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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 8-K/A
AMENDMENT NO. 1 TO CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
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OCTOBER 20, 1998
(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)
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<PAGE>
The undersigned Registrant hereby amends the following items, financial
statements, exhibits, or other portions of its Current Report on Form 8-K,
originally filed with the Securities and Exchange Commission on November 4, 1998
(the "Form 8-K") as set forth in the pages attached hereto:
ITEM 7. Financial Statements, Pro Forma Financial Information and Exhibits
(a) Financial Statements:
The following financial statements of the business acquired are attached
hereto:
Index to Financial Statements of the EOS Business of Raytheon Company........F-1
Report of Independent Accountants............................................F-2
Statement of Assets to be Acquired and Liabilities to be
Assumed as of December 31, 1997 and September 30, 1998 (unaudited).........F-3
Statement of Direct Revenues and Direct Operating Expenses for the year
ended December 31, 1997 and nine month periods
ended September 30, 1998 and 1997 (unaudited)..............................F-4
Notes to Financial Statements................................................F-5
(b) Pro Forma Financial Information:
The following unaudited pro forma consolidated condensed financial
statements are attached hereto:
Unaudited pro forma condensed consolidated financial information............F-16
Unaudited pro forma condensed consolidated balance sheet
as of September 30, 1998..................................................F-17
Unaudited pro forma condensed consolidated statements of earnings for
the fiscal year ended March 31, 1998 and the six-month period
ended September 30, 1998..................................................F-18
Notes to unaudited pro forma condensed consolidated financial information...F-19
(c) Exhibits:
<PAGE>
ITEM 7(a) Financial Statements
INDEX TO FINANCIAL STATEMENTS
Page
----
EOS Business of Raytheon Company
Report of Independent Accountants...........................................F-2
Statement of Assets to be Acquired and Liabilities to be
Assumed as of December 31, 1997 and September 30, 1998 (unaudited)........F-3
Statement of Direct Revenues and Direct Operating Expenses for the year
ended December 31, 1997 and the nine month periods
ended September 30, 1998 and 1997 (unaudited).............................F-4
Notes to Financial Statements...............................................F-5
F-1
<PAGE>
Report of Independent Accountants
In our opinion, the accompanying statement of assets to be acquired and
liabilities to be assumed and the related statement of direct revenues and
direct operating expenses present fairly, in all material respects, the assets
to be acquired and liabilities to be assumed of the EOS Business of Raytheon
Company (the "EOS Business" as defined in Note 1) as of December 31, 1997, and
its direct revenues and direct operating expenses for the year then ended, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of Raytheon Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
The accompanying financial statements have been prepared for the purpose of
substantially complying with the rules and regulations of the Securities and
Exchange Commission for inclusion in the report on Form 8-K of DRS Technologies,
Inc. as described in Note 1 and are not intended to be a complete presentation
of the financial position, results of operations and cash flows of the EOS
Business.
PricewaterhouseCoopers LLP
Dallas, Texas
October 8, 1998
F-2
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EOS Business of Raytheon Company
Statement of Assets to be Acquired and Liabilities to be Assumed
December 31, 1997 and September 30, 1998 (unaudited)
(Dollars in Thousands)
December 31, September 30,
1997 1998
--------- ---------
(unaudited)
ASSETS
Current assets:
Accounts receivable, net .......................... $ 2,847 $ 5,228
Contracts in process, net ......................... 13,004 23,245
Prepaids .......................................... 96 117
-------- --------
Total current assets .......................... 15,947 28,590
-------- --------
Property and equipment, at cost ..................... 70,471 72,638
Less accumulated depreciation ..................... (55,175) (58,179)
-------- --------
Property and equipment, net ................... 15,296 14,459
-------- --------
Total assets .............................. $ 31,243 $ 43,049
======== ========
LIABILITIES AND NET ASSETS
Current liabilities:
Accounts payable .................................. $ 2,096 $ 1,550
Deferred revenues ................................. 96 0
-------- --------
Total current liabilities ..................... 2,192 1,550
-------- --------
Commitments and contingencies (Notes 9 and 10)
Net assets .......................................... $ 29,051 $ 41,499
======== ========
The accompanying notes are an integral part of the financial statements.
F-3
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EOS Business of Raytheon Company
Statement of Direct Revenues and Direct Operating Expenses
For the year ended December 31, 1997
and the nine month periods ended September 30, 1998 and 1997 (unaudited)
(Dollars in Thousands)
Nine Months Ended
September 30,
(unaudited)
December 31, --------------------
1997 1998 1997
-------- -------- --------
Direct revenues ........................... $ 40,981 $ 47,055 $ 25,168
Direct operating expenses
Costs of revenues ....................... 34,146 38,672 21,817
Research and development ................ 1,297 944 915
Selling, general and administrative ..... 4,333 5,221 2,572
-------- -------- --------
Total direct operating expenses ..... 39,776 44,837 25,304
-------- -------- --------
Direct revenues in excess of (less than)
direct operating expenses ........... $ 1,205 $ 2,218 $ (136)
======== ======== ========
The accompanying notes are an integral part of the financial statements.
F-4
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EOS Business of Raytheon Company
Notes to Financial Statements
1. Basis of Presentation and Description of Business:
Raytheon Company ("Raytheon"), Raytheon TI Systems, Inc. ("RTIS"),
Raytheon Systems Georgia, Inc. ("RSG" and together with Raytheon and RTIS the
"Sellers") and DRS Technologies, Inc. ("DRS"), DRS EO, Inc. and DRS FPA, L.P.,
wholly-owned subsidiaries of DRS (collectively referred to with DRS as the
"Buyer"), entered into an asset purchase agreement on July 28, 1998, as
amended,(the "Agreement") under which, on the contractually designated closing
date, the Buyer acquired certain assets and liabilities consisting of the second
and third generation scanning and staring infrared detector businesses of RTIS
including all dewar and cryogenic cooler manufacturing and dewar and cryogenic
cooler assembly but excluding the uncooled Focal Plane Array ("FPA") business
(collectively referred to as the "FPA Business") and the second generation
ground electro-optical business of Raytheon and RSG (the "Ground EO Business"
and together with the FPA Business the "EOS Business"). The accompanying
financial statements present the assets to be acquired and liabilities to be
assumed and the direct revenues and direct operating expenses of the EOS
Business based upon the structure of the transaction as described in the
Agreement; this transaction is herein referred to as the "Acquisition."
