UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
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For
the fiscal year ended December 31, 2008
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OR
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
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For
the transition period from
to
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Commission
file number 001-34135
DYNAMICS RESEARCH
CORPORATION
(Exact Name of Registrant as
Specified in Its Charter)
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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
(Address
of Principal Executive Offices)
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01810-5498
(Zip
Code)
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Registrant’s telephone number,
including area code
Securities
registered pursuant to Section 12(b) of the Act:
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Title
of each class
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Name
of exchange on which registered
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Common
Stock, $0.10 par value
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Nasdaq
Global Market
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Securities registered pursuant to
Section 12(g) of the Act:
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes
o
No
þ
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange
Act. Yes
o
No
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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
þ
No
o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
o
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. (Check one): Large
accelerated filer
o
Accelerated
filer
þ
Non-accelerated
filer
o
Smaller reporting company
o
Indicate
by check mark whether the registrant is a shell Company (as defined in
Rule 12b-2 of the Exchange Act).
Yes
o
No
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The
aggregate market value of the registrant’s common stock, $0.10 par value,
held by nonaffiliates of the registrant as of June 30, 2008, was
$82,395,293 based on the reported last sale price per share of $10.50 on that
date on the Nasdaq Stock Market. As of February 28, 2009, 9,686,732 shares of
the registrant’s common stock, $0.10 par value, were
outstanding.
DOCUMENTS INCORPORATED BY
REFERENCE
Portions
of the registrant’s Proxy Statement involving the election of directors, which
is expected to be filed within 120 days after the end of the registrant’s
fiscal year, are incorporated by reference in Part III of this
Report.
ANNUAL
REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31,
2008
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Page
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PART I
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ITEM
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1.
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3
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1A.
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19
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1B.
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24
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2.
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24
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3.
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24
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4.
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25
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PART
II
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ITEM
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5.
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26
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6.
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28
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7.
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31
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7A.
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40
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8.
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41
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9.
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74
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9A.
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74
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9B.
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75
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PART
III
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ITEM
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10.
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76
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11.
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76
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12.
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76
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13.
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76
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14.
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76
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PART
IV
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ITEM
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15.
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77
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FORWARD-LOOKING
STATEMENTS
Some of
the statements under “Business”, “Management’s Discussion and Analysis of
Financial Condition and Results of Operations”, and elsewhere in this Annual
Report on Form 10-K (“Form 10-K”) 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 such 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. Factors that might cause or contribute to such differences
include, but are not limited to, those discussed in the Form 10-K 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.
Dynamics
Research Corporation is a leading provider of innovative engineering,
technical, information technology (“IT”) and management consulting services and
solutions to federal and state governments. Founded in 1955 and
headquartered in Andover, Massachusetts, DRC has approximately 1,500 employees
located throughout the United States. DRC operates as a parent
corporation and through its wholly owned subsidiaries, Kadix Systems, LLC, H.J.
Ford Associates, Inc. and DRC International Corporation. Unless the context
otherwise requires, references in this Form 10-K to “DRC”, “we”, “us” or “our”
refer to Dynamics Research Corporation and its subsidiaries.
We have
two reportable business segments: Systems and Services, and Metrigraphics. The
Systems and Services segment accounted for approximately 98% of total revenue
and the Metrigraphics segment accounted for approximately 2% of total revenue in
2008.
We are a
provider of mission-critical technology management consulting services and
solutions for government programs. Our position as a leading mid-size company
allows us to bring to bear the personnel, technology resources and industry
standard practices of a large company with the responsiveness of a small
company. Rather than force a pre-packaged solution, we listen to our customers,
and develop a tailored solution based on proven industry practices and lessons
learned in hundreds of successful engagements. We offer
forward-thinking solutions backed by a history of excellence and customer
satisfaction. We provide high quality, cost-effective services to
help meet customers’ evolving mission needs.
We
provide support to our customers in the primary mission areas of IT, Logistics
and Readiness, Systems Integration and Technical Services, Command, Control,
Computers, Communications, Intelligence, Surveillance and Reconnaissance
(“C4ISR”), Homeland Security, Health and Human Services, Intelligence/Space,
Cyber Security, and Public and Environmental Health. Customers
include the Department of Defense (“DoD”), the Department of Homeland
Security (“DHS”), federal civilian agencies and state
governments.
We offer
several business solutions to our customers, often combining two or more
solutions’ products and/or services to achieve customer goals as further
explained below.
Business
Transformation Solutions
We
provide a comprehensive set of services and tools for rapidly transforming
organizations and significantly improving organizational performance. Our
services in this area include applying proven, repeatable processes, such as
Lean Six Sigma, to the entire life cycle of business transformation and aligning
improvements with overall organizational objectives and
strategies. We provide web-based collaborative decision making tools
and facilities that enable participants in different locations to quickly and
cost-effectively participate in the transformation process. We
utilize process simulation tools and methods to conduct “what-if” analyses and
predict the impact of changes on performance. We have an established
track record in providing our business transformation customers with high
returns on their investment and/or positive impacts on performance. Because we
have no pre-selected solution or proprietary software packages to sell, we
tailor our processes and tools to meet each customer’s unique needs.
Descriptions of sample engagements follow.
The
Pension Benefit Guaranty Corporation (“PBGC”) guarantees payment of basic
pension benefits earned by 44 million American workers and retirees
participating in over 30,000 private-sector defined benefit pension plans. PBGC
must maintain reliable, secure information systems to communicate effectively
with its stakeholders, and safeguard personal and financial data. PBGC’s
Enterprise Program Management Office (“EPMD”), has a mission to maintain
corporate integrated IT governance and management framework policies, processes,
procedures, standards, and guidelines. The EPMD desired contractor support to
help meet its quality management objectives through the conduct of compliance
audits and the development and implementation of compliance improvement
programs. The EPMD chose DRC to perform quality audits and implement
a continuous process improvement program to ensure compliance of critical
information technology programs with applicable PBGC IT quality requirements. To
accomplish this, we employ documented audit processes, templates, and personnel
experienced in multiple IT process improvement and quality methodologies and
approaches, including Lean Six Sigma, capability maturity model integration
(“CMMI”), and project management body of knowledge. Our solution entails
employing a collaborative approach—working with all client stakeholders to
foster a positive, objective-oriented focus; structured product and process
quality assurance process implementation; and a clear focus towards our ultimate
goal: improving the delivery of products and services to PBGC EPMD
clients.
Our work
with the Naval Air System Command (“NAVAIR”) involves providing assistance in
implementing AIR
Speed
,
its approved Naval aviation maintenance/logistics integration and modernization
system, to share best business practices throughout the Naval aviation
enterprise. AIR
Speed
focuses on the total
aviation solution within all levels of supply and maintenance. As a
subcontractor to the Avraham Y. Goldratt Institute, we provide Lean Six Sigma
training and technical support services for NAVAIR maintenance facilities around
the world.
The
Federal Deposit Insurance Corporation (“FDIC”) is striving to continually
improve the overall operating efficiency and effectiveness of its IT resources.
Through FDIC’s business analysis and management support services, FDIC expects
to identify opportunities for improved efficiency and effectiveness of its IT
resources. We are providing advisory services and assistance in
developing project requirements, managing current IT projects, planning future
projects, preparing business case analyses, and the use of the rational unified
process, FDIC's standard development methodology.
EVENTSHARE
is an enterprise-level system and software engineering process improvement
program within the National Security Agency (“NSA”). We provide system
engineering and process engineering services in a five-year effort to drive the
organization to a CMMI-based engineering organization, ensuring the
establishment of an enterprise-wide system and software engineering process
architecture to support successful and timely deployment of mission
systems. Through this program, we provide the NSA with some of the
industry’s most qualified process engineers with experience in the areas of CMM,
CMMI and the IT Infrastructure Library (“ITIL
®
”).
IT
Infrastructure Services
We
provide a comprehensive set of services to support the design, installation,
operation, management, and continuous improvement of IT
infrastructures. Our processes consist of industry standard practices
combined with DRC’s unique processes. Our approach is based on
ITIL
®
, which
is the leading standard of practice for IT infrastructure development and
service management. Whether a simple daily operations checklist,
integration of security in high security environments, or a deployment procedure
for a new 500-user network site, we use proven, repeatable processes, which
ensure quality control and successful performance. We deploy
experienced, domestically located network professionals and ensure that they are
trained on our customers’ processes, technology, environment and objectives. We
have experience in providing IT services for up to 20,000
users.
