(in
thousands)
|
|
|
|
|
|
|
|
Capital
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In
Excess
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Common
Stock Issued
|
|
|
of
Par
|
|
|
Unearned
|
|
|
Comprehensive
|
|
|
Retained
|
|
|
|
|
|
|
Shares
|
|
|
Par
value
|
|
|
Value
|
|
|
Compensation
|
|
|
Loss
|
|
|
Earnings
|
|
|
Total
|
|
Balance
at December 31, 2004, as previously reported
|
|
|
8,737
|
|
|
$
|
874
|
|
|
$
|
40,849
|
|
|
$
|
(1,572
|
)
|
|
$
|
(7,724
|
)
|
|
$
|
28,891
|
|
|
$
|
61,318
|
|
Impact
of restatement (Note 1)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
549
|
|
|
|
549
|
|
Balance
December 31, 2004, as restated
|
|
|
8,737
|
|
|
|
874
|
|
|
|
40,849
|
|
|
|
(1,572
|
)
|
|
|
(7,724
|
)
|
|
|
29,440
|
|
|
|
61,867
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11,433
|
|
|
|
11,433
|
|
Other
comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum
pension liability adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,509
|
)
|
|
|
-
|
|
|
|
(1,509
|
)
|
Unrealized
gains on investments, net of reclassification adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,535
|
)
|
|
|
-
|
|
|
|
(1,535
|
)
|
Other
comprehensive income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,044
|
)
|
Comprehensive
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,389
|
|
Issuance
of common stock through stock option exercises and employee stock purchase
plan transactions
|
|
|
304
|
|
|
|
30
|
|
|
|
3,378
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,408
|
|
Issuance
of restricted stock
|
|
|
110
|
|
|
|
11
|
|
|
|
1,794
|
|
|
|
(1,805
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeiture
of restricted stock
|
|
|
(42
|
)
|
|
|
(4
|
)
|
|
|
(667
|
)
|
|
|
671
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Release
of restricted stock
|
|
|
(12
|
)
|
|
|
(1
|
)
|
|
|
(187
|
)
|
|
|
(9
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(197
|
)
|
Amortization
of unearned compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
865
|
|
|
|
-
|
|
|
|
-
|
|
|
|
865
|
|
Tax
benefit from stock options exercised and employee stock purchase plan
transactions
|
|
|
-
|
|
|
|
-
|
|
|
|
404
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
404
|
|
Balance
at December 31, 2005, as restated
|
|
|
9,097
|
|
|
|
910
|
|
|
|
45,571
|
|
|
|
(1,850
|
)
|
|
|
(10,768
|
)
|
|
|
40,873
|
|
|
|
74,736
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,072
|
|
|
|
4,072
|
|
Other
comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
liability adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,562
|
|
|
|
-
|
|
|
|
1,562
|
|
Comprehensive
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,634
|
|
Issuance
of common stock through stock option exercises and employee stock purchase
plan transactions
|
|
|
192
|
|
|
|
19
|
|
|
|
1,875
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,894
|
|
Issuance
of restricted stock
|
|
|
70
|
|
|
|
7
|
|
|
|
(7
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeiture
of restricted stock
|
|
|
(30
|
)
|
|
|
(3
|
)
|
|
|
3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Release
of restricted stock
|
|
|
(14
|
)
|
|
|
(2
|
)
|
|
|
(191
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(193
|
)
|
Share-based
compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
2,082
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,082
|
|
Tax
benefit from stock options exercised and employee stock purchase plan
transactions
|
|
|
-
|
|
|
|
-
|
|
|
|
161
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
161
|
|
Reversal
of unearned compensation upon adoption of FASB Statement No.
123(R)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,850
|
)
|
|
|
1,850
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance
at December 31, 2006, as restated
|
|
|
9,315
|
|
|
|
931
|
|
|
|
47,644
|
|
|
|
-
|
|
|
|
(9,206
|
)
|
|
|
44,945
|
|
|
|
84,314
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,102
|
|
|
|
7,102
|
|
Other
comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
liability adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,353
|
|
|
|
-
|
|
|
|
2,353
|
|
Unrealized
gain on investment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
108
|
|
|
|
-
|
|
|
|
108
|
|
Other
comprehensive income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,461
|
|
Comprehensive
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,563
|
|
Issuance
of common stock through stock option exercises and employee stock purchase
plan transactions
|
|
|
135
|
|
|
|
14
|
|
|
|
1,166
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,180
|
|
Issuance
of restricted stock
|
|
|
99
|
|
|
|
10
|
|
|
|
(10
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeiture
of restricted stock
|
|
|
(20
|
)
|
|
|
(2
|
)
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Release
of restricted stock
|
|
|
(19
|
)
|
|
|
(2
|
)
|
|
|
(200
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(202
|
)
|
Share-based
compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
1,640
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,640
|
|
Tax
benefit from stock options exercised and employee stock purchase plan
transactions
|
|
|
-
|
|
|
|
-
|
|
|
|
77
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
77
|
|
Tax
deficiencies on equity awards
|
|
|
-
|
|
|
|
-
|
|
|
|
(68
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(68
|
)
|
Balance
at December 31, 2007
|
|
|
9,510
|
|
|
$
|
951
|
|
|
$
|
50,251
|
|
|
$
|
-
|
|
|
$
|
(6,745
|
)
|
|
$
|
52,047
|
|
|
$
|
96,504
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
|
|
Year
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
7,102
|
|
|
$
|
4,072
|
|
|
$
|
11,433
|
|
Adjustments
to reconcile net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
3,081
|
|
|
|
3,203
|
|
|
|
3,719
|
|
Amortization
of intangible assets
|
|
|
2,602
|
|
|
|
2,809
|
|
|
|
3,039
|
|
Share-based
compensation, including cumulative effect of accounting
change
|
|
|
1,640
|
|
|
|
2,082
|
|
|
|
865
|
|
Non-cash
interest expense
|
|
|
147
|
|
|
|
203
|
|
|
|
304
|
|
Amortization
of deferred gain on sale of building
|
|
|
(676
|
)
|
|
|
(676
|
)
|
|
|
(6
|
)
|
Investment
income from equity interest
|
|
|
(516
|
)
|
|
|
(223
|
)
|
|
|
(166
|
)
|
Tax
benefit from stock options exercised and employee stock purchase plan
transactions, net of tax deficiencies on equity awards
|
|
|
(9
|
)
|
|
|
(161
|
)
|
|
|
404
|
|
Deferred
(prepaid) income taxes
|
|
|
(2,972
|
)
|
|
|
(6,744
|
)
|
|
|
1,869
|
|
Loss
(gain) on sale of investments and long-lived assets, net
|
|
|
32
|
|
|
|
(192
|
)
|
|
|
(1,984
|
)
|
Change
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract
receivables, net
|
|
|
714
|
|
|
|
30,260
|
|
|
|
1,647
|
|
Prepaid
expenses and other current assets
|
|
|
604
|
|
|
|
(1,341
|
)
|
|
|
4,185
|
|
Accounts
payable
|
|
|
(6,032
|
)
|
|
|
(7,473
|
)
|
|
|
5,118
|
|
Accrued
compensation and employee benefits
|
|
|
(745
|
)
|
|
|
(4,288
|
)
|
|
|
847
|
|
Other
accrued expenses
|
|
|
(1,166
|
)
|
|
|
(2,508
|
)
|
|
|
1,246
|
|
Other
long-term liabilities
|
|
|
(861
|
)
|
|
|
(1,439
|
)
|
|
|
(7,488
|
)
|
Net
cash provided by operating activities
|
|
|
2,945
|
|
|
|
17,584
|
|
|
|
25,032
|
|
Net
cash used in discontinued operations
|
|
|
-
|
|
|
|
-
|
|
|
|
(422
|
)
|
Net
cash provided by operating activities
|
|
|
2,945
|
|
|
|
17,584
|
|
|
|
24,610
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
to property, plant and equipment
|
|
|
(1,788
|
)
|
|
|
(2,482
|
)
|
|
|
(4,571
|
)
|
Proceeds
(payments) related to the sale of building, net
|
|
|
(980
|
)
|
|
|
-
|
|
|
|
19,275
|
|
Proceeds
from sale of investments and long-lived assets
|
|
|
6
|
|
|
|
214
|
|
|
|
2,003
|
|
Purchase
adjustment of business acquisition
|
|
|
-
|
|
|
|
-
|
|
|
|
(168
|
)
|
Dividends
from equity investment
|
|
|
180
|
|
|
|
155
|
|
|
|
60
|
|
Increase
in other assets
|
|
|
(170
|
)
|
|
|
(182
|
)
|
|
|
(92
|
)
|
Net
cash (used in) provided by investing activities
|
|
|
(2,752
|
)
|
|
|
(2,295
|
)
|
|
|
16,507
|
|
Cash
flow from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings
under revolving credit agreement
|
|
|
201,918
|
|
|
|
172,981
|
|
|
|
138,996
|
|
Repayments
under revolving credit agreement
|
|
|
(209,181
|
)
|
|
|
(157,981
|
)
|
|
|
(148,996
|
)
|
Principal
payments under loan agreements
|
|
|
-
|
|
|
|
(25,412
|
)
|
|
|
(34,430
|
)
|
Proceeds
from the exercise of stock options and employee stock purchase plan
transactions
|
|
|
1,180
|
|
|
|
1,894
|
|
|
|
3,408
|
|
Tax
benefit from stock options exercised and employee stock purchase plan
transactions, net of tax deficiencies on equity awards
|
|
|
9
|
|
|
|
161
|
|
|
|
-
|
|
Payments
of deferred financing costs
|
|
|
-
|
|
|
|
(65
|
)
|
|
|
-
|
|
Net
cash used in financing activities
|
|
|
(6,074
|
)
|
|
|
(8,422
|
)
|
|
|
(41,022
|
)
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(5,881
|
)
|
|
|
6,867
|
|
|
|
95
|
|
Cash
and cash equivalents, beginning of period
|
|
|
7,887
|
|
|
|
1,020
|
|
|
|
925
|
|
Cash
and cash equivalents, end of period
|
|
$
|
2,006
|
|
|
$
|
7,887
|
|
|
$
|
1,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the year for interest
|
|
$
|
1,494
|
|
|
$
|
2,078
|
|
|
$
|
4,302
|
|
Cash
paid during the year for income taxes, net of refunds
|
|
$
|
6,206
|
|
|
$
|
12,486
|
|
|
$
|
(196
|
)
|
Supplemental
disclosure of noncash financing and investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of restricted stock
|
|
$
|
1,135
|
|
|
$
|
1,000
|
|
|
$
|
1,805
|
|
Increase
(decrease) in pension liability
|
|
$
|
(3,899
|
)
|
|
$
|
(2,588
|
)
|
|
$
|
2,485
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars
in thousands, except per share amounts)
Dynamics
Research Corporation (the “Company”), headquartered in Andover, Massachusetts,
provides IT, engineering, logistics and other consulting services to federal
defense, civil and state agency customers. Founded in 1955 and headquartered in
Andover, Massachusetts, the Company has approximately 1,400 employees located
throughout the United States (“U.S.”). The Company operates through
the parent corporation and its wholly owned subsidiaries, H.J. Ford Associates,
Inc. (“HJ Ford”) and DRC International Corporation.
The
Company’s core capabilities are focused on IT, engineering and technical subject
matter expertise that pertain to the knowledge domains relevant to the Company’s
core customers. These capabilities include design, development, operation and
maintenance of IT systems, engineering services, complex logistics planning
systems and services, defense program administrative support services,
simulation, modeling, training systems and services, and custom built electronic
test equipment and services.
The
Company has restated its consolidated financial statements as of December 31,
2004 to correct certain tax liabilities, which resulted in an increase in
stockholders’ equity of $549. The restatement reflects corrections in
the measurement of deferred income tax liabilities relating to property and
equipment. The principal corrections pre-date all periods reported in
the Company’s financial statements, and, as a result, the related financial
statement effects are immaterial to the statements of operations for each of the
years ended December 31, 2006 and 2005. A summary of the aggregate
effect of the restatement on the Company’s consolidated balance sheet as of
December 31, 2006 is shown as follows:
|
|
As
of December 31, 2006
|
|
|
|
Previously
Reported
|
|
|
As
Restated
|
|
Changes
to Consolidated Balance Sheet:
|
|
|
|
|
|
|
Deferred
income taxes
|
|
$
|
11,698
|
|
|
$
|
9,864
|
|
Other
accrued expenses
|
|
$
|
3,916
|
|
|
$
|
5,201
|
|
Total
current liabilities
|
|
$
|
48,282
|
|
|
$
|
47,733
|
|
Total
liabilities
|
|
$
|
76,087
|
|
|
$
|
75,538
|
|
Retained
earnings
|
|
$
|
44,396
|
|
|
$
|
44,945
|
|
Total
stockholders' equity
|
|
$
|
83,765
|
|
|
$
|
84,314
|
|
NOTE
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis
of Presentation
The
consolidated financial statements include the accounts of the Company and all
wholly owned subsidiaries. All significant intercompany accounts and
transactions are eliminated in consolidation. Unless otherwise indicated, all
financial information presented herein refers to continuing operations. The
Company has reclassified certain prior period amounts to conform with the
current period presentation.