The financial statements have been prepared to substantially comply with
the rules and regulations of the Securities and Exchange Commission for business
combinations accounted for as a purchase and are not intended to be a complete
presentation of the financial position, results of operations and cash flows as
if the EOS Business had operated as a stand-alone company. The accompanying
financial statements, rather than full audited financial statements, are
presented because the EOS Business was not operated as a stand-alone business by
the Sellers, or, with respect to the FPA Business, within the Defense Business
of Texas Instruments ("TI") for periods prior to July 11, 1997, or, with respect
to the Ground EO Business, within the defense business of HE Holdings, Inc., a
wholly-owned subsidiary of Hughes Electronics Corporation ("Hughes") for periods
prior to December 16, 1997. In addition, historically, assets used in the EOS
Business were used as an integral part of the operations of the Sellers (or TI
and Hughes prior to ownership by the Sellers) to provide goods and services for
use in higher level products with such activity accounted for largely as
internal cost transfers without formal contracts, billing or revenue tracking.
Because the EOS Business was not operated as a stand-alone business, the
presentation does not include certain indirect expenses of the EOS Business.
Therefore, the accompanying financial statements are not representative of the
complete results of operations of the EOS Business for the period presented.
The FPA Business involves the design, development and production of focal
plane arrays, which are used to generate night vision capability, and cryogenic
linear coolers for infrared devices.
The Ground EO Business designs and manufactures second generation forward
looking infrared ("FLIR") systems for use on Abrams tanks, Bradley Fighting
Vehicles and High Mobility Multi-Wheel vehicles. Second generation FLIR
technology allows a human operator to detect, recognize and identify targets in
complete darkness at a substantially greater range than the first generation
FLIR systems.
Raytheon provides various services to the EOS Business including, but not
limited to, general management, facilities management, human resources, data
processing, security, payroll and employee benefits administration, financial,
legal, tax, insurance administration, duplicating, telecommunications and other
miscellaneous services. Expenses related to these services have been allocated
to the EOS Business in the accompanying statement of direct revenues and direct
operating expenses first on the basis of direct usage when identifiable, with
the remainder allocated primarily on the basis of direct labor costs or other
methodologies which comply with U.S. Government cost accounting standards. In
the opinion of management, these methods of allocating indirect costs are
reasonable; however, they do not necessarily equal the costs that the EOS
Business would have incurred on a stand-alone basis. Therefore, the financial
information included herein may not necessarily reflect the financial position,
results of operations and cash flows of the EOS Business on a stand-alone basis
in the future.
In the accompanying statement of direct revenues and direct operating
expenses, direct operating expenses presented reflect overhead rates specific to
RTIS (with respect to the FPA Business) and the Sensors and Communications
Systems segment of the Defense Business of Hughes (with respect to the Ground EO
Business), while direct revenues presented are derived from total direct
operating expenses of the EOS Business, including
F-5
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certain overhead costs, plus the applicable profit (except for revenues related
to firm fixed price contracts of the FPA Business which are derived from actual
billings). Because the overhead rates utilized were not based upon the operating
structure specific to the EOS Business, the direct operating expenses and direct
revenues presented do not necessarily equal the operating expenses or revenues
that the EOS Business would have realized had it operated as a stand-alone
company using its specific overhead rates.
The EOS Business participates in a centralized cash management system
wherein cash receipts are transferred to and cash disbursements are funded by
Raytheon. Since cash and cash equivalents related to the operations of the EOS
Business were not acquired by the Buyer, they are excluded from the statement of
assets to be acquired and liabilities to be assumed.
2. Summary of Significant Accounting Policies:
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions, in particular estimates of anticipated contract costs and revenues
utilized in the earnings recognition process, 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 direct revenues
and direct operating expenses during the reporting period. Due to the inherent
uncertainty involved in making estimates, actual results reported in future
periods may be based upon amounts which differ from those estimates.
Revenue Recognition
Revenues under long-term contracts (except for revenues under firm fixed
price contracts of the FPA Business) are primarily recorded under methods which
approximate the percentage of completion method, wherein costs and estimated
profit are recorded as revenues as the work is performed. Revenues under firm
fixed price contracts of the FPA Business are recognized as deliveries are made.
Estimated profits for all long-term contracts are based on management estimates
of total sales values and costs at completion. These estimates are reviewed and
revised periodically throughout the lives of the contracts, and adjustments
resulting from such revisions are recorded in the periods in which the revisions
are made. When appropriate, increased funding is assumed based on expected
adjustments of contract prices for increases in scope and other changes ordered
by the customer. Since many contracts extend over a long period of time,
revisions in cost and funding estimates during the progress of work have the
effect of adjusting current period earnings for performance in prior periods.
Losses on contracts are recorded in full as they are identified.
Certain contracts contain cost or performance incentives or both. These
incentives provide for increases in fees or profits for surpassing stated
targets or other criteria, or for decreases in fees or profits for failure to
achieve such targets or other criteria. Performance incentives are included in
sales at the time there is sufficient information to relate actual performance
to targets or other criteria.
Cost of sales includes direct engineering and manufacturing costs and
certain overheads including fringe benefits and an allocated portion of costs
incurred by support departments (see Note 1). Expenditures for research and
development are charged to expense as incurred.
Pursuant to the Agreement, product or service warranty obligations and
liabilities relating to work performed by the Sellers on contracts in progress
prior to the closing of the Acquisition are retained by the Sellers.
Accordingly, the EOS Business has not accrued a warranty reserve in the
accompanying financial statements.
Accounts Receivable
Accounts receivable are comprised of amounts due from the United States
Government (either directly, or indirectly through commercial customers who are
the prime contractor on contracts where the EOS Business is a subcontractor and
the United States Government is the sole end customer) and from commercial
customers principally related to long-term contracts and programs. These amounts
are billed in accordance with contract terms. Amounts billed under retainage
provisions of contracts are not significant and substantially all amounts are
collectible within five years.
F-6
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Contracts in Process
Contracts in process (except for firm fixed price contracts of the FPA
Business) are stated at actual production costs, including manufacturing
overhead and special tooling and engineering costs, plus estimated profit (but
not in excess of estimated realizable value) reduced by amounts billed to
customers and progress payments received (or, for firm fixed price contracts of
the FPA Business, by amounts identified with revenues recognized on units
delivered).
Firm fixed price contracts in process of the FPA Business do not include
estimated profit. The costs attributed to units delivered under these contracts
are based on the estimated average cost of all units to be produced under
existing contracts and are determined under the learning curve concept, which
anticipates a predictable decrease in unit costs as tasks and production
techniques become more efficient through repetition.
