UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark
One)
R
|
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF
1934
|
|
|
|
FOR
THE QUARTERLY PERIOD ENDED MARCH 31, 2008
|
|
|
|
OR
|
|
|
£
|
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF
1934
|
|
|
|
FOR
THE TRANSITION PERIOD
FROM
TO
|
Commission
file number 000-02479
DYNAMICS
RESEARCH CORPORATION
(Exact
name of registrant as specified in its charter)
MASSACHUSETTS
|
04-2211809
|
(State
or other jurisdiction of Incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
60
FRONTAGE ROAD, ANDOVER, MASSACHUSETTS 01810-5498
(Address
of principal executive offices) (Zip Code)
978-289-1500
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes
R
No
£
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
|
Large
accelerated filer
|
£
|
Accelerated
filer
R
|
|
|
Non-accelerated
filer
|
£
(Do not
check if a smaller reporting company)
|
Smaller
reporting company
£
|
|
Indicate
by check mark whether the registrant is a shell Company (as defined in Rule
12b-2 of the Exchange Act). Yes
£
No
R
As of
April 30, 2008, there were 9,556,363 shares of the registrant’s common stock
outstanding.
FORM
10-Q
For
the Quarterly Period Ended March 31, 2008
Table
of Contents
|
|
|
Page
|
Part
I. Financial Information
|
|
|
Item
1.
|
Financial
Statements
|
|
|
|
|
3
|
|
|
|
4
|
|
|
|
5
|
|
|
|
6
|
|
|
|
7
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|
Item
2.
|
|
16
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Item
3.
|
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22
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Item
4.
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|
23
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Part
II. Other Information
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|
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Item
1.
|
|
23
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|
Item
1A.
|
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23
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Item
2.
|
|
24
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|
Item
6.
|
|
24
|
FORWARD-LOOKING
STATEMENTS
Some of
the statements under “Management’s Discussion and Analysis of Financial
Condition and Results of Operations”, and elsewhere in this Quarterly Report on
Form 10-Q (“Form 10-Q”), contain “forward-looking statements” within the meaning
of the Private Securities Litigation Reform Act of 1995, regarding future events
and the future results of Dynamics Research Corporation (“DRC”) that are based
on current expectations, estimates, forecasts, and projections about the
industries in which DRC operates and the beliefs and assumptions of the
management of DRC. Words such as “anticipates”, “believes”,
“estimates”, “expects”, “intends”, “plans”, “projects”, “may”, “will”, “should”,
and other similar expressions are intended to identify these forward-looking
statements. These forward-looking statements are predictions of
future events or trends and are not statements of historical
matters. These statements are based on current expectations and
beliefs of DRC and involve a number of risks, uncertainties, and assumptions
that are difficult to predict. Therefore, actual results may differ
materially and adversely from those expressed in any forward-looking
statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date of this
document or in the case of the statements incorporated by reference, the date of
those statements. Factors that might cause or contribute to any
differences include, but are not limited to, those discussed in DRC’s Annual
Report on Form 10-K for the year ended December 31, 2007 under the section
entitled “Risk Factors”. Except to the extent required by applicable
law or regulation, DRC undertakes no obligation to revise or update publicly any
forward-looking statements for any reason.
PART I. FINANCIAL
INFORMATION
Item
1. Financial Statements
CONDENSED
CONSOLIDATED BALANCE SHEETS (unaudited)
(dollars
in thousands, except share data)
|
|
March
31,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
Assets
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1,061
|
|
|
$
|
2,006
|
|
Contract
receivables, net
|
|
|
61,911
|
|
|
|
63,570
|
|
Prepaid
expenses and other current assets
|
|
|
3,373
|
|
|
|
2,508
|
|
Total
current assets
|
|
|
66,345
|
|
|
|
68,084
|
|
Noncurrent
assets
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
9,884
|
|
|
|
10,182
|
|
Goodwill
|
|
|
63,055
|
|
|
|
63,055
|
|
Intangible
assets, net
|
|
|
2,560
|
|
|
|
3,069
|
|
Deferred
tax asset
|
|
|
1,484
|
|
|
|
1,484
|
|
Other
noncurrent assets
|
|
|
3,918
|
|
|
|
4,079
|
|
Total
noncurrent assets
|
|
|
80,901
|
|
|
|
81,869
|
|
Total
assets
|
|
$
|
147,246
|
|
|
$
|
149,953
|
|
Liabilities
and stockholders' equity
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
11,119
|
|
|
$
|
12,163
|
|
Accrued
compensation and employee benefits
|
|
|
11,943
|
|
|
|
13,409
|
|
Deferred
taxes
|
|
|
5,994
|
|
|
|
8,486
|
|
Other
accrued expenses
|
|
|
13,349
|
|
|
|
3,078
|
|
Total
current liabilities
|
|
|
42,405
|
|
|
|
37,136
|
|
Long-term
liabilities
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
5,000
|
|
|
|
7,737
|
|
Other
long-term liabilities
|
|
|
8,172
|
|
|
|
8,576
|
|
Total
long-term liabilities
|
|
|
13,172
|
|
|
|
16,313
|
|
Total
liabilities
|
|
|
55,577
|
|
|
|
53,449
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.10 par value; 5,000,000 shares authorized; no shares issued and
outstanding
|
|
|
-
|
|
|
|
-
|
|
Common
stock, $0.10 par value; 30,000,000 shares authorized; 9,558,433 and
9,509,849 shares issued and outstanding at March 31, 2008 and December 31,
2007, respectively
|
|
|
956
|
|
|
|
951
|
|
Capital
in excess of par value
|
|
|
50,775
|
|
|
|
50,251
|
|
Accumulated
other comprehensive loss
|
|
|
(6,853
|
)
|
|
|
(6,745
|
)
|
Retained
earnings
|
|
|
46,791
|
|
|
|
52,047
|
|
Total
stockholders' equity
|
|
|
91,669
|
|
|
|
96,504
|
|
Total
liabilities and stockholders' equity
|
|
$
|
147,246
|
|
|
$
|
149,953
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(dollars
in thousands, except share data)
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
|
2008
|
|
|
2007
|
|
Contract
revenue
|
|
$
|
54,773
|
|
|
$
|
55,912
|
|
Product
sales
|
|
|
1,705
|
|
|
|
868
|
|
Total
revenue
|
|
|
56,478
|
|
|
|
56,780
|
|
|
|
|
|
|
|
|
|
|
Cost
of contract revenue
|
|
|
46,212
|
|
|
|
46,933
|
|
Cost
of product sales
|
|
|
1,605
|
|
|
|
1,148
|
|
Total
cost of revenue
|
|
|
47,817
|
|
|
|
48,081
|
|
|
|
|
|
|
|
|
|
|
Gross
profit on contract revenue
|
|
|
8,561
|
|
|
|
8,979
|
|
Gross
profit (loss) on product sales
|
|
|
100
|
|
|
|
(280
|
)
|
Total
gross profit
|
|
|
8,661
|
|
|
|
8,699
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
5,401
|
|
|
|
5,598
|
|
Provision
for litigation
|
|
|
8,819
|
|
|
|
181
|
|
Amortization
of intangible assets
|
|
|
509
|
|
|
|
650
|
|
Operating
income (loss)
|
|
|
(6,068
|
)
|
|
|
2,270
|
|
Interest
expense, net
|
|
|
(139
|
)
|
|
|
(456
|
)
|
Other
income (expense), net
|
|
|
(71
|
)
|
|
|
133
|
|
Income
(loss) before provision (benefit) for income taxes
|
|
|
(6,278
|
)
|
|
|
1,947
|
|
Provision
(benefit) for income taxes
|
|
|
(1,022
|
)
|
|
|
824
|
|
Net
income (loss)
|
|
$
|
(5,256
|
)
|
|
$
|
1,123
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per common share
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.56
|
)
|
|
$
|
0.12
|
|
Diluted
|
|
$
|
(0.56
|
)
|
|
$
|
0.12
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
|
|
|
|
|
|
Basic
|
|
|
9,436,054
|
|
|
|
9,256,566
|
|
Diluted
|
|
|
9,436,054
|
|
|
|
9,507,446
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
CONDENSED