We
provide full life cycle support for Office of the Assistant Secretary of
Defense
(
“
OASD”) web sites and
web-based applications, including on-site project management, applications
development, web page design and maintenance, and operational support. We use
web technology to disseminate information in text, audio, and video formats to
DoD personnel worldwide. Our systems use template components, libraries of
images, and customizable layouts to publish local content within the context of
the global environment. We support over 1,000 web sites for OASD Public Affairs
(“PA”)'s Armed Forces Information Service (“AFIS”) (e.g.,
www.defendamerica.mil
,
www.defenselink.mil
). We
provide primary content to all OASD web sites, as well as 24/7 support, server
administration, content management, helpdesk support and training and develop
new server infrastructure from the ground up, ensuring that all servers are
registered with the Department of Information Systems Agency and compliant with
Government regulations. Our successes include migrating over 30 OASD
public web sites from the Department of Technical Information Center to AFIS for
hosting, with no down time or interruption to the live web sites, implementing
"GovDelivery" system application, which provides citizens with better service
and access to relevant DoD information, proactively delivering the new
information through e-mail and wireless alerts and seamlessly transferring 10
years worth of data from
www.d
efenselink.mil
into a
new content management system.
We
designed and built a network for the Colorado Department of Human Services,
which connects 7,000 state and county workers at 130 sites with the State’s
child welfare benefits management system. To ensure availability and
operability, we installed and operate remote control access to all
microcomputers. We provide help desk services, remote patch and service pack
upgrades, virus signatures, and a network management system that continuously
monitors and reports on network availability and stability. The network was
designed to accommodate the addition of new applications, including remote/web
file access, web-based email, thin client access to all core applications,
secure sockets layer security, heterogeneous directory integration, and portal
services. The upgrades increased security, provided additional services, and
saved the State enough operating dollars to pay for the entire upgrade in 18
months.
We
provide IT infrastructure support to the Internal Revenue Service (“IRS”) on a
number of critical programs. We support the collection services systems by
supplying full life cycle development support that includes security
certification support along with enterprise architecture analysis to ensure that
all development adheres to the IRS enterprise architecture in areas such as
communications, transaction processing and system management. Our support on the
credit card initiative program includes independent verification and validation
(“IV&V”) of web and interactive voice response applications and network
security assessment and review and evaluation of security
documentation. We support the enforcement revenue information system
by providing independently-assessed Software Engineering Institute (“SEI”) CMM
Level 3 IV&V support, including independent testing. Our services
are essential to ensure successful implementation of IRS e-commerce initiatives
and are vital to preserving security of the taxpayer's sensitive
information. Each year we have met aggressive deadlines and have
certified the systems in time for the first tax payments to be
received.
Training
and Performance Support Solutions
Our
training solutions are an integral part of a broader assessment of human
performance within an organization or system. Our methodology
integrates industry best practices in human performance assessment of
organizations, instructional systems development, and human systems integration
of complex systems. Our training encompasses individual training as
well as team training. We are an industry leader in the development of team
training applications for mission critical teams. Our training
solutions include training/task analysis, high performance team training,
web-based training, and automated training management. As part of our
integrated methodology, we also identify, develop, and deliver a variety of
additional human performance improvement solutions, including electronic
performance support systems, job/task redesign user interface change,
organizational redesign, and resource reallocation. Descriptions of
sample engagements follow.
We are
utilizing our proven instructional system development processes to provide
computer-based and web-based training for the pilots and crew members of the
U.S. Department of Homeland Security Immigration and Customs Enforcement group.
The training that we have developed has many advanced features including the
emulation of equipment control panels and the replication of equipment display
panels. Our training allows pilots to quickly come up to speed on
mission-specific equipment and learn common operating principles and standards.
The training fully supports the train "anywhere, anytime" concept, making
learning convenient and efficient for both pilots and
instructors.
The
United States Coast Guard (“USCG”) needed to enhance the performance of Coast
Guard personnel operating at sea in three areas: training and qualifying new
boat forces, improving the damage control and seamanship skills of all underway
forces, and improving the performance of fisheries law enforcement
officers. We developed a number of complex, highly interactive,
e-learning courses utilizing the analysis, design, development, implementation,
and evaluation instructional design methodology as the basis for designing and
developing courses. We worked closely with the USCG in the analysis
phase to determine performance assessment criteria, learner profiles, overall
course objectives, and optimal training/learning solutions. During
the design phase, our instructional designers mapped the defined learning
objectives to the performance criteria determined during the analysis
phase. The overall course structure was solidified and the USCG was
able to review and approve a prototype. USCG’s review ensured that the user
interface, assets and course format, including knowledge checks, met their
established standards and styles. We successfully delivered Web-based
e-Learning that was installed on the USCG’s learning management
system. All electronic and information technology met the USCG’s
interactivity requirements, was Section 508 compliant, and conformed to the
shareable content object reference model. Final products included a knowledge
management repository of job performance and reference information. This
training helped USCG personnel perform processes and procedures that better
protect the U.S. coastal borders and ensure public safety.
Army
training needs require team or collective training programs for its major new
network-centric system of Army combat vehicles—the Future Combat System (“FCS”).
The FCS program is a family of systems that will provide the basis for
transforming the Army's forces. It will be a networked, multifunctional,
multi-mission, re-configurable system of systems designed to maximize joint
interoperability, strategic transportability, and commonality of mission roles.
We are developing training support packages for collective training of the FCS
units, leader teams, and staff groups. We have developed a comprehensive method
for conducting collective task analysis and are applying it to several FCS
systems. Our training incorporates proven team training and
instructional development principles, employs mission-based task analysis
techniques to ensure that the resultant training is mission-based and
doctrinally correct, and is embedded within the FCS systems. We use
object-oriented approaches and directly interface with FCS simulation
systems. The outstanding quality of our work on this program was
recently recognized, as DRC received the 2008 Boeing Company Gold Supplier of
the Year Award.
Business
Intelligence Solutions
Our
business intelligence solutions are designed to provide the actionable
information needed to make critical decisions and continuously improve
organizational performance. Employing rapid development techniques,
we quickly produce results and arrive at business intelligence solutions that
meet user needs. With deep domain knowledge, we use data engineering
tools to extract and integrate information from legacy data systems. Finally, we
develop and apply modeling and simulation techniques. We are an industry leader
in the development and application of modeling and simulation techniques that
provide the analytical capability to make proactive business decisions. Our
solutions integrate business transformation processes, user interface design,
training, and system operations and maintenance; key activities needed for
successful business system implementation and use. Descriptions of
sample engagements follow.
Army Food
Management Information System (“AFMIS”) required modernization to better serve
its customers and to manage food distribution and dining facilities
worldwide. AFMIS provides an enterprise-wide automated solution for
the Army food management program, encompassing operations across each of the
major commands and Army regions. AFMIS provides an automated user interface for
dining facility operations and troop issue, as well as installation
management. We have partnered with Software Engineering Center Lee
(“SEC-L”) in the Army's modernization efforts with the AFMIS system since 1997
and were instrumental in the strategic planning and the functional requirements
gathering as well as the evaluation of commercial food service
commercial-off
the-shelf
(“COTS”) products to accomplish its mission. Our team led in the development and
integration of a hybrid COTS and custom-developed software. Recently, SEC-L has
contracted us to provide both legacy system migration support and re-engineering
support for the legacy server-based system to a web-based graphic user interface
system. Our engineers not only know the technology but also have
significant functional understanding of the food service system. This mix of
expertise has proven invaluable to the client as the replacement system was
successfully developed using an evolutionary prototype development methodology
incorporating the best-of-breed capabilities from the legacy system and COTS.
Our team has allowed the AFMIS program to successfully support 53 Army/reserve
installation operations and approximately 350 dining facilities
worldwide.
We
designed, developed and implemented the Joint Event Scheduling System (“JESS”).
