ESSEX CORPORATION and SUBSIDIARY and THE WINDERMERE GROUP, LLC and SUBSIDIARIES PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
EXHIBIT 99.3
ESSEX CORPORATION and SUBSIDIARY
and THE WINDERMERE GROUP, LLC and SUBSIDIARIES
PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
Introduction
Pursuant to a Purchase Agreement dated as of February 28, 2005 by and among Essex Corporation (“Essex” or the “Company”), The Windermere Group, LLC,; Windermere HDS, LLC,; Windermere Information Technology Systems, LLC and the Sellers of The Windermere Group, LLC (“Windermere”), Essex acquired all of the issued and outstanding ownership and membership interests from the ▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇▇▇, LLC, the ▇▇▇▇▇▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇▇, LLC, and the ▇▇▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇, LLC (each a “Seller” and collectively the “Sellers”). The merger became effective as of February 28, 2005.
Pro forma financial information, prepared as if the transaction was consummated on December 29, 2003 (the beginning of the Company’s fiscal year), is presented as follows.
| 1. | Pro Forma Consolidated Statement of Operations for the Fiscal Year Ended December 31, 2004 (unaudited) |
| 2. | Pro Forma Consolidated Statement of Operations for the quarter ended March 31, 2005 (unaudited) |
| 3. | Notes to Pro Forma Financial Information (unaudited) |
ESSEX CORPORATION and SUBSIDIARY
and THE WINDERMERE GROUP, LLC AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2004
UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
| HISTORICAL |
Pro Forma Adjustments & Eliminations |
Pro Forma Adjusted Total |
||||||||||||||||||||||
| ESSEX |
WINDERMERE |
TOTAL |
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| (Note A) | ||||||||||||||||||||||||
| Revenues: |
||||||||||||||||||||||||
| Services and products |
$ | 55,422 | $ | 64,740 | $ | 120,162 | $ | (12,151 | ) | E3 | $ | 105,536 | ||||||||||||
| (2,475 | ) | E4 | ||||||||||||||||||||||
| Purchased materials |
15,049 | — | 15,049 | 12,151 | E3 | 27,200 | ||||||||||||||||||
| Total |
70,471 | 64,740 | 135,211 | (2,475 | ) | 132,736 | ||||||||||||||||||
| Cost of goods sold and services provided |
||||||||||||||||||||||||
| Services and products |
(41,261 | ) | (60,354 | ) | (101,615 | ) | 14,520 | E3 | (74,284 | ) | ||||||||||||||
| 1,927 | E4 | |||||||||||||||||||||||
| 10,884 | E3 | |||||||||||||||||||||||
| Purchased materials |
(14,569 | ) | — | (14,569 | ) | (10,884 | ) | E3 | (25,453 | ) | ||||||||||||||
| Total |
(55,830 | ) | (60,354 | ) | (116,184 | ) | 16,447 | (99,737 | ) | |||||||||||||||
| Gross Margin |
14,641 | 4,386 | 19,027 | 13,972 | 32,999 | |||||||||||||||||||
| Selling, general and administrative expenses |
(11,129 | ) | (830 | ) | (11,959 | ) | (161 | ) | E1 | (25,017 | ) | |||||||||||||
| (13,670 | ) | E3 | ||||||||||||||||||||||
| 381 | E4 | |||||||||||||||||||||||
| 392 | E4 | |||||||||||||||||||||||
| Research and development |
(1,038 | ) | — | (1,038 | ) | (850 | ) | E3 | (1,888 | ) | ||||||||||||||
| Amortization of other intangibles |
(523 | ) | — | (523 | ) | (3,019 | ) | E1 | (3,542 | ) | ||||||||||||||
| Operating Income |
1,951 | 3,556 | 5,507 | (2,955 | ) | 2,552 | ||||||||||||||||||
| Interest/dividend income (expense), net |
332 | (238 | ) | 94 | 5 | E4 | 49 | |||||||||||||||||
| (50 | ) | E5 | ||||||||||||||||||||||
| Income Before Income Taxes |
2,283 | 3,318 | 5,601 | (3,000 | ) | 2,601 | ||||||||||||||||||
| Provision for income taxes |
E2 | (10 | ) | — | (10 | ) | — | E2 | (10 | ) | ||||||||||||||
| Net Income |
$ | 2,273 | $ | 3,318 | $ | 5,591 | $ | (3,000 | ) | $ | 2,591 | |||||||||||||
| Basic Earnings Per Common Share |
$ | 0.15 | $ | 0.17 | ||||||||||||||||||||
| Diluted Earnings Per Common Share |
$ | 0.13 | $ | 0.15 | ||||||||||||||||||||
| Weighted Average Number of Essex Shares Outstanding |
||||||||||||||||||||||||
| Basic |
15,603 | 15,603 | ||||||||||||||||||||||
| Effect of dilution- Stock options |
1,543 | 1,543 | ||||||||||||||||||||||
| Diluted |
17,146 | 17,146 | ||||||||||||||||||||||
The accompanying notes are an integral part of these pro forma financial statements.