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AND COMPREHENSIVE
INCOME (LOSS)
FOR
THE THREE MONTHS ENDED MARCH 31, 2008 AND 2007 (unaudited)
(in
thousands)
|
|
|
|
|
|
|
|
Capital
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in
Excess
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
of
Par
|
|
|
Comprehensive
|
|
|
Retained
|
|
|
|
|
|
|
Shares
|
|
|
Par
value
|
|
|
Value
|
|
|
Loss
|
|
|
Earnings
|
|
|
Total
|
|
Balance
at December 31, 2007
|
|
|
9,510
|
|
|
$
|
951
|
|
|
$
|
50,251
|
|
|
$
|
(6,745
|
)
|
|
$
|
52,047
|
|
|
$
|
96,504
|
|
Comprehensive
loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,256
|
)
|
|
|
(5,256
|
)
|
Other
comprehensive loss, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification
adjustment for gain on sale of investment realized in net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(108
|
)
|
|
|
-
|
|
|
|
(108
|
)
|
Comprehensive
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,364
|
)
|
Issuance
of common stock through stock option exercises and employee stock purchase
plan transactions
|
|
|
28
|
|
|
|
3
|
|
|
|
231
|
|
|
|
-
|
|
|
|
-
|
|
|
|
234
|
|
Issuance
of restricted stock
|
|
|
34
|
|
|
|
3
|
|
|
|
(3
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeiture
of restricted stock
|
|
|
(2
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Release
of restricted stock
|
|
|
(12
|
)
|
|
|
(1
|
)
|
|
|
(118
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(119
|
)
|
Share-based
compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
402
|
|
|
|
-
|
|
|
|
-
|
|
|
|
402
|
|
Tax
benefit from stock options exercised and employee stock purchase plan
transactions
|
|
|
-
|
|
|
|
-
|
|
|
|
12
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12
|
|
Balance
at March 31, 2008
|
|
|
9,558
|
|
|
$
|
956
|
|
|
$
|
50,775
|
|
|
$
|
(6,853
|
)
|
|
$
|
46,791
|
|
|
$
|
91,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in
Excess
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
of
Par
|
|
|
Comprehensive
|
|
|
Retained
|
|
|
|
|
|
|
|
Shares
|
|
|
Par
value
|
|
|
Value
|
|
|
Loss
|
|
|
Earnings
|
|
|
Total
|
|
Balance
at December 31, 2006
|
|
|
9,315
|
|
|
$
|
931
|
|
|
$
|
47,644
|
|
|
$
|
(9,206
|
)
|
|
$
|
44,945
|
|
|
$
|
84,314
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,123
|
|
|
|
1,123
|
|
Comprehensive
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,123
|
|
Issuance
of common stock through stock option exercises and employee stock purchase
plan transactions
|
|
|
52
|
|
|
|
6
|
|
|
|
417
|
|
|
|
-
|
|
|
|
-
|
|
|
|
423
|
|
Issuance
of restricted stock
|
|
|
32
|
|
|
|
3
|
|
|
|
(3
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeiture
of restricted stock
|
|
|
(4
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Release
of restricted stock
|
|
|
(17
|
)
|
|
|
(2
|
)
|
|
|
(173
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(175
|
)
|
Share-based
compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
396
|
|
|
|
-
|
|
|
|
-
|
|
|
|
396
|
|
Tax
benefit from stock options exercised and employee stock purchase plan
transactions
|
|
|
-
|
|
|
|
-
|
|
|
|
29
|
|
|
|
-
|
|
|
|
-
|
|
|
|
29
|
|
Balance
at March 31, 2007
|
|
|
9,378
|
|
|
$
|
938
|
|
|
$
|
48,310
|
|
|
$
|
(9,206
|
)
|
|
$
|
46,068
|
|
|
$
|
86,110
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(dollars
in thousands)
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
|
2008
|
|
|
2007
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(5,256
|
)
|
|
$
|
1,123
|
|
Adjustments
to reconcile net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
700
|
|
|
|
825
|
|
Amortization
of intangible assets
|
|
|
509
|
|
|
|
650
|
|
Share-based
compensation
|
|
|
402
|
|
|
|
396
|
|
Investment
income from equity interest
|
|
|
54
|
|
|
|
(81
|
)
|
Tax
benefit from stock options exercised and employee stock purchase plan
transactions
|
|
|
(12
|
)
|
|
|
(29
|
)
|
Provision
for litigation
|
|
|
8,819
|
|
|
|
181
|
|
Deferred
income taxes
|
|
|
(2,421
|
)
|
|
|
(861
|
)
|
Other
|
|
|
(245
|
)
|
|
|
(132
|
)
|
Change
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Contract
receivables, net
|
|
|
1,659
|
|
|
|
(12,609
|
)
|
Prepaid
expenses and other current assets
|
|
|
(1,220
|
)
|
|
|
(701
|
)
|
Accounts
payable
|
|
|
(1,044
|
)
|
|
|
(3,388
|
)
|
Accrued
compensation and employee benefits
|
|
|
(1,466
|
)
|
|
|
543
|
|
Other
accrued expenses
|
|
|
1,380
|
|
|
|
(799
|
)
|
Other
long-term liabilities
|
|
|
(235
|
)
|
|
|
(2,433
|
)
|
Net
cash provided by (used in) operating activities
|
|
|
1,624
|
|
|
|
(17,315
|
)
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Additions
to property, plant and equipment
|
|
|
(402
|
)
|
|
|
(509
|
)
|
Proceeds
from sale of investments and long-lived assets
|
|
|
273
|
|
|
|
-
|
|
Dividends
from equity investment
|
|
|
277
|
|
|
|
-
|
|
Payments
related to the sale of building
|
|
|
(35
|
)
|
|
|
-
|
|
Increase
in other assets
|
|
|
(191
|
)
|
|
|
(26
|
)
|
Net
cash used in investing activities
|
|
|
(78
|
)
|
|
|
(535
|
)
|
Cash
flow from financing activities:
|
|
|
|
|
|
|
|
|
Borrowings
under revolving credit agreement
|
|
|
20,497
|
|
|
|
65,770
|
|
Repayments
under revolving credit agreement
|
|
|
(23,234
|
)
|
|
|
(55,870
|
)
|
Proceeds
from the exercise of stock options and employee stock purchase plan
transactions
|
|
|
234
|
|
|
|
423
|
|
Tax
benefit from stock options exercised and employee stock purchase plan
transactions
|
|
|
12
|
|
|
|
29
|
|
Net
cash provided by (used in) financing activities
|
|
|
(2,491
|
)
|
|
|
10,352
|
|
Net
decrease in cash and cash equivalents
|
|
|
(945
|
)
|
|
|
(7,498
|
)
|
Cash
and cash equivalents, beginning of period
|
|
|
2,006
|
|
|
|
7,887
|
|
Cash
and cash equivalents, end of period
|
|
$
|
1,061
|
|
|
$
|
389
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollars
in thousands, except per share amounts)
The
unaudited condensed consolidated financial statements of Dynamics Research
Corporation (the “Company”) and its subsidiaries included herein have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The year-end condensed balance sheet data
was derived from audited financial statements, but does not include all
disclosures required by accounting principles generally accepted in the United
States of America.
In the
opinion of management, all material adjustments that are of a normal and
recurring nature necessary for a fair presentation of the results for the
periods presented have been reflected. All material intercompany transactions
and balances have been eliminated in consolidation. The results for the three
months ended March 31, 2008 may not be indicative of the results that may be
expected for the year ending December 31, 2008. The accompanying financial
information should be read in conjunction with the consolidated financial
statements and notes contained in the Company’s Form 10-K, filed with the United
States Securities and Exchange Commission (“SEC”) for the year ended December
31, 2007. The Company has reclassified certain prior period amounts
to conform with the current period presentation.
NOTE 2. RECENT ACCOUNTING
PRONOUNCEMENTS
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 157,
Fair Value Measurements
(“SFAS 157”), which defines fair value, establishes a framework for measuring
fair value and expands disclosure requirements about fair value
measurements. SFAS 157 was effective January 1, 2008, except for
non-financial assets and liabilities measured at fair value on a non-recurring
basis for which it will be effective January 1, 2009. The impact of the adoption
of SFAS 157 was not material to the Company’s condensed consolidated financial
statements and the adoption of the items deferred until fiscal 2009 is not
expected to be material.
