UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
8-K/A
Amendment
No. 1 to Form 8-K
CURRENT
REPORT
PURSUANT
TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of
Report (Date of earliest event reported)
July 30, 2008
DYNAMICS
RESEARCH CORPORATION
(Exact
name of registrant as specified in its charter)
Commission
file number 000-02479
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MASSACHUSETTS
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04-2211809
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(State
or other jurisdiction of Incorporation or organization)
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(I.R.S.
Employer Identification No.)
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60
FRONTAGE ROAD, ANDOVER, MASSACHUSETTS 01810-5498
(Address
of principal executive offices) (Zip Code)
978-289-1500
(Registrant’s
telephone number, including area code)
N/A
(Former
name or former address, if changed since last report)
Check the
appropriate box below if the Form 8-K filing is intended to simultaneously
satisfy the filing obligation of the registrant under any of the following
provisions (
see
General
Instruction A.2. below):
Written
communications pursuant to Rule 425 under the Securities Act (17 CFR
230.425)
Soliciting
material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
Pre-commencement
communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR
240.14d-2(b))
Pre-commencement
communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR
240.13e-4(c))
Item 2.01 Completion of
Acquisition or Disposition of Assets
On August
1, 2008, Dynamics Research Corporation (the “Company”) completed the
acquisition of Kadix Systems, LLC (“Kadix”) for approximately
$42 million in cash with the potential for additional consideration of up
to $5 million, based on achievement of certain conditions. Kadix
maintains practice specialties in organizational change, human capital,
information technology, public and environmental health and learning and
organizational development. Kadix is focused on the U.S. Department
of Homeland Security, Marine Corps information technology, military medical
health, and federal civilian markets. At August 1, 2008, Kadix had
approximately 270 employees and is headquartered in Arlington, VA with
additional offices in Greater Washington, DC and Aberdeen, MD. Kadix
had annual revenues of $23 million for the year ended December 31,
2007.
The terms
of the acquisition of Kadix are set forth in the Membership Interest Purchase
Agreement dated July 30, 2008, between the Company, Kadix and Daisy D. Layman,
the sole member of Kadix (the “Seller”), filed as Exhibit 2.1 to the
Current Report on Form 8-K dated August 5, 2008. This Form 8-K/A
amends our Current Report on Form 8-K filed on August 5, 2008 to provide
required financial information.
The terms
of the transaction and the consideration paid by the Company to Seller were a
result of arm’s length negotiations between the Company’s representatives and
representatives of Seller. Prior to the completion of the transaction, neither
the Company nor, to the Company’s knowledge, any of its directors and officers
and their respective associates had any material relationship with the
Seller.
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(a)
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Financial
Statements of Businesses Acquired
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Included
with this report on Form 8-K/A are the audited and unaudited financial
statements of
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Kadix
Systems, LLC, as follows: (*)
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As
of and for the six months ended June 30, 2008:
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As
of and for the years ended December 31, 2007 and 2006:
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(*)
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Note: No
procedures have been performed by Cherry, Bekaert & Holland, L.L.P.
with respect to the June 30, 2008 financial statements
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(b)
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Unaudited
Pro Forma Financial Information
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(c)
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Exhibits
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Item Number
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Description
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23.1
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Consent
of Cherry, Bekaert & Holland, L.L.P. (Independent Auditors for Kadix
Systems, LLC)
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KADIX
SYSTEMS, LLC
INTERIM
FINANCIAL STATEMENTS
JUNE
30, 2008
KADIX
SYSTEMS, LLC
Table of
Contents
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Page
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Balance
Sheet (unaudited)
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1
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Statement
of Income and Changes in Accumulated Earnings (unaudited)
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2
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Statement
of Cash Flows (unaudited)
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3
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Notes
to Interim Financial Statements
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4-5
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BALANCE
SHEET (unaudited)
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JUNE
30, 2008
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ASSETS
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Current
assets
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Cash
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$
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2,496,044
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Restricted
cash
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113,528
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Accounts
receivable, net
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8,740,309
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Prepaid
expenses
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71,968
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Total
current assets
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11,421,849
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Property
and equipment, net
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315,358
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Other
assets
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6,710
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Total
assets
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$
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11,743,917
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LIABILITIES
AND MEMBER'S EQUITY
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Current
liabilities
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Capital
lease obligations, current portion
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$
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57,685
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Accounts
payable
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1,842,942
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Accrued
salaries and related expenses
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1,637,927
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Deferred
rent, current portion
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6,625
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Total
current liabilities
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3,545,179
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Non
current liabilities
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Capital
lease obligations, long term portion
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12,094
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Deferred
rent, long term portion
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4,561
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Total
non current liabilities
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16,655
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Total
liabilities
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3,561,834
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Commitments
and contingencies
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Member's
equity
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Capital
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100
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Accumulated
earnings
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8,181,983
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Total
member's equity
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8,182,083
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Total
liabilities and member's equity
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$
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11,743,917
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(See
notes to interim financial statements)
1
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STATEMENTS
OF INCOME AND CHANGES IN ACCUMULATED EARNINGS (unaudited)
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SIX
MONTHS ENDED JUNE 30, 2008
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Revenue
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$
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20,608,708
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Costs
and expenses:
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Direct
expenses
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10,501,750
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Indirect
expenses
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5,206,333
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Total
costs and expenses
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15,708,083
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Operating
income
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4,900,625
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Interest
and other income (expense)
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Interest
income, net
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3,832
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Other
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(70,107
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Total
interest and other income (expense)
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(66,275
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Net
income
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4,834,350
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Accumulated
earnings, beginning of year
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5,399,929
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Distributions
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(2,052,296
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Accumulated
earnings, end of period
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$
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8,181,983
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(See
notes to interim financial statements)
2
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STATEMENT
OF CASH FLOWS (unaudited)
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SIX
MONTHS ENDED JUNE 30, 2008
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Cash
flows from operating activities:
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Net
income
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$
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4,834,350
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Adjustments
to reconcile net income to net cash provided by operating
activities:
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Depreciation
and amortization
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97,755
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Loss
on disposal of fixed assets
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599
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Changes
in assets and liabilities:
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Restricted
cash
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360,752
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Accounts
receivable, net
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(3,803,950
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Prepaid
expenses
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(14,319
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Accounts
payable
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561,424
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Accrued
salaries and related expenses
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1,274,122
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Deferred
rent
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222
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Net
cash provided by operating activities
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3,310,955
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Cash
flows from investing activities:
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Purchases
of property and equipment
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(199,025
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Net
cash used in investing activities
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(199,025
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Cash
flows from financing activities:
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Payments
for capital lease obligations
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(54,843
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Distributions
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(2,052,296
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Net
cash used in financing activities
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(2,107,139
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Change
in cash
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1,004,791
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Cash,
beginning of year
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1,491,253
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Cash,
end of period
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$
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2,496,044
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(See
notes to interim financial statements)
3
KADIX
SYSTEMS, LLC
NOTES
TO INTERIM FINANCIAL STATEMENTS
JUNE
30, 2008
Kadix
Systems, LLC (the Company) was incorporated in the Commonwealth of Virginia on
November 27, 2001 as a limited liability company. The Company will
continue until December 31, 2031 unless sooner terminated in accordance with its
Operating Agreement. The Company is a professional services firm
providing technical support and consulting to the Federal Government and to
commercial organizations in the D.C. metropolitan area, Aberdeen and Columbia
(Maryland), Quantico (Virginia) and San Antonio (Texas).