JESS is a force management tool that provides automated event management,
scheduling and deconfliction capabilities to the U.S. Joint Forces Command
(“USJFCOM”). JESS improves management of DoD force deployment for
joint operations, training exercises, experiments, demonstrations, and
evaluations, as well as providing visibility into real-world events, global
force presence, and transportation requirements.
The
National Science Foundation (“NSF”) website advertises scientific research grant
opportunities and awards, documents completed research, and educates the
research community and general public about scientific advances taking place
around the world. We helped the NSF redesign its website's look,
feel, and architecture, beginning by carefully considering the needs of NSF’s
organizations. We created a dictionary of common terminology and developed a
standardized design, provided web development, converted old applications and
created a role-based administration web application. This system enables users
with no knowledge of web development to post information; ensures error free and
consistent layout via standardized templates; and features a review and approval
process workflow that enforces policy and business rules. The website
can be updated in real time by end users using standard policies and processes
and enhances the productivity of the entire NSF community. This
website won the 2007 Webby Award in the government category of web site
design. The Webby is the leading international award honoring
excellence in web design, creativity, usability and
functionality.
Automated
Case Management Solutions
Our
automated case management solutions are focused on state health and human
services. We have successfully developed and implemented these
state-wide systems for the states of Ohio, Colorado and New
Hampshire. In early 2008, the State of Tennessee selected DRC to
develop and deploy a similar system. Our approach is based on the
philosophy of developing a customized solution that leverages existing
predefined and commercial-off-the-shelf products specifically tailored to meet
our customers’ needs. Our rapid requirements definition process
quickly creates a set of baseline models and then our model driven architecture,
coupled with our iterative development process, generates significant portions
of the application. We employ an integrated process that combines
innovative technology approaches for software development with award-winning
training and performance support solutions and powerful business transformation
techniques. The end result is a customized case management solution that is both
timely and affordable and embraced by users who were active participants in its
development.
The
system we have built and implemented for the State of Ohio supports workers with
over 658,000 client cases in 88 counties. The requirements and effort needed to
transition from the current environment to the integrated statewide automated
child welfare information system (“SACWIS”) implementation was
large. By applying our proven business transformation methods and
practices we delivered a solution that provided the State of Ohio with the
benefits of custom development without the risks and longer timelines normally
associated with large-scale development. Our methods ensured that county
children’s services agencies across the State were actively involved with design
and user acceptance testing, and system workflow directly mirrored Ohio's
revised business processes. The system effectively supports cases
from intake to closure and is accessible to workers anywhere there is Internet
access, allowing information sharing across county lines and helping local and
state administrators make informed decisions about the services provided to
families.
TNKids, a
first-generation child welfare information system, has supported Tennessee’s
child welfare practice since 2000. Technical limitations, Federal requirements
and an evolving practice model mandated a replacement that leveraged technology
to meet unique State needs and Federal requirements. We are
customizing our web-based Ohio SACWIS solution to align it with Tennessee’s
unique child welfare practices. Our solution incorporates a proven state-of-art
user-friendly interface, a comprehensive, user-driven reporting system, and
dashboards to provide users with essential information when
needed.
This
solution provides secure Internet and mobile device connectivity that supports
public/private agency access, information exchange and self-service features
such as the ability to directly enter child protective services referrals via
the Internet and end-to-end case integration across all areas. A single view of
the case draws on a central repository for all case documents. Its case-file
print feature customizes a printout of an entire case, thereby eliminating
standalone, disjointed legacy systems that frustrate workers and lead to tedious
work and sub-optimal client outcomes. Our solution incorporates a proven, common
interface model across disparate legacy systems that accommodates current
external interfaces and can handle future interfaces. Our highly
structured yet agile development approach features frequent progress metrics and
early review/defect correction. This iterative approach permits the development
and integration of enhancements
before
statewide system
rollout. We are providing a customized solution that is 100% aligned
with Tennessee’s unique child welfare practices resulting in a statewide child
welfare practice model that improves family
outcomes
by incorporating best practices from both industry and Tennessee case
managers. Our technical architecture can easily adapt to future needs
and technology changes. We offer a reusable model-based case
management framework that can be used for other case management needs (e.g.,
adult protection, child care, juvenile justice) in any state.
Acquisition
Management Solutions
We
provide DoD System Program Offices (“SPO”) with a comprehensive set of services
to support the acquisition and management of complex systems throughout their
life cycle, offering expertise in all acquisition areas including acquisition
program management, business, cost, and financial management, systems
engineering, software engineering, production sustainment and readiness and
acquisition logistics. Descriptions of sample engagements
follow.
We
provide comprehensive support in engineering, management, financial, and
logistics areas to the Air Force Predator Program office. Our team also
supports the Air Force in the refinement and updating of the group manpower
products, program information, and the development of the foreign military sales
program plan. We successfully coordinate stakeholder inputs and the preparation
of key program director-level reports resulting in the successful support of
programs to arm soldiers with war-winning Predator/Reaper
capabilities.
The C-17
SPO directs and executes development, production, deployment, sustainment,
modification and test of the C-17 airlift aircraft. The $43 billion program
employs 40,000 people and has 1,700 suppliers to provide the airlift capability
critical to the U.S. national defense. We provide specialized domain
knowledge to the SPO in acquisition program management and logistics,
configuration and data management, manufacturing, quality assurance and
financial analysis. We update and maintain the C-17 integrated master plan and
integrated master schedule. We also develop requirements related to readiness
objectives and design and conduct specialized analyses on life cycle cost,
logistics and resource requirements. We provide manufacturing and quality
assurance expertise for program milestone reviews and supported the development,
implementation and assessment of an advanced quality system at prime and
subcontractors' facilities using SAE AS9100 series standards.
We
provide specialized engineering services to support the design, test,
manufacturing, and integration of advanced components and complex systems,
including reverse engineering, manufacturing engineering, automated test
equipment design, production and correlation support, and integrated circuit
device and circuit board modeling and simulation.
We also
support the Navy's submarine-launched strategic missile guidance system through
the Navy Strategic Systems Program Office and the Charles Stark Draper
Laboratory. As such, we provide engineering services for both the
hardware and embedded software of automated test equipment and communications
evaluations used to facilitate the development and test of critical system
assemblies. We perform reverse engineering services for DoD customers
such as the U.S. Air Force, U.S. Marine Corps, Naval Surface Warfare Center in
Crane, Indiana, and NAVAIR. Our reverse engineering services include
feasibility studies, repair/production fabrication efforts, and complete and
partial reverse engineering.
We
provide developmental research supporting the establishment of the Item Unique
Identification (“IUID”) umbrella program for Air Force depots. This task order
expands upon IUID research work previously performed by DRC for Air Force depots
and improves the Defense Department's asset tracking of repaired, overhauled and
manufactured components for accountability, valuation and life cycle management.
By employing previous research on specific metallurgical impacts of IUID
marking, this effort increases the number of items that will be marked, bringing
the Air Force closer to realizing its objective of total asset visibility. We
also provide comprehensive analysis of tagging and labeling methods, including
detailed studies of adhesives durability in operational environments. Our
efforts assist in the identification of state-of-the art asset tracking
technology and help improve accountability throughout the life cycle of all DoD
assets.
Our Versa
Module Eurocard Global Positioning System (“VME GPS”) Receiver product line
has a flexible design, which allows the integration of any GPS receiver that
complies with the Navigation Satellite Timing and Ranging Joint Program Office
performance specification for standard electronic module Type E GPS receivers,
Critical Item GPS Receiver Application Module-500. These GPS receiver products
are powerful and versatile modules that provide robust GPS solutions used for
navigation and for hot starting the embedded GPS receivers of precision guided
munitions.
We offer
strategic human capital, workforce planning, and performance management
solutions for our customers to transform the cultures of Federal agencies so
they become less hierarchical, process-oriented, and inwardly focused; and more
flat, results-oriented, integrated, and externally focused. We combine the best
commercial and Government sector approaches to deliver innovative human capital
solutions that address the challenges facing our clients today. Our capabilities
include applying private sector HR practices (workforce planning, succession
planning, and competency modeling) to Government organizations. We
support the electronic
human
resource initiative, deliver electronic official personnel file capabilities,
and provide human capital transformation expertise based on successful past
support to Government clients. We work with our Federal clients to solve many of
the leading human capital issues facing the Government today.