The
Company, through HJ Ford, has a 40% ownership interest in
HMR
Tech,
LLC (“
HMR
Tech”),
a small disadvantaged business as defined by the Small Business Administration
of the U.S. Government. This investment is accounted for using the
equity method and reported as a component of other noncurrent assets in the
Company’s Consolidated Balance Sheets.
Risks, Uncertainties and Use of
Estimates
There are
business risks specific to the industries in which the Company operates. These
risks include, but are not limited to, estimates of costs to complete contract
obligations, changes in government policies and procedures, government
contracting issues and risks associated with technological development. The U.S.
Government has the right to terminate contracts for convenience in accordance
with government regulations. If the government terminated contracts, the Company
would generally
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
recover
costs incurred up to termination, costs required to be incurred in connection
with the termination and a portion of the fee earned commensurate with the work
performed to termination. However, significant adverse effects on the Company’s
indirect cost pools may not be recoverable in connection with a termination for
convenience. Contracts with state and other governmental entities are subject to
the same or similar risks.
A
majority of the Company’s revenue is derived from U.S. Government agencies,
primarily the Department of Defense (“DoD”). Any cancellations or modifications
of the Company’s significant contracts or subcontracts, or failure by the
government to exercise option periods relating to those contracts or
subcontracts, could adversely affect the Company’s business, financial
condition, results of operations and cash flows. A significant portion of the
Company’s federal government contracts are renewable on an annual basis, or are
subject to the exercise of contractual options. The government has the right to
terminate contracts for convenience. Multi-year contracts often require funding
actions by the government on an annual or more frequent basis. The Company could
experience material adverse consequences should such funding actions or other
approvals not be taken. In addition to contract cancellations and declines in
government budgets, the Company’s business, financial condition, results of
operations and cash flows may be adversely affected by competition within a
consolidating defense industry, increased government regulation and general
economic conditions.
The
financial statements have been prepared in conformity with accounting principles
generally accepted in the U.S. of America and, accordingly, include amounts
based on informed estimates and judgments of management with consideration given
to materiality. Estimates and judgments also affect the amount of revenue and
expenses during the reported period. Actual results could differ from those
estimates. The Company believes the following accounting policies affect the
more significant judgments made and estimates used in the preparation of its
consolidated financial statements.
The
Company also estimates and provides for potential losses that may arise out of
litigation and regulatory proceedings to the extent that such losses are
probable and can be estimated, in accordance with Financial Accounting Standards
Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 5,
Accounting for
Contingencies
. Significant judgment is required in making these estimates
and the Company’s final liabilities may ultimately be materially different. The
Company’s total liability in respect of litigation and regulatory proceedings is
determined on a case-by-case basis and represents an estimate of probable losses
after considering, among other factors, the progress of each case or proceeding,
the Company’s experience and the experience of others in similar cases or
proceedings, and the opinions and views of legal counsel. Given the inherent
difficulty of predicting the outcome of the Company’s litigation and regulatory
matters, particularly in cases or proceedings in which substantial or
indeterminate damages or fines are sought, the Company cannot estimate losses or
ranges of losses for cases or proceedings where there is only a reasonable
possibility that a loss may be incurred. See Note 12 for information on the
Company’s litigation and other proceedings.
The
Company’s Systems and Services business segment provides its services pursuant
to time and materials, cost reimbursable and fixed-price contracts, including
service-type contracts.
For time
and materials contracts, revenue reflects the number of direct labor hours
expended in the performance of a contract multiplied by the contract billing
rate, as well as reimbursement of other billable direct costs. The risk inherent
in time and materials contracts is that actual costs may differ materially from
negotiated billing rates in the contract, which would directly affect operating
income.
For cost
reimbursable contracts, revenue is recognized as costs are incurred and includes
a proportionate amount of the fee earned. Cost reimbursable contracts specify
the contract fee in dollars or as a percentage of estimated costs. The primary
risk on a cost reimbursable contract is that a government audit of direct and
indirect costs could result in the disallowance of certain costs, which would
directly impact revenue and margin on the contract. Historically, such audits
have not had a material impact on the Company’s revenue and operating
income.
Revenue
from service-type fixed-price contracts is recognized ratably over the contract
period or by other appropriate output methods to measure service provided, and
contract costs are expensed as incurred. Under fixed-price contracts, other than
service-type contracts, revenue is recognized primarily under the percentage of
completion method in accordance with American Institute of Certified Public
Accountants Statement of Position (“SOP”) 81-1,
Accounting for Performance of
Construction-Type and Certain Production-Type Contract
s
. The risk on a
fixed-price contract is estimates of costs to complete the contract may exceed
revenues on the contract.
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
For all
types of contracts, the Company recognizes anticipated contract losses as soon
as they become known and estimable. Out-of-pocket expenses that are reimbursable
by the customer are included in contract revenue and cost of contract
revenue.
Unbilled
receivables are the amounts of recoverable contract revenue that have not been
billed at the balance sheet date. Generally, the Company’s unbilled receivables
relate to revenue that is billed in the month after services are performed. In
certain instances, billing is deferred in compliance with contract terms, such
as milestone billing arrangements and withholdings, or delayed for other
reasons. Costs related to certain U.S. Government contracts, including
applicable indirect costs, are subject to audit by the government. Revenue from
such contracts has been recorded at amounts the Company expects to realize upon
final settlement.
The
Company’s Metrigraphics business segment records revenue from product sales upon
transfer of both title and risk of loss to the customer, provided there is
evidence of an arrangement, fees are fixed or determinable, no significant
obligations remain, collection of the related receivable is reasonably assured
and customer acceptance criteria have been successfully demonstrated. Product
sales are recorded net of sales taxes and net of returns upon
delivery. Amounts billed to customers related to shipping and
handling is classified as product sales. The cost of shipping
products to the customer is recognized at the time the products are shipped and
is recorded as cost of product sales.
Cash and Cash
Equivalents
All cash
investments, which consist primarily of money market accounts, have original
maturities of three months or less and are classified as cash
equivalents.
Contract
receivables consisted of the following:
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Contract
receivables, net:
|
|
|
|
|
|
|
Billed
receivables
|
|
$
|
31,884
|
|
|
$
|
27,865
|
|
Unbilled
receivables:
|
|
|
|
|
|
|
|
|
Revenues
recorded in excess of milestone billings on fixed price contract with
State of Ohio
|
|
|
7,572
|
|
|
|
9,377
|
|
Retainages
and fee withholdings
|
|
|
1,529
|
|
|
|
1,119
|
|
Other
unbilled receivables
|
|
|
23,488
|
|
|
|
26,716
|
|
Total
unbilled receivables
|
|
|
32,589
|
|
|
|
37,212
|
|
Allowance
for doubtful accounts
|
|
|
(903
|
)
|
|
|
(793
|
)
|
Contract
receivables, net
|
|
$
|
63,570
|
|
|
$
|
64,284
|
|
Contract
receivables, net of the established allowance, are stated at amounts expected to
be realized in future periods. Unbilled receivables are amounts that
are expected to be billed in accordance with contract terms and delivery
schedules, as well as amounts expected to become billable upon final execution
of contracts, contract completion, milestones or completion of rate
negotiations. Generally, the Company’s unbilled receivables relate to
revenue that is billed in the month after services are performed. Costs related
to certain U.S. Government contracts, including applicable indirect costs, are
subject to audit by the government. Revenue from such contracts has been
recorded at amounts the Company expects to realize upon final
settlement.
Contract
receivables are classified as current assets in accordance with industry
practice. At December 31, 2006, $493 of the unbilled balance
regarding fixed price contract with the State of Ohio was not scheduled to be
billed within twelve months. In addition, $553 and $545 as of
December 31, 2007 and 2006, respectively, of unbilled retainages and fee
withholdings are not anticipated to be billed within twelve months.
The
allowance for doubtful accounts is determined based upon the Company's best
estimate of a customer's ability to pay. The factors that influence management’s
estimate include historical experience, specific identification and an aging
criteria of
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
potential
uncollectible accounts. The Company writes off contract receivables when such
amounts are determined to be uncollectible. Losses have historically been within
management’s expectations.
Inventories
are stated at the lower of cost (first-in, first-out) or market, and consist of
materials, labor and overhead. There are no amounts in inventories relating to
contracts having production cycles longer than one year. Total inventories
aggregated $584 and $116 at December 31, 2007 and 2006, respectively, and
are included in prepaid expenses and other current assets on the
accompanying balance sheets.
Property
and equipment, including improvements that significantly add to productive
capacity or extend the asset’s useful life are capitalized and recorded at cost.
When items are sold, or otherwise retired or disposed of, operating income is
charged or credited for the difference between the net book value and proceeds
realized thereon. Repairs and maintenance costs are expensed as
incurred. Property and equipment is depreciated on the straight-line basis over
their estimated useful lives. Estimated useful lives of production
equipment typically range from three to five years, while software and
furniture and other equipment typically range from three to ten years. Leasehold
improvements are amortized over the shorter of the remaining expected term of
the lease, considering renewal options, or the life of the related asset. The
Company recorded depreciation expense of $3,081, $3,203 and $3,719 during 2007,
2006 and 2005, respectively.
On
December 29, 2005, the Company entered into a purchase and sale agreement
and lease in connection with a sale and leaseback of its headquarters in
Andover, Massachusetts. The net proceeds from the sale, after transaction and
other related costs, were $19,275 resulting in a gain of $6,765 which is
being recognized over the initial ten year term of the lease. The Company
amortized $676 in both 2007 and 2006 and $6 in 2005 of the deferred gain. As of
December 31, 2007, the current portion of the deferred gain of $676 was included
in other accrued expenses and the remaining $4,733 was included in
long-term liabilities in the accompanying balance sheets.
In
addition to the sale and leaseback transaction in 2005, the Company recorded
disposals of $3,736, $646 and $15,423, during 2007, 2006 and 2005, respectively,
of substantially fully-depreciated machinery, equipment and leasehold
improvements no longer in use.
Internal
Software Development Costs
The
Company follows the provisions of SOP 98-1,
Accounting for the
C
osts of Compute
r
Software Developed or Obtained for
Internal Use
, in accounting for development costs of software to be used
internally. SOP 98-1 requires that both internal and external cost
incurred to develop internal-use computer software during the application
development stage be capitalized and subsequently amortized over the estimate
economic useful life of the software. These costs are included with
machinery and equipment, a separate component of property and
equipment.
The
Company accounts for investments in accordance with SFAS No. 115,
Accounting for Certain Investments
in Debt and Equity Securities
. Investments, which are
classified as available-for-sale, are carried at fair value and reported as a
component of other noncurrent assets in the Company’s Consolidated Balance
Sheet. Realized gains and losses on investments are determined using
the specific identification method and reported as a component of selling,
general and administrative expenses in the accompanying statements of
operations. Unrealized holding gains and losses, net of related tax
effects, are excluded from earnings and are reported in accumulated other
comprehensive income, a separate component of stockholders’ equity in the
accompanying balance sheets, until realized.
At
December 31, 2007, the Company owned shares of an actively traded public entity
that had a fair market value of $334 and were included in prepaid expenses and
other current assets at December 31, 2007. The unrealized holding
gain of $108, net of a $71 tax effect, was recorded in accumulated other
comprehensive income at December 31, 2007.
During
2005, the Company sold its shares of common stock in Lucent Technologies,
Inc. (the “Lucent shares”) for $1,997, net of transaction costs,
realizing a gain on the sale in the same amount. At December 31, 2005, an
additional 74,724 Lucent
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
shares
were held in escrow for indemnification related to Lucent’s acquisition of
Telica. During the first quarter of 2006, the shares held in escrow were
released to the Company in which the Company subsequently sold all of the shares
and realized a gain of $211.
The
Company also holds investments related to its deferred compensation
plan. These investments, which are classified as trading securities
and held in a Rabbi Trust, are carried at fair value and reported as a component
of other noncurrent assets. Unrealized holding gains and losses are
included in earnings as a component of other income or
expense. During 2007, 2006 and 2005, net unrealized holding gains of
$164, $171 and $121, respectively, related to Rabbi Trust investments were
recorded.
