(6) (158,658,000)
------------- ----------- ---------- -------------
Operating income (loss) 12,582,000 6,731,000 (5,281,000) 14,032,000
Interest and related expenses (3,592,000) (164,000) (2,282,000)(7) (6,038,000)
Interest and other income, net 698,000 160,000 -- 858,000
Minority interest (404,000 -- -- (404,000)
------------- ----------- ---------- -------------
Earnings before income taxes 9,284,000 6,727,000 (7,563,000) 8,448,000
Income taxes 3,621,000 2,833,000 (3,159,000)(8) 3,295,000
------------- ----------- ---------- -------------
Net earnings $ 5,663,000 3,894,000 (4,404,000) $ 5,153,000
============= =========== ========== =============
Earnings per share of common stock
Primary $ 0.98 $ .90
Fully Diluted $ 0.84 $ .78
Weighted average number of shares of common
stock outstanding
Primary 5,753,000 5,753,000
Fully Diluted 8,931,000 8,931,000
See accompanying notes to unaudited pro forma condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
DRS TECHNOLOGIES, INC & SUBSIDIARIES
AND SPAR APPLIED SYSTEMS
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF EARNINGS
<CAPTION>
HISTORICAL
---------------------------------------- PRO FORMA
DRS SPAR APPLIED SYSTEMS CONSOLIDATED
----------------- -------------------- PRO FORMA -----------------
Six Months Ended Six Months Ended ADJUSTMENTS Six Months Ended
September 30, 1997 June 30, 1997 ADD (DEDUCT) September 30, 1997
------------------ -------------------- ------------ -----------------
<S> <C> <C> <C> <C>
Revenues $ 77,735,000 12,928,000 (1,047,000)(3),(4) $ 89,616,000
Costs and expenses (71,551,000) (11,737,000) (282,000)(5),(6) (83,570,000)
------------ ----------- ---------- ------------
Operating income 6,184,000 1,191,000 (1,329,000) 6,046,000
Interest and related expenses (1,802,000) 2,000 (1,141,000)(7) (2,941,000)
Interest and other income, net 691,000 293,000 -- 984,000
Minority interest (612,000) -- -- (612,000)
------------ ----------- ---------- ------------
Earnings before income taxes 4,461,000 1,486,000 (2,470,000) 3,477,000
Income taxes 1,651,000 200,000 (565,000)(8) 1,286,000
------------ ----------- ---------- -------------
Net earnings $ 2,810,000 1,286,000 (1,905,000) $ 2,191,000
============ =========== ========== ============
Earnings per share of common stock
Primary $ 0.48 $ 0.37
Fully Diluted $ 0.41 $ 0.35
Weighted average number of shares of common
stock outstanding
Primary 5,848,000 5,848,000
Fully Diluted 9,044,000 9,044,000
See accompanying notes to unaudited pro forma condensed consolidated finanal statements. ci
</TABLE>
<PAGE>
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES,
SPAR APPLIED SYSTEMS
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements
1) The unaudited pro forma condensed consolidated financial statements of DRS
Technologies, Inc. and Subsidiaries ("DRS"), the Applied Systems Division
of Spar Aerospace Limited and Spar Aerospace (UK) Ltd. (together, "Spar
Applied Systems") have been prepared by consolidating the historical
consolidated financial statements of DRS with the historical combined
financial statements of Spar Applied Systems. DRS prepares financial
statements on the basis of a fiscal year ending March 31, whereas the
historical combined financial statements of Spar Applied Systems have been
prepared on a calendar year basis. As permitted under United States
Securities and Exchange Commission Regulation S-X, Article 11, these pro
forma condensed consolidated financial statements (the "pro forma financial
statements") have been prepared by consolidating the historical financial
statements of DRS and Spar Applied Systems on the basis of their respective
historical fiscal periods. Therefore, the pro forma financial statements
have been prepared using the consolidated financial statements of DRS as of
September 30, 1997 and for the fiscal year and six month period ended March
31, 1997 and September 30, 1997, respectively, together with the combined
financial ended December 31, 1996 statements of Spar Applied Systems as of
June 30, 1997 and for the year and the six month period ended June 30,
1997, respectively.
2) In connection with the acquisition, the cost of property, plant and
equipment was reduced by the amount of accumulated depreciation in order to
arrive at estimated fair market values. Actual fair market values may
differ from these estimates.
3) Spar Applied Systems has recognized revenue on all long-term contracts
using the percentage of completion method, based on work performed. With
respect to long-term production contracts, DRS's recognizes revenue as
units are shipped. For purposes of these pro forma financial statements, it
was not practicable to restate the historical financial statements of Spar
Applied Systems in order to conform with the DRS revenue recognition
policy.