ESSEX CORPORATION and SUBSIDIARY
and THE WINDERMERE GROUP, LLC AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED
MARCH 31, 2005
UNAUDITED
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
| HISTORICAL |
Pro Forma Adjustments |
Pro Forma |
||||||||||||||||||||||
| ESSEX |
WINDERMERE |
TOTAL |
||||||||||||||||||||||
| (NOTE A) | ||||||||||||||||||||||||
| Revenues: |
||||||||||||||||||||||||
| Services and products |
$ | 23,423 | $ | 11,988 | $ | 35,411 | $ | (3,303 | ) | E3 | $ | 31,885 | ||||||||||||
| (223 | ) | E4 | ||||||||||||||||||||||
| Purchased materials |
2,255 | — | 2,255 | 3,303 | E3 | 5,558 | ||||||||||||||||||
| Total |
25,678 | 11,988 | 37,666 | (223 | ) | 37,443 | ||||||||||||||||||
| Cost of goods sold and services provided |
||||||||||||||||||||||||
| Services and products |
(16,554 | ) | (8,794 | ) | (25,348 | ) | 2,958 | E3 | (22,126 | ) | ||||||||||||||
| 264 | E4 | |||||||||||||||||||||||
| Purchased materials |
(2,067 | ) | — | (2,067 | ) | (2,958 | ) | E3 | (5,025 | ) | ||||||||||||||
| Total |
(18,621 | ) | (8,794 | ) | (27,415 | ) | 264 | (27,151 | ) | |||||||||||||||
| Gross Margin |
7,057 | 3,194 | 10,251 | 41 | 10,292 | |||||||||||||||||||
| Selling, general and administrative expenses |
(5,194 | ) | (2,057 | ) | (7,251 | ) | (27 | ) | E1 | (7,218 | ) | |||||||||||||
| 60 | E4 | |||||||||||||||||||||||
| Research and development |
(487 | ) | (136 | ) | (623 | ) | — | (623 | ) | |||||||||||||||
| Amortization of other intangibles |
(552 | ) | — | (552 | ) | (38 | ) | E1 | (590 | ) | ||||||||||||||
| Operating Income |
824 | 1,001 | 1,825 | 36 | 1,861 | |||||||||||||||||||
| Interest/dividend income (expense), net |
732 | (343 | ) | 389 | 2 | E4 | 76 | |||||||||||||||||
| (315 | ) | E5 | ||||||||||||||||||||||
| Income Before Income Taxes |
1,556 | 658 | 2,214 | (277 | ) | 1,937 | ||||||||||||||||||
| Provision for income taxes |
E2 | (20 | ) | — | (20 | ) | — | E2 | (20 | ) | ||||||||||||||
| Net Income |
$ | 1,536 | $ | 658 | $ | 2,194 | $ | (277 | ) | $ | 1,917 | |||||||||||||
| Basic Earnings Per Common Share |
$ | 0.07 | $ | 0.09 | ||||||||||||||||||||
| Diluted Earnings Per Common Share |
$ | 0.07 | $ | 0.08 | ||||||||||||||||||||
| Weighted Average Number of Essex Shares Outstanding |
||||||||||||||||||||||||
| Basic |
21,006 | 21,006 | ||||||||||||||||||||||
| Effect of dilution- Stock options |
1,601 | 1,601 | ||||||||||||||||||||||
| Diluted |
22,607 | 22,607 | ||||||||||||||||||||||
The accompanying notes are an integral part of these pro forma financial statements.