The
Company accounts for business acquisitions in accordance with SFAS No. 141,
Business Combinations
,
which requires that the purchase method of accounting be used for all business
“combinations” completed after June 30, 2001. The Company determines and
records the fair values of assets acquired and liabilities assumed as of the
dates of acquisition. The Company utilizes an independent valuation specialist
to determine the fair values of identifiable intangible assets acquired in order
to determine the portion of the purchase price allocable to these
assets. The Company has not acquired any business since
2004.
Goodwill
and Indefinite-lived Intangible Assets
Goodwill
is recorded when the consideration paid for business acquisitions exceeds the
fair value of net tangible and identifiable intangible assets acquired. The
Company accounts for goodwill and other intangible assets in accordance with
SFAS No. 142,
Goodwill
and Other Intangible Assets
(“SFAS 142”), which requires that
goodwill and other intangible assets with indefinite useful lives no longer be
amortized, but rather, be tested annually for impairment. In accordance with
SFAS 142, goodwill recorded in conjunction with the Company’s business
acquisitions is not being amortized.
The
Company assesses goodwill for impairment at least once each year by applying a
direct value-based fair value test. Goodwill could be impaired due to market
declines, reduced expected future cash flows, or other factors or events. Should
the fair value of goodwill at the measurement date fall below its carrying
value, a charge for impairment of goodwill would occur in that period.
SFAS 142 requires a two-step impairment testing approach. Companies must
first determine whether goodwill is impaired and if so, they must value that
impairment based on the amount by which the book value exceeds the estimated
fair value. As a result of the annual impairment test performed as of
December 31, 2007, the Company determined that the carrying amount of
goodwill did not exceed its fair value and, accordingly, did not record a charge
for impairment. There can be no assurance that goodwill will not
become impaired in future periods.
Intangible and Other Long-lived
Assets
The
Company uses assumptions in establishing the carrying value, fair value and
estimated lives of identifiable intangible and other long-lived assets. The
Company accounts for impairments under SFAS No. 144,
Accounting for the Impairment or
Disposal of Long-lived Assets.
Long-lived assets are reviewed for
impairment whenever events or changes in circumstances indicate that the asset
carrying value may not be recoverable. Recoverability is measured by a
comparison of the asset’s continuing ability to generate positive income from
operations and positive cash flow in future periods compared to the carrying
value of the asset. If assets are considered to be impaired, the impairment is
recognized in the period of identification and is measured as the amount by
which the carrying value of the asset exceeds the fair value of the asset. The
useful lives and related amortization of identifiable intangible assets are
based on their estimated residual value in proportion to the economic benefit
consumed. The useful lives and related depreciation of other long-lived assets
are based on the Company’s estimate of the period over which the asset will
generate revenue or otherwise be used by the Company.
Asset Retirement
Obligations
The
Company accounts for obligations associated with retirements of long-lived
assets under SFAS No. 143,
Accounting for Asset Retirement
Obligations
(“SFAS 143”). This statement addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. In March
2005, the FASB issued FASB Interpretation No. 47,
Accounting for Conditional Asset
Retirement Obligations
(“FIN 47”). FIN 47 clarifies that the
term “conditional asset retirement obligation,” as used in SFAS 143, refers
to a legal obligation to perform an asset retirement activity in which the
timing and/or method of settlement are conditional on a future event that may or
may not be within the control of the entity. However, the obligation to perform
the asset retirement activity is unconditional even
though
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
uncertainty
exists about the timing and/or method of settlement. FIN 47 requires that
the uncertainty about the timing and/or method of settlement of a conditional
asset retirement obligation be factored into the measurement of the liability
when sufficient information exists. FIN 47 also clarifies when an entity
would have sufficient information to reasonably estimate the fair value of an
asset retirement obligation. The Company determined that no obligations were
required to be recognized at December 31, 2007 and 2006.
On
January 1, 2007, the Company adopted FASB Interpretation No. 48,
Accounting for Uncertainty in Income
Taxes
(“FIN 48”), which addresses the determination of how tax benefits
claimed or expected to be claimed on a tax return should be recorded in the
financial statements. Under FIN 48, the Company must recognize the tax benefit
from an uncertain tax position only if it is more likely than not that the tax
position will be sustained on examination by the taxing authorities, based on
the technical merits of the position. The tax benefits recognized in the
financial statements from these positions are measured based on the largest
benefit that has a greater than fifty percent likelihood of being realized upon
ultimate resolution. Interest costs and penalties related to uncertain tax
positions continue to be classified as net interest expense and selling, general
and administrative costs, respectively, in the Company’s financial
statements.
The
Company accounts for income taxes using the asset and liability method in
accordance with SFAS No. 109,
Accounting for Income Taxes
,
pursuant to which 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
the financial statements in the period that includes the enactment date.
Valuation allowances are provided if based upon the weight of available
evidence, it is more likely than not that some or all of the deferred tax assets
will not be realized. The Company has considered future taxable income and
ongoing prudent and feasible tax planning strategies in assessing the need for
the valuation allowance. In the event it is determined that the Company would
not be able to realize its deferred tax asset in excess of their net recorded
amount, an adjustment to the deferred tax asset would increase income in the
period such determination was made. Likewise, should the Company determine it
would not be able to realize all or part of its net deferred tax asset in the
future, an adjustment to the deferred tax asset would be charged to income in
the period such determination was made. The Company determined that no valuation
allowance was required at December 31, 2007 and 2006.
The
Company adopted the accounting requirements of SFAS No. 158,
Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements
No. 87, 88, 106, and 132(R)
, (“SFAS 158”) as of December 31,
2006. As required by SFAS 158, the Company will continue to apply the
provisions in SFAS No. 87,
Employers Accounting for
Pensions
, in
measuring plan assets and benefit obligations associated with its defined
benefit pension plan in determining the amount of net periodic benefit cost
.
SFAS 158 requires
entities to measure plan assets and benefit obligations as of the date of their
fiscal year end which is effective for the Company’s fiscal year ending on
December 31, 2008. Early application is allowed, however, the Company
has elected not to change the measurement date provision as of December 31,
2007.
Accounting
and reporting for the Company’s pension plan requires the use of assumptions,
including but not limited to, a discount rate and an expected return on
assets. These assumptions are reviewed at least annually based on reviews of
current plan information and consultation with the Company’s independent actuary
and the plan’s investment advisor. If these assumptions differ materially from
actual results, the Company’s obligations under the pension plan could also
differ materially, potentially requiring the Company to record an additional
pension liability. An independent actuarial valuation of the pension plan is
performed each year.
Costs
associated with obtaining the Company’s financing arrangements are deferred and
amortized over the term of the financing arrangements using the effective
interest method.
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
Fair Value of Financial
Instruments
The
carrying values of cash and cash equivalents, contract receivables and accounts
payable approximate fair value because of the short-term nature of these
instruments. Investment securities are carried at fair value. The
fair value of debt instruments approximates carrying value because these
agreements bear interest at variable market rates.
The
Company accounts for operating leases in accordance with the provisions of SFAS
No. 13,
Accounting for
Leases
, which require minimum lease payments be recognized on a
straight-line basis, beginning on the date that the lessee takes possession or
control of the property. When the terms of an operating lease provide
for periods of free rent, rent concessions and/or rent escalations, the Company
establishes a deferred rent liability for the difference between the scheduled
rent payment and the straight-line rent expense recognized. The
deferred rent liability is amortized over the underlying lease term on a
straight-line basis as a reduction of rent expense. The Company had a
deferred rent liability of $1,177 and $1,031 recorded as of December 31, 2007
and 2006, respectively. The long-term portions of the deferred rent
liability of $1,037 and $953 were recorded in other long-term liabilities as of
December 31, 2007 and 2006, respectively, and the remaining current portions
were recorded in other accrued expenses in the accompanying balance
sheets.
The
Company recognizes obligations associated with restructuring activities in
accordance with SFAS No. 146,
Accounting for Costs Associated with
Exit or Disposal Activities
, (“SFAS 146”). SFAS 146
generally requires a liability for costs associated with an exit or disposal
activity be recognized and measured initially at its fair value in the period in
which the liability is incurred. The overall purpose of the Company’s
restructuring actions is to lower overall operating costs and improve
profitability by reducing excess capacities. Restructuring charges are typically
reported in selling, general and administrative expenses in the period in which
the plan is approved by the Company’s senior management and, where material, the
Company’s Board of Directors, and when the liability is
incurred.
The
Company accounts for comprehensive income in accordance with SFAS No. 130,
Reporting Comprehensive
Income
. As it relates to the Company, comprehensive income is
defined as net income plus other comprehensive income, which is the sum of
changes in additional pension liabilities and unrealized gains and losses on
investments available for sale, and is presented net of tax in the
accompanying statements of changes in stockholders’ equity and comprehensive
income.
Basic
earnings per share are computed by dividing net income by the weighted average
number of shares of common stock outstanding during the period. Diluted earnings
per share is determined by using the weighted average number of common and
dilutive common equivalent shares outstanding during the period.
Restricted
shares of common stock that vest based on the satisfaction of certain conditions
are treated as contingently issuable shares until the conditions are satisfied.
These shares are excluded from the basic earnings per share calculation and
included in the diluted earnings per share calculation.
Share
-Based
Compensation
The
Company accounts for share-based compensation in accordance with SFAS No. 123
(revised 2004),
Share-Based
Payment
(“SFAS 123(R)”), and related interpretations. SFAS
123(R) requires the measurement and recognition of compensation expense based on
estimated fair value for all share-based payment awards including stock options,
employee stock purchases under employee stock purchase plans, non-vested share
awards (restricted stock) and stock appreciation rights. The Company uses the
Black-Scholes pricing model as the most appropriate method for determining the
estimated fair value of all applicable awards. For share-based awards granted
after January 1, 2006, the Company recognized compensation expense based on the
estimated grant date fair value method required under SFAS 123(R). For all
awards the Company has recognized compensation expense using a straight-line
amortization method over the vesting period of the award. As SFAS 123(R)
requires that share-based compensation expense be based on awards that
ultimately vest, estimated share-based compensation
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
for 2007
and 2006 has been reduced for estimated forfeitures. Pursuant to the income tax
provisions included in SFAS 123(R), the Company has elected the “long-form”
method of establishing the beginning balance of the pool of excess tax benefits
available to absorb tax deficiencies recognized subsequent to the adoption of
SFAS 123(R).
The
Company adopted the provisions of SFAS 123(R), using the modified prospective
transition method, beginning January 1, 2006. Accordingly, the
Company recorded share-based compensation expense during 2006 for awards granted
prior to but not yet vested as of January 1, 2006 as if the fair value method
required for pro forma disclosure under SFAS 123 were in effect for expense
recognition purposes, adjusted for estimated forfeitures. During the first
quarter of 2006, the Company recorded a pre-tax cumulative benefit of accounting
change of $146 ($84 net of tax effects) related to estimating forfeitures for
restricted stock awards that were unvested as of January 1,
2006. In accordance with that transition method, the Company
has not restated prior periods for the effect of compensation expense calculated
under SFAS 123(R). Prior to the adoption of SFAS 123(R), the Company
provided the disclosures required under SFAS 123, as amended by SFAS No. 148,
“Accounting for Stock-Based Compensation – Transition and Disclosures.”
Forfeitures of awards were recognized as they occurred. The pro forma
information for the year ended December 31, 2005 was as follows:
Net
income, as reported
|
|
$
|
11,433
|
|
Add:
Share-based employee compensation expense included in reported net income,
net of related tax effects
|
|
|
515
|
|
Deduct:
Total share-based employee compensation expense determined under the fair
value based method for all awards, net of related tax
effects
|
|
|
(1,204
|
)
|
Pro
forma net income
|
|
$
|
10,744
|
|
|
|
|
|
|
Earnings
per common share:
|
|
|
|
|
As
reported:
|
|
|
|
|
Basic
|
|
$
|
1.30
|
|
Diluted
|
|
$
|
1.24
|
|
Pro
forma:
|
|
|
|
|
Basic
|
|
$
|
1.22
|
|
Diluted
|
|
$
|
1.16
|
|
Change
in Accounting Principle
The
modified prospective transition method of SFAS 123(R) requires an adjustment to
record the cumulative effect of a change in accounting principle to reflect the
compensation cost that would not have been recognized in prior periods had
forfeitures been estimated during those periods. This adjustment
applies only to compensation costs previously recognized in the financial
statements for awards that were unvested on the adoption date. Upon
the adoption of SFAS 123(R), the Company recorded a cumulative benefit of
accounting change of $84, net of income taxes of $62, related to estimating
forfeitures for restricted stock awards that were unvested as of January 1,
2006.
Certain reclassifications have been
made to prior periods, as a result of the current year presentation with no
effect on net earnings.