Our
approach is based on the Office of Personnel Management's human capital
assessment and accountability framework (“HCAAF”). The HCAAF provides high level
standards for Human Capital policies, programs, and practices to achieve a
shared vision integrated with the agency's strategic plan.
The DHS
CBP Procurement Directorate (“PD”) needed a comprehensive, state-of-the-art
knowledge management system to support the finance acquisition improvement
initiative. We provided a simple and easy-to-use portal for the
collection, dissemination, and utilization of a standardized, up-to-date body of
knowledge, policies, and procedures. Working collaboratively with CBP, DRC
analyzed the PD's current IT infrastructure to identify the optimal combination
of knowledge management techniques and tools. Based on our assessment, we
recommended SharePoint 2007 as a scalable, cost-effective software solution to
maximize knowledge sharing in the CBP environment. Implementation of a
SharePoint 2007-based solution required substantial custom development to assure
that the solution fulfilled documented CBP requirements. This development
involved iterative prototyping, direct client interaction, and on-site user
accessibility testing that resulted in a product that fulfilled CBP's needs. The
size and scope of the initial implementation covered 250 procurement personnel
dispersed across the country. The project has since been extended to include
development of 7 additional knowledge management systems for each of the Office
of Finance Directorates, serving more than 1,200 staff in
total. Within six months of contract award we deployed a fully
functional Web-based knowledge management system. The acquisition resource
management system (“ARMS”) provides a one-stop-shop for program customers,
procurement personnel, and other stakeholders to access best practices, tools,
templates, research, and other information. The knowledge management system
currently contains a fully functioning workflow support tool for the creation,
submission and tracking of leave requests. Further workflow support tools are in
development for future implementation.
Battle
Command Knowledge System (“BCKS”) is the Army’s knowledge management system
providing the capability to effectively share, integrate, reuse, and apply
information and experience. It helps solve problems, make decisions and improve
operational performance. Knowledge management facilitators and professionals
support a series of knowledge management networks and forums designed to
capture, manage and share information on a variety of military subjects that
link groups of similar interest virtually 24/7. We provide knowledge management
support and services to the leadership and leader development knowledge network
and operational forces knowledge network. Our knowledge managers
facilitate, coordinate, integrate and share knowledge among the eight
professional forums in the leadership and leader development and operating
forces knowledge network. Forum facilitators support online discussions, connect
forum members and subject matter experts and capture new knowledge for future
use. We also provide BCKS/ knowledge management training to customers
across the Army.
Cyber
Security
Our
information assurance/cyber security services include management support,
operational support and technical support. We help develop security policies and
plans, provide certification and accreditation assistance, provide management
support to security programs, assist in the identification and mitigation of
security risks, provide test and evaluation support, and help agencies meet
Government compliance management/reviews including remediation support. We fully
support the "people" side of information assurance (“IA”) by helping agencies
acquire and train the key IA skills through our proven human capital, training,
and change management practices for the security community. In addition, we
provide a wide range of security operations support to include incident
handling, disaster recover/continuity of operations, and computer support and
operations. We have the skills to provide a broad range of technical support to
include security architecture design and development, identification and access
control, intrusion detection/penetration testing, and network security design
and assessment. DRC’s IA services combine industry standard practices with our
unique processes and tools and a highly capable staff that is trained and
certified in key security skills. We have experience with a diverse range of
Government organizations such as the DHS, DoD, National Security Agency, the
Department of the Treasury, United States Patent and Trademark Office, National
Archives and Records Administration, the Department of Justice, and State
Governments. This diversity allows us to bring to bear the best practices for
meeting the difficult challenges associated with complying with the myriad of
Government security requirements, developing effective staff security practices
and skills, and protecting Government data and systems from rapidly evolving
threats.
Our other
business segment, the Metrigraphics Division, develops and produces components
for original equipment manufacturers in the medical electronics, computer
peripheral devices, telecommunications and other industries. Manufacturing core
capabilities are focused on the custom design and manufacture of miniature
electronics parts that are designed to meet ultra-high precision requirements
through the use of electroforming, thin film deposition and photolithography
technologies.
We
believe that Metrigraphics’ superior ability to design and manufacture
components and maintain critical tolerances is an important driver for a wide
range of high-technology applications. We currently apply these technologies in
four distinct applications:
(i) inkjet
printer cartridge nozzle plates and hard drive test devices; (ii) medical
applications for micro-flex circuits; (iii) electrical test device for
application in flexible interposers and 3-D microstructures; and (iv) devices
used in the manufacture of fiber optic system components requiring precision
alignment and 3-D microstructures.
Financial
Data and Other Information
Financial
data and other information about our operating segments can be found in the
section titled “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” in Part II, Item 7, and in Note 12 of
the “Notes to Consolidated Financial Statements” in Part II,
Item 8 on this Form 10-K. Unless otherwise indicated, all financial
information contained in this Form 10-K refers to continuing
operations.
We
maintain an Internet site at
http://www.drc.com
.
Our Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on
Form 8-K and all amendments to these reports are available free of charge
through our website by clicking on the “Investor Relations” page and selecting
“SEC Filings”. The public may read and copy any materials we file with the
Securities and Exchange Commission at the SEC’s Public Reference Room at 100 F
Street, NE, Washington, DC 20549. The public may also obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The SEC maintains an Internet site (
http://www.sec.gov
) that
contains reports, proxy and information statements and other information
regarding issuers that file electronically with the SEC. We do not
intend that the information contained on our website be deemed a part of this
Form 10-K or to be deemed filed with the SEC.
We are
focused on providing higher end, high value solutions and services to government
customers. We believe that our core capabilities are well aligned with the types
of services and solutions for which the government has increasing demands;
assistance with transforming the delivery of government services, systems which
deliver a high level of business intelligence to its users, advanced military
training architecture and systems, automation which provides a new level of
quality, responsiveness and reliability in the delivery of citizen services and
engineering services which enhance and leverage technology to help our customers
efficiently achieve their mission.
According
to INPUT, Inc., a leading research firm specializing in the market for
government contractors, the growth in federal IT spending will be slow over the
next couple of years, then will pick up resulting in a compounded annual growth
rate (“CAGR”) of 3.9% over the next five years. INPUT expects
civilian agencies’ IT spending to grow faster at a CAGR of 4.2% compared to a
CAGR of 3.5% for defense. INPUT also expects intelligence IT spending
to grow even faster at a CAGR of 5.5% over the next five
years.
We are
cognizant of funding challenges and changing priorities of the federal
government. In February 2009, the President made his initial budget
submission to Congress. While a more detailed budget will be provided
in April, the submission, along with the Federal Stimulus Plan, will provide
clear indications of priorities and direction for the new
administration. Overall, the budget provides for discretionary
spending growth of 7%. Breaking the increase down by sector, the
budget proposal reflects 9% growth in funding for civilian agencies and 4%
growth in funding for defense. However, significant contract awards
have been and may continue to be delayed and new initiatives have been slow to
start.
Customers
are moving away from the GSA schedule time and materials contracts toward
agency sponsored indefinite delivery-indefinite quantity (“ID/IQ”) 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 training, business
transformation, lean six sigma, human capital management, cyber security 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.
In the
state and local government sector, there is a need for states to continue to
modernize child welfare systems and Medicare management systems, areas where
our automated case management solution fits well. We have considerable
experience in providing IT expertise in the health and human services areas. We
believe the primary factors driving growth in this sector are infrastructure
modernization and expansion, the migration of information and training to
web-based applications and cost-sharing incentives to facilitate data exchange
with federal agencies, which generally have large and burdensome caseloads.
These agencies must maintain extensive records, report program data, eliminate
errors and work toward a more responsive management. Yet the information systems
of many of these agencies are antiquated, in some cases more than twenty years
old, and have limited data interfacing and reporting
capabilities.
Our
Metrigraphics Division represented approximately 2% of total revenue in 2008.
The Metrigraphics Division serves the commercial original equipment
manufacturers market. This market includes manufacturers of medical technology
equipment and
computer
peripheral devices and telecommunications. The Metrigraphics Division sells
principally to commercial customers and is not considered strategically
important to our future.