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. The results for the six months ended June
30, 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 audited financial statements and notes for the year
ended December 31, 2007 (contained in this filing). The Company has
reclassified certain prior period amounts to conform with the current period
presentation.
Note
2 – Critical accounting policies
Revenue recognition
–
The Company performs work
under time and materials, cost plus, and fixed price contracts. The
Company must receive approval to incur costs in excess of
funding. Revenues on time and materials contracts are recognized on
the basis of direct labor hours delivered and reimbursable costs incurred.
Revenues on fixed price contracts are calculated based on the percentage of
completion method. Under this method, individual contract revenue
earned is measured by the percentage relationship that contract costs incurred
bear to management’s estimate of total contract costs. Revenue from
cost-type contracts is recognized as costs are incurred on the basis of direct
costs plus allowable indirect costs and an allocable portion of the
fee.
Losses
are recorded in full when they become determinable. Revenue
recognized on contracts in excess of related billings is reflected as unbilled
receivables. Progress billings in excess of earned revenue are
reflected as billings in excess of costs and accrued profit.
Note
3 – Accounts receivable
Accounts
receivable at June 30, 2008 consists of:
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Billed
– trade
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$
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8,380,615
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Unbilled
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359,694
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$
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8,740,309
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Note
4 – Property and equipment
A summary
of property and equipment at June 30, 2008 is as follows:
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Leasehold
improvements
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$
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107,565
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Furniture
and fixtures
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112,774
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Computer
equipment
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130,300
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Capitalized
leases
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427,043
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Software
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149,768
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927,450
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Less
accumulated depreciation and amortization
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(612,092
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$
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315,358
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Depreciation
and amortization expense was $97,755 for the six months ended June 30,
2008.
KADIX
SYSTEMS, LLC
NOTES
TO INTERIM FINANCIAL STATEMENTS (continued)
JUNE
30, 2008
Note
5 – Bank line-of-credit
The
Company has a line-of-credit agreement with a bank, which provides for
borrowings up to $3,000,000, subject to an annual reaffirmation by the
bank. As of June 30, 2008 no amounts were outstanding. The
maximum borrowing amount is equal to the lesser of $3,000,000 or the sum of 90%
of eligible government receivables, as defined in the agreement. The
interest floor is 5.0% and borrowings are secured by all of the Company's
assets. The agreement contains a covenant related to net
worth. As of June 30, 2008 the Company was in compliance with this
covenant.
Note
6 – Concentrations
Substantially
all of the Company’s revenue and accounts receivable are derived from prime
contracts and subcontracts with the U.S. Government or with commercial prime
contractors. Since a majority of the Company’s revenue is derived
from contracts with the U.S. government, any cancellations or modifications of
significant contracts or subcontracts, or failure by the U.S. government to
exercise an option period relating to those contracts or subcontracts, could
adversely affect our financial condition and results of operations in the short
and long term. Additionally, U.S. government contracts can be
terminated at any time by U.S. government without cause, for the convenience of
the U.S. government. If such termination occurs, the Company would be
entitled to receive compensation for services provided and costs incurred
through termination, plus, in certain circumstances, a negotiated amount of
profit.
Note
7 – Contingencies
The
Company is subject to legal proceedings and claims which arise in the ordinary
course of business. In the opinion of management, there is no pending
or threatened litigation or administrative proceeding that is expected to have a
material adverse impact on the Company’s financial position or results of
operations.
Note
8 – Subsequent Events
On August
1, 2008, the Company sold 100% of its outstanding membership interests in the
Company to Dynamics Research Corporation (Dynamics Research) for
$42 million in cash, subject to certain adjustments typical for a
transaction of this type, with the potential for additional consideration of up
to $5 million, based on achievement of certain conditions, as more fully
described in the Member Interest Purchase Agreement, dated July 30,
2008. The terms of the transaction and the consideration paid by
Dynamics Research to the Company were a result of arm’s length negotiations
between the representatives of both parties. Prior to the completion of the
transaction, the Company did not have a material relationship with Dynamics
Research.
In
conjunction with the sale and pursuant to the terms of the Company’s Phantom
Unit Plan and Ownership Appreciation Rights Plan, as amended, to allow the
acceleration of all unvested outstanding rights, all of the units outstanding
vested on the sale date. The total amount due to the holders of these
units was $7.5 million and was paid from the proceeds of the membership interest
sale. In addition $375,000 of transaction and discretionary bonuses
along with $1.7 million of professional fees were paid from the proceeds of the
membership interest sale.
KADIX
SYSTEMS, LLC
REPORT
AND FINANCIAL STATEMENTS
DECEMBER
31, 2007 and 2006
KADIX
SYSTEMS, LLC
Table of
Contents
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Page
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Report
of Independent Auditors
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1
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Balance
Sheets
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2
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Statements
of Income and Changes in Accumulated Earnings
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3
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Statements
of Cash Flows
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4
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Notes
to Financial Statements
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5-10
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To the
Member of
Kadix
Systems, LLC
We have
audited the accompanying balance sheets of Kadix Systems, LLC (a Limited
Liability Company) as of December 31, 2007 and 2006 and the related statements
of income and changes in accumulated earnings and of cash flows for the years
then ended. These financial statements are the responsibility of the management
of Kadix Systems, LLC. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with auditing standards generally accepted in
the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Kadix Systems, LLC as of December
31, 2007 and 2006, and the results of its operations and its cash flows for the
years then ended in conformity with accounting principles generally accepted in
the United States of America.