Recent Accounting
Pronouncements
In
September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
(“SFAS 157”). SFAS 157 clarifies the principle that fair value should be based
on the assumptions market participants would use when pricing an asset or
liability and establishes a fair value hierarchy that prioritizes the
information used to develop those assumptions. Under SFAS 157, fair value
measurements would be separately disclosed by level within the fair value
hierarchy. The provisions of SFAS 157, as issued, are effective for the fiscal
years beginning after November 15, 2007. However, in February 2008, the
FASB issued FASB Staff Position No. 157-2,
Effective Date of FASB Statement No.
157,
(“FSP 157-2”)
that amended SFAS 157
to delay the effective date of for all non-financial assets and non-financial
liabilities, except those that are recognized or disclosed at fair value in the
financial statements on a recurring basis (that is, at least annually). FSP
157-2 defers the effective date of SFAS 157 to fiscal years beginning after
November 15, 2008, and interim periods within those fiscal years for items
within the scope
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
of FSP
157-2. The Company adopted the required provision of SFAS 157 as of
January 1, 2008. The Company does not expect the adoption of SFAS 157 to
have a material impact on its consolidated financial statements.
In
February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial
Assets and Financial Liabilities - Including an amendment of FASB Statement No.
115
(“SFAS 159”). SFAS 159 permits entities to choose to
measure many financial instruments and certain other items at fair value. The
objective is to improve financial reporting by providing entities with the
opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex hedge
accounting provisions. SFAS 159 is effective as of the beginning of an entity's
first fiscal year that begins after November 15, 2007. Although the Company
adopted SFAS 159 as of January 1, 2008, the Company has not yet elected the
fair value option for any items permitted under SFAS 159.
In
December 2007, the FASB issued SFAS No. 141(R),
Business Combinations
(“SFAS
141(R)”), which amends SFAS No. 141, and provides revised guidance for
recognizing and measuring identifiable assets and goodwill acquired, liabilities
assumed, and any noncontrolling interest in the acquiree. It also provides
disclosure requirements to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. SFAS 141(R) is
effective for fiscal years beginning after December 15, 2008 and is to be
applied prospectively. SFAS 141(R) will have an impact on accounting for
business combinations once adopted but the effect is dependent upon acquisitions
at that time.
In
December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in
Consolidated Financial Statements—An Amendment of ARB No. 51
(“SFAS
160”). SFAS 160 establishes new accounting and reporting standards for the
non-controlling interest in a subsidiary and for the deconsolidation of a
subsidiary. SFAS 160 is effective for fiscal years beginning on or after
December 15, 2008 and early adoption is prohibited. The Company does not
currently expect the adoption of SFAS 160 to have a material impact on its
consolidated financial statements.
NOTE
3. DISCONTINUED OPERATIONS
During
2005, the Company charged $422 in expenditures against the remaining lease exit
cost accrual for its discontinued Encoder Division operations, which was sold in
2003. The lease on the Encoder facility expired in August 2005.
Accordingly, lease payments and payments for other associated costs were made
and charged to the accrual through that date. The difference between the fair
value of the total lease costs and the total cash payments were charged to
discontinued operations as expense through the expiration of the lease term,
including sublease income initially estimated at the time the accrual was
recorded, but not subsequently realized.
NOTE 4. SUPPLEMENTAL BALANCE
SHEET INFORMATION
The
composition of selected balance sheet accounts is as follows:
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Property
and equipment, net:
|
|
|
|
|
|
|
Production
equipment
|
|
$
|
11,917
|
|
|
$
|
11,942
|
|
Software
|
|
|
11,052
|
|
|
|
11,283
|
|
Furniture
and other equipment
|
|
|
6,862
|
|
|
|
8,792
|
|
Leasehold
improvements
|
|
|
2,375
|
|
|
|
2,137
|
|
Property
and equipment
|
|
|
32,206
|
|
|
|
34,154
|
|
Less
accumulated depreciation
|
|
|
(22,024
|
)
|
|
|
(22,645
|
)
|
Property
and equipment, net
|
|
$
|
10,182
|
|
|
$
|
11,509
|
|
|
|
|
|
|
|
|
|
|
Other
noncurrent assets:
|
|
|
|
|
|
|
|
|
Deferred
compensation plan investments
|
|
$
|
1,747
|
|
|
$
|
1,627
|
|
Equity
investment
|
|
|
1,119
|
|
|
|
787
|
|
Prepaid
pension asset
|
|
|
718
|
|
|
|
-
|
|
Other
|
|
|
495
|
|
|
|
592
|
|
Other
noncurrent assets
|
|
$
|
4,079
|
|
|
$
|
3,006
|
|
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Accrued
compensation and employee benefits:
|
|
|
|
|
|
|
Accrued
payroll and payroll taxes
|
|
$
|
6,967
|
|
|
$
|
5,956
|
|
Accrued
vacation
|
|
|
4,273
|
|
|
|
4,343
|
|
Accrued
pension liability
|
|
|
-
|
|
|
|
2,000
|
|
Other
|
|
|
2,488
|
|
|
|
2,174
|
|
Accrued
compensation and employee benefits
|
|
$
|
13,728
|
|
|
$
|
14,473
|
|
|
|
|
|
|
|
|
|
|
Other
accrued expenses:
|
|
|
|
|
|
|
|
|
Deferred
gain on sale of building
|
|
$
|
676
|
|
|
$
|
676
|
|
Accrued
income taxes
|
|
|
585
|
|
|
|
946
|
|
Amount
outstanding under letter of credit
|
|
|
36
|
|
|
|
1,016
|
|
Other
|
|
|
1,951
|
|
|
|
2,563
|
|
Other
accrued expenses
|
|
$
|
3,248
|
|
|
$
|
5,201
|
|
|
|
|
|
|
|
|
|
|
Other
long-term liabilities:
|
|
|
|
|
|
|
|
|
Deferred
gain on sale of building
|
|
$
|
4,733
|
|
|
$
|
5,407
|
|
Deferred
compensation plan liability
|
|
|
1,747
|
|
|
|
1,627
|
|
Long-term
contract payments
|
|
|
-
|
|
|
|
2,700
|
|
Accrued
pension liability
|
|
|
-
|
|
|
|
1,933
|
|
Other
|
|
|
1,607
|
|
|
|
1,138
|
|
Other
long-term liabilities
|
|
$
|
8,087
|
|
|
$
|
12,805
|
|
NOTE
5. GOODWILL AND INTANGIBLE ASSETS
The
Company’s identifiable intangible assets consisted solely of customer
relationships as of December 31, 2007 and 2006. The carrying cost of
customer relationships for both periods was $12,800, offset by accumulated
amortization of $9,731 and $7,129 as of December 31, 2007 and 2006,
respectively. The Company recorded amortization expense for its
identifiable intangible assets of $2,602, $2,809 and $3,039 in the years ended
December 31, 2007, 2006 and 2005, respectively. At December 31, 2007,
estimated future amortization expense for the identifiable intangible assets to
be recorded by the Company in subsequent fiscal years was as
follows:
Year
ending December 31:
|
|
|
|
2008
|
|
$
|
2,038
|
|
2009
|
|
$
|
1,031
|
|
There
were no changes in the carrying amount of goodwill for the years ended
December 31, 2007 and 2006. The carrying amount of goodwill of $63,055 at
December 31, 2007 and December 31, 2006 was included in the Systems
and Services segment.
Total
income tax expense was allocated as follows:
|
|
Year
ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Income
from operations
|
|
$
|
4,682
|
|
|
$
|
2,730
|
|
|
$
|
7,781
|
|
Cumulative
benefit of accounting change
|
|
|
-
|
|
|
|
62
|
|
|
|
-
|
|
Stockholders’
equity for compensation expense for tax purposes in excess of amounts
recognized for financial reporting purposes
|
|
|
(77
|
)
|
|
|
(161
|
)
|
|
|
(404
|
)
|
Other
comprehensive income
|
|
|
1,617
|
|
|
|
1,026
|
|
|
|
(1,969
|
)
|
|
|
$
|
6,222
|
|
|
$
|
3,657
|
|
|
$
|
5,408
|
|
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
The
components of the provision for federal and state income taxes from operations
were as follows:
|
|
Year
ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Currently
payable
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
6,623
|
|
|
$
|
8,041
|
|
|
$
|
4,902
|
|
State
|
|
|
1,031
|
|
|
|
1,433
|
|
|
|
1,010
|
|
Total
currently payable
|
|
|
7,654
|
|
|
|
9,474
|
|
|
|
5,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
(prepaid)
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(2,490
|
)
|
|
|
(5,174
|
)
|
|
|
1,493
|
|
State
|
|
|
(482
|
)
|
|
|
(1,570
|
)
|
|
|
376
|
|
Total
deferred (prepaid)
|
|
|
(2,972
|
)
|
|
|
(6,744
|
)
|
|
|
1,869
|
|
Provision
for income taxes
|
|
$
|
4,682
|
|
|
$
|
2,730
|
|
|
$
|
7,781
|
|
The major
items contributing to the difference between the statutory U.S. federal income
tax rate and the Company’s effective tax rate on income from continuing
operations were as follows:
|
|
Year
ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Provision
at statutory rate
|
|
$
|
4,124
|
|
|
|
35.0
|
%
|
|
$
|
2,351
|
|
|
|
35.0
|
%
|
|
$
|
6,533
|
|
|
|
34.0
|
%
|
State
income taxes, net of federal tax benefit
|
|
|
512
|
|
|
|
4.3
|
|
|
|
355
|
|
|
|
5.3
|
|
|
|
923
|
|
|
|
4.8
|
|
Permanent
differences, net
|
|
|
166
|
|
|
|
1.4
|
|
|
|
177
|
|
|
|
2.6
|
|
|
|
170
|
|
|
|
0.9
|
|
SFAS
123(R) expense
|
|
|
73
|
|
|
|
0.6
|
|
|
|
166
|
|
|
|
2.5
|
|
|
|
-
|
|
|
|
-
|
|
Change
in deferred tax rate
|
|
|
-
|
|
|
|
-
|
|
|
|
186
|
|
|
|
2.8
|
|
|
|
-
|
|
|
|
-
|
|
Adjustments
to tax accruals and reserves
|
|
|
(201
|
)
|
|
|
(1.7
|
)
|
|
|
(266
|
)
|
|
|
(4.0
|
)
|
|
|
127
|
|
|
|
0.7
|
|
Tax
credits and state audits
|
|
|
(82
|
)
|
|
|
(0.7
|
)
|
|
|
(226
|
)
|
|
|
(3.4
|
)
|
|
|
-
|
|
|
|
-
|
|
Other,
net
|
|
|
90
|
|
|
|
0.8
|
|
|
|
(13
|
)
|
|
|
(0.2
|
)
|
|
|
28
|
|
|
|
0.1
|
|
Provision
for income taxes
|
|
$
|
4,682
|
|
|
|
39.7
|
%
|
|
$
|
2,730
|
|
|
|
40.6
|
%
|
|
$
|
7,781
|
|
|
|
40.5
|
%
|
The tax
effects of significant temporary differences that comprise deferred tax assets
and liabilities are as follows:
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Pension
liability
|
|
$
|
4,465
|
|
|
$
|
6,010
|
|
Deferred
gain on sale of building
|
|
|
2,680
|
|
|
|
2,768
|
|
Accrued
vacation
|
|
|
1,152
|
|
|
|
1,163
|
|
Accrued
expenses
|
|
|
1,050
|
|
|
|
689
|
|
Employee
share-based compensation
|
|
|
903
|
|
|
|
713
|
|
Receivables
reserves
|
|
|
477
|
|
|
|
314
|
|
Other
|
|
|
5
|
|
|
|
-
|
|
Deferred
tax assets
|
|
|
10,732
|
|
|
|
11,657
|
|
|
|
|
|
|
|
|
|
|
Unbilled
receivables
|
|
|
(7,476
|
)
|
|
|
(9,207
|
)
|
Pension
funding
|
|
|
(4,749
|
)
|
|
|
(5,675
|
)
|
Fixed
assets and intangibles
|
|
|
(3,348
|
)
|
|
|
(3,052
|
)
|
Domestic
International Sales Corporation
|
|
|
(1,973
|
)
|
|
|
(1,961
|
)
|
Investment
available for sale
|
|
|
(132
|
)
|
|
|
-
|
|
Other
|
|
|
(56
|
)
|
|
|
(119
|
)
|
Deferred
tax liability
|
|
|
(17,734
|
)
|
|
|
(20,014
|
)
|
Deferred
tax liability, net
|
|
$
|
(7,002
|
)
|
|
$
|
(8,357
|
)
|
Management
believes that it is more likely than not that these deferred tax assets will be
realized.
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
On
January 1, 2007, the Company adopted the provisions of FIN 48. The
implementation of FIN 48 did not have a material impact on the amount of the
Company’s tax liability for unrecognized tax benefits. As of the date of
adoption, the Company
had $291 of unrecognized tax benefits, of which
approximately $100 would affect its effective tax rate if recognized. As of the
date of adoption, the Company had approximately $89 of accrued interest and
penalties related to unrecognized tax
benefits.