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. The Company adopted
SFAS 159 as of January 1, 2008 and elected not to adopt 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 non-controlling interest in an acquired entity. 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.
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollars
in thousands, except share amounts)
NOTE 3. SUPPLEMENTAL BALANCE SHEET
INFORMATION
The
composition of selected balance sheet accounts is as follows:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
Contract
receivables, net
|
|
|
|
|
|
|
Billed
receivables
|
|
$
|
29,059
|
|
|
$
|
31,884
|
|
Unbilled
receivables
(1)
:
|
|
|
|
|
|
|
|
|
Revenues
recorded in excess of milestone billings on fixed price contract with
State of Ohio
|
|
|
10,961
|
|
|
|
7,572
|
|
Retainages
and fee withholdings
|
|
|
1,106
|
|
|
|
1,529
|
|
Other
unbilled receivables
|
|
|
21,695
|
|
|
|
23,488
|
|
Total
unbilled receivables
|
|
|
33,762
|
|
|
|
32,589
|
|
Allowance
for doubtful accounts
|
|
|
(910
|
)
|
|
|
(903
|
)
|
Contract
receivables, net
|
|
$
|
61,911
|
|
|
$
|
63,570
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net:
|
|
|
|
|
|
|
|
|
Production
equipment
|
|
$
|
11,919
|
|
|
$
|
11,917
|
|
Software
|
|
|
11,083
|
|
|
|
11,052
|
|
Furniture
and other equipment
|
|
|
7,154
|
|
|
|
6,862
|
|
Leasehold
improvements
|
|
|
2,452
|
|
|
|
2,375
|
|
Property
and equipment
|
|
|
32,608
|
|
|
|
32,206
|
|
Less
accumulated depreciation
|
|
|
(22,724
|
)
|
|
|
(22,024
|
)
|
Property
and equipment, net
|
|
$
|
9,884
|
|
|
$
|
10,182
|
|
|
|
|
|
|
|
|
|
|
Other
noncurrent assets:
|
|
|
|
|
|
|
|
|
Deferred
compensation plan investments
|
|
$
|
1,581
|
|
|
$
|
1,747
|
|
Prepaid
pension asset
|
|
|
1,018
|
|
|
|
718
|
|
Equity
investments
|
|
|
788
|
|
|
|
1,119
|
|
Other
|
|
|
531
|
|
|
|
495
|
|
Other
noncurrent assets
|
|
$
|
3,918
|
|
|
$
|
4,079
|
|
|
|
|
|
|
|
|
|
|
Accrued
compensation and employee benefits:
|
|
|
|
|
|
|
|
|
Accrued
payroll and payroll taxes
|
|
$
|
5,637
|
|
|
$
|
6,967
|
|
Accrued
vacation
|
|
|
4,702
|
|
|
|
4,273
|
|
Other
|
|
|
1,604
|
|
|
|
2,169
|
|
Accrued
compensation and employee benefits
|
|
$
|
11,943
|
|
|
$
|
13,409
|
|
|
|
|
|
|
|
|
|
|
Other
accrued expenses:
|
|
|
|
|
|
|
|
|
Accrued
litigation liability
|
|
$
|
9,000
|
|
|
$
|
181
|
|
Accrued
income taxes
|
|
|
1,649
|
|
|
|
585
|
|
Deferred
gain on sale of building
|
|
|
676
|
|
|
|
676
|
|
Other
|
|
|
2,024
|
|
|
|
1,636
|
|
Other
accrued expenses
|
|
$
|
13,349
|
|
|
$
|
3,078
|
|
|
|
|
|
|
|
|
|
|
Other
long-term liabilities:
|
|
|
|
|
|
|
|
|
Deferred
gain on sale of building, net
|
|
$
|
4,564
|
|
|
$
|
4,733
|
|
Deferred
compensation plan liability
|
|
|
1,581
|
|
|
|
1,747
|
|
Other
|
|
|
2,027
|
|
|
|
2,096
|
|
Other
long-term liabilities
|
|
$
|
8,172
|
|
|
$
|
8,576
|
|
(1)
|
Contract
receivables are classified as current assets in accordance with industry
practice. At March 31, 2008 and December 31, 2007, $508 and
$553, respectively, of unbilled retainages and fee withholdings are not
anticipated to be billed within twelve
months.
|
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollars
in thousands, except share amounts)
NOTE 4. GOODWILL AND INTANGIBLE
ASSETS
The
Company’s identifiable intangible assets consisted of only customer
relationships as of March 31, 2008 and December 31, 2007. The cost of
customer relationships for both periods was $12,800, offset by accumulated
amortization of $10,240 and $9,731 as of March 31, 2008 and December 31, 2007,
respectively. The Company recorded amortization expense for its
identifiable intangible assets of $509 and $650 for the three months ended March
31, 2008 and March 31, 2007, respectively.
Amortization
expense on the Company’s identifiable intangible assets for their remaining
useful lives is as follows:
Remainder
of 2008
|
|
$
|
1,529
|
|
2009
|
|
$
|
1,031
|
|
There
were no changes in the carrying amount of goodwill for the three months ended
March 31, 2008. The carrying amount of goodwill of $63,055 at March 31, 2008 and
December 31, 2007 was included in the Systems and Services segment.
NOTE
5. INCOME TAXES
For the
three months ended March 31, 2008, the effective income tax rate was
16.3%. Excluding the $8,819 litigation provision, the effective rate
was 43.4%. The Company has estimated the tax benefits associated with the
litigation provision at $2,124. However, there is no assurance that
this benefit will be realized and therefore income tax expense may be adjusted
in a future period. The effective income tax rate for the comparable
prior year period was 42.3%, or 42.1% excluding the $181 litigation provision
recorded in the three months ended March 31, 2007. The increase in
the effective rate excluding the litigation provision was due to SFAS 123(R)
pool of excess tax deficiencies in the current period partially offset by a
favorable blended state tax rate. The pool of excess tax benefits has
been depleted and as a result any future SFAS 123(R) tax deficiencies will be
recorded directly to earnings. The effective tax rate for the year ended
December 31, 2007 was 39.7%, reflecting adjustments to tax accruals and reserves
plus favorable effects of tax credits and state tax audits.
As of
March 31, 2008 the Company had $531 of unrecognized tax benefits, of which $167
would affect its effective tax rate if recognized. Accrued penalties and
interest were $126 at March 31, 2008.
The
Internal Revenue Service (“IRS”) is currently examining 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 exam 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. Tax returns for all years after 2003 are subject
to future examination by federal, state and local tax authorities.
NOTE 6. FINANCING
ARRANGEMENTS
The
Company’s outstanding debt at March 31, 2008 and December 31, 2007 was $5,000
and $7,737, respectively, which consisted of net borrowings against the
Company’s $50 million revolving credit facility (the “Revolver”). The
interest rate on the outstanding balance at March 31, 2008 was 5.25% based on a
base rate option that was in effect on March 31, 2008. 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. Borrowings under the Revolver have been classified as a
long-term liability. The repayment of borrowings under the Revolver
is contractually due on September 29, 2009; however, the Company may repay
at
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollars
in thousands, except share amounts)
any time
prior to that date. At March 31, 2008, the remaining available
balance to borrow against the Revolver was $45,000.
On May
12, 2008, the Company amended the credit facility to exclude the provision for
litigation recorded in the first quarter of 2008 from the net profit covenant
test for the remainder of 2008. The amended credit facility also
provided a one-time waiver for non-compliance with the net profit covenant test
for the period ended March 31, 2008.