/s/
Cherry, Bekaert & Holland, L.L.P.
Vienna,
Virginia
March 20,
2008
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BALANCE
SHEETS
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December
31,
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2007
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2006
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ASSETS
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Current
assets
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Cash
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$
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1,491,253
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$
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333,401
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Restricted
cash
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474,280
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306,337
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Accounts
receivable, net
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5,044,512
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3,878,681
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Prepaid
expenses
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57,649
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58,924
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Total
current assets
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7,067,694
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4,577,343
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Property
and equipment, net
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214,687
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392,565
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Other
assets
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6,710
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6,035
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Total
assets
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$
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7,289,091
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$
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4,975,943
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LIABILITIES
AND MEMBER'S EQUITY
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Current
liabilities
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Bank
line-of-credit
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$
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-
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$
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615,000
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Capital
lease obligations, current portion
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91,616
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135,436
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Accounts
payable
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1,281,518
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766,096
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Accrued
salaries and related expenses
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363,805
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299,646
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Billings
in excess of cost and profit
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108,153
|
|
|
|
-
|
|
|
Deferred
rent, current portion
|
|
|
3,062
|
|
|
|
10,495
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
1,848,154
|
|
|
|
1,826,673
|
|
|
|
|
|
|
|
|
|
|
|
|
Non
current liabilities
|
|
|
|
|
|
|
|
|
|
Capital
lease obligations, long term portion
|
|
|
33,006
|
|
|
|
88,962
|
|
|
Deferred
rent, long term portion
|
|
|
7,902
|
|
|
|
9,077
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
non current liabilities
|
|
|
40,908
|
|
|
|
98,039
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
1,889,062
|
|
|
|
1,924,712
|
|
|
|
|
|
|
|
|
|
|
|
|
Member's
equity
|
|
|
|
|
|
|
|
|
|
Capital
|
|
|
100
|
|
|
|
100
|
|
|
Accumulated
earnings
|
|
|
5,399,929
|
|
|
|
3,051,131
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
member's equity
|
|
|
5,400,029
|
|
|
|
3,051,231
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and member's equity
|
|
$
|
7,289,091
|
|
|
$
|
4,975,943
|
|
(See
notes to financial statements)
2
|
|
|
|
STATEMENTS
OF INCOME AND CHANGES IN ACCUMULATED EARNINGS
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
22,970,932
|
|
|
$
|
17,485,764
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
Direct
expenses
|
|
|
11,136,300
|
|
|
|
9,731,570
|
|
|
Indirect
expenses
|
|
|
8,202,594
|
|
|
|
6,767,731
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
costs and expenses
|
|
|
19,338,894
|
|
|
|
16,499,301
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
3,632,038
|
|
|
|
986,463
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and other income (expense)
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
|
(30,893
|
)
|
|
|
(66,820
|
)
|
|
Other
|
|
|
(95,347
|
)
|
|
|
(111,469
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest and other income (expense)
|
|
|
(126,240
|
)
|
|
|
(178,289
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
3,505,798
|
|
|
|
808,174
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
earnings, beginning of year
|
|
|
3,051,131
|
|
|
|
2,438,957
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions
|
|
|
(1,157,000
|
)
|
|
|
(196,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
earnings, end of year
|
|
$
|
5,399,929
|
|
|
$
|
3,051,131
|
|
(See
notes to financial statements)
3
|
|
|
|
STATEMENTS
OF CASH FLOWS
|
|
|
|
|
|
|
|
Year
ended December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
3,505,798
|
|
|
$
|
808,174
|
|
|
Adjustments
to reconcile net income to net cash provided by
|
|
|
|
|
|
|
|
|
|
operating
activities:
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
259,508
|
|
|
|
206,044
|
|
|
Loss
on disposal of fixed assets
|
|
|
1,436
|
|
|
|
-
|
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
|
(1,165,831
|
)
|
|
|
1,990,978
|
|
|
Prepaid
expenses
|
|
|
1,275
|
|
|
|
(7,038
|
)
|
|
Other
assets
|
|
|
(675
|
)
|
|
|
(3,101
|
)
|
|
Accounts
payable
|
|
|
515,422
|
|
|
|
(443,099
|
)
|
|
Accrued
salaries and related expenses
|
|
|
64,159
|
|
|
|
(297,988
|
)
|
|
Billings
in excess of cost and profit
|
|
|
108,153
|
|
|
|
-
|
|
|
Deferred
rent
|
|
|
(8,608
|
)
|
|
|
(8,334
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
|
3,280,637
|
|
|
|
2,245,636
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(43,621
|
)
|
|
|
(21,341
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(43,621
|
)
|
|
|
(21,341
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Net
payments to bank line-of-credit
|
|
|
(615,000
|
)
|
|
|
(1,353,200
|
)
|
|
Payments
for capital lease obligations
|
|
|
(139,221
|
)
|
|
|
(122,948
|
)
|
|
Distributions
|
|
|
(1,157,000
|
)
|
|
|
(196,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in financing activities
|
|
|
(1,911,221
|
)
|
|
|
(1,672,148
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Change
in cash
|
|
|
1,325,795
|
|
|
|
552,147
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash,
beginning of year
|
|
|
639,738
|
|
|
|
87,591
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash,
end of year
|
|
$
|
1,965,533
|
|
|
$
|
639,738
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
32,917
|
|
|
$
|
68,909
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
|
|
Equipment
acquired under capital leases
|
|
$
|
39,445
|
|
|
$
|
93,110
|
|
(See
notes to financial statements)
4
KADIX
SYSTEMS, LLC
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
Kadix
Systems, LLC (the Company) was incorporated in the Commonwealth of Virginia on
November 27, 2001 as a limited liability company. The Company will
continue until December 31, 2031 unless sooner terminated in accordance with its
Operating Agreement. The Company is a professional services firm
providing technical support and consulting to the Federal Government and to
commercial organizations in the D.C. metropolitan area, Aberdeen and Columbia
(Maryland), Quantico (Virginia) and San Antonio (Texas).
Note
2 – Summary of significant accounting policies
Cash
– For purposes of the
statement of cash flows, the Company considers all highly liquid debt
instruments purchased with an original maturity of three months or less to be
cash equivalents. At December 31, 2007 and 2006, cash consisted of
demand deposits held in banks. The Company maintains some of its cash in bank
deposit accounts which exceed federally insured limits from time to
time. The Company has not experienced any losses in such accounts and
believes it is not exposed to any significant credit risk on cash and cash
equivalents.