Property and Equipment
Pursuant to the Agreement, certain property and equipment owned by the
Sellers which is used in connection with the EOS Business was purchased by the
Buyer, and the cost and related accumulated depreciation of such property and
equipment is included in the accompanying financial statements.
Property and equipment is recorded at cost less accumulated depreciation.
Major improvements and renewals are capitalized while expenditures for
maintenance and repairs and minor renewals are charged to expense.
Depreciation is computed using accelerated and straight-line methods over
the estimated useful lives of the related assets. Recoverability of property is
periodically evaluated by assessing whether the net book value can be recovered
over its remaining life through undiscounted cash flows generated by the asset.
The EOS Business constructs certain property for use within its programs.
The costs incurred to construct this property are capitalized as equipment under
construction until completion. Once completed, the property is placed into
service and depreciated based on its estimated useful life.
Income Taxes
No provision or benefit for income taxes has been provided in the
accompanying statements of direct revenues and direct operating expenses due to
the fact that the EOS Business was not operated as a stand-alone company and no
allocation of the Sellers' income tax provision/benefit has been made to the EOS
Business.
Pursuant to the Agreement, no tax related assets or liabilities have been
acquired or assumed by the Buyer and, accordingly, no tax related assets or
liabilities are reflected in the accompanying statement of assets to be acquired
and liabilities to be assumed.
3. Accounts Receivable:
As of December 31, 1997, accounts receivable are comprised as follows:
Commercial .............................................. $ 541
United States Government ................................ 2,340
-------
Total ............................................. 2,881
Less allowance for doubtful accounts .................... (34)
-------
Accounts receivable, net ................................ $ 2,847
=======
4. Contracts in Process
As of December 31, 1997 and September 30, 1998 (unaudited), contracts in
process are comprised as follows:
December 31, September 30,
1997 1998
--------- ------------
(unaudited)
Contracts in process .................... $ 20,358 $ 42,261
Progress payments ....................... (4,956) (16,626)
Reserves ................................ (2,398) (2,390)
-------- ---------
Total ................................... $ 13,004 $ 23,245
======== =========
F-7
<PAGE>
Cash received from direct sales of the EOS Business was approximately
$33,383 for the year ended December 31, 1997.
5. Property and Equipment:
As of December 31, 1997, property and equipment are comprised as follows:
Estimated Life
(in years)
----------
Machinery and equipment ...................... 10 - 13 $ 51,229
Furniture and fixtures ....................... 10 - 20 16,755
Computer software and hardware ............... 3 - 6 1,414
Equipment under construction ................. N/A 1,073
--------
Total .................................. 70,471
Less accumulated depreciation ................ (55,175)
--------
Property and equipment, net .................. $ 15,296
========
Depreciation expense for the year ended December 31, 1997 was approximately
$3,704.
In addition to the assets recorded above, the EOS Business uses certain
government-owned equipment and shared Raytheon equipment for production of the
programs. All of these items have been excluded from the accompanying statement
of assets to be acquired and liabilities to be assumed.
Concurrent with the closing of the Acquisition, the Sellers and the Buyer
entered into a lease agreement and two sublease agreements (the "Leases")
whereby the Sellers agreed to lease or sublease to the Buyer space occupied by
the EOS Business in Texas and California. The Leases contain certain renewal
options and escalation clauses. RTIS agreed to sublease to the Buyer space
occupied by the FPA Business in RTIS' Semiconductor building and its Research
West building. Under the terms of the sublease for the Semiconductor Building,
the Buyer will pay RTIS a monthly rental based upon the ratio of net square feet
occupied by the FPA Business (the "FPA Premises") divided by the square feet of
the premises in which the FPA Premises are located. Under the terms of the
sublease for the Research West building, the FPA Business will occupy all space
of the building and will pay RTIS rental payments equal to the monthly rental
paid by RTIS.
Raytheon agreed to lease to the Buyer space currently occupied by the
Ground EO Business in El Segundo, California for a term of one year from the
closing date of the Acquisition. At the end of the one-year term, the Buyer will
have the option to rent the El Segundo space for up to three additional months
on a month-to-month basis.
Minimum rental commitments under the Leases as of the closing date of the
Acquisition are as follows:
1st year .............................................. $ 3,026
2nd year .............................................. 3,052
3rd year .............................................. 3,452
4th year .............................................. 3,607
5th year .............................................. 3,607
Thereafter ............................................ 13,430
-------
Total ................................................. $30,174
=======
Occupancy expense (including rental expense) allocated to the EOS Business
for the year ended December 31, 1997 was approximately $906.
Pursuant to the Agreement, RTIS has agreed to cooperate with the Buyer to
consolidate the FPA Business within the Semiconductor and Research West
buildings and Raytheon has agreed to cooperate with the Buyer to move all
operations of the Ground EO Business. RTIS and Raytheon, respectively, have
agreed to pay all expenses in connection with these moves as well as the cost of
constructing and demising walls and other improvements in the buildings.
The EOS Business has certain operating lease commitments for equipment. The
minimum future commitments under these leases is not material.
F-8
<PAGE>
6. Accrued Expenses:
Pursuant to the Agreement, on or before the closing date of the Acquisition
Raytheon will pay to each assumed employee the cash equivalent of his or her
accumulated but unused time in accordance with Raytheon's Paid Time Off Policy.
From and after the closing date of the Acquisition, the assumed employees will
receive vacation benefits pursuant to the Buyer's vacation policy. There were no
other accrued liabilities of the EOS Business assumed by the Buyer as of the
closing date of the Acquisition. Accordingly, as of December 31, 1997, accrued
expenses are excluded from the accompanying financial statements.
7. Related Party Transactions:
Included in the accompanying statement of assets to be acquired and
liabilities to be assumed are certain amounts due to/due from other Raytheon
Company entities as follows:
Accounts receivable ........................................ $ 255
Contracts in process ....................................... $ 324
Accounts payable ........................................... $ 962
In addition to the items noted above, included in the accompanying
statement of direct revenues and direct operating expenses are certain
transactions between the Ground EO Business and various related parties.