At December 31,
2007, the Company had unrecognized tax benefits of $517, which if recognized in
future periods, could favorably impact the effective tax rate by approximately
$154. The total amount of accrued interest and penalties resulting
from such unrecognized tax benefits was $115 at December 31,
2007. The change in the unrecognized tax benefits was as
follows
:
Balance
at January 1, 2007
|
|
$
|
291
|
|
Additions
for current year tax positions
|
|
|
237
|
|
Reductions
for prior year tax positions
|
|
|
(9
|
)
|
Lapse
of statute of limitations
|
|
|
(2
|
)
|
Balance
at December 31, 2007
|
|
|
517
|
|
Interest
and penalties
|
|
|
115
|
|
Total
unrecognized tax benefits, including interest and
penalties
|
|
$
|
632
|
|
The
Internal Revenue Service (“IRS”) has initiated an audit of the Company’s 2004
income tax return. The IRS continues to challenge the deferral of
income for tax purposes related to unbilled receivables including the
applicability of a Letter Ruling issued by the IRS to the Company in January
1976 which granted to the Company deferred tax treatment of the unbilled
receivables. This issue has been elevated to the IRS National Office
for determination. While the outcome of the audit is not expected to
be known for several months and remains uncertain, the Company may incur
interest expense, its deferred tax liabilities may be reduced and income tax
payments may be increased substantially in future periods.
The
Company files income tax returns in the U.S. federal jurisdiction and numerous
state jurisdictions. Federal and state tax returns for all years
after 2003 are subject to future examination.
NOTE
7. FINANCING ARRANGEMENTS
The
Company’s revolving credit facility (the “credit facility”) provides for a
$50,000 three-year revolving credit agreement (the “revolver”) for working
capital needs. The bank group, led by Brown Brothers Harriman & Co. as a
lender and as administrative agent, also includes TD Banknorth, N.A. and Bank of
America, N.A. The revolver matures on September 29, 2009.
The fee
on the unused portion of the revolver ranges from 0.25% to 0.50% per annum,
depending on the Company’s leverage ratio, and is payable quarterly in arrears.
The Company has the option of selecting an annual interest rate for the revolver
equal to either: (i) the then applicable LIBOR rate plus 1.50% to 2.50% per
annum, depending on the Company’s most recently reported leverage ratio; or
(ii) the Base Rate. The Base Rate means the higher of the base rate as
announced from time to time by Brown Brothers Harriman & Co. or the Federal
Funds Effective Rate plus one-half percent (.50%) per annum. For
those portions of the revolver accruing at the LIBOR rate, the Company has the
option of selecting interest periods of 30, 60, 90 or
180 days.
On an
ongoing basis, the credit facility requires the Company to meet certain
financial covenants, including maintaining a minimum net worth and certain cash
flow and debt coverage ratios. The covenants also limit the Company’s ability to
incur additional debt, pay dividends, purchase capital assets, sell or dispose
of assets, make additional acquisitions or investments, or enter into new
leases, among other restrictions. In addition, the credit facility provides that
the bank group may accelerate payment of all unpaid principal and all accrued
and unpaid interest under the credit facility, upon the occurrence and
continuance of certain events of default, including, among others, the
following:
|
•
|
Any
failure by the Company and its subsidiaries to make any payment of
principal, interest and other sums due under the credit facility within
three (3) calendar days of the date when the payment is
due;
|
|
•
|
Any
breach by the Company or any of its subsidiaries of certain covenants,
representations and warranties;
|
|
•
|
Any
default and acceleration of any indebtedness owed by the Company or any of
its subsidiaries to any person (other than the bank group) which is in
excess of $1,000;
|
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
|
•
|
Any
final judgment against the Company or any of its subsidiaries in excess of
$1,000 which has not been insured to the reasonable satisfaction of Brown
Brothers Harriman & Co. as administrative agent;
|
|
•
|
Any
bankruptcy (voluntary or involuntary) of the Company or any of its
subsidiaries;
|
|
•
|
Any
material adverse change in the business or financial condition of the
Company and its subsidiaries; or
|
|
•
|
A
change in control of the Company, as described in the credit
facility.
|
At
December 31, 2007, the Company was in compliance with its debt
covenants.
The
Company’s outstanding debt of $7,737 and $15,000 at December 31, 2007 and 2006,
respectively, consisted of net borrowings against the revolver. The
interest rate on $5,000 of the outstanding balance at December 31, 2007 was
6.34% based on the 60-day LIBOR option elected on December 31,
2007. The interest rate on the remaining $2,737 outstanding balance
at December 31, 2007 was 7.25% based on a base rate option that was in effect on
December 31, 2007. The interest rate for the outstanding debt at December 31,
2006 was 6.87% based on the 90-day LIBOR option elected on October 5,
2006. Borrowings under the revolver have been classified as a
long-term liability. The repayment of borrowings under the revolver
is contractually due on the maturity of the credit facility, however the Company
may repay at any time prior to that date. At December 31, 2007, the
remaining available balance to borrow against the revolver was
$41,232.
NOTE
8. EMPLOYEE BENEFIT PROGRAMS
Defined
Benefit Pension Plan
On
October 25, 2006, the Company’s Board of Directors approved amendments to the
Company’s Defined Benefit Pension Plan (the “Pension Plan”) and to the Company’s
401(k) Savings and Investment Plan (the “401(k) Plan”). The Pension
Plan amendment removed the 3% annual benefit inflator for active
participants in the Pension Plan which froze each participant's calculated
pension benefit as of December 31, 2006. The Pension Plan amendment
resulted in a curtailment to the Pension Plan which was accounted for under the
provisions of SFAS No. 88,
Employers’ Accounting for
Settlements and Curtailments and for Termination Benefits
.
The
Company’s Pension Plan is non-contributory, covering substantially all employees
of the Company who had completed a year of service prior to July 1,
2002. Membership in the Pension Plan was frozen effective July 1,
2002 by approved actions by the Company’s Board of Directors in
2001.
The
Company’s funding policy is to contribute at least the minimum amount required
by the Employee Retirement Income Security Act of 1974. Additional amounts are
contributed to assure that plan assets will be adequate to provide retirement
benefits. The Company expects to contribute $500 to fund the Pension Plan in
2008.
In 2003,
the Company changed its Pension Plan measurement date to November 30 to
facilitate its fiscal year-end accounting for and disclosure of its Plan assets,
liabilities, income and expense. As required by SFAS No. 158, the
Company’s Pension Plan measurement date will be changed to December 31 beginning
in 2008.
Net
Periodic Pension Cost
|
|
Year
ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Interest
cost
|
|
$
|
3,955
|
|
|
$
|
3,995
|
|
|
$
|
3,937
|
|
Expected
return on plan assets
|
|
|
(5,811
|
)
|
|
|
(5,117
|
)
|
|
|
(4,407
|
)
|
Recognized
actuarial loss
|
|
|
1,104
|
|
|
|
1,717
|
|
|
|
1,503
|
|
Net
periodic pension cost (income)
|
|
$
|
(752
|
)
|
|
$
|
595
|
|
|
$
|
1,033
|
|
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
Obligations
and Funded Status
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
Change
in benefit obligation
|
|
|
|
|
|
|
Benefit
obligation at beginning of year
|
|
$
|
70,006
|
|
|
$
|
70,761
|
|
Curtailment
|
|
|
-
|
|
|
|
(3,012
|
)
|
Interest
cost
|
|
|
3,955
|
|
|
|
3,995
|
|
Benefits
paid
|
|
|
(2,760
|
)
|
|
|
(2,625
|
)
|
Actuarial
(gain) loss
|
|
|
(3,859
|
)
|
|
|
887
|
|
Benefit
obligation at end of year
|
|
|
67,342
|
|
|
|
70,006
|
|
Change
in plan assets
|
|
|
|
|
|
|
|
|
Fair
value of plan assets at beginning of year
|
|
|
66,073
|
|
|
|
56,260
|
|
Actual
return on plan assets
|
|
|
4,747
|
|
|
|
7,218
|
|
Employer
contributions
|
|
|
-
|
|
|
|
5,220
|
|
Benefits
paid
|
|
|
(2,760
|
)
|
|
|
(2,625
|
)
|
Fair
value of plan assets at end of year
|
|
|
68,060
|
|
|
|
66,073
|
|
Funded
status
|
|
$
|
718
|
|
|
$
|
(3,933
|
)
|
Amounts
recognized in the consolidated balance sheets consist of:
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
Other
noncurrent assets
|
|
$
|
718
|
|
|
$
|
-
|
|
Accrued
compensation and employee benefits
|
|
|
-
|
|
|
|
(2,000
|
)
|
Other
long-term liabilities
|
|
|
-
|
|
|
|
(1,933
|
)
|
Net
amount recognized
|
|
$
|
718
|
|
|
$
|
(3,933
|
)
|
The
accumulated benefit obligation for the Pension Plan was $67,342 and $70,006 at
December 31, 2007 and 2006, respectively. During 2006, the
accumulated benefit obligation was in excess of plan assets. The
Company reduced its additional liability by $3,899 to reflect the required
pension liability of $11,260 at December 31, 2007. In 2006, the
additional liability was reduced by $2,588 to reflect the required pension
liability of $15,159. These amounts are reflected, net of related tax
effects, in the caption “Accumulated other comprehensive loss” a separate
component of stockholders’ equity in the accompanying balance
sheets.
The
reconciliation of the unrecognized net actuarial loss was as
follows:
|
|
Beginning
|
|
|
|
|
|
Experience
|
|
|
Effect
of
|
|
|
Ending
|
|
|
|
Balance
|
|
|
Amortization
|
|
|
Loss/(Gain)
|
|
|
Curtailment
|
|
|
Balance
|
|
2007
|
|
$
|
15,159
|
|
|
$
|
(1,104
|
)
|
|
$
|
(2,795
|
)
|
|
$
|
-
|
|
|
$
|
11,260
|
|
2006
|
|
$
|
21,102
|
|
|
$
|
(1,717
|
)
|
|
$
|
(1,214
|
)
|
|
$
|
(3,012
|
)
|
|
$
|
15,159
|
|
The
Company expects to recognize amortization expense related to the net actuarial
loss of approximately $585 in 2008.
The
assumed discount rate, which is intended to be the actual rate at which benefits
could effectively be settled, is determined by a spot-rate yield curve method.
The spot-rate yield curve is employed to match the plan assets cash outflows
with the timing and amount of the expected benefit payments.
The
assumed expected rate of return on plan assets, which is the average return
expected on the funds invested or to be invested to provide future benefits to
pension plan participants, is determined by an annual review of historical plan
assets returns and consulting with outside investment advisors. In
selecting the expected long-term rate of return on assets, the Company
considered its investment return goals stated in the Pension Plan’s investment
policy. The Company, with input from
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
the
Pension Plan’s professional investment managers, also considered the average
rate of earnings expected on the funds invested or to be invested to provide
Pension Plan benefits. This process included determining expected returns for
the various asset classes that comprise the Pension Plan’s target asset
allocation. Based on this analysis, the Company’s overall expected long-term
rate of return on assets was over 9.0%; however, the Company determined that the
selection of a 9.0% long-term asset return assumption is appropriate and
prudent. This basis for selecting the expected long-term asset return assumption
is consistent with the prior year.
The
following assumptions were used to determine the benefit obligations and net
periodic benefit costs:
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
Used
to determine benefit obligations
|
|
|
|
|
|
|
Discount
rate
|
|
|
6.25
|
%
|
|
|
5.75
|
%
|
Rate
of compensation increase
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
Year
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Used
to determine net periodic benefit costs
|
|
|
|
|
|
|
|
|
|
|
|
Discount
rate
|
|
|
5.75
|
%
|
|
|
5.75
|
%
|
|
|
6.00
|
%
|
Expected
rate of return on assets
|
|
|
9.00
|
%
|
|
|
9.00
|
%
|
|
|
9.00
|
%
|
Rate
of compensation increase
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
The
Company’s investment policy includes a periodic review of the Pension Plan’s
investment in the various asset classes. The Company’s asset allocations by
asset category are as follows:
|
|
Target
|
|
|
December
31,
|
|
|
|
Allocation
|
|
|
2007
|
|
|
2006
|
|
Equity
securities
|
|
|
60
|
%
|
|
|
64
|
%
|
|
|
66
|
%
|
Debt
securities
|
|
|
38
|
|
|
|
31
|
|
|
|
27
|
|
Other
|
|
|
2
|
|
|
|
5
|
|
|
|
7
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
The
Pension Plan’s assets did not include any of the Company’s common stock at
December 31, 2007 and 2006.