At
December 31, 2007 and 2006 the Company held restricted cash of $474,280 and
$306,337, respectively, representing funds collected on behalf of the Federal
Government to facilitate training services. The Company has a
corresponding payable of $549,792 and $356,337, respectively.
Accounts receivable
–
Accounts receivable are
generated from prime and subcontracting arrangements with U.S. governmental
agencies and various commercial entities. Accounts receivable are
stated at cost less an allowance for doubtful accounts. Credit is extended to
customers after an evaluation of the customer’s financial condition, and
generally collateral is not required. Management’s determination of the
allowance for doubtful accounts is based on an evaluation of the accounts
receivable, past experience, current economic conditions, and other risks
inherent in the accounts receivable portfolio.
Billed
accounts receivable are considered past due if the invoice has been outstanding
more than 30 days. The Company does not charge interest on accounts
receivable; however, U.S. governmental agencies may pay interest on invoices
outstanding more than 30 days. The Company records such interest
income when received.
Unbilled
accounts receivable consist primarily of revenue which was unbilled due to
insufficient funding at the task order level. At December 31, 2007,
$102,163 of revenue was at risk.
Property and equipment
–
Property and equipment are
stated at cost. Property and equipment under capital leases are
stated at the lower of the present value of minimum lease payments at the
beginning of the lease term or fair value of the property at the inception of
the leases.
Depreciation
on property and equipment is calculated using the straight-line method over the
estimated useful lives of the assets, generally 3 to 5
years. Property and equipment held under capital leases and leasehold
improvements are amortized on the straight-line method over the shorter of the
lease term or estimated useful life of the asset.
Revenue recognition
–
The Company performs work
under time and materials, cost plus, and fixed price contracts. The
Company must receive approval to incur costs in excess of
funding. Revenues on time and materials contracts are recognized on
the basis of direct labor hours delivered and reimbursable costs incurred.
Revenues on fixed price contracts are calculated based on the percentage of
completion method. Under this method, individual contract revenue
earned is measured by the percentage relationship that contract costs incurred
bear to management’s estimate of total contract costs. Revenue from
cost-type contracts is recognized as costs are incurred on the basis of direct
costs plus allowable indirect costs and an allocable portion of the
fee.
KADIX
SYSTEMS, LLC
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
(Continued)
Losses
are recorded in full when they become determinable. Revenue
recognized on contracts in excess of related billings is reflected as unbilled
receivables. Progress billings in excess of earned revenue are
reflected as billings in excess of costs and accrued profit.
The Small
Business Administration offers the 8(a) certification program to provide
opportunities for qualifying small businesses seeking access to the government
contracts marketplace. The program positions the company for contract
opportunities with government agencies and major prime contractors in a wide
variety of industries. The Company was certified 8(a) by the Small
Business Administration (SBA) on April 17, 2003. The 8(a)
certification ends in 2012. Total revenue related to 8(a) contracts
decreased 31% in 2007 and generated revenues of $8,711,107 and
$12,806,419 for the years ended December 31, 2007 and 2006,
respectively.
Income tax accounting method
– Kadix Systems, LLC is a single member limited liability company and uses the
cash basis of accounting for tax purposes, whereby revenue is recognized when
collected and expenses are recognized when paid. Income is taxed to
the individual member rather than to the Company and, consequently, no provision
for income taxes is reflected in the accompanying financial
statements.
Accounting estimates
–
The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Due to
uncertainties inherent in the estimation process, and uncertainties relating to
future performance as the contracts are completed, it is at least reasonably
possible that estimated contract costs, used for calculating revenues and
certain assets and liabilities, will be revised within the near
term.
Reclassifications –
Certain
reclassifications have been made to the 2006 financial statements in order to
conform to the 2007 presentation.
Note
3 – Accounts receivable
Accounts
receivable at December 31, 2007 and 2006 consists of:
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
Billed
– trade
|
|
$
|
4,931,057
|
|
|
$
|
3,633,441
|
|
|
Allowance
for doubtful accounts
|
|
|
-
|
|
|
|
(42,342
|
)
|
|
Unbilled
|
|
|
113,455
|
|
|
|
287,582
|
|
|
|
|
$
|
5,044,512
|
|
|
$
|
3,878,681
|
|
The
Company's revenue and costs are subject to audit by the Defense Contract Audit
Agency (DCAA). Billings and revenue under cost-reimbursable
government contracts are based on provisional rates, which permit recovery of
indirect expenses at rates approved by the government in advance. The actual
allowable costs and rates are subject to review and audit by the government on
an annual basis. When final approval of the allowable costs and rates
has been made, billings and revenue may be adjusted.
KADIX
SYSTEMS, LLC
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
(Continued)
The
Company obtained its first cost plus type contract in 2005 and is required to
submit incurred cost submissions for the years ended December 31, 2005, 2006 and
2007, which will be subject to audit by DCAA. Management does not
believe that the accompanying financial statements will be materially affected
by any adjustments that may result from audits of the incurred cost submissions
for the three years ended December 31, 2007.
Note
4 – Property and equipment
A summary
of property and equipment at December 31, is as follows:
|
|
|
2007
|
|
|
2006
|
|
|
Leasehold
improvements
|
|
$
|
107,565
|
|
|
$
|
107,565
|
|
|
Furniture
and fixtures
|
|
|
110,936
|
|
|
|
104,659
|
|
|
Office
equipment
|
|
|
-
|
|
|
|
1,658
|
|
|
Computer
equipment
|
|
|
33,403
|
|
|
|
45,951
|
|
|
Capitalized
leases (see Note 7)
|
|
|
449,018
|
|
|
|
409,572
|
|
|
Software
|
|
|
38,200
|
|
|
|
33,581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
739,122
|
|
|
|
702,986
|
|
|
Less
accumulated depreciation
|
|
|
|
|
|
|
|
|
|
and
amortization
|
|
|
524,435
|
|
|
|
310,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
214,687
|
|
|
$
|
392,565
|
|
Depreciation
expense was $259,508 and $206,044 for the years ended December 31, 2007 and
2006, respectively.