For the period from January 1, 1997 through December 16, 1997, the Ground
EO Business was part of Hughes (see Note 1) and did not have any customers who
were related parties. For the period from December 17, 1997 through December 31,
1997, the Ground EO Business was part of Raytheon. Prior to December 17, 1997,
RTIS, a subsidiary of Raytheon, was a customer of the Ground EO Business. As a
result of the merger between Hughes and Raytheon, RTIS became a related party to
the Ground EO Business. The amount of direct revenue related to RTIS recognized
during the period from December 17, 1997 through December 31, 1997, and
therefore included in the accompanying statement of direct revenues and direct
operating expenses, is immaterial.
For the year ended December 31, 1997, the EOS Business purchased goods and
services from other Raytheon Company entities (or, with respect to the FPA
Business, the Defense Business of TI for periods prior to July 11, 1997, or,
with respect to the Ground EO Business, other Hughes entities for periods prior
to December 16, 1997) that were related parties. These goods and services were
provided and thus recorded at cost. The total amount of these costs included in
the accompanying statement of operations is not material to total direct
operating expenses.
8. Employee Benefit Plans:
The employees of the EOS Business participate in various pension, post
retirement, post employment, savings and investment, stock ownership and retiree
health care benefit plans of the Sellers. Pursuant to the Agreement, liabilities
pertaining to participation by such employees of the EOS Business in these
employee benefit plans of the Sellers are not assumed by the Buyer. Accordingly,
such liabilities are excluded from the accompanying statement of assets to be
acquired and liabilities to be assumed. Pursuant to the Agreement, employees of
the EOS Business will continue to receive pension accruals from Raytheon as
though they were still employees of Raytheon while they continue to be employed
by the Buyer through the end of the sixth full calendar month after the closing
date of the Acquisition. Payroll deduction contributions will be required of the
employees to benefit from this continued accrual.
A retention program has been set in place to retain key skills and
leadership capability within the EOS Business. This bonus program includes
certain employees with bonus amounts ranging from 3 to 12 months of base pay.
Raytheon is required to pay 25% of the retention award for these employees
within 20 days of the closing date of the Acquisition (except that for employees
of the FPA Business the entire bonus is payable within 20 days of the closing
date of the Acquisition in the event the employees are not offered employment by
the Buyer at a comparable compensation level or that the employees' commute is
changed as defined by the Agreement), and the remaining 75% of the retention
award within 20 days after the employees have completed 90 days of employment
with the Buyer.
F-9
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9. Stock Options:
As a business unit of Raytheon, the EOS Business has no employee stock
option plan; however, certain employees of the EOS Business participate in stock
option plans of Raytheon. These plans provide for the grant of both incentive
and nonqualified options at an exercise price which is 100% of the fair market
value on the date of grant. The options may be exercised in their entirety from
one to ten years after the date of grant. In connection with the sale, employees
of the EOS Business who hold unvested options will be paid in cash by Raytheon
for the difference between the value of the unvested options as of the closing
date of the Acquisition and the exercise price of the options.
10. Risk Concentrations, Commitments and Contingencies:
General
Companies such as the EOS Business, which are engaged in supplying
defense-related equipment to the U.S. Government, are subject to certain
business risks peculiar to that industry. Sales to the U.S. Government may be
affected by changes in procurement policies, budget considerations, changing
concepts of national defense, political developments abroad and other factors.
As a result of the Balanced Budget and Emergency Deficit Reduction Control Act,
the federal deficit and changing world order conditions, Department of Defense
("DOD") budgets have been subject to increasing pressure resulting in an
uncertainty as to the future effects of DOD budget cuts.
Credit Risk
Financial instruments which subject the EOS Business to concentrations of
credit risk primarily relate to accounts receivable. Contracts involving the
U.S. Government do not require collateral or other security. However, ongoing
credit evaluations of domestic non-U.S. Government customers are conducted.
Generally collateral or other security is not required from these customers.
Historically, no significant credit-related losses have been incurred by the EOS
Business.
Market Concentrations and Export Sales
Sales under United States Governmental contracts (including contracts for
which the EOS Business is either the prime contractor or a subcontractor) were
approximately 99% of net sales for the year ended December 31, 1997.
Approximately 80% of direct revenue for the year ended December 31, 1997 is from
two United States Government Programs. There are no export sales. Revenues under
United States Government prime contracts and subcontracts approximated $33,974
and $6,718, respectively, for the year ended December 31, 1997. Percentages of
United States Government sales by contract type for the year ended December 31,
1997 were 68% cost plus and 32% firm fixed price.
Commitments
Pursuant to the Agreement, the Buyer acquired all of the rights and
obligations of the Sellers in connection with purchase orders relating primarily
to the EOS Business which were outstanding at the closing of the Acquisition.
These purchase orders relate primarily to raw materials and purchased parts for
inventories and equipment under construction. As of December 31, 1997, open
commitments for such purchase orders totaled approximately $19,990. In addition,
as of December 31, 1997, the Ground EO Business had another open purchase
commitment with a related party of up to approximately $1,100.
Litigation and Regulatory Proceedings
The EOS Business is subject to potential liability under government
regulations and various lawsuits, claims and proceedings arising in the normal
course of business. Management of the EOS Business and the Sellers believe the
disposition of matters which are pending or asserted will not have a material
adverse effect on the EOS Business' operations or financial position.
Raytheon is included among a number of U.S. defense contractors which are
currently the subject of U.S. government investigations regarding alleged
procurement irregularities. Raytheon is unable to predict the outcome of the
investigations at this time or to estimate the kinds or amounts of claims or
other actions that could be instituted against the EOS Business. Under present
government procurement regulations, such investigations could lead to a
F-10
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government contractor being suspended or debarred from eligibility for awards of
new government contracts. In the current environment, even matters that seem
limited to disputes about contract interpretation can result in criminal
prosecution. While criminal charges against contractors have resulted from such
investigations, Raytheon does not believe such charges would be appropriate in
its case and has not, at any time, lost its eligibility to enter into government
contracts or subcontracts under these regulations.
11. Supply and Services Agreements:
Supply Agreement: FPA Business as Supplier to RTIS
Concurrent with the closing of the Acquisition, RTIS and the Buyer entered
into a supply agreement (the "FPA Supply Agreement") whereby the Buyer agreed to
provide, and RTIS agreed to purchase, second generation and third generation
scanning and staring cooled IR detectors, including all dewar and cryogenic
cooler manufacturing and dewar and cryogenic cooler assembly, but excluding
uncooled FPAs (collectively, the "FPA Products").