Our 2008
contract revenue delineated by market sector was derived 66.3% from the
national defense and intelligence sector, 13.9% from other federal civilian
agencies, 8.1% from homeland security, 10.9% from state and local governments,
and 0.8% from other commercial customers. We had one customer in the past three
years that accounted for more than 10% of total revenues. This
customer, the U.S. Air Force Aeronautical Systems Center, along with other
customers, is more fully described by sector below.
National Defense and Intelligence
Sector
U.S. Air
Force customers constituted the largest component of our national defense and
intelligence revenue in 2008, representing 32.8% of contract revenue, while
U.S. Navy revenue represented 13.3%, U.S. Army revenue represented
12.7% and revenue from other agencies represented 41.2% of contract revenue. Key
capabilities that we offer to defense customers include business intelligence
systems, business transformation services, acquisition management services,
training and performance support systems and services, and IT infrastructure
services. In addition, we develop, maintain and validate hardware and software
for complex weapons systems. The work we perform for our major customers in this
sector is described below.
Materiel
Command
,
Global Logistics
Support Center
In 2008
we were awarded a $12.9 million contract to support the U.S. Air Force Global
Logistics Support Center, part of the Air Force Materiel Command located at
Wright Patterson Air Force Base, in Dayton, Ohio. The contract, that has one
base year and four option years, will enable DRC to continue its support
services, which identify and eradicate faulty data anomalies in the D200A data
quality system. We will determine the extent of interface and system data
quality problems, identify discrepancies, initiate corrections, and provide
visibility of data as well as maintain web applications, which assist in
tracking, scanning and organizing data to identify anomalies in the system and
correct them. Maintaining high data quality is an essential factor in
the Air Force’s ability to maintain cost efficiency and readiness as well as
streamline logistics and supply chain management.
Materiel
Command
,
Aeronautical
Systems Center (“ASC”)
The ASC,
headquartered at Wright-Patterson Air Force Base, is responsible for research,
development, testing, evaluation and initial acquisition of aeronautical systems
and related equipment for the Air Force. Major active programs supported include
the C-17, F/A-22 and B-2 systems group.
Materiel
Command, Electronic Systems Center (“ESC”)
The
mission of the U.S. Air Force ESC, headquartered at Hanscom Air Force Base in
Bedford, Massachusetts, is to serve as the center of excellence for command and
control and information systems to support the U.S. Air Force and the DoD. ESC
provides full spectrum architectures, weapon systems management and technical
cognizance throughout the life cycle of communications, intelligence,
surveillance, reconnaissance and information systems. We evaluate system
requirements, provide technical services, support the integration of products
into airborne and ground weapons systems, and provide management services
supporting ESC systems program offices.
As a
member of the Computer Science Corporation team we are providing technical and
subject matter experts supporting the implementation of the Air Force’s
Expeditionary Combat Support System. This multi-year effort is
intended to transform Air Force logistics.
Materiel
Command, Depot Operations
In 2005,
the Ogden Air Logistics Center, one of three U.S. Air Force Materiel Command Air
Logistic Centers, awarded us an ID/IQ Design Engineering and Support
Program II (“DESP II”) contract to provide the U.S. Air Force and other DoD
agencies with design, engineering and technical support services. Task orders
under the contract may be received through June 2010 and must be completed by
June 2012. We are one of twenty prime contractors that received an award. The
contract has a ceiling value of $1.9 billion. DESP II is specifically
designed to support the engineering services requirements of the U.S. Air Force
logistics and maintenance community, which has been a customer of ours for
thirty years.
We
perform logistics analyses and operations for the U.S. Air Force’s Air
Logistics Centers at Tinker and Hill Air Force Bases in Midwest City, Oklahoma
and Ogden, Utah, respectively. We also provide logistics support, IT management
and analysis, system
engineering
and technical services on programs such as the B-1B, the B-2, the B-52, the
KC-135 and the E-3A aircraft repair, maintenance and upgrade
programs. On DESP II task order awards to date, we have won task
orders having a total contract value of $50.1 million. A majority of
the task orders were completed during 2008, however, a few task orders extend
through 2012.
We
provide developmental research supporting the establishment of the IUID umbrella
program for Air Force depots. This task order expands upon IUID research work
previously performed by DRC for Air Force depots and improves the Defense
Department's asset tracking of repaired, overhauled and manufactured components
for accountability, valuation and life cycle management. By employing previous
research on specific metallurgical impacts of IUID marking, this effort
increases the number of items that will be marked, bringing the Air Force closer
to realizing its objective of total asset visibility. We also provide
comprehensive analysis of tagging and labeling methods, including detailed
studies of adhesives durability in operational environments. Our efforts assist
in the identification of state-of-the art asset tracking technology and help
improve accountability throughout the life cycle of all DoD assets.
Air
Mobility Command (“AMC”)
The U.S.
Air Force AMC, headquartered at Scott Air Force Base in Belleville, Illinois,
has as its primary mission rapid, global mobility and sustainment for America’s
Armed Forces. The AMC also plays an important role in providing humanitarian
support in the U.S. and around the world. We provide technical and subject
matter expertise in support of this mission, providing program planning,
decision support, logistics analysis and financial analysis
services.
Development
and Fielding System Group (“DFSC”)
The
weapon systems management information system, a key decision-support tool for
assessing the impact of maintenance, parts and repair status on weapons systems
availability, is the responsibility of the U.S. Air Force DFSG. We provide
operations, maintenance and development support services to DFSG for this
system. In 2007, we also began work as a subcontractor to Computer
Sciences Corporation developing the U.S. Air Force’s Global Combat Support
System (“GCSS”). GCSS is intended to provide access to high-level
integrated information and enhance the ability of commanders to make timely,
informed decisions.
Air
Operation Center (“AOC”)
In 2006,
we were awarded a subcontract for up to 10 years to integrate and sustain the
U.S. Air Force’s AOC weapon system. We are assisting Lockheed Martin
in all phases of development from requirements determination through
implementation on this critical C4ISR project. The ID/IQ
cost-plus-fixed-fee and cost-plus-award fee contract includes funding for
operations, maintenance and sustainment. The AOC Weapon System
Integrator (“WSI”) program will integrate and standardize the systems and
interfaces across the more than 20 U.S. Air Force AOCs to a common hardware and
software baseline. This will facilitate moving to a
network-centric environment in which incoming data can flow freely and be
managed efficiently. The WSI also will add machine-to-machine
interfaces that will increase automation of tasks and provide faster access to
incoming intelligence, surveillance and reconnaissance data.
In 2006,
we were awarded a five-year ID/IQ contract by Avraham Goldratt Institute, the
prime contractor, to support their Naval Air Systems Command Enterprise AIR
Speed
program. The
contract provides for training in, and implementation of, theory of constraints
and lean six sigma methodologies as applicable to the Naval Aviation
Enterprise.
For more
than forty years we have provided services to the U.S. Navy’s Strategic
Systems Programs. We build specialized equipment that tests and validates the
accuracy and operability of gyroscopes and other guidance equipment for
Trident II submarine-launched ballistic missiles.
We
provide network and database administration, system security and other IT
services to support and maintain the U.S. Navy’s HIV Management System (“HMS”)
under a $4.8 million contract. The HMS supports clinical and patient
management at field, hospital and branch clinical locations worldwide and
processes approximately 10,000 records each day.
We
provide engineering and IT services to the Office of Naval Research’s Navy
Manufacturing Technology Program, known as MANTECH. This contract supports
MANTECH, as well as a related program known as Lean Pathways and the Office of
the Secretary of Defense’s own MANTECH initiative. MANTECH’s mission is to
reduce costs for U.S. Navy weapons systems through the development of and
transition to advanced manufacturing technology. We provide support in the
annual strategic planning process, as well as project tracking and benefits
analysis. For Lean Pathways, we provide a transformation process to eliminate
waste and drive enterprise-wide improvements at small and medium-sized
suppliers. It supports programs designed to improve value chain performance and
weapon systems affordability.
United
States Marine Corps Systems Command
Marine
Corps Systems Command is the Marine Corps’s principal agent for acquisition and
sustainment of systems and equipment used by the operating forces to accomplish
their warfighting mission. We provide project management and full lifecycle
software support for the Web-based Manpower Assignment Support System (“Web
MASS”) and Web-based PCS Orders Delivery System. Web MASS provides an automated
and integrated workflow tool to access information essential for making
assignment and career management decisions.