Note
5 – Bank line-of-credit
The
Company has a line-of-credit agreement with a bank, which provides for
borrowings up to $3,000,000, subject to an annual reaffirmation by the
bank. As of December 31, 2007 and 2006, $0 and $615,000 was
outstanding, respectively. The maximum borrowing amount is equal to
the lesser of $3,000,000 or the sum of 90% of eligible government receivables,
as defined in the agreement. At December 31, 2007 and 2006,
borrowings incurred interest at the prime rate as published by the Wall Street
Journal. At December 31, 2007 and 2006, the interest rate was 7.25%
and 8.25%, respectively. The interest floor is 5.0% and borrowings
are secured by all of the Company's assets. The agreement contains a
covenant related to net worth. As of December 31, 2007 and 2006, the
Company was in compliance with this covenant.
Note
6 – Asset purchase
The
Company entered into an Asset Purchase Agreement dated March 1, 2004 for the
purchase of five contracts, uncollected notes receivable, accounts receivable,
accounts payable and property and office equipment for $50,000. Certain
personnel associated with the specific contracts became employees of the
Company. During 2004, the company from whom the assets were purchased
continued to account for the purchased contracts by rendering invoices,
collecting payments and paying expenses associated with the purchased
contracts. As of December 31, 2007 and 2006, the balance due to the
Company was $0 and $6,655, respectively.
KADIX
SYSTEMS, LLC
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
(Continued)
Note
7 – Leases
The
Company is obligated under several capital leases for computer hardware and a
telephone system. The leases expire over various periods through
2010. At December 31, the gross amount of capital leases included in
the Company’s property and equipment was as follows:
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
Computer
hardware
|
|
$
|
405,873
|
|
|
$
|
366,427
|
|
|
Telephone
system
|
|
|
43,145
|
|
|
|
43,145
|
|
|
|
|
|
449,018
|
|
|
|
409,572
|
|
|
Less
accumulated amortization
|
|
|
(336,372
|
)
|
|
|
(172,066
|
)
|
|
|
|
$
|
112,646
|
|
|
$
|
237,506
|
|
The
Company also has non-cancelable operating leases for office equipment and
facilities that expire over the next four years. The facilities lease
includes scheduled rent escalations (base rent) and also requires the Company to
pay its proportionate share of building expenses as additional rent. The
aggregate cash payments for base rent are being expensed ratably over the
related lease term.
Future
minimum lease payments under non-cancelable operating leases and the present
value of future minimum capital lease payments as of December 31, 2007
are:
|
|
|
Capital
|
|
|
Operating
|
|
|
Year Ending December 31,
|
|
Leases
|
|
|
Leases
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
$
|
106,327
|
|
|
$
|
476,218
|
|
|
2009
|
|
|
36,348
|
|
|
|
111,910
|
|
|
2010
|
|
|
958
|
|
|
|
11,856
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
minimum lease payments
|
|
|
143,633
|
|
|
$
|
599,984
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
interest (at rates from 6.53% to 11.37%)
|
|
|
12,094
|
|
|
|
|
|
|
Less
taxes
|
|
|
6,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
present value
|
|
|
124,622
|
|
|
|
|
|
|
Less
current portion
|
|
|
91,616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current
portion
|
|
$
|
33,006
|
|
|
|
|
|
Rent
expense inclusive of deferred rent was $437,773 in 2007 and $370,292 in
2006.
Note
8 – Phantom unit plan and ownership appreciation rights
Phantom unit plan
- The
Company has established a Phantom Unit Plan (the Phantom Plan), which entitles
the holder of the units to receive payment equal to the value of membership
units upon a change in control of the Company. The Phantom Plan unit value will
be determined by dividing 15% of the fair market value of the
KADIX
SYSTEMS, LLC
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
(Continued)
Company
on the control change date by the number of Phantom Plan units authorized for
issuance. The Company authorized 6 million Phantom Plan units, of
which all were granted on January 6, 2005. These units expire on
January 6, 2014.
Ownership appreciation rights -
The Company has established an Ownership Appreciation Rights Plan (the
OAR Plan), which entitles the holder of the rights to receive compensation equal
to the increase in the value of membership units upon a change in control of the
Company. The OAR Plan value per unit will be determined by the
increase in the quotient resulting from dividing 10% of the fair market value of
the Company on the issuance date and control change date by the number of units
authorized for issuance. The Company has authorized up to 4 million
ownership appreciation right units. The OAR Plan is effective for ten
years. At December 31, 2007, 2,850,000 units were issued and
outstanding.
OAR Plan
units vest on a graduated schedule as follows:
|
Date
|
|
|
|
|
Units
|
|
|
|
|
|
|
|
|
|
|
Fully
vested at December 31, 2007
|
|
|
|
525,000
|
|
|
|
|
|
|
|
|
|
|
|
Vesting
on:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June
1, 2008
|
|
|
75,000
|
|
|
|
|
|
|
August
1, 2008
|
|
|
175,000
|
|
|
|
|
|
|
August
1, 2009
|
|
|
175,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
425,000
|
|
|
Change
of control + 1 year
|
|
|
|
1,900,000
|
|
|
|
|
|
|
|
|
|
2,850,000
|
|
All
outstanding OAR Plan units can only be exercised upon change in control and
expire between years 2016 and 2018. All rights are forfeited if
employment ends before change of control.
No
compensation expense has been recognized for either the Phantom Plan or the OAR
Plan.
Note
9 – Employee retirement plan
The
Company maintains a 401(k) profit sharing plan (the "Plan") in accordance with
section 401(k) of the Internal Revenue code of 1986, as amended. All
employees (except for those employees whose employment is governed by a union
contract; non-resident aliens who do not receive any United States income from
employer; and leased employees) who have attained age 21 are eligible for
participation in the Plan. The Company makes discretionary matching
contributions that are determined each plan year. The matching
contributions are fully vested after 3 years of eligible service. The
Company may also make other discretionary contributions (Non-Elective
Contributions) to the Plan.
For the
years ended December 31, 2007 and 2006, the Company made matching contributions
of $177,780 and $129,349, respectively, to the Plan.
KADIX
SYSTEMS, LLC
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
(Continued)
Note
10 – Concentrations
Substantially
all of the Company’s revenue and accounts receivable are derived from prime
contracts and subcontracts with the U.S. Government or with commercial prime
contractors. Since a majority of the Company’s revenue is derived
from contracts with the U.S. government, any cancellations or modifications of
significant contracts or subcontracts, or failure by the U.S. government to
exercise an option period relating to those contracts or subcontracts, could
adversely affect our financial condition and results of operations in the short
and long term. Additionally, U.S. government contracts can be
terminated at any time by U.S. government without cause, for the convenience of
the U.S. government. If such termination occurs, the Company would be
entitled to receive compensation for services provided and costs incurred
through termination, plus, in certain circumstances, a negotiated amount of
profit.