4) The pro forma condensed consolidated statements of earnings have been
adjusted to reflect the reversal of revenue and elimination of deferred
revenue recognized by Spar Applied Systems in connection with a certain
contract. The unamortized balance of such deferred revenue was excluded
from the net assets acquired by DRS in connection with the acquisition and
therefore will not be included in reported results of operations subsequent
to the date of acquisition. For purposes of the pro forma condensed
consolidated balance sheet, differed taxes have been adjusted to reflect
the future tax liability associated with such deferred revenue as assumed
by DRS in the acquisition.
5) DRS's capitalizes as a component of inventory general and administrative
expenses chargeable to government contracts. Spar Applied Systems has
historically expensed general and administrative expenses as incurred,
whether or not such expenses are chargeable to government contracts.
Because Spar Applied Systems has used the percentage of completion method
for revenue recognition on long-term contracts (see Note 2 to the pro forma
financial statements), reported inventory balances have typically been
immaterial in relation to total assets and to total costs and expenses
recognized in its statements of earnings. Management therefore believes
that the effect of any adjustment to the pro forma financial statements to
conform the treatment of general and administrative expenses would be
immaterial. Accordingly, no such adjustments are reflected in these pro
forma financial statements.
6) On October 29, 1997 (the "Closing Date"), DRS acquired, through certain of
its subsidiaries, the net assets of the Applied Systems Division of Spar
Aerospace Limited, a Canadian corporation, and 100% of the stock of Spar
Aerospace (UK) Ltd., incorporated under the laws of England and Wales,
pursuant to a Purchase Agreement (the "Agreement")
<PAGE>
dated as of September 19, 1997, between DRS and Spar Aerospace Limited (the
"Acquisition"). The Company paid approximately $35.4 million in cash for
the Acquisition (which includes $6.9 million for cash acquired in
connection with this transaction), subject to certain working capital
adjustments as provided for in the Agreement.
The Acquisition was accounted for using the purchase method of accounting.
DRS expects to incur professional fees and other costs related to the
Acquisition of approximately $1.0 million. The excess of cost over assets
acquired and liabilities assumed was approximately $21.0 million as of
September 30, 1997, based on the unaudited balance sheet of Spar Applied
Systems as of June 30, 1997. As of October 29, 1997, the excess of cost
over the estimated fair value of net assets acquired was approximately
$16.9 million and is being amortized on a straight line basis over 30 years
at the rate of approximately $0.6 million per year. Purchase price
allocation has not yet been finalized, and actual purchase price allocation
may differ from that used for purposes of these Pro Forma Financial
Statements.
6) In connection with the Acquisition, on October 29, 1997, the Company
entered into a $60 million secured credit facility (the "Secured Credit
Facility") with Mellon Bank, N.A., consisting of a $20 million term loan
(the "Term Loan") and a $40 million revolving line of credit (the "Secured
Line of Credit"). The Secured Credit Facility expires on March 31, 2003 and
replaced the Company's existing $15 million unsecured revolving line of
credit and $5 million secured equipment line of credit/term loan facility.
The Term Loan was used to finance a portion of the Acquisition. The Secured
Line of Credit was used to finance the remaining balance due in connection
with the Acquisition and to repay outstanding borrowings on the $15 million
unsecured revolving line of credit and the $5 million secured equipment
line of credit/term loan facility. The pro forma financial statements
include adjustments of $2,282 and $1,141 for the fiscal year ended March
31, 1997 and the six month period ended September 30, 1997, respectively,
to reflect interest expense on the debt associated with the Acquisition
based on prevailing interest rates as of the Closing Date.
7) The provision for income taxes has been adjusted to reflect the pro forma
effective rates for Spar Applied Systems as if the Acquisition had occurred
at the beginning of the periods presented.
<PAGE>
Item 7c. EXHIBITS
Consent of KPMG, Chartered Accountants
The Board of Directors
DRS Technologies, Inc:
We consent to the incorporation by reference in the registration statements (No.
2-87303, No. 2-99986, No. 2-99784, and No. 333-14487) on Form S-8 and (No.
33-33125, No. 33-42886, No. 33-64641, and No. 333-04929) on Form S-3 of DRS
Technologies, Inc. of our report dated December 5, 1997, with respect to the
combined balance sheets of Applied Systems Division of Spar Aerospace Limited
and Spar Aerospace (UK) Ltd., a wholly-owned subsidiary of Spar Aerospace
Limited, as of December 31, 1996 and 1995, and the related combined statements
of earnings, capital employed and retained earnings and cash flows for each of
the years in the three-year period ended December 31, 1996, which report appears
in the Form 8-K of DRS Technologies, Inc. dated January 12, 1998, as amended.
KPMG
Ottawa, Canada
January 12, 1998