NOTE 7. DEFINED BENEFIT PENSION
PLAN
The
components of net periodic benefit income for the Company’s defined benefit
pension plan are as follows:
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
|
2008
|
|
|
2007
|
|
Interest
cost on projected benefit obligation
|
|
$
|
959
|
|
|
$
|
1,006
|
|
Expected
return on plan assets
|
|
|
(1,396
|
)
|
|
|
(1,464
|
)
|
Recognized
actuarial loss
|
|
|
137
|
|
|
|
270
|
|
Net
periodic pension income
|
|
$
|
(300
|
)
|
|
$
|
(188
|
)
|
The
Company will adopt the measurement date provisions of SFAS 158,
Employers’
Accounting for Defined Benefit
Pension and Other Postretirement Plans – an amendment of FASB Statements
No. 87, 88, 106, and 132(R),
on December 31, 2008, using the
alternative transition method. In lieu of re-measuring plan assets at the
beginning of 2008, the alternative transition method allows the use of the
November 30, 2007 measurement date with net periodic benefit income for the
period from December 1, 2007 to December 31, 2008 allocated
proportionately between an adjustment of retained earnings (for the period from
December 1, 2007 to December 31, 2007) and net periodic benefit income
for 2008 (for the period from January 1, 2008 to December 31, 2008).
The impact of using the alternative transition method is expected to result in a
positive adjustment of approximately $100 to retained earnings and net periodic
benefit income is anticipated to be approximately $1,200 for fiscal year
2008.
NOTE 8. SHARE-BASED
COMPENSATION
Share-Based
Compensation Costs
Total
share-based compensation recorded in the Condensed Consolidated Statements of
Operations was as follows:
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
|
2008
|
|
|
2007
|
|
Cost
of products and services
|
|
$
|
163
|
|
|
$
|
126
|
|
Selling,
general and administrative
|
|
|
239
|
|
|
|
270
|
|
Total
share-based compensation expense
|
|
$
|
402
|
|
|
$
|
396
|
|
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollars
in thousands, except share amounts)
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, 2007
|
|
|
1,012,078
|
|
|
$
|
8.34
|
|
|
|
3.0
|
|
|
$
|
3,030
|
|
Granted
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(14,900
|
)
|
|
$
|
7.60
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(6,600
|
)
|
|
$
|
16.19
|
|
|
|
|
|
|
|
|
|
Outstanding
at March 31, 2008
|
|
|
990,578
|
|
|
$
|
8.30
|
|
|
|
2.8
|
|
|
$
|
2,328
|
|
Exercisable
at March 31, 2008
|
|
|
495,578
|
|
|
$
|
7.66
|
|
|
|
2.4
|
|
|
$
|
1,749
|
|
No stock
options were granted during the three months ended March 31, 2008 and
2007. Cash proceeds received, the intrinsic value and the total tax
benefits realized resulting from stock option exercises were as
follows:
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
|
2008
|
|
|
2007
|
|
Amounts
realized or received from stock option exercises:
|
|
|
|
|
|
|
Cash
proceeds received
|
|
$
|
113
|
|
|
$
|
261
|
|
Intrinsic
value realized
|
|
$
|
34
|
|
|
$
|
71
|
|
Income
tax benefit realized
|
|
$
|
11
|
|
|
$
|
27
|
|
The total
income tax benefit realized from exercised stock options and Employee Stock
Purchase Plan transactions for the three months ended March 31, 2008 and 2007
was $12, and $29, respectively. These amounts were reported as a
financing cash inflow with a corresponding operating cash outflow in the
accompanying Condensed Consolidated Statement of Cash Flows. 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 March 31, 2008, the total unrecognized compensation
cost related to stock options was $104, which is expected to be recognized
during the three months ended June 30, 2008.
Restricted
Stock Award Activity
The
following table summarizes restricted stock activity under the Company’s 2000
Incentive Plan:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Number
of
|
|
|
Grant-Date
|
|
|
|
Shares
|
|
|
Fair
Value
|
|
Nonvested
at December 31, 2007
|
|
|
223,330
|
|
|
$
|
11.43
|
|
Granted
|
|
|
34,000
|
|
|
$
|
10.00
|
|
Vested
|
|
|
(34,803
|
)
|
|
$
|
13.58
|
|
Cancelled
|
|
|
(1,800
|
)
|
|
$
|
11.86
|
|
Nonvested
at March 31, 2008
|
|
|
220,727
|
|
|
$
|
10.87
|
|
The total
fair value of restricted shares vested during the three months ended March 31,
2008 and 2007 was $473 and $731, respectively. As of March 31, 2008, the total
unrecognized compensation cost related to restricted stock awards was $1,381,
which is expected to be amortized over a weighted-average period of
approximately two years.
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollars
in thousands, except share amounts)
NOTE 9. STOCKHOLDERS’
EQUITY
Earnings
(Loss) Per Share
For the
three months ended March 31, 2008 and March 31, 2007, basic earnings (loss) per
share are computed by dividing net income (loss) by the weighted average number
of shares of common stock outstanding during the period. Unexercised stock
options and unvested restricted shares are excluded from this calculation but
are included in the diluted earnings per share calculation using the treasury
stock method so long as their effect is not anti-dilutive.
For the
three months ended March 31, 2007, diluted earnings per share are determined by
using the weighted average number of common and dilutive common equivalent
shares outstanding during the period. For the three months ended
March 31, 2008, the diluted effect of stock options and restricted stock grants
of approximately 292,000 shares were not included in the computation of diluted
loss per share as the net loss would have made their effect
anti-dilutive.
Due to
the anti-dilutive effect, approximately 89,000 options to purchase common stock
were excluded from the calculation of diluted earnings per share for the three
months ended March 31, 2007.
The
following table illustrates the reconciliation of the weighted average shares
outstanding:
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
|
2008
|
|
|
2007
|
|
Weighted
average shares outstanding - Basic
|
|
|
9,436,054
|
|
|
|
9,256,566
|
|
Dilutive
effect of stock options and restricted stock grants
|
|
|
-
|
|
|
|
250,880
|
|
Weighted
average shares outstanding - Diluted
|
|
|
9,436,054
|
|
|
|
9,507,446
|
|
NOTE 10. BUSINESS SEGMENT, MAJOR
CUSTOMERS AND RELATED PARTY INFORMATION
Business
Segment
Results
of operations information for the Company’s two reportable business segments are
as follows:
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
|
2008
|
|
|
2007
|
|
Revenues
from external customers
|
|
|
|
|
|
|
Systems
and Services
|
|
$
|
54,773
|
|
|
$
|
55,912
|
|
Metrigraphics
|
|
|
1,705
|
|
|
|
868
|
|
|
|
$
|
56,478
|
|
|
$
|
56,780
|
|
Gross
profit (loss)
|
|
|
|
|
|
|
|
|
Systems
and Services
|
|
$
|
8,561
|
|
|
$
|
8,979
|
|
Metrigraphics
|
|
|
100
|
|
|
|
(280
|
)
|
|
|
$
|
8,661
|
|
|
$
|
8,699
|
|
Operating
income (loss)
|
|
|
|
|
|
|
|
|
Systems
and Services
|
|
$
|
(5,841
|
)
|
|
$
|
2,798
|
|
Metrigraphics
|
|
|
(227
|
)
|
|
|
(528
|
)
|
|
|
$
|
(6,068
|
)
|
|
$
|
2,270
|
|
Sales
between segments represent less than 1% of total revenue and are accounted for
at cost.
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollars
in thousands, except share amounts)
Major
Customers
Revenues
from Department of Defense (“DoD”) customers accounted for approximately 73% and
79% of total revenues in the three months ended March 31, 2008 and 2007,
respectively. Revenues earned from the U.S. Air Force Aeronautical
Systems Center (“ASC”), a significant DoD customer, were as
follows:
|
|
Three
Months Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Revenue
|
|
|
%
|
|
|
Revenue
|
|
|
%
|
|
Air
Force Aeronautical Systems Center
|
|
$
|
4,543
|
|
|
|
8
|
%
|
|
$
|
7,567
|
|
|
|
13
|
%
|
The
outstanding contract receivables balance of this customer was as
follows:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
Air
Force Aeronautical Systems Center
|
|
$
|
3,843
|
|
|
$
|
5,261
|
|
The
Company had no other customer in the three months ended March 31, 2008 and March
31, 2007 that accounted for more than 10% of revenues.
Related
Party
Through
its wholly owned subsidiary, H.J. Ford Associates, Inc. (“HJ Ford”), the Company
has a 40% interest in
HMR
Tech,
LLC (“
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 the three months ended March 31, 2008 and 2007
were $31, and $98, respectively. The amounts due from
HMR
Tech
included in contract receivables at March 31, 2008 and December 31, 2007 were
$18 and $52, respectively.