Note
11 – Contingencies
The
Company is subject to legal proceedings and claims which arise in the ordinary
course of business. In the opinion of management, there is no pending
or threatened litigation or administrative proceeding that is expected to have a
material adverse impact on the Company’s financial position or results of
operations.
DYNAMICS
RESEARCH CORPORATION
UNAUDITED
PRO FORMA COMBINED FINANCIAL INFORMATION
On August
1, 2008, Dynamics Research Corporation (“DRC” or the “Company”) completed the
acquisition of Kadix Systems , LLC (“Kadix”) for $42 million in cash,
subject to certain adjustments typical for a transaction of this type, with the
potential for additional consideration of up to $5 million, based on achievement
of certain conditions. For tax purposes, the transaction will be
treated as an asset purchase resulting in expected tax benefits to the Company,
which have an estimated value of $10 million. Kadix maintains
practice specialties in organizational change, human capital, information
technology and public and environmental health. Kadix is focused on
the U.S. Department of Homeland Security (“DHS”), Marine Corps information
technology, military medical health, and federal civilian markets. At
August 1, 2008, Kadix had approximately 270 employees and is headquartered in
Arlington, VA with additional offices in Greater Washington, DC and Aberdeen,
MD. The acquisition strengthens and expands the Company’s
growth as a provider of high-end services and solutions in the DHS and other
federal markets.
The
following unaudited pro forma combined condensed balance sheets as of June 30,
2008 were prepared to illustrate the estimated effects of the acquisition of
Kadix by DRC as if the acquisition had occurred at June 30, 2008. The
unaudited pro forma combined condensed statements of income for the six months
ended June 30, 2008 and the year ended December 31, 2007 were prepared to
illustrate the estimated effects of the acquisition of Kadix by DRC as if the
acquisition had occurred at January 1, 2007.
The
unaudited pro forma combined condensed balance sheets as of June 30, 2008, have
been derived from the unaudited financial statements of DRC, as filed with the
Securities and Exchange Commission (“SEC”) in the Company’s Quarterly Report on
Form 10-Q for the six months ended June 30, 2008, and the historical
financial statements of Kadix for the six months ended June 30,
2008.
The
preliminary purchase price allocation assuming the acquisition had occurred at
June 30, 2008 is as follows:
|
Cash
consideration
|
|
$
|
44,496
|
|
|
Transaction
costs
|
|
|
408
|
|
|
Purchase
price
|
|
|
44,904
|
|
|
Cash
acquired
|
|
|
(2,496
|
)
|
|
Purchase
price, net of cash acquired
|
|
$
|
42,408
|
|
|
|
|
|
|
|
|
Current
assets, less cash acquired
|
|
$
|
8,982
|
|
|
Property
and equipment
|
|
|
259
|
|
|
Other
noncurrent assets
|
|
|
7
|
|
|
Current
liabilities
|
|
|
(3,545
|
)
|
|
Long-term
liabilities
|
|
|
(17
|
)
|
|
Identified
intangible assets
|
|
|
4,900
|
|
|
Goodwill
|
|
|
31,822
|
|
|
Total
purchase price allocation
|
|
$
|
42,408
|
|
The
unaudited pro forma combined condensed statements of income for the year ended
December 31, 2007, have been derived from the audited financial statements
of DRC, as filed with the SEC in the Company’s Annual Report on Form 10-K for
the year ended December 31, 2007, and of Kadix for that period. The unaudited
pro forma combined condensed statements of income for the six months ended June
30, 2008, have been derived from the unaudited financial statements of DRC, as
filed with the SEC in the Company’s Quarterly Report on Form 10-Q for the
six months ended June 30, 2008, and the historical financial statements of Kadix
for the six months ended June 30, 2008.
The
unaudited pro forma financial information is presented for illustrative purposes
only and is not necessarily indicative of the operating results that would have
occurred if the transaction had been consummated as of January 1, 2007, nor
is it necessarily indicative of future operating results. The unaudited pro
forma combined financial information should be read in conjunction with the
historical consolidated financial statements of DRC and related notes thereto,
and “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” of DRC contained in DRC’s Quarterly Reports on Form 10-Q, our
Annual Report on Form 10-K for the year ended December 31, 2007, and
other information DRC has filed with the U.S. Securities and Exchange
Commission.
|
|
|
|
PRO
FORMA COMBINED CONDENSED BALANCE SHEETS (unaudited)
|
|
|
AS
OF JUNE 30, 2008
|
|
|
(dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical
|
|
|
Historical
|
|
|
Pro
forma
|
|
|
|
Pro
forma
|
|
|
|
|
DRC
|
|
|
Kadix
|
|
|
adjustments
|
|
|
|
combined
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
108
|
|
|
$
|
2,496
|
|
|
$
|
(895
|
)
|
(1)
|
|
$
|
1,709
|
|
|
Restricted
cash
|
|
|
-
|
|
|
|
114
|
|
|
|
-
|
|
|
|
|
114
|
|
|
Contract
receivables, net
|
|
|
64,239
|
|
|
|
8,740
|
|
|
|
-
|
|
|
|
|
72,979
|
|
|
Prepaid
expenses and other current assets
|
|
|
2,723
|
|
|
|
72
|
|
|
|
56
|
|
(2)
|
|
|
2,851
|
|
|
Total
current assets
|
|
|
67,070
|
|
|
|
11,422
|
|
|
|
(839
|
)
|
|
|
|
77,653
|
|
|
Noncurrent
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
9,576
|
|
|
|
315
|
|
|
|
(56
|
)
|