The Buyer will exclusively supply RTIS with FPA Products from the Closing
Date of the Agreement through December 31, 2000 (the exclusivity period) for
specific programs identified in the Agreement (with the exclusivity on the
JAVELIN program including all Multiyear 1 quantities with deliveries extending
into 2000 but not including JAVELIN Multiyear 2). If Raytheon enters a contract
win during the exclusivity period for any of the programs identified in the
Agreement, the Buyer would receive a corresponding contract for the FPA Products
listed in the Agreement. The Agreement specifies a quantity range and unit price
by program for the FPA Products to be supplied. RTIS is not obligated to place a
contract with the Buyer until a specific contract has been funded. For changes
to the quantity ordered during the exclusivity period, RTIS and the Buyer will
negotiate the price for the quantities in excess of or below the quantity range
specified in the Agreement consistent with historical cost adjusted by forward
pricing rate multipliers.
Under the FPA Supply Agreement, general RTIS requests for fabrication and
technical services from the Buyer will be priced at direct costs plus indirect
costs (including G&A) plus a 10% fee.
Supply Agreement: RTIS as Supplier to FPA Business
Concurrent with the closing of the Acquisition, RTIS and the Buyer entered
into a supply agreement (the "RTIS Supply Agreement") whereby RTIS agreed to
provide, and the Buyer agreed to purchase, certain fabrication parts and
technical services (the "RTIS Products" and "RTIS Services", respectively).
RTIS will supply RTIS Products at a listed price for quantities specified
in the RTIS Supply Agreement. The prices for the RTIS Products will remain as
listed in the RTIS Supply Agreement for the firm quantities for a period of 60
days from the closing of the Acquisition.
RTIS will also supply engineering and fabrication services to the Buyer.
For all services that support FPA Products, or services that will be resold to
RTIS or its affiliates, services will be billed to the Buyer based on RTIS'
direct costs. For all other RTIS Services, pricing will be based on RTIS' direct
costs and indirect costs (including G&A), plus a fee of 10%.
Master Services Agreement: RTIS as Service Provider to FPA Business
Concurrent with the closing of the Acquisition, RTIS and the Buyer entered
into a master services agreement (the "RTIS Master Services Agreement") whereby
RTIS agreed to provide, and the Buyer agreed to purchase, support services and
facilities (collectively, the "RTIS Master Services") including cafeteria
vending and catering services; information technology services; calibration
support services; special manufacturing maintenance services; receiving,
inspection and shipping services; mail services; purchasing services;
environmental, safety and health services; laboratory analysis services;
janitorial services; warehouse services; Environmental Test Lab services;
exterior facilities repairs and maintenance services; technical publication
services and engineering and drafting services. Generally, the cost to the Buyer
for the RTIS Master Services will be (i) in the case of all services other than
engineering and drafting, the cost to RTIS (but excluding G&A costs) and no fee
and (ii) in the case of engineering and drafting services, the cost to RTIS
(including G&A costs) plus a 5% fee.
The RTIS Master Services Agreement shall continue to be in effect until
either termination by mutual consent or at the Buyer's direction upon 30 days
notice.
F-11
<PAGE>
Supply Agreement: Raytheon as Supplier to Ground EO Business
Concurrent with the closing of the Acquisition, Raytheon and the Buyer
entered into a supply agreement (the "Raytheon Supply Agreement") whereby
Raytheon agreed to provide, and the Buyer has the option to purchase, certain
electro-optical products be used for Long-Range Advanced Scout Surveillance
Systems ("LRAS3") and specific components for the Improved Bradley Acquisition
System LRIP contract ("IBAS") and in any other future contracts under the IBAS
and LRAS3 programs (collectively the "Raytheon Products"). Under the Raytheon
Supply Agreement, Raytheon shall have the exclusive right to supply the Buyer
with the Raytheon Products for the duration of the LRAS3 contract. The Buyer
shall have the right, but is not obligated, to purchase Raytheon Products for
the IBAS contract and future contracts under the IBAS and LRAS3 programs. Under
the Raytheon Supply Agreement, the terms and conditions for the existing IBAS
and LRAS3 work will be the same as those contained in the IBAS LRIP and LRAS3
contracts, respectively, with the exception of the contract type, which will be
cost plus a fixed fee of 10% including the cost of money. Pricing and other
terms for all new purchase orders will be based on the IBAS Contract and the
LRAS3 Contract, as applicable. Raytheon agreed to supply products to the Buyer
at prices no greater than those applied to most favored customers for the same
quantities and under the same terms and conditions. The Raytheon Supply
Agreement shall continue to be in effect until the expiration or termination of
the IBAS contract and the LRAS contract, in each case as extended by mutual
agreement, as applicable.
Supply Agreement: ELCAN as Supplier to Ground EO Business
Concurrent with the closing of the Acquisition, Raytheon Systems Canada
Ltd. (ELCAN) and the Buyer entered into a supply agreement (the "ELCAN Supply
Agreement") whereby ELCAN agreed to provide, and the Buyer agreed to purchase,
certain electro-optical products for the HTI MultiYear Production Contract
("HTI") , the IBAS LRIP contract and any other future contracts under the HTI
and IBAS programs. (collectively the "ELCAN Products"). Under the ELCAN Supply
Agreement, ELCAN shall have the exclusive right to supply ELCAN Products to the
Buyer for program years one and two of the HTI contract and phases one and two
of the IBAS LRIP contract. The Buyer will have the right to purchase ELCAN
Products for program year three of the HTI contract (and any option exercises
under this program) and for phase three of the IBAS LRIP contract. Existing work
performed under the ELCAN Supply Agreement will be charged at a firm fixed price
which includes a profit of 12% and including the cost of money. Pricing and
other terms for all new purchase orders will be based on the HTI Multi-Year
Production Contract and the IBAS LRIP Contract, as applicable. ELCAN agreed to
supply products to the Buyer at prices no greater than those applied to most
favored customers for the same quantities and under the same terms and
conditions. The ELCAN Supply Agreement shall continue to be in effect until the
expiration or termination of the HTI contract and the IBAS LRIP contract, in
each case as extended by mutual agreement, as applicable.