In
September 2007, the Company sold its 40% interest in the Joint Venture back to
the Joint Venture. The Joint Venture, which had been formed under the
SBA Mentor-Protégé program, was accounted for using the equity method of
accounting. The Company continues to be a subcontractor to the Joint
Venture on existing Consolidated Acquisition and Professional Services (“CAPS”)
contract task orders until such task orders are completed. Revenues recognized
by the Company as a subcontractor to the Joint Venture for the three months
ended March 31, 2008 and 2007 were $2,604 and $4,921, respectively.
Through
September 2007, the Company provided the Joint Venture with various
administrative services under the terms of a Services
Agreement. Charges by the Company for these administrative services
to the Joint Venture for the three months ended March 31, 2007 were
$354. 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 $133 in the three
months ended March 31, 2008.
The table
below presents the various amounts included in the accompanying balance sheets
related to the above mentioned transactions with the Joint Venture:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
Contract
receivables, net
|
|
$
|
2,483
|
|
|
$
|
4,486
|
|
Other
receivables, net
|
|
$
|
-
|
|
|
$
|
314
|
|
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollars
in thousands, except share amounts)
NOTE 11. COMMITMENTS AND
CONTINGENCIES
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 those expenditures can be reasonably
estimated. Except as noted below, the Company 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 federal government 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. These claims,
which cannot lead to multiple awards, are based on the False Claims Act, the
Anti-Kickback Act, and 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 and
equitable claims as well as for recovery of costs, and interest on the breach of
contract damages. The maximum possible awardable amount of damages,
based on the governments claims, is estimated to be $26 million. On
February 14, 2007, the U.S. Attorney filed a motion for summary judgment as to
liability and as to damages in this matter. On March 31, 2008, the Court issued
a Memorandum on Summary Judgment Motion granting summary judgment in favor of
the Government on the breach of contract, False Claims Act and Anti-Kickback Act
claims but, due to substantial disputed facts, denied summary judgment on
damages. The Court has scheduled a status conference on June 10,
2008. Regarding the alleged actual damages, the Company
believes that it has substantive defenses and intends to vigorously defend
itself. Upon completion of the proceedings in District Court, the
Company would consider appealing the District Court’s decision granting summary
judgment to the Government depending on the outcome of the District Court
proceedings. Nevertheless, the Company believes the Memorandum of March 31, 2008
substantially narrows the range of likely outcomes. Accordingly, at
March 31, 2008, the Company has recognized an estimated liability for all claims
related to this matter in the amount of $9 million, reduced by $2.2 million for
estimated tax benefits, for an after-tax effect of $6.8 million. Of
this amount, $181 was provided for in previous periods. This amount
represents the Company’s best estimate of liability. However, as the
matter is ongoing, the ultimate outcome remains uncertain. Due to
these uncertainites actual results may eventually differ materially from the $9
million for which the Company has provided, and the range of reasonably possible
loss cannot be estimated. As a result, there can be no
assurance that that there will not be additional provisions required, which
could 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 was
informed 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.
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollars
in thousands, except share amounts)
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. 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. In the
arbitration, the Company has filed a Motion to Dismiss and/or for Summary
Disposition, asserting that the Company is entitled to use the “window of
correction” provided by the Fair Labor Standards Act’s regulations and that the
arbitration should be dismissed without further action in the
arbitration. The motion is pending before the
arbitrator.
The
following discussion should be read in conjunction with our condensed
consolidated financial statements and the related notes. Unless the
context otherwise requires, references in this Form 10-Q to “DRC”, “we”, “us” or
“our” refer to Dynamics Research Corporation and its
subsidiaries.
The
following discussion also contains non-GAAP financial measures. In evaluating
our operating performance, management uses certain non-GAAP financial measures
to supplement the consolidated financial statements prepared under generally
accepted accounting principles in the United States (“GAAP”).
More
specifically, we use the following non-GAAP financial measures: non-GAAP
operating profit, non-GAAP income before income taxes, non-GAAP provision for
income taxes, non-GAAP net income and non-GAAP earnings per
share.
Management
believes these non-GAAP measures help indicate our operating performance before
charges that are considered by management to be outside our ongoing operating
results. Accordingly, management uses these non-GAAP measures to gain a better
understanding of our comparative operating performance from period-to-period and
as a basis for planning and forecasting future periods. Management believes
these non-GAAP measures, when read in conjunction with our GAAP financials,
provide useful information to investors by offering:
|
•
|
|
the
ability to make more meaningful period-to-period comparisons of our
ongoing operating results;
|
|
|
|
|
|
•
|
|
the
ability to better identify trends in our underlying business and perform
related trend analysis;
|
|
|
|
|
|
•
|
|
a
higher degree of transparency for certain expenses (particularly when a
specific charge impacts multiple line items);
|
|
|
|
|
|
•
|
|
a
better understanding of how management plans and measures our underlying
business; and
|
|
|
|
|
|
•
|
|
an
easier way to compare our most recent results of operations against
investor and analyst financial
models.
|
The
non-GAAP measures we use exclude the provision for litigation charge and its
related tax effect that management believes is unusual and outside of our
ongoing operations for the period presented.
These
non-GAAP measures have limitations, however, because they do not include all
items of expense that impact our operations. Management compensates for these
limitations by also considering our GAAP results. The non-GAAP financial
measures we use are not prepared in accordance with, and should not be
considered an alternative to, measurements required by GAAP, such as operating
loss, net loss and loss per share, and should not be considered measures of our
liquidity. The presentation of this additional information is not meant to be
considered in isolation or as a substitute for the most directly comparable GAAP
measures. In addition, these non-GAAP financial measures may not be comparable
to similar measures reported by other companies.
OVERVIEW
Dynamics
Research Corporation, headquartered in Andover, Massachusetts, is a leading,
innovative provider of solutions and services to federal, state and local
governments. We provide support to our customers in the primary
mission areas of IT, Logistics and Readiness, Systems Integration and Technical
Services, C4ISR, Homeland Security, Health and Human Services, and
Intelligence/Space.
According
to INPUT, Inc. a leading research firm specializing in the market for government
contractors, federal market demand for vendor-furnished information systems and
services is estimated to increase at a compound annual growth rate of 5% over
the next 5 years. The President’s proposed budget for the United States for
fiscal 2008 reflects a 4% increase in expenditures for IT
services. We are cognizant of funding challenges facing the federal
government and the resulting increase in competitiveness in our
industry. Significant contract awards have been and will continue to
be delayed and new initiatives have been slow to start. There appears to
be recent improvement in contract award and funding decisions with the passage
of Federal budgets for fiscal year 2008 for
the DoD
and Department of Homeland Security (“DHS”). However, contract award and funding
decisions for the Federal civilian agencies have been delayed, as these
departments are currently operating under a continuing resolution for fiscal
year 2008. Customers are moving away from General Services Administration and
time and materials contracts toward agency sponsored Indefinite
Delivery/Indefinite Quantity contract vehicles and fixed price contracts and
task orders. The DoD seeks to reduce spending on contracted program
advisory and assistance services and often is setting this work aside for small
businesses. Concurrently, there is increasing demand from federal
customers for engineering, training, business transformation, lean six sigma and
business intelligence solutions and services. Many federal customers are
seeking to streamline their procurement activities by consolidating work under
large contract vehicles. Our competitive strategy is intended to align
with these trends.
The
operating loss for the three months ended March 31, 2008 was $6.1 million,
compared to operating income of $2.5 million for the same period in
2007. Excluding the provision for litigation, operating income for
the three months ended March 31, 2008 and 2007 was $2.8 million and $2.6
million, respectively, and the operating margin was 4.9% and 4.6% of total
revenue, respectively. The increase in operating margin in the first
quarter of 2008 compared with the same period in 2007, excluding the provision
for litigation, was primarily due to lower selling, general and administrative
costs and decreased amortization of intangible assets.