In
February 2009, we were one of 22 companies awarded a prime contract under the
U.S. Army Program Executive Office Simulation, Training and Instrumentation
Omnibus Contract, known as STOC II. The contract is for one base period and
three option periods. Under the terms of the contract, DRC will develop and
support simulation and training systems to train U.S. soldiers with critical
warfighting skills. With a total ceiling value for all awardees of
$17.5 billion over a 10-year period, STOC II is the largest Department of
Defense multiple-award, ID/IQ contract for training and simulation. Under STOC
II the Army will procure a broad range of modeling, simulation, and
instrumentation solutions.
We are
one of five prime contractors awarded the Training, Doctrine and Combat
Development (“TDCD”) ID/IQ contract, which has a ceiling of $97 million to
provide training, doctrine and combat development to the U.S. Army Armor Center
at Fort Knox, Kentucky. We were awarded a task order under this vehicle to
provide training development support to the Heavy Brigade Combat Teams (“HBCTs”)
as the Army transitions the Armor Center from Ft. Knox to the Maneuver Center of
Excellence at Fort Benning, Georgia. In 2008 we were awarded another task order
by the U.S. Army's Armor School and Center Directorate of TDCD worth $2.3
million. Under the terms of the contract, we will support the Maneuver Force by
developing a Tactical Leaders Course for all HBCTs. As the Army continues its
transformation toward a fully integrated force, DRC will continue to provide the
top-notch training and performance support programs that result from our 50-plus
years of experience helping the U.S. military achieve its readiness
objectives.
In 2008,
we were awarded a one-year contract by the U.S. Army Telemedicine and Advanced
Technology Research Center to support human patient simulation training for U.S.
Army Reserve medical units. We provide a training support package to
include performance assessment material and after-action review
strategies.
In 2006,
we were awarded a new ID/IQ contract by the U.S. Army with a potential value of
$22 million over five years to support the U.S. Army Training and Doctrine
Command Analysis Center (“TRAC”) at Fort Leavenworth, Kansas with operation
analysis, experimentation, war fighting scenarios, combat modeling and
simulation, operational effectiveness analysis and planning and decision
aids. The contract includes one base year and four option
years. We assist TRAC in conducting major studies and analysis to
support U.S. Army doctrine, organization, training, material, leadership,
personnel and facilities issues associated with U.S. Army
transformation. We also help TRAC develop, manage, operate, and
maintain the tools, scenarios, data and simulation needed to enable
analysis.
In 2005,
the U.S. Army Training, Doctrine and Combat Development Directorate at
Fort Knox awarded us a new ID/IQ contract with a ceiling of
$97 million to provide doctrine and training services. The Training,
Doctrine and Combat Development Directorate awarded five prime contracts for
these services. We provide training, doctrine, and combat development functions
associated with modular and FCS equipped forces.
In 2003,
we were selected, as part of the Boeing-SAIC lead system integrator team, under
a seven-year blanket purchase order, to provide training software and
documentation to support the U.S. Army’s FCS program. We are developing
training support packages for this vital transformation program. Services
provided include analysis of training requirements and design, media selection
and production of training support products. The work is performed in Orlando,
Florida, Leavenworth, Kansas and Andover,
Massachusetts.
Recognizing our proven capabilities for instructional system development, we
were one of fifty Boeing providers out of 18,000 global providers to receive the
Gold Boeing Performance Excellence Award.
Medical
Research Institute for Chemical Defense (“MRICD”)
The
mission of the US Army MRICD is to develop medical countermeasures to chemical
warfare agents and to train medical personnel in the medical management of
chemical casualties. As a part of its mission, MRICD offers a wide
variety of events and courses to the Department of Defense community and first
responders including classroom training and computer based distance
learning. The Institute's Chemical Casualty Care Division (“CCCD”)
developed a learning management system and secure training website featuring a
variety of their instructional products in the medical management of chemical
casualties as well as a mechanism to capture, process, and track the fees and
registration data associated with the courses.
We
maintain CCCD courseware including modifying course content and descriptions and
tracking CCCD courses. We provide academic outreach and
communications program support to retain, recruit, transition, and provide
outreach and education to new talent acquired through the internships, Oak Ridge
Institute for Science and Education, and the National Research
Council.
Proponency
Office for Preventive Medicine (“POPM”)
The
mission of the POPM is to provide advocacy for preventative medicine issues for
the Army. As part of its mission, POPM requires technical and program support
for a variety of program initiatives in environmental, occupational health, and
safety. The POPM is also responsible for providing staff support and
technical/clinical consultative services for preventive medicine/public health
to headquarters, Department of the Army and the Office of the Surgeon
General/Medical Command. In addition the Office develops
policy
and guidance for medical surveillance and occupational and environmental health
surveillance and coordinates with the U.S. Army Training and Doctrine Command
concerning prevention and control of injuries and communicable disease in
recruit and training populations. POPM also takes the lead working with Army
Medical Department Center and School and U.S. Army Medical Research and Materiel
Command concerning doctrine, organization, training, material, leadership and
education, personnel, and facilities solutions to Army preventive
medicine/public health issues.
We
provide development and training management support for the analysis, design,
development, execution, and evaluation of POPM’s knowledge management
systems. We support in the development, implementation, and
maintenance of preventive medicine, environmental and occupational health
training programs, which provide instruction for personnel in relevant policies,
procedures, guidelines and regulations. We also develop, provide content, and
provide management oversight of aspects of safety and environmental health as
well as environmental training courses.
Software
Engineering Center
In 2008
we received a contract to provide information technology and business consulting
services for the Automated Food Management Information System (“AFMIS”) Web
maintenance and deployment at the Software Engineering Center in Fort Lee,
Virginia. We are providing IT and business consulting services for AFMIS Web
maintenance and deployment during the first and second quarters of year one,
extending these services to AFMIS Army Reserve Web maintenance and deployment in
quarters three and four. These tasks include analysis, design and development,
installation and evaluation, and technical, customer and operations support.
AFMIS provides automated support to control the management and operation of the
Army's worldwide food service program, including operations of dining facilities
for menu planning, production and recipe management, automated head count, cash
collection and equipment replacement.
Aviation
/ Missile Command
We
provide programmatic consulting, engineering and logistics management to the
U.S. Army Materiel Command and U.S. Army program executive officers for
acquisition of major weapon systems. Our engineers analyze and review airframe,
avionics, aeromechanics and propulsion issues for U.S. Army project managers,
provide logistics and fielding support, and prepare electronic technical manuals
for rotary and fixed-wing aircraft systems. We also support other U.S. Army
activities with acquisition logistics, systems engineering and other related
program management services for the U.S. Army Aviation Center,
Tank-Automotive and Armaments Command and Communications-Electronics
Command.
Other
Defense Agency Customers
Defense
Department Logistics
In May
2008, we were one of six companies to be awarded a prime logistics, maintenance
and supply support contract to provide lifecycle management services across
Defense Department Services. The ID/IQ contract, awarded through the
Army’s Program Executive Office for Enterprise Information Systems, is for a
base year with four one-year options. Under the terms of the
contract,
we will
provide total life cycle systems management associated with the planning,
implementation, execution and retirement of business processes and systems
solutions for logistics, maintenance and supply support
activities.
U.S.
Transportation Command
In 2007,
we were awarded a 43-month contract valued at $13 million by the U.S.
Transportation Command to provide logical and physical data modeling expertise,
data engineering and management support services.
The
Missile Defense Agency is chartered with developing the future space-based
missile defense capabilities. We provide research on manufacturability and
research services to this client, under multi-year contracts.
Joint
Strike Fighter (“JSF”) Program
In 2006,
the JSF Program Office awarded us a five-year contract, with one base year and
four option years, worth $10.5 million if all options are exercised. Our
scope of work encompasses a variety of acquisition support services in the areas
of autonomics logistics, strategic planning, business operations management and
technical assessment and analysis. We assist in the evaluation and
development of acquisition and sustainment strategies, provide analytical
support for government validation and verification of the autonomic logistics
system and provide technical support for JSF models enhancement, business
process improvement initiatives and recommendations for performance-based
program metrics that capture operational and supportability
requirements.