Estimated
Future Benefit Payments
The
following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid:
Year
ending December 31:
|
|
|
|
2008
|
|
$
|
3,315
|
|
2009
|
|
$
|
3,497
|
|
2010
|
|
$
|
3,665
|
|
2011
|
|
$
|
3,894
|
|
2012
|
|
$
|
4,182
|
|
Five
subsequent fiscal years ending December 31, 2017
|
|
$
|
23,595
|
|
The
Company also maintains a cash or deferred savings plan, the 401(k) Plan. All
employees are eligible to elect to defer a portion of their salary and
contribute the deferred portion to the 401(k) Plan.
On
January 1, 2007, the 401(k) Plan was restructured with two components:
(i) a Company matching contribution to 100% of the first 2% of the employee
contribution and an additional 50% of the next 4% of the employee contribution;
and (ii) a discretionary profit sharing contribution by the Company, even
if the employee does not contribute to the 401(k) Plan.
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
Employee
contributions and the Company’s matching and past core contributions are
invested in one or more collective investment funds at the participant’s
direction. The Company’s matching and past core contributions are subject to
forfeitures of any non-vested portion if termination occurs. The
vesting of the Company’s matching and future profit sharing contribution was
also restructured effective January 1, 2007. The restructured vesting
of the Company’s matching contribution is 25% after one year and 100% after the
second year. The restructured vesting of future profit sharing
contributions is 100% cliff vesting after three years. The Company’s
contributions, net of forfeitures, charged to expense aggregated $3,188, $3,383
and $3,033 in 2007, 2006 and 2005, respectively.
Supplemental
Executive Retirement Plan
The
Company has a Supplemental Executive Retirement Plan, or SERP, for certain
former key employees providing for annual benefits commencing on the sixth
anniversary of the executive’s retirement. The cost of these benefits is being
charged to expense and accrued using a projected unit credit method. Expense
related to this plan was $36 in 2007, $80 in 2006, and $25 in 2005. The
liability related to the SERP, which is unfunded, was $383 and $417 at
December 31, 2007 and 2006, respectively. These amounts represent the
amounts the Company estimates to be the present value of the obligation at each
respective date.
Deferred
Compensation Plans
The
Company has a deferred compensation plan approved by the Board of Directors that
allows certain employees the ability to annually elect to defer up to 100% of
any cash incentive payments from the Company and any salary in excess of the
FICA earnings ceiling. Employee contributions are invested in selected mutual
funds held within a Rabbi Trust. These investments, which the Company has
classified as trading securities as permitted by SFAS No. 115, are recorded
at fair value and reported as a component of other noncurrent assets in the
accompanying balance sheets. Amounts recorded as deferred compensation
liabilities are adjusted to reflect the fair value of investments held by the
Rabbi Trust. Changes in obligations to participants as a result of gains or
losses on the fair value of the investments are reflected as a component of
compensation expense. At December 31, 2007 and 2006, $1,747 and $1,627,
respectively, had been deferred under the plan.
The
Company also has a deferred compensation plan under which non-employee directors
may elect to defer their directors’ fees. Amounts deferred for each participant
are credited to a separate account, and interest at the lowest rate at which the
Company borrowed money during each quarter or, if there was no such borrowing,
at the prime rate, is credited to each account quarterly. The balance in a
participant’s account is payable in a lump sum or in installments when the
participant ceases to be a director.
NOTE
9. SHARE–BASED COMPENSATION
Share-Based
Compensation Plans
The
Company has four shareholder approved equity incentive plans, which are
administered by the Compensation Committee of the Board of Directors (the
“Committee”). The Committee determines which employees receive grants, the
number of shares or options granted and the exercise prices of the shares
covered by each grant.
The
Company’s 1993 Equity Incentive Plan (the “1993 Plan”) expired in April
2003. The 1993 Plan permitted the Company to grant incentive stock
options, nonqualified stock options, stock appreciation rights, awards of
nontransferable shares of restricted common stock and deferred grants of common
stock. The option price of incentive stock options was not less than the fair
market value at the time the option was granted. The option period was not
greater than 10 years from the date the option was granted. Normally the
stock options were exercisable in three equal installments beginning one year
from the date of the grant. Through shareholder approval, 580,800 shares
were reserved for the 1993 Plan. A total of 30,000, 83,180 and 108,081 stock
options were outstanding under the 1993 Plan, of which 30,000, 83,180 and
107,580 stock options were exercisable, at December 31, 2007, 2006 and 2005,
respectively.
The
Company’s 1995 Stock Option Plan for Non-employee Directors (the “1995 Plan”)
expired in April 2005. The 1995 Plan provided for each outside
director to receive options to purchase 5,000 shares of common stock at the
first annual meeting at which the director was elected. As long as he or she
remained an eligible director, the director received options to purchase
1,000 shares of common stock at each annual meeting. Eligible directors
could not be an employee of the Company or one of its subsidiaries or a holder
of five percent or more of the Company’s common stock. The exercise price of
these options was the
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
fair
market value of the common stock on the date of grant. Each option was
non-transferable except upon death and expires 10 years after the date of
grant. The options became exercisable in three equal installments on the first,
second and third anniversaries of the date of grant. A total of
132,000 shares were reserved for issuance. A total of 14,614, 20,614 and
20,614 stock options were outstanding under the 1995 Plan, of which 14,614,
18,947 and 15,613 stock options were exercisable, at December 31, 2007, 2006 and
2005, respectively.
The
Company’s 2000 Incentive Plan (the “2000 Plan”) allows the Company to grant
incentive stock options, nonqualified stock options, stock appreciation rights,
restricted stock awards and deferred grants of common stock. In the case of
incentive stock options, the option price will not be less than the fair market
value of the stock at the date of grant. The option period will not exceed
10 years from the date of grant. The terms of the 2000 Plan are
substantially similar to those of the 1993 Plan. A total of 1.5 million
shares were reserved for issuance, of which 96,434 shares remained
available at December 31, 2007. A total of 717,464, 786,885 and 860,698
stock options were outstanding under the 2000 Plan, of which 222,464, 236,217
and 273,362 stock options were exercisable, at December 31, 2007, 2006 and 2005,
respectively.
All
restricted stock awards granted by the Company were issued under the 2000 Plan.
Shares of restricted stock of the Company may be granted at no cost to
employees. Recipients are entitled to cash dividends and to vote
their respective shares. Restrictions limit the sale or transfer of
these shares until they vest, which is typically over three
years. The Company granted 99,300, 69,900 and 111,580 restricted
stock awards during the years ended December 31, 2007, 2006 and 2005,
respectively, of which 223,330, 212,264 and 221,816 awards were unvested and
outstanding as of December 31, 2007, 2006 and 2005,
respectively.
During
2001, the Board of Directors approved the Executive Long Term Incentive Program
(the “ELTIP”), implemented under the provisions of the 2000 Plan. The ELTIP
provides incentives to program participants through a combination of stock
options and restricted stock grants, which vest fully in seven years. The ELTIP
allows for accelerated vesting based on the Company’s achievement of specified
financial performance goals. During 2001, the Company granted stock options
totaling 750,000 shares of common stock at fair market value and awarded
121,000 shares of restricted common stock under the
ELTIP. Included in the 2000 Plan amounts stated above, a total
of 495,000, 540,000 and 565,000 stock options and 77,000, 84,000 and 89,000
restricted stock awards were outstanding and not yet vested under the ELTIP at
December 31, 2007, 2006 and 2005, respectively. The ELTIP stock option and
restricted stock awards will fully vest in May 2008.
The
Company’s 2003 Incentive Plan (the “2003 Plan”) allows the Company to grant
incentive stock options, non-qualified stock options, stock appreciation rights,
awards of nontransferable shares of restricted common stock and deferred grants
of common stock up to a total of 400,000 shares to directors or key
employees of the Company. The terms of the 2003 Plan are substantially similar
to those of the 2000 Plan. There were no awards granted under the 2003 Plan from
its inception.
During
1999, the Company granted a key executive officer 250,000 non-qualified stock
options that were not part of an approved shareholder plan. Twenty percent of
the options vested immediately and an additional twenty percent vested in each
successive year from the date of the grant. The option price for these grants
was the fair market value at the time of the grant. For the three years ended
December 31, 2007, a total of 250,000 stock options were outstanding and
exercisable. These stock options expire in November
2009.
Employee
Stock Purchase Plan
The
Company’s shareholders approved the 2000 Employee Stock Purchase Plan (the
“ESPP”) which is designed to give eligible employees an opportunity to purchase
common stock of the Company through accumulated payroll deductions. All
employees of the Company or designated subsidiaries who customarily work at
least 20 hours per week and do not own five percent or more of the
Company’s common stock are eligible to participate in the ESPP. A total of
1,300,000 shares are available for issuance under the ESPP, of which 484,434
shares were remaining at December 31, 2007. In 2007, 2006 and
2005, a total of 59,662, 140,542 and 129,545 shares were issued,
respectively, under the ESPP.
On
October 25, 2006, the Company’s Board of Directors approved an amendment to
eliminate the “look-back” option and to reduce the stock purchase discount from
15% to 5% under the ESPP effective November 1, 2006. Under SFAS
123(R), this amendment results in the Company accounting for shares purchased in
connection with the ESPP as non-compensatory as of the effective
date.
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
Share-Based
Compensation Costs
Total
share-based compensation cost reported in the Consolidated Statements of
Operations was as follows:
|
|
Year
ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Cost
of products and services
|
|
$
|
605
|
|
|
$
|
1,065
|
|
|
$
|
-
|
|
Selling,
general and administrative
|
|
|
1,035
|
|
|
|
1,163
|
|
|
|
865
|
|
Cumulative
effect of accounting change
|
|
|
-
|
|
|
|
(146
|
)
|
|
|
-
|
|
Total
share-based compensation expense
|
|
$
|
1,640
|
|
|
$
|
2,082
|
|
|
$
|
865
|
|
Valuation
Assumptions
The fair
value of share-based awards for employee stock option awards and employee stock
purchases made under the ESPP was estimated using the Black-Scholes pricing
model. During 2005, the Company realigned its approach to share-based
compensation by increasing the issuance of restricted stock awards and reducing
the issuance of stock options. As a result, no stock options were
awarded during 2007 and 2006. The following weighted average
assumptions were used for stock option issued during 2005: risk-free
rate of 3.87%; dividend yield of zero; volatility of 66.38%; and expected life
of 6.5 years.
During
2007, valuation assumptions were not required for employee stock purchases due
to the amendment to the ESPP. The following weighted average
assumptions were used for employee stock purchases under the ESPP during 2006
and 2005: risk-free rate of 4.77% and 3.00%, respectively; dividend
yield of zero for both periods; volatility of 27.09% and 33.05%, respectively;
and expected life of three months for both periods.
The
Company selected the assumptions used in the Black-Scholes pricing model using
the following criteria:
Risk-free interest
rate.
The Company bases the risk-free interest rate on implied
yields available on a U.S. Treasury note with a maturity term equal to or
approximating the expected term of the underlying award.
Dividend
yield.
The Company does not intend to pay dividends on its
common stock for the foreseeable future and, accordingly, uses a dividend yield
of zero.
Volatility.
The
expected volatility of the Company’s shares was estimated based upon the
historical volatility of the Company’s share price with consideration given to
the expected life of the award.
Expected
life
. For stock
options, the expected term was estimated based upon exercise experience made in
the past to employees. For employee stock purchase plan transactions,
the expected term was based on the purchase period of three
months.
Stock
Option Award Activity
The
following table summarizes stock option activity under all plans:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
Aggregate
|
|
|
|
Number
of
|
|
|
Exercise
|
|
|
Term
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Price
|
|
|
(in
years)
|
|
|
Value
|
|
Outstanding
at December 31, 2006
|
|
|
1,140,679
|
|
|
$
|
8.37
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(74,917
|
)
|
|
$
|
7.45
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(53,684
|
)
|
|
$
|
10.29
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2007
|
|
|
1,012,078
|
|
|
$
|
8.34
|
|
|
|
3.0
|
|
|
$
|
3,030
|
|
Exercisable
at December 31, 2007
|
|
|
517,078
|
|
|
$
|
7.76
|
|
|
|
2.7
|
|
|
$
|
2,100
|
|
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
The
weighted-average grant-date fair value of stock options granted during 2005 was
$12.08. No stock options were granted during the years ended December
31, 2007 and 2006. Cash proceeds received, the intrinsic value and
the total tax benefits realized resulting from stock option exercises were as
follows:
|
|
Year
ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Amounts
realized or received from stock option exercises:
|
|
|
|
|
|
|
|
|
|
Cash
proceeds received
|
|
$
|
558
|
|
|
$
|
351
|
|
|
$
|
1,635
|
|
Intrinsic
value realized
|
|
$
|
279
|
|
|
$
|
384
|
|
|
$
|
1,147
|
|
Income
tax benefit realized
|
|
$
|
70
|
|
|
$
|
134
|
|
|
$
|
353
|
|
The total
income tax benefit realized from exercised stock options and ESPP transactions
for 2007, 2006 and 2005 was $77, $161 and $404, respectively. These
amounts were reported as a financing cash inflow with a corresponding operating
cash outflow in 2007 and 2006 and as an operating cash inflow in 2005 in the
accompanying Consolidated Statement of Cash Flows.