RECONCILIATION
OF NON-GAAP MEASURES
|
|
Three
Months Ended
|
|
|
|
|
March
31,
|
|
|
|
|
2008
|
|
|
|
2007
|
|
|
(in
millions)
|
|
|
$
(1)
|
|
|
%
(2)
|
|
|
|
$
(1)
|
|
|
%
(2)
|
|
|
GAAP
operating income (loss)
|
|
$
|
(6.1
|
)
|
|
(10.7
|
)%
|
|
|
$
|
2.5
|
|
|
4.3
|
%
|
|
Provision
for litigation
|
|
|
8.8
|
|
|
15.6
|
%
|
|
|
|
0.2
|
|
|
0.3
|
%
|
|
Non-GAAP
operating income
|
|
$
|
2.8
|
|
|
4.9
|
%
|
|
|
$
|
2.6
|
|
|
4.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP
income (loss) before provision for income taxes
|
|
$
|
(6.3
|
)
|
|
(11.1
|
)%
|
|
|
$
|
1.9
|
|
|
3.4
|
%
|
|
Provision
for litigation
|
|
|
8.8
|
|
|
15.6
|
%
|
|
|
|
0.2
|
|
|
0.3
|
%
|
|
Non-GAAP
income before provision for income taxes
|
|
$
|
2.5
|
|
|
4.5
|
%
|
|
|
$
|
2.1
|
|
|
3.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP
provision (benefit) for income taxes
|
|
$
|
(1.0
|
)
|
|
16.3
|
%
|
(3)
|
|
$
|
0.8
|
|
|
42.3
|
%
|
(3)
|
Tax
benefit for provision for litigation
|
|
|
2.1
|
|
|
24.1
|
%
|
(3)
|
|
|
0.1
|
|
|
39.8
|
%
|
(3)
|
Non-GAAP
provision for income taxes
|
|
$
|
1.1
|
|
|
43.4
|
%
|
(3)
|
|
$
|
0.9
|
|
|
42.1
|
%
|
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP
net income (loss)
|
|
$
|
(5.3
|
)
|
|
(9.3
|
)%
|
|
|
$
|
1.1
|
|
|
2.0
|
%
|
|
Provision
for litigation, net of tax benefit
|
|
|
6.7
|
|
|
11.9
|
%
|
|
|
|
0.1
|
|
|
0.2
|
%
|
|
Non-GAAP
net income
|
|
$
|
1.4
|
|
|
2.5
|
%
|
|
|
$
|
1.2
|
|
|
2.2
|
%
|
|
(1)
|
Totals
may not add due to rounding.
|
(2)
|
Represents
a percentage of total revenue of $56.5 million and $56.8 million in the
three months ended March 31, 2008 and 2007, respectively, excluding the
percentages for provision (benefit) for income taxes and the tax benefit
for provision for litigation.
|
(3)
|
These
amounts represent a percentage of GAAP income (loss) before provision for
income taxes, provision for litigation and non-GAAP income before
provision for income taxes,
respectively.
|
We have
two reportable business segments: Systems and Services and Metrigraphics. The
Systems and Services segment accounted for approximately 97% of total revenue
and the Metrigraphics segment accounted for approximately 3% of total revenue
for the three months ended March 31, 2008.
RESULTS
OF OPERATIONS
Operating
results expressed as a percentage of segment and total revenue are as
follows:
|
|
Three
Months Ended March 31,
|
|
|
|
|
2008
|
|
|
|
2007
|
|
|
(in
millions)
|
|
|
$
(1)
|
|
%
|
|
|
|
|
$
(1)
|
|
%
|
|
|
Contract
revenue
|
|
$
|
54.8
|
|
|
97.0
|
%
|
|
|
$
|
55.9
|
|
|
98.5
|
%
|
|
Product
sales
|
|
|
1.7
|
|
|
3.0
|
|
|
|
|
0.9
|
|
|
1.5
|
|
|
Total
revenue
|
|
$
|
56.5
|
|
|
100.0
|
%
|
|
|
$
|
56.8
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit on contract revenue
(3)
|
|
$
|
8.6
|
|
|
15.6
|
%
|
|
|
$
|
9.0
|
|
|
16.1
|
%
|
|
Gross
profit (loss) on product sales
(3)
|
|
|
0.1
|
|
|
5.9
|
%
|
|
|
|
(0.3
|
)
|
|
(32.3
|
)%
|
|
Total
gross profit
(3)
|
|
|
8.7
|
|
|
15.3
|
%
|
|
|
|
8.7
|
|
|
15.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
5.4
|
|
|
9.6
|
%
|
|
|
|
5.6
|
|
|
9.9
|
%
|
|
Provision
for litigation
|
|
|
8.8
|
|
|
15.6
|
%
|
|
|
|
0.2
|
|
|
0.3
|
%
|
|
Amortization
of intangible assets
|
|
|
0.5
|
|
|
0.9
|
%
|
|
|
|
0.7
|
|
|
1.1
|
%
|
|
Operating
income (loss)
|
|
|
(6.1
|
)
|
|
(10.7
|
)%
|
|
|
|
2.3
|
|
|
4.0
|
%
|
|
Interest
expense, net
|
|
|
(0.1
|
)
|
|
(0.2
|
)%
|
|
|
|
(0.5
|
)
|
|
(0.8
|
)%
|
|
Other
income, net
|
|
|
(0.1
|
)
|
|
(0.1
|
)%
|
|
|
|
0.1
|
|
|
0.2
|
%
|
|
Provision
(benefit) for income taxes
|
|
|
(1.0
|
)
|
|
16.3
|
%
|
(2)
|
|
|
0.8
|
|
|
42.3
|
%
|
(2)
|
Net
income (loss)
|
|
$
|
(5.3
|
)
|
|
(9.3
|
)%
|
|
|
$
|
1.1
|
|
|
2.0
|
%
|
|
(1)
|
Totals
may not add due to rounding.
|
(2)
|
The
percentage of provision (benefit) for income taxes relates to a percentage
of income (loss) before income taxes.
|
(3)
|
These
amounts represent a percentage of contract revenues, product sales and
total revenues, respectively.
|
Revenues
We
reported total revenue of $56.5 million and $56.8 million in the three
months ended March 31, 2008 and 2007, respectively. Total revenues for the first
quarter of 2008 represent a decrease of $0.3 million from the same period in
2007 resulting from lower contract revenue, partially offset by an increase
in product sales.
Contract
Revenues
Contract
revenues in our Systems and Services segment were earned from the following
sectors:
|
|
Three
Months Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
(in
millions)
|
|
|
$
(1)
|
|
|
|
%
(1)
|
|
|
|
$
(1)
|
|
|
|
%
(1)
|
|
National
defense and intelligence agencies
|
|
$
|
41.0
|
|
|
|
74.9
|
%
|
|
$
|
44.6
|
|
|
|
79.8
|
%
|
Federal
civilian agencies
|
|
|
7.9
|
|
|
|
14.4
|
|
|
|
7.6
|
|
|
|
13.5
|
|
State
and local government agencies
|
|
|
5.2
|
|
|
|
9.6
|
|
|
|
3.5
|
|
|
|
6.3
|
|
Other
|
|
|
0.6
|
|
|
|
1.1
|
|
|
|
0.2
|
|
|
|
0.3
|
|
Total
contract revenue
|
|
$
|
54.8
|
|
|
|
100.0
|
%
|
|
$
|
55.9
|
|
|
|
100.0
|
%
|
(1)
|
Totals
may not add due to rounding.
|
The
decrease in revenues from national defense and intelligence agencies in the
three months ended March 31, 2008 compared to the same period in 2007 was due to
decreased revenues from the U.S. Air Force Aeronautical Systems Center
Consolidated Acquisition of Professional Services (“CAPS”) contract and
Electronic Systems Center contracts.
In July
2007, the Joint Venture was notified that the U.S. Air Force contracting officer
for the CAPS contract had made a determination that it would no longer be
eligible to bid on further contract task orders.
In
January 2008, we purchased from THE CENTECH GROUP, Inc. a prime CAPS contract,
on which minimal work was being performed. This purchase now enables us to
respond to government solicitations under the CAPS contract. We are
awaiting the U.S. Air Force decision on the contract novation.
The
increase in revenues from federal civilian agencies in the three months ended
March 31, 2008 compared to the same period in 2007 was primarily due to
increased revenues from the DHS contract and the Federal Deposit Insurance
Corporation contract.