(2)
|
|
|
9,835
|
|
|
Goodwill
|
|
|
63,055
|
|
|
|
-
|
|
|
|
31,822
|
|
(3)
|
|
|
94,877
|
|
|
Intangible
assets, net
|
|
|
2,050
|
|
|
|
-
|
|
|
|
4,900
|
|
(3)
|
|
|
6,950
|
|
|
Deferred
tax asset
|
|
|
1,484
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
1,484
|
|
|
Other
noncurrent assets
|
|
|
4,303
|
|
|
|
7
|
|
|
|
487
|
|
(4)
|
|
|
4,797
|
|
|
Total
noncurrent assets
|
|
|
80,468
|
|
|
|
322
|
|
|
|
37,153
|
|
|
|
|
117,943
|
|
|
Total
assets
|
|
$
|
147,538
|
|
|
$
|
11,744
|
|
|
$
|
36,314
|
|
|
|
$
|
195,596
|
|
|
Liabilities
and stockholders' equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
portion of long-term debt
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
8,000
|
|
(5)
|
|
$
|
8,000
|
|
|
Current
portion of capital lease obligations
|
|
|
-
|
|
|
|
58
|
|
|
|
-
|
|
|
|
|
58
|
|
|
Accounts
payable
|
|
|
13,626
|
|
|
|
1,843
|
|
|
|
-
|
|
|
|
|
15,469
|
|
|
Accrued
compensation and employee benefits
|
|
|
13,433
|
|
|
|
1,638
|
|
|
|
-
|
|
|
|
|
15,071
|
|
|
Deferred
taxes
|
|
|
5,696
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
5,696
|
|
|
Other
accrued expenses
|
|
|
12,727
|
|
|
|
6
|
|
|
|
-
|
|
|
|
|
12,733
|
|
|
Total
current liabilities
|
|
|
45,482
|
|
|
|
3,545
|
|
|
|
8,000
|
|
|
|
|
57,027
|
|
|
Long-term
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
607
|
|
|
|
-
|
|
|
|
36,496
|
|
(5)
|
|
|
37,103
|
|
|
Capital
lease obligations, long-term portion
|
|
|
-
|
|
|
|
12
|
|
|
|
-
|
|
|
|
|
12
|
|
|
Other
long-term liabilities
|
|
|
7,931
|
|
|
|
5
|
|
|
|
-
|
|
|
|
|
7,936
|
|
|
Total
long-term liabilities
|
|
|
8,538
|
|
|
|
17
|
|
|
|
36,496
|
|
|
|
|
45,051
|
|
|
Total
liabilities
|
|
|
54,020
|
|
|
|
3,562
|
|
|
|
44,496
|
|
|
|
|
102,078
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
Common
stock
|
|
|
956
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
956
|
|
|
Capital
in excess of par value
|
|
|
50,995
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
50,995
|
|
|
Accumulated
other comprehensive loss
|
|
|
(6,853
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
(6,853
|
)
|
|
Retained
earnings
|
|
|
48,420
|
|
|
|
8,182
|
|
|
|
(8,182
|
)
|
|
|
|
48,420
|
|
|
Total
stockholders' equity
|
|
|
93,518
|
|
|
|
8,182
|
|
|
|
(8,182
|
)
|
|
|
|
93,518
|
|
|
Total
liabilities and stockholders' equity
|
|
$
|
147,538
|
|
|
$
|
11,744
|
|
|
$
|
36,314
|
|
|
|
$
|
195,596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these unaudited pro forma
combined financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
PRO
FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
|
|
|
FOR
THE SIX MONTHS ENDED JUNE 30, 2008
|
|
|
(in
thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical
|
|
|
Historical
|
|
|
Pro
forma
|
|
|
|
Pro
forma
|
|
|
|
|
DRC
|
|
|
Kadix
|
|
|
adjustments
|
|
|
|
combined
|
|
|
Contract
revenue
|
|
$
|
108,481
|
|
|
$
|
20,609
|
|
|
$
|
-
|
|
|
|
$
|
129,090
|
|
|
Product
sales
|
|
|
3,290
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
3,290
|
|
|
Total
revenue
|
|
|
111,771
|
|
|
|
20,609
|
|
|
|
-
|
|
|
|
|
132,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of contract revenue
|
|
|
91,811
|
|
|
|
-
|
|
|
|
12,897
|
|
(2)
|
|
|
104,708
|
|
|
Cost
of product sales
|
|
|
2,998
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
2,998
|
|
|
Direct
expenses
|
|
|
-
|
|
|
|
10,502
|
|
|
|
(10,502
|
)
|
(2)
|
|
|
-
|
|
|
Selling,
general and administrative expenses
|
|
|
10,548
|
|
|
|
-
|
|
|
|
2,893
|
|
(2)
|
|
|
13,441
|
|
|
Provision
for litigation
|
|
|
8,819
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
8,819
|
|
|
Indirect
expenses
|
|
|
-
|
|
|
|
5,206
|
|
|
|
(5,206
|
)
|
(2)
|
|
|
-
|
|
|
Amortization
of intangible assets
|
|
|
1,019
|
|
|
|
-
|
|
|
|
963
|
|
(7)
|
|
|
1,982
|
|
|
Total
cost and expenses
|
|
|
115,195
|
|
|
|
15,708
|
|
|
|
1,045
|
|
|
|
|
131,948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
(3,424
|
)
|
|
|
4,901
|
|
|
|
(1,045
|
)
|
(2)
|
|
|
432
|
|
|
Interest
expense, net
|
|
|
(281
|
)
|
|
|
4
|
|
|
|
(930
|
)
|
(8)
|
|
|
(1,207
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(16
|
)
|
(9)
|
|
|
(16
|
)
|
|
Other
income (expense), net
|
|
|
168
|
|
|
|
(70
|
)
|
|
|
82
|
|
(2)
|
|
|
180
|
|
|
Income
(loss) before provision for income taxes
|
|
|
(3,537
|
)
|
|
|
4,835
|
|
|
|
(1,909
|
)
|
|
|
|
(611
|
)
|
|
Provision
for income taxes
|
|
|
90
|
|
|
|
-
|
|
|
|
1,982
|
|
(10)
|
|
|
2,072
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(783
|
)
|
(11)
|
|
|
(783
|
)
|
|
Net
income (loss)
|
|
$
|
(3,627
|
)
|
|
$
|
4,835
|
|
|
$
|
(3,108
|
)
|
|
|
$
|
(1,900
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
$
|
(0.38
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
9,430,607
|
|
|
|
|
|
|
|
|
|
|
|
|
9,430,607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these unaudited pro forma
combined financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
PRO
FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
|
|
|
FOR
THE YEAR ENDED DECEMBER 31, 2007
|
|
|
(in
thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical
|
|
|
Historical
|
|
|
Pro
forma
|
|
|
|
Pro
forma
|
|
|
|
|
DRC
|
|
|
Kadix
|
|
|
adjustments
|
|
|
|
combined
|
|
|
Contract
revenue
|
|
$
|
224,676
|
|
|
$
|
22,971
|
|
|
$
|
-
|
|
|
|
$
|
247,647
|
|
|
Product
sales
|
|
|
4,901