Office
of Assistant Secretary of Defense for Health Affairs
In March
2008, we were awarded a ten-year ID/IQ contract by the Office of the
Assistant Secretary of Defense for Health Affairs, which includes TRICARE
management activity. The contract, called TRICARE Evaluation, Analysis, and
Management Support (“TEAMS”), provides a vehicle for obtaining services in
support of policy development, decision-making, management and administration,
program and/or project management and administration.
In
November 2008, we received an $11.4 million task order under the TEAMS contract
to provide program management support to the traumatic brain injury and
psychological health program. We assist in the coordination of projects,
initiatives, and activities in support of implementing the recommendations and
requirements within the purview of the Force Health Protection and Policy
Programs Directorate. The objectives include improving program coordination,
managing funds/budgeting tasks, develop scheduling, streamlining information
handling/sharing, monitoring program performance and managing projects
portfolio.
Department
of Homeland Security
The
funding for DHS initiatives has been and is expected to continue to increase in
coming years. Growth in spending in this sector is being driven by the threat of
domestic terrorism, as well as the need for modernization.
In 2006,
we were awarded an ID/IQ contract by the DHS to provide IT support services on
the Enterprise Acquisition Gateway for Leading Edge Solutions (“EAGLE”)
program. Our award was for functional category 5 – Management Support
Services. This functional category provides the full range of
business and technical management services that assist in the development,
implementation, and continuous improvement of policies, procedures, guidelines,
and directives. These services encompass all areas of IT policy and planning
including: enterprise architecture, security, training, enterprise resource
management, business process reengineering, IT transformation and strategy,
organizational change leadership, and enterprise and program management office
support.
With the
acquisition of Kadix, we now also hold an EAGLE function category 3 contract to
provide independent verification and validation services and a DHS Professional
Management Support Services contract.
Office
of the Chief Information Officer (“OCIO”)
In
October 2007, we were awarded an $11.4 million task order by the DHS to provide
high-end Capital Planning and Investment Control (“CPIC”) and Earned Value
Management System (“EVMS”) consulting to the OCIO under the EAGLE
Program. The task order has a two month base period and five one-year
options. Under the terms of this task order, we are providing DHS
with integrated technical, schedule and cost performance best practices, as well
as providing a systematic approach to selecting, managing, and evaluating
information technology investments. In addition, we will be providing training
for the CPIC and EVMS disciplines, as well as for the Office of Management and
Budget-300 process, and the capital asset plan and business case documentation
that agencies must present to the Office of Management and Budget to win funding
for their projects.
Immigration
and Customs Enforcement (“ICE”)
In 2008
we received a $15 million contract from the OCIO for U.S. ICE; which was awarded
through the EAGLE program. We will provide business engineering services,
technical support, design, and architectural support required to assist with the
development of enterprise and system-level architectures for ICE. We are
providing business-engineering, technical, design, and architectural support for
the transformation of DHS/ICE enterprise and system-level architectures. The
tasks include system/software engineering support, integration activities
support, system security support, and program documentation required for
continued software support and requirements management. We are supporting
the ongoing development and subsequent maintenance of the ICE enterprise
architecture planning artifacts. The enterprise solution we are helping to
develop will provide the framework for fully integrating ICE systems and provide
the basis for continuously evaluating and assessing transformation efforts. This
solution will help ICE incorporate new technologies and opportunities for
consolidation and improvements in areas such as data flow connectivity, data
processing, database management, enterprise infrastructure, and information
display.
In
December 2008 we were awarded two task orders totaling $11.5 million in contract
work through the EAGLE program to provide program management support to various
offices within DHS. Under the first two year task order we will provide program
management support to the systems development division in OCIO. The second task
order is for one base year and two option years. Using the IT investment
management framework and value-driven reengineering methodology we will provide
the ICE OCIO program executive office with the resources, processes and
expertise required to better manage the ICE IT investment portfolio. Under this
contract we will assist in implementing project management best practices that
encourage collaboration and integration for improved project
performance.
United
States Coast Guard
In
September 2008 we were awarded a $3.4 million task order by the USCG through the
EAGLE program. The contract, which is for one base year and three option years,
assists the information system security manager in responding to IT notices of
findings and recommendations from recent financial audits. We will provide
support to the Coast Guard in the analysis of their recent audit results and
development of improvements to IT policies, procedures, and practices in order
to ensure that the audit results are adequately addressed and compliance with
DHS requirements is achieved.
U.S.
Citizenship and Immigration Services (“USCIS”)
In
February 2009, we were awarded a $3.3 million contract from the DHS USCIS Office
of Field Operations. Under the terms of the contract, which has one base year
and two option years, we will provide comprehensive quality assurance program
management services to the USCIS Application Support Centers biometrics
system. USCIS requires applicants and petitioners for certain
immigration benefits to be photographed and fingerprinted for the purpose of
conducting criminal background checks. To facilitate this effort, DRC provides
support in data management, scheduling, trends analysis, equipment utilization,
personnel support, special projects, standard operating procedures and project
reporting. USCIS is responsible for the administration of immigration and
naturalization adjudication functions and establishing immigration services,
policies and priorities.
In the
fall of 2007 we were awarded a $2.7 million program support services contract
with the USCIS and its Information and Customer Services Division (“ICSD”). The
ICSD is the face of USCIS to millions of visitors as they submit immigration
applications and inquire on the status of their applications. We support these
activities by providing program management, technical writing, and
administrative support to ICSD.
Office
of Customs and Border Protection Air and Marine (“CBP A&M”)
In
December of 2008 we received a $11.5 million training and simulation contract
from the DHS, CBP A&M to provide Web-based training and other training
services. We will develop functional Web-based training courseware to meet the
training and simulation needs of CBP A&M. We will work with CBP A&M to
implement, expand and maintain their OpSTAR network, which we designed and
developed to meet the training, distribution and tracking needs of the National
Air Training Center. We will also provide flight training support, tactical
scenario based instruction, and other related training needs. CBP A&M
is the world's largest law enforcement air force charged with protecting the
nation's critical infrastructure through the use of air and marine forces
stationed at American borders.
Federal
Emergency Management Agency (“FEMA”)
Audits of
DHS information systems that process financial data are critical in that they
assure stakeholders that the financial data produced by the information systems
is accurate and verifiable. Adverse audit findings must be reduced
and eventually eliminated. We support DHS by providing guidance,
training, and feedback to the components on the development and maintenance of
plans of action and milestones. We also review plan of action and milestones
data and present current information to FEMA system security
officers,
managers, and owners, utilizing existing audit database and shared network drive
to track audit requests and remediation efforts to further ensure timely
delivery of information.
Federal
Civilian Agencies
General
Services Administration (“GSA”) Alliant Contract
In August
2007, we were one of 29 companies awarded a GSA Alliant Government-Wide
Acquisition Contract. The awards were protested. GSA has
requested resubmissions. We anticipate that the GSA will re-issue awards in
March 2009. Alliant will be an ID/IQ contract with an estimated
ceiling value of $50 billion for all companies in the aggregate to provide
integrated information technology services and solutions, including
infrastructure, applications and IT management. The contract is
anticipated to have a five-year base performance period and one five-year option
period. Alliant will provide federal government agencies with access
to a wide selection of streamlined, cost-effective management and information
technology services and solutions. The contract will ensure that government
agencies receive the most up-to-date technologies and services while complying
with federal regulations.
Pension
Benefit Guaranty Corporation (“PBGC”)
The PBGC,
a new client for DRC, is a federal corporation created under the Employee
Retirement Income Security Act of 1974. It currently guarantees payment of basic
pension benefits earned by 44 million American workers and retirees
participating in over 30,000 private-sector defined benefit pension plans. PBGC
must, therefore, maintain reliable, secure information systems to communicate
effectively with its stakeholders and safeguard personal and financial
data. The PBGC's EPMD has a mission to maintain integrated IT governance
and management framework policies, processes, procedures, standards, and
guidelines. DRC helped EPMD meet its quality management objectives through the
conduct of compliance audits and the development and implementation of
compliance improvement programs. In November 2008 we received a contract
valued at $13.4 million from the PBGC to provide quality management services.