Supply Agreement: ROS as Supplier to Ground EO Business
Concurrent with the closing of the Acquisition, Raytheon Optical Systems,
Inc. ("ROS") and the Buyer entered into a supply agreement (the "ROS Supply
Agreement"), whereby ROS agreed to provide and the Buyer agreed to purchase
electro-optical products for the IBAS LRIP contract and any other future
contracts under the IBAS program. (the "ROS Products"). Under the ROS Supply
Agreement, ROS shall have the exclusive right to supply ROS Products to the
Buyer for phases one and two of the IBAS LRIP contract. The Buyer will have the
right but is not obligated to procure the ROS Products for phase three of the
IBAS LRIP contract and any future contracts under the IBAS program. Existing
work performed under the ROS Supply Agreement will be charged at a firm fixed
price which includes profit of 10% and including the cost of money. Pricing and
other terms for all new purchase orders will be based on the IBAS LRIP Contract.
ROS agrees to supply ROS Products to the Buyer at prices no greater than those
applied to most favored customers for the same quantities and under the same
terms and conditions. The ROS Supply Agreement shall continue to be in effect
until the expiration or termination of the IBAS LRIP contract, as extended by
mutual agreement, as applicable.
Master Services Agreement: Raytheon as Service Provider to Ground EO
Business
Concurrent with the closing of the Acquisition, Raytheon and the Buyer
entered into a master services agreement (the "Raytheon Master Services
Agreement") whereby Raytheon agreed to provide, and the Buyer agreed to
purchase, certain support services and facilities (collectively, the "Raytheon
Master Services") in order to promote the efficient operation of the Ground EO
Business including but not limited to records retention services, information
technology services, equipment storage, calibration support services, and mail
services. Generally, the cost to the Buyer for the
F-12
<PAGE>
Raytheon Master Services will be the cost to Raytheon including labor,
out-of-pocket costs to third parties and a reasonable allocation for overhead
and indirect costs. Raytheon will also offer certain other services including
but not limited to special manufacturing services, engineering and technical
support services, purchasing support services, contracts administration
services, safety and health services and facility and general administrative
services. Generally, the cost to the Buyer for these services will be the fixed
price of time and materials incurred by Raytheon plus a 5% fee.
The Raytheon Master Services Agreement shall continue to be in effect until
either termination by mutual consent or at the Buyer's discretion upon 30 days
notice. In any case, Raytheon is not required to provide services pursuant to
the Raytheon Master Services Agreement past the earlier of 24 months after the
closing date of the Acquisition or 12 months after the Buyer vacates the El
Segundo facility.
F-13
<PAGE>
ITEM 7(b) Pro forma Financial Information
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
Unaudited Pro Forma Condensed Consolidated Financial Information
The following unaudited pro forma condensed consolidated financial
information (the pro forma financial information) set forth below is presented
to reflect the pro forma effects of the acquisition by DRS Technologies, Inc.
and Subsidiaries (DRS) of the EOS Business of Raytheon Company (EOS Business),
(the EOS Acquisition). As more fully described in the notes to the pro forma
financial information, the unaudited pro forma financial statements also give
effect to the acquisition of the Applied Systems Division of Spar Aerospace
Limited and Spar Aerospace (U.K.) Limited, which took place on October 29, 1997
(the Spar Acquisition).
The unaudited pro forma financial information is based on, and should be
read together with: the historical consolidated financial statements of DRS as
of and for the year ended March 31, 1998; the unaudited consolidated financial
statements of DRS as of and for the six months ended September 30, 1998; the
historical financial statements of EOS Business as of and for the year ended
December 31, 1997; and the unaudited financial statements of EOS Business as of
and for the period ended September 30, 1998. The pro forma financial information
is based on certain assumptions and includes the adjustments described herein
and in the notes to the pro forma financial information.
The unaudited pro forma condensed consolidated balance sheet was prepared
based on the assumption that the EOS Acquisition was completed on September 30,
1998. The unaudited condensed consolidated statements of earnings for the year
ended March 31, 1998 and for the six months ended September 30, 1998 were
prepared as if the both the EOS Acquisition and the Spar Acquisition had taken
place on April 1, 1997. For accounting purposes, the EOS Acquisition will be
treated as a purchase.
It should be understood that the unaudited 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 related to or following the acquisitions may be different than amounts
assumed or estimated. The pro forma financial information is provided for
illustrative purposes only and may not necessarily be indicative of the
financial results that would have occurred had the acquisitions been effective
on the dates indicated, and should not be viewed as indicative of results of
operations or financial position of future periods.
F-14
<PAGE>
DRS TECHNOLOGIES, INC & SUBSIDIARIES
AND THE EOS BUSINESS OF RAYTHEON COMPANY
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
Fiscal Year Ended March 31, 1998
(in thousands except share and per share data)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
---------------------------------------- -----------------------------------------
EOS SPAR EOS DRS/EOS
DRS SPAR(2) BUSINESS(4) Adjustments Adjustments Total
-------- -------- ----------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues ............................... $ 190,854 $ 15,556 $ 40,981 $ (1,182)(2) $ (10,541)(8) $ 235,668
(5),(6)
Costs and expenses ..................... (176,595) (14,324) (39,776) (329)(2) 6,079(7),(8) (224,945)
-------- ------- ------- ------ ------- -------
Operating income (loss) .............. 14,259 1,232 $ 1,205 (1,511) (4,462) 10,723
=======
Interest and related expenses ...... (5,098) (170) -- (7,332)(6) (12,600)
Interest and other income, net ......... 1,377 465 -- -- 1,842
Minority interest ...................... (874) -- -- -- (874)
-------- ------- ------ ------- -------
Earnings (loss) before income taxes .. 9,664 1,527 (1,511) (11,794) (909)
Income tax expense (benefit) ........... 3,292 285 (453)(3) (3,918)(9) (794)
-------- ------- ------ ------- -------
Earnings (loss) before extraordinary
item (notes 6 and 10)............... $ 6,372 $ 1,242 $ (1,058) $ (7,876) $ (115)
======== ======= ====== ======= =======
Earnings per share
Earnings (loss) from continuing
operations before extraordinary item
Basic ............................ $1.13 -- -- -- $(0.02)
Diluted .......................... 0.93 -- -- -- (0.02)
Weighted average shares outstanding
Basic ............................ 5,626 -- -- -- 5,626
Diluted .......................... 9,045 -- -- -- 5,626
======== ======= ====== ======= =======
</TABLE>
See accompanying notes to Unaudited Pro Forma Condensed
Consolidated Financial Information
F-15
<PAGE>
DRS TECHNOLOGIES, INC & SUBSIDIARIES
AND THE EOS BUSINESS OF RAYTHEON COMPANY