During
2007, the Company also recorded SFAS 123(R) tax deficiencies on its equity
awards of $68 against its pool of excess tax benefits. At December
31, 2007, the remaining pool of excess tax benefits was depleted and as a result
any future SFAS 123(R) tax deficiencies will be recorded directly to
earnings. As of December 31, 2007, the total unrecognized
compensation cost related to stock options was $257, which is expected to be
recognized over a weighted-average period of approximately five
months.
Restricted
Stock Award Activity
The
following table summarizes restricted stock activity under the 2000
Plan:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Number
of
|
|
|
Grant-Date
|
|
|
|
Shares
|
|
|
Fair
Value
|
|
Nonvested
at December 31, 2006
|
|
|
212,264
|
|
|
$
|
12.86
|
|
Granted
|
|
|
99,300
|
|
|
$
|
11.43
|
|
Vested
|
|
|
(68,510
|
)
|
|
$
|
15.45
|
|
Cancelled
|
|
|
(19,724
|
)
|
|
$
|
12.82
|
|
Nonvested
at December 31, 2007
|
|
|
223,330
|
|
|
$
|
11.43
|
|
The total
fair value of restricted shares vested during 2007, 2006 and 2005 was $1,059,
$833 and $629, respectively. As of December 31, 2007, the total unrecognized
compensation cost related to restricted stock awards was $1,311, which is
expected to be amortized over a weighted-average period of approximately 1.9
years.
NOTE
10. SHAREHOLDERS’ EQUITY
Preferred
Stock Purchase Rights
On
February 17, 1998, the Company declared a dividend distribution of one
preferred stock purchase right (the “Right”) for every outstanding share of
common stock, effective July 27, 1998. The Rights attach to all outstanding
shares of common stock, and no separate right certificates will be issued. The
Rights will become exercisable upon the tenth business day following the earlier
of: (i) the date of a public announcement that a person or group of
affiliated or associated persons has acquired, or obtained the right to acquire,
beneficial ownership of 15% or more of the outstanding shares of common stock of
the Company; or (ii) the commencement or announcement of an intention to
make a tender offer or exchange offer that would result in a person or group
owning 15% or more of the outstanding common stock of the
Company.
When
exercisable, each Right entitles the registered holder to purchase from the
Company one-twelfth of a share of its Series B Participating Preferred
Stock, $0.10 par value, at a price of $54.17 per each one-twelfth
share of preferred stock. Until a Right is exercised, the holder thereof, as
such, will have no rights as a shareholder of the Company, including, without
limitation, the right to vote or to receive dividends. Under certain
circumstances, each share of the Series B Participating Preferred Stock
would be convertible into a number of shares of the Company’s common stock
having a value equal to twice the exercise price of the preferred stock purchase
right. The Rights may be redeemed by the Company at the discretion of the Board
of Directors at a price of $0.0083 per Right. The Rights are scheduled to
expire on July 27, 2008.
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
As
required by SFAS 123(R), the unearned compensation balance of $1,850 as of
December 31, 2005, which was accounted for under APB 25, was reclassified into
capital in excess of par value upon the Company’s adoption of SFAS
123(R).
Accumulated Other Comprehensive
Loss
Accumulated
other comprehensive loss of $6,745 as of December 31, 2007 consisted of
aggregate additional pension liability adjustments of $6,853, net of a $4,407
tax effect, partially offset by unrealized holding gain on investments of $108,
net of a $71 tax effect. Accumulated other comprehensive loss as of
December 31, 2006 consisted solely of an aggregate additional pension liability
adjustments of $9,206, net of a $5,953 tax effect.
The
related tax effects allocated to each component of other comprehensive income
(loss) was as follows:
|
|
Before
|
|
|
Tax
|
|
|
Net
of
|
|
|
|
Tax
|
|
|
(Expense)
|
|
|
Tax
|
|
|
|
Amount
|
|
|
Benefit
|
|
|
Amount
|
|
Year
ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
Minimum
pension liability adjustment
|
|
$
|
(2,485
|
)
|
|
$
|
976
|
|
|
$
|
(1,509
|
)
|
Unrealized
gains on investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
holding losses arising during the period
|
|
|
(531
|
)
|
|
|
207
|
|
|
|
(324
|
)
|
Less:
reclassification adjustment for gains realized in net
income
|
|
|
(1,997
|
)
|
|
|
786
|
|
|
|
(1,211
|
)
|
Net
unrealized gains
|
|
|
(2,528
|
)
|
|
|
993
|
|
|
|
(1,535
|
)
|
Other
comprehensive loss
|
|
$
|
(5,013
|
)
|
|
$
|
1,969
|
|
|
$
|
(3,044
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
liability adjustment
|
|
$
|
2,588
|
|
|
$
|
(1,026
|
)
|
|
$
|
1,562
|
|
Unrealized
gains on investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
holding gains arising during the period
|
|
|
211
|
|
|
|
(89
|
)
|
|
|
122
|
|
Less:
reclassification adjustment for gains realized in net
income
|
|
|
(211
|
)
|
|
|
89
|
|
|
|
(122
|
)
|
Net
unrealized gains
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other
comprehensive income
|
|
$
|
2,588
|
|
|
$
|
(1,026
|
)
|
|
$
|
1,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
liability adjustment
|
|
$
|
3,899
|
|
|
$
|
(1,546
|
)
|
|
$
|
2,353
|
|
Unrealized
holding gains arising during the period
|
|
|
179
|
|
|
|
(71
|
)
|
|
|
108
|
|
Other
comprehensive income
|
|
$
|
4,078
|
|
|
$
|
(1,617
|
)
|
|
$
|
2,461
|
|
Due to
their antidilutive effect, approximately 80,500, 77,000 and 96,800 options to
purchase common stock were excluded from the calculation of diluted earnings per
share for the years ended December 31, 2007, 2006 and 2005, respectively.
However, these options could become dilutive in future periods. The following
table sets forth the reconciliation of the weighted average shares
outstanding:
|
|
Year
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Weighted
average shares outstanding - Basic
|
|
|
9,326,907
|
|
|
|
9,099,897
|
|
|
|
8,809,644
|
|
Dilutive
effect of stock options and restricted stock grants
|
|
|
322,990
|
|
|
|
326,638
|
|
|
|
443,878
|
|
Weighted
average shares outstanding - Diluted
|
|
|
9,649,897
|
|
|
|
9,426,535
|
|
|
|
9,253,522
|
|
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
NOTE
11. BUSINESS SEGMENT, GEOGRAPHIC, MAJOR CUSTOMER AND RELATED PARTY
INFORMATION
Business
Segment
The
Company has two reportable business segments: Systems and Services, and
Metrigraphics.
The
Systems and Services segment provides support in the primary mission areas
of Information Technology (“IT”), Logistics and Readiness, Systems
Integration and Technical Services, C4ISR, Homeland Security, Health and Human
Services, and Intelligence/Space to government customers. The segment is
comprised of three operating groups that provide similar services and solutions
and are subject to similar regulations. These services and solutions include:
(i) design, development, operation and maintenance of Business Intelligence
Systems, Business Transformation Services, Engineering Services, Acquisition
Management Services, Training and Performance Support Systems and Services, (ii)
Automated Case Management Systems; and (iii) IT Infrastructure
Services.
The
Metrigraphics segment develops and produces components for original equipment
manufacturers in the medical electronics, computer peripheral device,
telecommunications and other industries, with the focus on the custom design and
manufacture of miniature electronic parts that are designed to meet ultra-high
precision requirements through the use of electroforming, thin film deposition
and photolithography technologies.
The
Company evaluates performance and allocates resources based on operating income.
The operating income for each segment includes selling, general and
administrative expenses and amortization of intangible assets directly
attributable to the segment. All corporate operating expenses, including
depreciation, are allocated between the segments based on segment revenues.
However, depreciation related to corporate assets that is subsequently allocated
to the segment operating results is included in the table below. Sales between
segments represent less than 1% of total revenue and are accounted for at
cost.
Results
of operations information for the Company’s business segments were as
follows:
|
|
Year
ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Revenues
from external customers
|
|
|
|
|
|
|
|
|
|
Systems
and Services
|
|
$
|
224,676
|
|
|
$
|
252,890
|
|
|
$
|
293,662
|
|
Metrigraphics
|
|
|
4,901
|
|
|
|
6,097
|
|
|
|
6,778
|
|
|
|
$
|
229,577
|
|
|
$
|
258,987
|
|
|
$
|
300,440
|
|
Gross
margin
|
|
|
|
|
|
|
|
|
|
|
|
|
Systems
and Services
|
|
$
|
37,160
|
|
|
$
|
33,914
|
|
|
$
|
48,096
|
|
Metrigraphics
|
|
|
(53
|
)
|
|
|
1,202
|
|
|
|
1,566
|
|
|
|
$
|
37,107
|
|
|
$
|
35,116
|
|
|
$
|
49,662
|
|
Operating
income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
Systems
and Services
|
|
$
|
13,826
|
|
|
$
|
8,066
|
|
|
$
|
20,819
|
|
Metrigraphics
|
|
|
(1,147
|
)
|
|
|
105
|
|
|
|
486
|
|
|
|
$
|
12,679
|
|
|
$
|
8,171
|
|
|
$
|
21,305
|
|
Depreciation
and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
Systems
and Services
|
|
$
|
4,755
|
|
|
$
|
5,385
|
|
|
$
|
5,821
|
|
Metrigraphics
|
|
|
212
|
|
|
|
365
|
|
|
|
347
|
|
Segment
depreciation and amortization
|
|
|
4,967
|
|
|
|
5,750
|
|
|
|
6,168
|
|
Corporate
depreciation and amortization
|
|
|
716
|
|
|
|
262
|
|
|
|
590
|
|
|
|
$
|
5,683
|
|
|
$
|
6,012
|
|
|
$
|
6,758
|
|
Capital
expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
Systems
and Services
|
|
$
|
1,267
|
|
|
$
|
2,243
|
|
|
$
|
3,664
|
|
Metrigraphics
|
|
|
112
|
|
|
|
17
|
|
|
|
63
|
|
Segment
capital expenditures
|
|
|
1,379
|
|
|
|
2,260
|
|
|
|
3,727
|
|
Corporate
capital expenditures
|
|
|
409
|
|
|
|
222
|
|
|
|
844
|
|
|
|
$
|
1,788
|
|
|
$
|
2,482
|
|
|
$
|
4,571
|
|
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
Asset
information for the Company’s business segments and a reconciliation of segment
assets to the corresponding consolidated amounts is as
follows:
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Segment
assets
|
|
|
|
|
|
|
Systems
and Services
|
|
$
|
136,541
|
|
|
$
|
143,793
|
|
Metrigraphics
|
|
|
2,229
|
|
|
|
1,756
|
|
Total
segment assets
|
|
|
138,770
|
|
|
|
145,549
|
|
Corporate
assets
|
|
|
11,183
|
|
|
|
14,303
|
|
|
|
$
|
149,953
|
|
|
$
|
159,852
|
|
Corporate
assets are primarily comprised of cash and cash equivalents, the
PeopleSoft-based enterprise business system, deferred tax assets, certain
corporate prepaid expenses and other current assets and valuation
allowances.
Geographic
Revenue
is attributed to geographic areas based on the customer’s location. The Company
does not have locations outside the U.S.; however, in rare instances, it may
have contracts with sales representatives located in foreign countries and
provide services at customer locations outside the U.S. Domestic revenues
comprised approximately 99% of revenues in the three years ended December 31,
2007. The Company’s long-lived assets of $80,385 and $83,241, at
December 31, 2007 and 2006, respectively, were located in the
U.S. Long-lived assets included property and equipment, goodwill,
intangible assets and other noncurrent assets.
Major
Customers
Revenues
from DoD customers accounted for approximately 78%, 80% and 78% of total
revenues in 2007, 2006 and 2005, respectively. Revenues earned from a
significant DoD customer, as a percentage of the Company’s total revenues, was
as follows:
|
|
Year
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
Revenue
|
|
|
%
|
|
|
Revenue
|
|
|
%
|
|
|
Revenue
|
|
|
%
|
|
Air
Force Aeronautical Systems Center
|
|
$
|
24,565
|
|
|
|
11
|
%
|
|
$
|
47,870
|
|
|
|
18
|
%
|
|
$
|
48,693
|
|
|
|
16
|
%
|
The
outstanding contract receivables balance of this customer was as
follows:
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Air
Force Aeronautical Systems Center
|
|
$
|
5,261
|
|
|
$
|
5,433
|
|
The
Company had no other customer in any of the three years ended December 31,
2007 that accounted for more than 10% of revenues.