ESSEX CORPORATION and SUBSIDIARY
AND
THE WINDERMERE GROUP, LLC and SUBSIDIARIES
NOTES TO PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
Note A: Historical Information
The financial information shown for Essex Corporation and Subsidiary (“Essex” or the “Company”) represents the information from the Company’s Form 10-K for the fiscal year ended December 31, 2004 and from its Form 10-Q for the quarterly period ended March 31, 2005.
The financial information for The Windermere Group, LLC & Subsidiaries (“Windermere”) was derived from its audited information for its fiscal year ended December 31, 2004 as well as unaudited internal financial information for the two months ended February 28, 2005. Windermere financial results for the month of March 2005 are included in the Essex historical column.
Note B: Agreement to acquire The Windermere Group, LLC and Subsidiaries
Effective February 28, 2005, under a Purchase Agreement between the Company and the Sellers, the Company acquired all of the membership interests of Windermere. Under the terms of the Purchase Agreement, the Company initially paid $69.4 million in cash and assumed $15.5 million in liabilities. Windermere paid the $25.3 million principal and accrued interest under the Promissory Note and Loan Agreement (as amended) dated January 7, 2005 from the proceeds of the initial cash payment. The Company also incurred approximately $2.6 million in outside expenses for legal, accounting and other fees.
In addition, Essex has agreed to pay in cash, on May 31, 2006, an “Earn Out” as specified in Section 2.2 of the Purchase Agreement. The maximum additional amount that could be paid is $30.0 million. No effect has been given in the pro forma financial information to the potential additional consideration due to the uncertainty at this time of the ultimate amount of payment, if any.
Note C: Common Stock
Essex common stock is no par value with 50 million shares authorized. For historical purposes, there were 20,917,493 shares issued and outstanding at December 31, 2004 and 21,067,221 at March 31, 2005. There were 17,146,373 and 22,607,240 diluted weighted average common shares outstanding during fiscal 2004 and in the first quarter of 2005, respectively.
Note D: Pro Forma Consolidated Balance Sheet (Unaudited)
A pro forma consolidated balance sheet has not been prepared since the transaction is reflected in the Company’s balance sheet filed with its Form 10-Q for the quarter ended March 31, 2005.
ESSEX CORPORATION and SUBSIDIARY
AND
THE WINDERMERE GROUP, LLC and SUBSIDIARIES
NOTES TO PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
Note E: Pro Forma Consolidated Statements of Operations (Unaudited)
The Pro Forma Consolidated Statements of Operations have been prepared on the basis of the following assumptions:
| (1) | Amortizable intangible assets of approximately $6.8 million were primarily related to contracts which have average lives of less than 5 years. A non compete covenant was valued at $603,000 with an estimated life of 4 years. Amortization is calculated on a straight-line basis relative to the monthly operating results of the contract portfolio. Pro forma amortization of other intangibles was $3.0 million in 2004 and $38,000 in the first two months of the first quarter of 2005. Property and equipment pro forma amortization of the fair value adjustment increased depreciation expense by $161,000 in 2004 and $27,000 in the first two months of the first quarter of 2005. |
| (2) | No federal income tax expense has been recognized on the basis that the entities will file a consolidated return. Essex has net operating loss carryforwards which are expected to be available to offset taxable operating income generated from this transaction for the periods shown. State income tax expense has been recognized in states where our net operating loss is not available. At this time, Essex fully adjusts its deferred tax asset valuation account to eliminate the recognition of its deferred tax asset. |
| (3) | The Windermere statement of income was adjusted to reclassify certain Windermere revenues and cost of contract revenue to their respective categories for revenues and cost of goods sold and services provided for (a) services and products and (b) purchased materials. Windermere cost of contract revenue was also reclassified to respective selling, general and administrative expenses or research and development or amortization of other intangibles. These reclassifications were made in order to conform to the Company’s historical financial statement presentation. |
| (4) | In connection and concurrent with the closing of this transaction, Windermere sold two of its operations to the former employees of Windermere. The results of these operations have been eliminated. |
| (5) | Eliminate interest associated with the Essex 2004 stock offering, proceeds for which were used to acquire The Windermere Group. |