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
Six Months Ended September 30, 1998
(in thousands except per share data)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
--------------------------- --------------------------
EOS EOS DRS/EOS
DRS BUSINESS(4) Adjustments Total
-------- ----------- ----------- --------
<S> <C> <C> <C> <C>
Revenues ................................ $ 92,114 $ 35,154 $ (15,159)(8) $ 112,109
(5),(6)
Costs and expenses ...................... (88,299) (33,896) 12,083(7),(8) (110,112)
-------- -------- --------- ---------
Operating income (loss) ............... 3,815 $ 1,258 (3,076) (1,997)
========
Interest and related expenses ........... (3,113) (2,675)(6) (5,788)
Interest and other income, net .......... 328 -- 328
Minority interest ....................... (425) -- (425)
-------- --------- ---------
Earnings (loss) before income taxes ..... 605 (5,751) (3,888)
Income tax expense (benefit) .......... 224 (1,663)(9) (1,439)
-------- --------- ---------
Earnings (loss) before extraordinary
item (notes 6 & 10) ................... $ 381 $ (4,088) $ (2,449)
======== ========= =========
Earnings per share
Earnings (loss) before extraordinary item
Basic ............................... $ 0.06 -- -- $ (0.39)
Diluted ............................. 0.06 -- -- (0.39)
Weighted average shares outstanding
Basic ............................... 6,224 -- -- 6,224
Diluted ............................. 6,463 -- -- 6,224
======== ======== ========= =========
</TABLE>
See accompanying notes to Unaudited Pro Forma Condensed
Consolidated Financial Information
F-16
<PAGE>
DRS TECHNOLOGIES, INC. & SUBSIDIARIES
AND THE EOS BUSINESS OF RAYTHEON COMPANY
Unaudited Pro Forma Condensed Consolidated Balance Sheet
September 30, 1998
(in thousands)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
---------- -----------------------
EOS EOS DRS/EOS
DRS Business(4) Adjustments Total
-------- ----------- ---------- -------
Assets
Current Assets:
<S> <C> <C> <C> <C>
Cash ........................................... $ 13,026 $ -- $ 500(6) $ 13,526
Accounts receivable, net ....................... 43,295 5,228 -- 48,523
Inventories, net of progress payments .......... 41,152 23,245 (3,642)(8) 60,755
Prepaid expenses and other current assets ...... 2,213 117 (833)(6) 1,497
-------- ------- -------- --------
Total current assets ................... 99,686 28,590 (3,975) 124,301
Net equipment and improvements ................... 22,661 14,459 -- 37,120
Net Intangible assets ............................ 31,451 -- 15,643(5) 47,094
Other assets ..................................... 9,332 -- -- 9,332
-------- ------- -------- --------
Total assets ........................... 163,130 43,049 11,668 217,847
-------- ------- -------- --------
Liabilities and Stockholders' Equity
Current liabilities:
Current installments-- long term debt .......... 8,543 -- -- 8,543
Other current liabilities ...................... 42,913 1,550 (308)(6) 44,155
-------- ------- -------- --------
Total current liabilities .............. 51,456 1,550 (308) 52,698
Long term debt, excluding current installments ... 57,819 -- 57,000(6) 114,819
Deferred income taxes ............................ 3,897 -- (1,110)(6) 2,787
Other liabilities ................................ 4,233 -- -- 4,233
-------- ------- -------- --------
Total liabilities ...................... 117,405 1,550 55,582 174,537
Stockholders' equity:
Common stock ................................... 67 -- -- 67
Additional paid-in capital ..................... 20,446 -- -- 20,446
Retained earnings .............................. 27,438 -- (2,415)(6) 25,023
Net assets ............................. -- $41,499 $(41,499) --
======= ========
Cumulative translation adjustment .............. (291) (291)
Treasury stock, at cost ........................ (1,561) (1,561)
Unamortized restricted stock compensation ...... (374) (374)
-------- --------
Net stockholders' equity ............... 45,725 43,310
-------- --------
$163,130 $217,847
======== ========
</TABLE>
See accompanying notes to Unaudited Pro Forma Condensed
Consolidated Financial Information
F-17
<PAGE>
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES,
AND THE EOS BUSINESS OF RAYTHEON COMPANY
Notes to Unaudited Pro Forma Condensed Financial Information
(dollar amounts in thousands)
1. The unaudited pro forma condensed consolidated financial statements of DRS
Technologies, Inc. and Subsidiaries (DRS) and the EOS Business of Raytheon
Company (EOS Business), have been prepared by combining the historical
consolidated financial statements of DRS with the historical financial
statements of EOS Business. The unaudited pro forma condensed consolidated
financial statements as of and for the six months ended September 30, 1998
have been prepared combining the unaudited historical financial statements
of DRS and EOS Business as of and for the six months ended September 30,
1998. DRS prepares consolidated financial statements on the basis of a
fiscal year ending March 31, whereas the historical financial statements of
EOS Business have been prepared on a calendar year basis. As permitted
under United States Securities and Exchange Commission Regulation S-X,
Article 11, the pro forma condensed consolidated statement of earnings (the
pro forma statement of earnings) for the year ended March 31, 1998 has been
prepared by combining the historical financial statements of DRS and EOS
Business on the basis of their respective historical fiscal periods.
Therefore, the pro forma statement of earnings for the year ended March 31,
1998 has been prepared using the consolidated financial statements of DRS
as of and for the fiscal year ended March 31, 1998, together with the
financial statements of EOS Business as of December 31, 1997 and for the
year then ended. As a result, the historical financial statements of EOS
Business for the period January 1, 1998 to March 31, 1998 are not included
in this pro forma presentation.
The pro forma financial statements also give effect to DRS's acquisition of
the Applied Systems Division of Spar Aerospace Limited and Spar Aerospace
(U.K) Limited, which took place on October 29, 1997 (the Spar Acquisition),
as if the Spar Acquisition had taken place effective April 1, 1997.
The pro forma financial statements have not been adjusted for certain
operating efficiencies that may be realized as a result of the
acquisitions.
Spar Acquisition
2. On October 29, 1997, DRS acquired, through certain of its subsidiaries, the
net assets of the Applied Systems Division of Spar Aerospace Limited, a
Canadian corporation (Spar Applied Systems), and 100% of the stock of Spar
Aerospace (U.K.) Limited, incorporated under the laws of England and Wales,
pursuant to a Purchase Agreement (the Agreement) dated as of September 19,
1997, between DRS and Spar Aerospace Limited. The Company paid
approximately $35.4 million in cash for the Spar 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 Spar Acquisition was accounted for using the purchase method of
accounting. In connection with the Spar Acquisition, DRS incurred
professional fees and other costs of approximately $1.5 million, which were
capitalized as part of the total purchase price. The excess of cost over
assets acquired and liabilities assumed was approximately $20.0 million and
is being amortized on a straight line basis over 30 years. The pro forma
financial statements for the year ended March 31, 1998 reflect increased
amortization expense of $0.3 million resulting from the Spar Acquisition.