The
increase in revenues from state and local government agencies in the three
months ended March 31, 2008 compared to the same period in 2007 was primarily
due to additional change orders under the State of Ohio contract during 2007 and
2008.
In
February 2008, we were selected by the State of Tennessee to develop and
implement a statewide child welfare system similar to the one in
Ohio. We anticipate revenues with the State of Tennessee in the
vicinity of $6 million in the last three quarters of 2008. As a
result, we anticipate our revenues in this market sector will grow in 2008 as
compared to 2007.
Revenues
by contract type as a percentage of Systems and Services revenues were as
follows:
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
|
2008
|
|
|
2007
|
|
Time
and materials
|
|
|
55
|
%
|
|
|
57
|
%
|
Cost
reimbursable
|
|
|
19
|
|
|
|
22
|
|
Fixed
price, including service type contracts
|
|
|
26
|
|
|
|
21
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
Prime
contract
|
|
|
61
|
%
|
|
|
57
|
%
|
Sub-contract
|
|
|
39
|
|
|
|
43
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
Product
Sales
Product
sales for our Metrigraphics segment were $1.7 million and $0.9 million in the
three months ended March 31, 2008 and 2007, respectively. The
increase in product sales in the first quarter of 2008 compared to the same
period in 2007 was primarily due to higher sales to a new medical device
customer.
Funded
Backlog
Our
funded backlog was $113.7 million at March 31, 2008 and $116.5 million at
December 31, 2007. We expect that substantially all of our backlog will generate
revenue during the subsequent twelve month period.
Gross
Profit
Total
gross profit was $8.7 million for both the three months ended March 31, 2008 and
2007, resulting in a gross margin of 15.3% for the first quarters of 2008 and
2007.
Our gross
profit on contract revenue was $8.6 million and $9.0 million for the three
months ended March 31, 2008 and 2007, respectively. The decrease in gross profit
on contract revenue resulted in a gross margin of 15.6% in the first quarter of
2008, compared to 16.1% in the same period in 2007. The decrease in gross margin
in the first quarter of 2008 compared to the same period in 2007 was primarily
attributable to a change in revenue mix with lower direct labor and higher
indirect costs in the first quarter of 2008.
Our gross
profit on product sales was $0.1 million for the three months ended March 31,
2008, compared to a gross loss of $0.3 million for the same period in
2007. The increase in gross profit was primarily attributable to
higher medical device sales.
Selling,
general and administrative expenses
Selling,
general and administrative expenses were $5.4 million and $5.6 million in the
three months ended March 31, 2008 and 2007, respectively. Selling, general and
administrative expenses as a percent of total revenue in the first quarter of
2008 and 2007 was 9.6% and 9.9%, respectively. Selling, general and
administrative expenses in the first quarter of 2008 were lower than the same
period in 2007 as a result of a decrease in legal costs and deferred
compensation costs.
Provision
for litigation
During
the first quarter of 2008, we increased the accrual for litigation to $9.0
million from $0.2 million in 2007 based on our assessment of a March 2008 ruling
of the U.S. District Court resulting in a charge of $8.8 million in the first
quarter of 2008. Further discussion related to this ruling is
referenced in Note 11 of our Notes to Condensed Consolidated Financial
Statements.
Amortization
of intangible assets
Amortization
expense was $0.5 million and $0.7 million in the three months ended March 31,
2008 and 2007, respectively. Amortization expense primarily relates
to intangible assets acquired in our 2004 acquisition of Impact Innovations
Group LLC and is included in the Systems and Services segment. The remaining
amortization expense for the current fiscal year is expected to be approximately
$1.5 million.
Interest
expense, net
We
incurred interest expense of $0.1 million and $0.5 million in the three months
ended March 31, 2008 and 2007, respectively. The decrease in interest expense in
the first quarter of 2008 compared to the same period in 2007 was primarily due
to a combination of lower average outstanding debt and lower average weighted
interest rates during the first quarter of 2008.
Other
income (expense), net
We
recorded $0.1 million of other expense in the three months ended March 31, 2008
compared to other income of $0.1 million in the same period in
2007. In the first quarter of 2008, we recorded $0.1 million of
realized gains resulting from the sale of shares of common stock of an actively
traded public entity. Other income also includes recognition of our
portion of earnings in
HMR
Tech. Our
earnings (loss) related to these equity investments were $(0.1) million and $0.1
million in the first quarter of 2008 and 2007, respectively.
Income
tax provision (benefit)
For the
three months ended March 31, 2008, we recorded an effective income tax rate of
16.3%. Excluding the $8.8 million litigation provision, the effective
rate was 43.4%. We have estimated the tax benefits associated with the
litigation provision at $2.1 million. However, there is no assurance
that this benefit will be realized and therefore income tax expense may be
adjusted in a future period. The effective income tax rate for the
comparable prior year period was 42.3%, or 42.1% excluding the $0.2 million
litigation provision recorded in the three months ended March 31,
2007. The increase in the effective rate excluding the litigation
provision was due to SFAS 123(R) pool of excess tax deficiencies in the current
period partially offset by a favorable blended state tax rate. The
pool of excess tax benefits has been depleted and as a result any future SFAS
123(R) tax deficiencies will be recorded directly to earnings. The effective tax
rate for the year ended December 31, 2007 was 39.7%, reflecting adjustments to
tax accruals and reserves plus favorable effects of tax credits and state tax
audits.
LIQUIDITY
AND CAPITAL RESOURCES
The
following discussion analyzes liquidity and capital resources by operating,
investing and financing activities as presented in our Condensed Consolidated
Statements of Cash Flows. Our principal sources of liquidity are cash flows from
operations and borrowings from our Revolver. At March 31, 2008, the borrowing
capacity available under our Revolver was $45.0 million.
Our
results of operations, cash flows and financial condition are subject to trends,
events and uncertainties, including demands for capital to support growth,
economic conditions, government payment practices and contractual matters. Our
need for access to funds is dependent on future operating results, our growth
and acquisition activity and external conditions.
We
believe that selective acquisitions are an important component of our growth
strategy. We may acquire, from time to time, firms or properties that are
aligned with our core capabilities and which complement our customer base. We
will continue to consider acquisition opportunities that align with our
strategic objectives, along with the possibility of utilizing the credit
facility as a source of financing.
Based
upon our present business plan and operating performance, we believe that cash
provided by operating activities, combined with amounts available for borrowing
under the Revolver, will be adequate to fund the capital requirements of our
existing operations during 2008 and for the foreseeable future. In the event
that our current capital resources are not sufficient to fund requirements, we
believe our access to additional capital resources would be sufficient to meet
our needs.
At March
31, 2008 and December 31, 2007, we had cash and cash equivalents aggregating
$1.1 million and $2.0 million, respectively. Our operating practice is to apply
cash received against outstanding revolving credit facility
balances. As a result, cash balances at the end of each quarter
generally reflect the timing and size of cash receipts at the end of those
periods.
Operating
activities
Net cash
provided by operating activities totaled $1.6 million in the first quarter of
2008 compared to net cash used in operating activities of $17.3 million in the
first quarter of 2007. The cash provided by operating activities in the first
quarter of 2008 was primarily attributable to contract receivable
collections. The cash used in the first quarter of 2007 was primarily
attributable to an increase in contract receivables and a decrease in accounts
payable, other long-term liabilities and deferred taxes.
At March
31, 2008, we had recognized an estimated litigation liability in the amount of
$9 million, reduced by $2.2 million for estimated tax benefits, for an after-tax
effect of $6.8 million. As the matter is ongoing, the ultimate
outcome as to the amount and timing of possible cash payments remains
uncertain.
Contract
receivables were $61.9 million at March 31, 2008, or 99 days sales outstanding
(DSO), down $1.7 million, or 2 days, from $63.6 million at December 31, 2007.
Federal business DSO was 87 days at March 31, 2008, while balances related to
our contract with the State of Ohio at March 31, 2008 totaled $11.0 million, or
13 days sales outstanding, up from $7.6 million, or 10 days sales outstanding,
at December 31, 2007. Collections of billed receivables in the first
quarter of 2008 were strong, which decreased $2.8 compared to December 31,
2007.