Related
Party
Through
its wholly owned subsidiary, HJ Ford, the Company has a 40% interest in
HMR
Tech
which is accounted for using the equity method. The Company,
through HJ Ford, also had a 40% ownership interest in
HMR
Tech/HJ
Ford SBA JV, LLC, (the “Joint Venture”). The Joint Venture was formed
with
HMR
Tech. Revenues from
HMR
Tech
included in contract revenues for 2007, 2006 and 2005 were $365, $406 and $540,
respectively. The amounts due from
HMR
Tech
included in contract receivables at December 31, 2007 and 2006 were $52 and $50,
respectively.
In
September 2007, the Company sold its 40% interest in the Joint Venture back to
the Joint Venture. The Joint Venture, which was formed by
HMR
Tech
and HJ Ford under the SBA Mentor-Protégé program, was accounted for using the
equity method of accounting. The Company received $4 in proceeds from
the transaction, representing the Company’s original
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
investment
in the Joint Venture. The Company continues to be a subcontractor to the Joint
Venture on existing CAPS contract task orders until such task orders are
completed.
Revenues
recognized by the Company as a subcontractor to the Joint Venture for 2007 and
2006 were $20,935 and $1,837, respectively. Charges by the Company
for administrative services to the Joint Venture under the terms of the Services
Agreement for 2007 and 2006 were $1,155 and $102, respectively. A new
Services Agreement was entered into effective October 1, 2007 under which the
Company charges
HMR
Tech
for administrative services at 2.8% of revenues derived from the CAPS
contract. Revenues under this arrangement were $281 in
2007.
The table
below presents the various amounts included in the accompanying balance sheets
related to the above mentioned transactions with the Joint Venture:
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Contract
receivables
|
|
$
|
4,486
|
|
|
$
|
1,837
|
|
Other
receivables, net
|
|
$
|
314
|
|
|
$
|
110
|
|
NOTE
12. COMMITMENTS AND CONTINGENCIES
The
Company conducts its operations in facilities that are under long-term operating
leases. These leases expire at various dates through 2015, with options to renew
as negotiated between the Company and its landlords. The Company does not
believe that exercise of any of its lease renewal options are reasonably assured
and, accordingly, the exercise of such options has not been assumed in the
accounting for leasehold improvements and the deferred gain on the sale of the
corporate office facility. Rent expense under these leases (inclusive of real
estate taxes and insurance) was $6,132 in 2007, $6,600 in 2006 and $5,446 in
2005.
Minimum
lease commitments, primarily for facilities under non-cancelable operating
leases and related sublease income in effect at December 31, 2007 were as
follows:
|
|
Operating
|
|
|
|
|
|
|
Lease
|
|
|
Sublease
|
|
|
|
Commitment
|
|
|
Income
|
|
Year
ended December 31:
|
|
|
|
|
|
|
2008
|
|
$
|
7,462
|
|
|
$
|
1,360
|
|
2009
|
|
|
6,888
|
|
|
|
1,507
|
|
2010
|
|
|
6,006
|
|
|
|
1,474
|
|
2011
|
|
|
3,377
|
|
|
|
642
|
|
2012
|
|
|
2,561
|
|
|
|
-
|
|
2013
and thereafter
|
|
|
7,388
|
|
|
|
-
|
|
|
|
$
|
33,682
|
|
|
$
|
4,983
|
|
The
Company has an outstanding letter of credit aggregating $1,031 at December 31,
2007 related to the sale and leaseback of the Company’s headquarters in
2005. The agreement provides that the Company pay for certain
improvements by the end of the third lease year. At December 31,
2007, the improvements were substantially completed; however the letter of
credit is required to be maintained until 45 days after the completion of the
improvements.
As a
defense contractor, the Company is subject to many levels of audit and review
from various government agencies, including the Defense Contract Audit Agency,
various inspectors general, the Defense Criminal Investigation Service, the
Government Accountability Office, the Department of Justice and Congressional
Committees. Both related to and unrelated to its defense industry involvement,
the Company is, from time to time, involved in audits, lawsuits, claims,
administrative proceedings and investigations. The Company accrues for
liabilities associated with these activities when it becomes probable that
future expenditures will be made and such expenditures can be reasonably
estimated. Except as noted below, the Company
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
does not
presently believe it is reasonably likely that any of these matters would have a
material adverse effect on the Company’s business, financial position, results
of operations or cash flows. The Company’s evaluation of the likelihood of
expenditures related to these matters is subject to change in future periods,
depending on then current events and circumstances, which could have material
adverse effects on the Company’s business, financial position, results of
operations and cash flows.
On
October 26, 2000, two former Company employees were indicted and charged with
conspiracy to defraud the U.S. Air Force and wire fraud, among other charges,
arising out of a scheme to defraud the U.S. out of approximately $10 million.
Both men subsequently pled guilty to the principal charges against them. On
October 9, 2003, the U.S. Attorney filed a civil complaint in the U.S. District
Court for the District of Massachusetts against the Company based in substantial
part upon the actions and omissions of the former employees that gave rise to
the criminal cases against them. In the civil action, the U.S. Attorney has
asserted three claims against the Company, which are not
additive. These claims, which would not be duplicately awarded, are
based on the False Claims Act, the Anti-Kickback Act, or breach of contract for
which the government estimates damages at approximately $24 million, $20 million
and $10 million, respectively. The U.S. Attorney is also seeking
recovery on certain common law claims, costs, equitable claims, and interest on
breach of contract damages. On February 14, 2007, the U.S. Attorney
filed a motion for summary judgment as to liability and as to damages in this
matter. The Company filed an opposition to the government’s motion which
includes substantive defenses. The Company is awaiting a decision
from the court at this time. While there can be no assurance as to
the ultimate disposition of this case, the Company considers it to be probable
that the court may grant summary judgment as to the breach of contract liability
claim and more likely than not, but not probable, that the court may grant
summary judgment as to the False Claims Act liability claim. For the
claim in which management believes an unfavorable outcome is probable, the
Company has recognized its estimated liability. The Company believes,
however, that it is unlikely the court would grant summary judgment as to the
government’s claim of damages, in which circumstance the case would proceed to
trial as to damages. If, upon conclusion of summary judgment,
liability claims are entered against the Company, the Company estimates that it
would become liable for repayment of certain contract billings and penalties
that together are expected to range from approximately $181 to $1,750, excluding
the outcome as to damages. Regarding the alleged actual damages, the
Company believes that it has substantive defenses and intends to vigorously
defend itself. The Company presently has insufficient information to
quantify potential actual damages, if any. As a result, the ultimate
outcome of the litigation as to damages remains indeterminate. If an
unfavorable determination is rendered, the outcome would have a material adverse
effect on the Company’s business, financial position, results of operations and
cash flows.
The
Company has provided documents in response to a previously disclosed grand jury
subpoena issued on October 15, 2002 by the U.S. District Court for the District
of Massachusetts, directing the Company to produce specified documents dating
back to 1996. The subpoena relates to an investigation, which focused on the
period from 1996 to 1999, by the Antitrust Division of the Department of Justice
in New York into the bidding and procurement activities involving the Company
and several other defense contractors who have received similar subpoenas and
may also be subjects of the investigation. On February 7, 2007, the Company
learned that the Antitrust Division has communicated to the Department of
Justice in Washington, D.C. the results of its investigation which have not been
made available to the Company. The Company has cooperated in the investigation;
however, it does not have a sufficient basis to predict the outcome of the
investigation. Should the Company be found to have violated the
antitrust laws, the matter could have a material adverse effect on the Company’s
business, financial position, results of operations and cash flows.
On June
28, 2005, a suit, characterized as a class action employee suit, was filed in
the U.S. District Court for the District of Massachusetts alleging violations of
the Fair Labor Standards Act and certain provisions of Massachusetts General
Laws. The Company believes that its practices complied with the Fair Labor
Standards Act and Massachusetts General Laws. The Company intends to vigorously
defend itself and has sought to have the complaint dismissed from District Court
and addressed in accordance with the Company’s mandatory dispute resolution
program for the arbitration of workplace complaints. On April 10, 2006, the U.S.
District Court for the District of Massachusetts entered an order granting in
part the Company’s motion to dismiss the civil action filed against the Company,
and to compel compliance with its mandatory dispute resolution program,
directing that the parties arbitrate the aforementioned claims, and striking the
class action waiver which was part of the dispute resolution program. Following
the District Court’s decision, the plaintiffs commenced an arbitration before
the American Arbitration Association, asserting the same claims as they asserted
in the District Court. An arbitrator has been selected, but no
substantive action has occurred in the arbitration. On January 26, 2007 the
Company filed an appeal with the United States Court of Appeals for the Second
Circuit appealing the portion of the District Court’s decision that the class
action waiver is not enforceable. The U.S. Court of Appeals on November 19, 2007
concurred with the District Court’s opinion that the matter should proceed in
arbitration and remanded the matter to the District Court. The
parties have informed the District Court that they will proceed in arbitration
as a class action.
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
NOTE
13. QUARTERLY RESULTS (UNAUDITED)
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
Fiscal
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Year
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
56,780
|
|
|
$
|
58,010
|
|
|
$
|
58,328
|
|
|
$
|
56,459
|
|
|
$
|
229,577
|
|
Cost
of contract revenue and product sales
|
|
$
|
48,081
|
|
|
$
|
48,660
|
|
|
$
|
49,020
|
|
|
$
|
46,709
|
|
|
$
|
192,470
|
|
Gross
profit
|
|
$
|
8,699
|
|
|
$
|
9,350
|
|
|
$
|
9,308
|
|
|
$
|
9,750
|
|
|
$
|
37,107
|
|
Operating
income
|
|
$
|
2,451
|
|
|
$
|
2,936
|
|
|
$
|
3,396
|
|
|
$
|
3,896
|
|
|
$
|
12,679
|
|
Net
income
|
|
$
|
1,123
|
|
|
$
|
1,514
|
|
|
$
|
1,919
|
|
|
$
|
2,546
|
|
|
$
|
7,102
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
(1)
|
|
$
|
0.12
|
|
|
$
|
0.16
|
|
|
$
|
0.21
|
|
|
$
|
0.27
|
|
|
$
|
0.76
|
|
Diluted
(1)
|
|
$
|
0.12
|
|
|
$
|
0.16
|
|
|
$
|
0.20
|
|
|
$
|
0.26
|
|
|
$
|
0.74
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
68,213
|
|
|
$
|
67,278
|
|
|
$
|
63,161
|
|
|
$
|
60,335
|
|
|
$
|
258,987
|
|
Cost
of contract revenue and product sales
|
|
$
|
58,243
|
|
|
$
|
59,609
|
|
|
$
|
54,973
|
|
|
$
|
51,046
|
|
|
$
|
223,871
|
|
Gross
profit
|
|
$
|
9,970
|
|
|
$
|
7,669
|
|
|
$
|
8,188
|
|
|
$
|
9,289
|
|
|
$
|
35,116
|
|
Operating
income
|
|
$
|
2,635
|
|
|
$
|
930
|
|
|
$
|
1,927
|
|
|
$
|
2,679
|
|
|
$
|
8,171
|
|
Income
before cumulative effect of accounting change
|
|
$
|
1,390
|
|
|
$
|
176
|
|
|
$
|
921
|
|
|
$
|
1,501
|
|
|
$
|
3,988
|
|
Net
income
|
|
$
|
1,474
|
|
|
$
|
176
|
|
|
$
|
921
|
|
|
$
|
1,501
|
|
|
$
|
4,072
|
|
Earnings
per share on income before cumulative effect of accounting
change:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
(1)
|
|
$
|
0.15
|
|
|
$
|
0.02
|
|
|
$
|
0.10
|
|
|
$
|
0.16
|
|
|
$
|
0.44
|
|
Diluted
(1)
|
|
$
|
0.15
|
|
|
$
|
0.02
|
|
|
$
|
0.10
|
|
|
$
|
0.16
|
|
|
$
|
0.42
|
|
Earnings
per share on net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
(1)
|
|
$
|
0.16
|
|
|
$
|
0.02
|
|
|
$
|
0.10
|
|
|
$
|
0.16
|
|
|
$
|
0.45
|
|
Diluted
(1)
|
|
$
|
0.16
|
|
|
$
|
0.02
|
|
|
$
|
0.10
|
|
|
$
|
0.16
|
|
|
$
|
0.43
|
|
(1)
|
Basic
and diluted earnings per common share is computed independently for each
of the quarters presented; accordingly, the sum of the quarterly earnings
per common share may not equal the total computed for the
year.
|