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
4,901
|
|
|
Total
revenue
|
|
|
229,577
|
|
|
|
22,971
|
|
|
|
-
|
|
|
|
|
252,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of contract revenue
|
|
|
187,516
|
|
|
|
-
|
|
|
|
14,149
|
|
(2)
|
|
|
201,665
|
|
|
Cost
of product sales
|
|
|
4,954
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
4,954
|
|
|
Direct
expenses
|
|
|
-
|
|
|
|
11,136
|
|
|
|
(11,136
|
)
|
(2)
|
|
|
-
|
|
|
Selling,
general and administrative expenses
|
|
|
21,826
|
|
|
|
-
|
|
|
|
5,285
|
|
(2)
|
|
|
27,111
|
|
|
Indirect
expenses
|
|
|
-
|
|
|
|
8,203
|
|
|
|
(8,203
|
)
|
(2)
|
|
|
-
|
|
|
Amortization
of intangible assets
|
|
|
2,602
|
|
|
|
-
|
|
|
|
1,725
|
|
(7)
|
|
|
4,327
|
|
|
Total
costs and expenses
|
|
|
216,898
|
|
|
|
19,339
|
|
|
|
1,820
|
|
|
|
|
238,057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
12,679
|
|
|
|
3,632
|
|
|
|
(1,820
|
)
|
|
|
|
14,491
|
|
|
Interest
expense, net
|
|
|
(1,541
|
)
|
|
|
(31
|
)
|
|
|
(2,180
|
)
|
(8)
|
|
|
(3,752
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(31
|
)
|
(9)
|
|
|
(31
|
)
|
|
Other
income (expense), net
|
|
|
646
|
|
|
|
(95
|
)
|
|
|
95
|
|
(2)
|
|
|
646
|
|
|
Income
(loss) before provision for income taxes
|
|
|
11,784
|
|
|
|
3,506
|
|
|
|
(3,936
|
)
|
|
|
|
11,354
|
|
|
Provision
for income taxes
|
|
|
4,682
|
|
|
|
-
|
|
|
|
1,437
|
|
(10)
|
|
|
6,119
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,613
|
)
|
(11)
|
|
|
(1,613
|
)
|
|
Net
income (loss)
|
|
$
|
7,102
|
|
|
$
|
3,506
|
|
|
$
|
(3,760
|
)
|
|
|
$
|
6,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.76
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.73
|
|
|
Diluted
|
|
$
|
0.74
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
9,326,907
|
|
|
|
|
|
|
|
|
|
|
|
|
9,326,907
|
|
|
Diluted
|
|
|
9,649,897
|
|
|
|
|
|
|
|
|
|
|
|
|
9,649,897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these unaudited pro forma
combined financial statements.
|
|
|
|
|
|
|
|
|
NOTES
TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
(1)
|
Cash
adjustments:
|
|
|
|
|
|
Payment
of deferred financing costs
|
|
$
|
(487
|
)
|
|
|
Payment
of transaction costs
|
|
|
(408
|
)
|
|
|
|
|
$
|
(895
|
)
|
|
|
|
|
|
|
|
|
(2)
|
To
reclass certain accounts to conform with the Company's
presentation
|
|
|
|
|
|
|
|
|
|
(3)
|
Goodwill
and other intangible assets adjustment per preliminary purchase price
allocation:
|
|
|
|
|
|
|
Goodwill
|
|
$
|
31,768
|
|
|
|
Other
identified intangible assets
|
|
$
|
4,900
|
|
|
|
|
|
|
|
|
|
(4)
|
Other
noncurrent assets adjustment:
|
|
|
|
|
|
|
Deferred
financing costs
|
|
$
|
487
|
|
|
|
|
|
|
|
|
|
(5)
|
Debt
adjustment:
|
|
|
|
|
|
|
Proceeds
from term loan
|
|
$
|
40,000
|
|
|
|
Proceeds
from revolver
|
|
|
4,496
|
|
|
|
Total
proceeds
|
|
|
44,496
|
|
|
|
Less
current portion of long-term debt
|
|
|
(8,000
|
)
|
|
|
Long-term
debt, less current portion
|
|
$
|
36,496
|
|
|
|
|
|
|
|
|
|
(6)
|
Retained
earnings adjustment:
|
|
|
|
|
|
|
Elimination
of Kadix equity
|
|
$
|
(8,182
|
)
|
|
(7)
|
To
record amortization expense on the identifiable intangible assets arising
from the acquisition. A portion of the excess of purchase price over fair
value of net assets acquired was allocated on a preliminary basis to
customer relationships and non-compete agreements. The amount allocable to
this intangible asset was estimated to be $4.9 million, and DRC
estimates it to have a weighted average useful life of 4.4 years, based
upon a preliminary independent appraisal. Accordingly, DRC is amortizing
these intangible assets over their respective periods, based upon the
estimated future cash flows of the individual contracts related to this
asset.
|
|
|
|
|
(8)
|
To
record interest expense on the outstanding principal balance of the term
loan, assuming principal payments in accordance with the financing
arrangements entered into on August 1, 2008, as described in the Company’s
Current Report on Form 8-K, dated July 30, 2008 and filed with the SEC on
August 5, 2008. The weighted average rates used to calculate interest
expense for each principal payment period was 5.15% based on committed and
current rates.
|
|
|
|
|
(9)
|
To
record amortization expense on the deferred financing costs related to the
term loan.
|
|
|
|
|
(10)
|
To
record income tax expense on the historical results of Kadix, a single
member limited liability company. Income was taxed to the
individual member rather than to the company and no provision for income
taxes was reflected in their financial statements. The statutory tax rate
used was 41% for the six months ended June 30, 2008 and the year ended
December 31, 2007.
|
|
|
|
|
(11)
|
To
record the income tax effect of pro forma adjustments at the statutory tax
rate of 41% for the six months ended June 30, 2008 and the year ended
December 31, 2007.
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.
|
|
|
DYNAMICS
RESEARCH CORPORATION
|
|
|
|
(Registrant)
|
|
|
|
|
|
|
|
|
|
|
Date: October
15, 2008
|
/s/
David Keleher
|
|
|
|
Senior
Vice President, Chief Financial Officer and
Treasurer
|
Exhibit
Index
|
Exhibit
Number
|
|
Exhibit
Name
|
Location
|
|
|
|
|
|
|
|
|
23.1
|
|
Consent
of Cherry, Bekaert & Holland (Independent Auditors for Kadix Systems,
LLC)
|
Filed
herewith
|
|
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