The pro forma condensed consolidated statement of earnings has been
adjusted to reflect the reversal of revenue previously recognized by Spar
Applied Systems in connection with a certain contract which was excluded
from the net assets acquired by DRS.
3. The adjustment to the provision for income taxes represents the income tax
effect of additional amortization, and reversal of revenue related to the
Spar Acquisition based on Canadian and UK effective tax rates.
F-18
<PAGE>
EOS Acquisition
4. In an agreement dated July 28, 1998 by and between Raytheon Company,
Raytheon Systems Georgia, Inc., Raytheon TI Systems, Inc. (collectively,
Raytheon) and DRS, DRS agreed to purchase certain assets and liabilities of
the electro-optical systems business of Raytheon. The EOS Acquisition was
consummated on October 20, 1998 for a purchase price of $45 million,
subject to post closing adjustments of no more than $7 million. For
purposes of the pro forma financial statements, the pro forma balance sheet
gives effect to the EOS Acquisition as if it had taken place on September
30, 1998. The pro forma statements of earnings gives effect to the EOS
Acquisition as if it had taken place on April 1, 1997.
The EOS Business did not operate as a stand-alone business within Raytheon.
Because the EOS Business did not operate on a stand-alone basis, the
historical financial statements do not include certain indirect expenses of
the EOS Business and the historical financial statements are not
representative of the complete results of operations of the EOS Business
for the periods presented.
5. The EOS Acquisition is being accounted for using the purchase method of
accounting. For purposes of the pro forma financial statements, the total
estimated purchase price is $53,500, consisting of the contractual purchase
price of $45,000, the maximum post-closing adjustment of $7 million and the
estimated costs of the acquisition. As of September 30, 1998, this purchase
price exceeds the estimated fair value of net assets acquired of
approximately $37,857 (see also Note 8). The excess of the purchase price
over the net assets acquired results in goodwill which will be amortized by
DRS on a straight line basis over 20 years. The pro forma balance sheet has
been adjusted to reflect estimated goodwill and the statements of earnings
have been adjusted to reflect amortization expense of $782 for the year
ended March 31, 1998 and $391 for the six months ended September 30, 1998.
The actual purchase price will be determined upon receipt by DRS of a
closing date balance sheet, and the resulting purchase price could be up to
$7,000 less than the amount used in the pro forma financial statements. A
lower price would result in less goodwill and related amortization expense.
DRS is in the process of completing its fair valuation of the net assets
acquired. As a result, the purchase price allocation has not been finalized
and actual purchase price allocation may differ from that used for purposes
of these pro forma financial statements. The valuation could result in a
different portion of the purchase price being allocated to tangible or
intangible assets, including acquired-in process research and development
(IPR&D). The useful lives of such tangible or intangible assets could range
from one to 20 years, while IPR&D would be expensed immediately. DRS is
currently unable to determine the potential effect on its financial
position and results of operations. However, if the composite average life
of these assets was 10 years, the amortization expense would increase by
$782 and $391 for the year and six months ended March 31, 1998 and
September 30, 1998, respectively. If the composite average life was 5
years, the amortization would increase by $2,346 and $1,173 for the
respective periods over that presented in the accompanying pro forma
financial statements.
6. In connection with the EOS Acquisition, DRS entered into an amendment of
its existing credit facility whereby DRS obtained a $150 million secured
credit facility (the Borrowing) consisting of two term loans in the
aggregate principal amount of $80 million and a $70 million revolving line
of credit. The proceeds of the Borrowing at the date of the EOS Acquisition
of $98,883 were used to repay the balance of the debt outstanding under
DRS's previous credit facility in the amount of $48,883 which had been used
to finance the Spar Acquisition and for general corporate purposes.
For accounting purposes, the amendment of the facility was accounted for as
an extinguishment of debt and therefore the unamortized balance of the
deferred financing costs of the previous credit facility plus the fees paid
to the lender in connection with the Borrowing resulted in an extraordinary
loss, net of related tax, of $2,415.
F-19
<PAGE>
The pro forma balance sheet includes an adjustment to reflect the
additional bank borrowing of $50,000, an assumed borrowing for the maximum
post-closing adjustment of $7 million, the write-off of unamortized
deferred financing costs of $833 and the after-tax effect on equity of the
extraordinary loss. The pro forma statements of earnings include
adjustments for additional interest expense of $7,423 for the year ended
March 31, 1998 and $2,767 for the six months ended September 30, 1998, and
include adjustments to reverse amortization of deferred financing costs of
$91 and $92 for the year ended March 31, 1998 and six months ended
September 30, 1998, respectively. The extraordinary loss on the
extinguishment of debt is excluded from the pro forma statements of
earnings due to its non-recurring nature.
7. Concurrent with the EOS Acquisition, DRS and Raytheon entered into master
services agreements (the Master Services Agreements) whereby Raytheon
agreed to provide and DRS agreed to purchase various support services and
facilities for the EOS Business. Generally the cost to DRS will be the cost
to Raytheon of labor, out of pocket costs, allocated overhead, and, for
some services, an agreed-upon fee. The pro forma statements of earnings
include adjustments for estimated costs associated with the Master Services
Agreements of $2,000 and $1,000 for the year ended March 31, 1998 and six
months ended September 30, 1998, respectively.
8. The EOS Business recognized revenues on certain contracts on a percentage
completion (cost-to-cost) basis. To be consistent with DRS accounting
policies, revenue on these contracts would be recognized based on units
delivered. The pro forma statements of earnings reflect adjustments to
revenues and cost of sales on these contracts and the pro forma balance
sheet reflects an adjustment to inventories for the carrying costs of these
contracts.
9. The adjustment to the provision for income taxes represents the income tax
effect of an increase in interest expense, a reduction of amortization of
deferred financing costs, an increase of amortization related to the EOS
Acquisition, and the tax effect of the historical direct revenues and
expenses of the EOS Business.
F-20
<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 4, 1999
/s/ Nancy R. Pitek
-------------------------------------
Nancy R. Pitek
Vice President, Finance and Treasurer