Regarding
payments on our contract with the State of Ohio we currently anticipate
collecting $5.6 million during the second quarter of 2008 and the remaining
unbilled receivable balance in the second half of 2008.
Our net
deferred tax liability was $4.5 million at March 31, 2008 compared to $7.0
million at December 31, 2007. The decrease in deferred taxes was
principally due to a deferred tax asset of $ 2.1 million associated with the
litigation provision and deferred taxes on unbilled receivables which declined
from $7.5 million at December 31, 2007 to $7.3 million at March 31,
2008. We paid $0.3 million in income taxes in the first quarter of
2008 and currently anticipate additional income tax payments of $5.4 million in
the last three quarters of 2008. The IRS continues to challenge the
deferral of income for tax purposes related to our unbilled receivables
including the applicability of a Letter Ruling issued by the IRS to us in
January 1976 which granted to us deferred tax treatment of
our
unbilled receivables. This issue has been elevated to the IRS
National Office for determination. While the outcome of the
examination of the 2004 income tax return is not expected to be known for
several months and remains uncertain, we may incur interest expense, our
deferred tax liabilities may be reduced and income tax payments may be increased
substantially in future periods.
Share-based
compensation was $0.4 million in the first quarter of 2008, unchanged from the
same period in 2007. As of March 31, 2008 the total unrecognized
compensation related to restricted stock awards was $1.4 million to be
recognized over two years, and the total unrecognized compensation cost related
to stock options was $0.1 million, which is expected to be recognized over two
months.
In May
2008, the Executive Long Term Incentive Program stock option and restricted
stock awards are scheduled to vest. Based on recent vesting behavior
by the executives covered by this program, we expect that these executives will
release a portion of their restricted stock awards back to us to compensate for
the tax consequence of the vesting. We anticipate the value of the
taxes to be approximately $0.4 million which we will pay in lieu of the release
of their restricted stock awards.
Non-cash
amortization expense of our acquired intangible assets was $0.5 million and $0.7
million in the first quarter of 2008 and 2007, respectively. We
anticipate that non-cash expense for the amortization of intangible assets will
remain at a comparable quarterly level through the remaining quarters of
2008.
Investing
activities
Net cash
used in investing activities was $0.1 million and $0.5 million in the first
quarters of 2008 and 2007, respectively. The net cash used was primarily
comprised of capital expenditures of $0.4 million and $0.5 million in the first
quarters of 2008 and 2007, respectively. Net cash used in investing activities
in the first quarter of 2008 was partially offset by proceeds from the sale of
investments and dividends received from
HMR
Tech.
We expect capital expenditures of $2 million or less in 2008.
Financing
activities
Net cash
provided by (used in) financing activities was $(2.5) million and $10.4 million
in the first quarters of 2008 and 2007, respectively. The amount of cash used in
2008 represents net payments under our revolving credit agreement of $2.7
million partially offset by $0.2 million of proceeds from the issuance of common
stock through the exercises of stock options and employee stock purchase plan
transactions. The amount of cash provided in 2007 represents net
borrowings under our revolving credit agreement of $9.9 million and $0.4 million
of proceeds from the issuance of common stock through the exercises of stock
options and employee stock purchase plan transactions.
The
average daily borrowing on our Revolver for the first quarter of 2008 was $6.5
million at a weighted average interest rate of 5.85%, compared to an average
daily borrowing of $10.2 million at a weighted average interest rate of 7.54%
under our then existing revolver in the first quarter of 2007.
RECENT
ACCOUNTING PRONOUNCEMENTS
A
description of recent accounting pronouncements are referenced in Note 2 of our
Condensed Consolidated Financial Statements in Part I, Item 1 on this Form
10-Q.
We are
subject to interest rate risk associated with our Revolver, where interest
payments are tied to either LIBOR or the prime rate. At any time, a sharp rise
in interest rates could have an adverse effect on net interest expense as
reported in our Condensed Consolidated Statements of Operations. A hypothetical
and instantaneous increase of one full percentage point in the interest rate on
our Revolver would increase annual interest expense by approximately
$0.1 million.
We
presently have no investments in debt securities and, accordingly, no exposure
to market interest rates on investments. We have no significant exposure to
foreign currency fluctuations. Foreign sales, which are nominal, are primarily
denominated in United States dollars.
The
Company’s principal executive officer (“CEO”) and principal financial officer
(“CFO”) evaluated, together with other members of senior management, the
effectiveness of the Company’s disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) as of March 31, 2008; and, based on
this review, the Company’s CEO and CFO concluded that, as of March 31, 2008, the
Company’s disclosure controls and procedures were effective to ensure that
information required to be disclosed by it in the reports that it files or
submits under the Securities Exchange Act of 1934 (i) is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and
forms and (ii) is accumulated and communicated to the Company’s management,
including the Company’s CEO and CFO, as appropriate, to allow timely decisions
regarding required disclosure.
There has
been no change in the Company’s internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during the quarterly
period ended March 31, 2008 that has materially affected, or is reasonably
likely to materially affect, the Company’s internal control over financial
reporting.
PART II. OTHER
INFORMATION
As a
defense contractor, we are 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 our defense industry involvement,
we are, from time to time, involved in audits, lawsuits, claims, administrative
proceedings and investigations. We accrue for liabilities associated with these
activities when it becomes probable that future expenditures will be made and
such expenditures can be reasonably estimated. We are a party to or have
property subject to litigation and other proceedings referenced in Note 11 of
the Notes to Condensed Consolidated Financial Statements (Unaudited) included in
this Form 10-Q and in Note 12 of our Form 10-K for the year ended December 31,
2007. Our 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 a material adverse effect on our business,
financial position, results of operations and cash flows.
For
information regarding factors that could affect our results of operations,
financial condition and liquidity, refer to the section titled “Risk Factors” in
Part 1, Item 1A of our 2007 Form 10-K. There have been no material changes from
the risk factors previously disclosed in our most recent Form 10-K.
The
following table sets forth all purchases made by us or on our behalf by any
"affiliated purchaser," as defined in Rule 10b-18(a)(3) under the Exchange Act,
of shares of our common stock during each month in the first quarter of
2008. All shares repurchased were not part of a publicly announced
share purchase program and represent shares repurchased to cover payroll
withholding taxes in connection with the vesting of restricted stock
awards.
|
|
|
|
|
|
|
|
Total Number
|
|
|
Approximate
|
|
|
|
|
|
|
|
|
|
of
Shares
|
|
|
Dollar
Value
|
|
|
|
|
|
|
|
|
|
Purchased
as
|
|
|
of Shares that
|
|
|
|
|
|
|
|
|
|
Part
of
|
|
|
May
Yet Be
|
|
|
|
Total Number
|
|
|
Average
Price
|
|
|
Publicly
|
|
|
Purchased
|
|
|
|
of
Shares
|
|
|
Paid
Per
|
|
|
Announced
|
|
|
Under
the
|
|
Period
|
|
Purchased
|
|
|
Share
|
|
|
Programs
|
|
|
Programs
|
|
January
1, 2008 to January 31, 2008
|
|
|
738
|
|
|
$
|
10.24
|
|
|
|
-
|
|
|
$
|
-
|
|
February
1, 2008 to February 29, 2008
|
|
|
3,501
|
|
|
$
|
9.43
|
|
|
|
-
|
|
|
|
-
|
|
March
1, 2008 to March 31, 2008
|
|
|
7,828
|
|
|
$
|
9.98
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
12,067
|
|
|
$
|
9.84
|
|
|
|
-
|
|
|
$
|
-
|
|
The
following Exhibits are filed or furnished, as applicable, herewith:
31.1
|
Certification
of the Chief Executive Officer pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
31.2
|
Certification
of the Chief Financial Officer pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
32.1
|
Certification
of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
32.2
|
Certification
of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
SIGNATURE
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
DYNAMICS
RESEARCH CORPORATION
|
|
(Registrant)
|
|
|
|
|
Date: May
12, 2008
|
/s/
David Keleher
|
|
Senior
Vice President, Chief Financial Officer and Treasurer
|
|
(Principal
Financial Officer and Principal Accounting
Officer)
|
25
Dynamics Research Corp. (MM) (NASDAQ:DRCO)
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