The contract is for a one-year base period and nine one-year option periods. We
will perform quality audits and implement a continuous process improvement
program to ensure compliance of critical information technology programs with
applicable PBGC IT quality requirements.
Federal
Deposit Insurance Corporation
In 2006,
we were awarded a seven-year contract to provide business analysis and
management support services (“BAMSS”) to the FDIC. The contract,
initially valued at $29 million, currently has a total value of $31 million
including follow-on task order awards. The BAMSS charter is to ensure
that all system development projects adhere to specific development, quality
assurance, process improvement, and internal FDIC requirement
guidelines. Through the contract, we promote, monitor and manage
various system development projects to create a more efficient and effective
deployment program.
Federal
Bureau of Investigation (“FBI”)
The FBI
initiated a large organizational change initiative to improve the linguist
acquisition process, which required a lengthy time period to produce proficient
linguists. We were awarded a contract to conduct a workforce assessment of
the current process to identify and propose solutions to improve inefficiencies,
outdated technology, and underlying environmental and cultural factors. Our team
developed a Web-based workflow management tool called CLASS, to help FBI staff
manage the linguist acquisition process, communicate to the applicants, and
report on the applicant progress. We built an access-based human resource
solution called the workforce tracking tool that provides the FBI with a
centralized tool for creating and filling position profiles. Our CLASS
system will help the FBI realize a significant reduction in the cycle time of
the linguist acquisition process and increase in management visibility
throughout the process with reporting and candidate tracking.
Office
of Personnel Management (“OPM”)
We have a
five-year ID/IQ contract to provide training and human capital services to
Federal agencies under the U.S. OPM Training and Management Assistance (“TMA”)
program. The OPM provides an array of human capital programs and services which
range from the Federal employees health benefit program to the training and
management assistance program. By implementing a modern, integrated financial
system, OPM will be better equipped to manage its essential business and provide
the visibility and accountability that its stakeholders, customers, and sponsors
demand. We were awarded a contract to assist OPM establishing its
financial systems modernization project management office by providing support
in: (i) program planning and management, (ii) contract management, (iii)
financial management, (iv) risk management, (v) quality management, and (vi)
change management/communication. We are implementing an integrated project
management methodology and establishing project management principles consistent
with OPM standard policies, procedures, standards, and toolsets.
United
States Department of Agriculture (“USDA”)
We
provide IT consulting services to the three USDA Plant and Protection
Quarantines (“PPQs”). We develop recommendations to redesign PPQs IT
organization which align the PPQ IT organization with the new USDA enterprise
architecture and also perform independent reviews of faltering IT
projects.
The USDA
Food Safety and Inspection Service (“FSIS”) is responsible for ensuring the
safety of the nation's food supply, including developing robust processing plant
hazard analysis critical control point plans. We assist FSIS in leveraging
eLearning technology to improve the plans quality and overall compliance across
processing plants.
Internal
Revenue Service
The IRS
seeks highly qualified IT infrastructure support on a number of key
high-visibility programs. Under a series of contracts, we provide IT
infrastructure support to a number of critical programs including: (i)
collection services systems where we provide full life cycle development support
that includes security certification support along with enterprise architecture
analysis to ensure that all development adheres to the IRS enterprise
architecture in areas such as communications, transaction processing and system
management, (ii) credit card initiative where we provide IV&V of Web and
interactive voice response applications and network security assessment, and
review and evaluate security documentation, (iii) enforcement revenue
information system where we provided independently-assessed SEI CMM Level 3
IV&V support, including independent testing. Our support is essential to
ensure successful implementation of IRS e-commerce initiatives and is vital to
preserving security of the taxpayers' sensitive information.
State and Local Government
Sector
We
design, develop, implement, maintain and support automated case management
systems, networks and systems for state health and human services agencies and
local users of these statewide systems. A description of our major
customer engagements in this sector follows.
In 2004,
we were awarded a $30 million contract by the State of Ohio to develop and
implement a web-based SACWIS. With change orders since the initial award, the
period of performance for the contract was extended from three to four and
one-half years and the value of the contract grew to over $50
million. The system is in production and is fully
implemented.
In
February 2008, we were awarded a $25.5 million contract from the State of
Tennessee to develop and implement a new SACWIS. The effort began in the second
quarter of 2008 with deployment scheduled to occur in early 2010. Under the
terms of the contract we will implement a fully automated web-based statewide
child welfare system that supports child welfare cases from intake to
closure.
The State
of Colorado has been a customer of ours since 1997. In 2006, we were
awarded a new five-year contract worth $22.5 million by Colorado’s Department of
Human Services to continue providing infrastructure support and management of
the statewide Department of Human Services county infrastructure. The
new contract contains three one-year options with additional potential revenue
of $16.4 million beyond the initial five-year contract. The Colorado
Department of Human Services county infrastructure supports more than 7,000
county and state workers with web-based access to applications supporting child
welfare, eligibility, child support and child care. Infrastructure
support services provided by us include operation and maintenance of enterprise
wireless and land-based networks, servers and storage, disaster recovery,
databases and related software distribution for the thousands of workers using
the system.
Our
original Colorado effort was to develop an integrated statewide child welfare
and youth corrections system, known as the Colorado Trails application. We
continue to support this application with database and host server maintenance
and support.
Our
business development process is aligned with our operating units to address
target markets, expand work with current customers and win new
business.
We also
have a central business development group, which is aligned with our operating
units and is charged with identifying and winning significant new business
opportunities. The business development group also maintains a proposal
development and
publication
capability. The business development group operates with formal processes that
monitor the pipeline of opportunities and align resources to new
opportunities.
The
federal procurement process has changed significantly in recent years. The
traditional method of federal government procurement had been to conduct a
lengthy competitive bidding process for each award. Today, agency sponsored
multiple award schedule and ID/IQ task order contracts are the predominant form
by which the federal government contracts for IT and technical services. These
vehicles have enabled contracting officers to accelerate the pace of awards.
Concurrently, under current budgetary pressures, our customers have the
flexibility to delay awards, reduce funding or fund work on an incremental
basis. Foreseeing this trend, DRC has the acquisition of these
contracts as a strategic priority. Today, DRC holds a broad portfolio
of these contracts, including:
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Department
of Homeland Security – EAGLE;
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Department
of Homeland Security – PMSS;
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Air
Force Depot – DESP II
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Army/Navy/Marine
Corps Logistics – LMMS
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Office
of Personnel Management – TMA
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Army
Research Institute
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Army
Training and Doctrine Command – STOC II
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Navy
Warfare Development Command
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Military
Medical Health – TEAMS
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Our U.S.
Government contracts fall into one of three categories: (i) fixed-price,
both completion and term (which operate similar to time-and-material), including
service-type contracts, (ii) time-and-materials, and (iii) cost
reimbursable. Under a fixed-price contract, the U.S. Government pays an agreed
upon price for our services or products, and we bear the risk that increased or
unexpected costs may reduce our profits or cause us to incur a loss. Conversely,
to the extent we incur actual costs below anticipated costs on these contracts,
we could realize greater profits. Under a time-and-materials contract, the U.S.
Government pays us a fixed hourly rate, which is intended to cover salary costs
and related indirect expenses, to include a profit margin. Under a
cost-reimbursable contract, the U.S. Government reimburses us for our allowable
direct expenses and allowable and allocable indirect costs and pays a negotiated
fee.
Our state
and local contracts are generally either fixed-price completion, including
service-type contracts, or time-and-materials. In certain instances, these
contracts are subject to annual state-legislative funding approval and to
termination provisions.
Our
contracts with the U.S. Government and state customers generally are subject to
termination at the convenience of the U.S. Government or the state. However, in
the event that a contract is terminated by the respective government, we would
be reimbursed for our allowable costs up to the time of termination and would be
paid a proportionate amount of the stipulated profit attributable to the work
actually performed. Although U.S. Government or state contracts may extend for
several years, they are generally funded on an annual basis, or
incrementally for shorter time periods, and are subject to reduction or
cancellation in the event of changes in U.S. Government or state requirements
due to appropriations or budgetary concerns. In addition, if the federal or
state government curtail expenditures for research, development and consulting
activities, the curtailment could have a material adverse impact on our revenue
and earnings.
Our
funded backlog was $149.2 million at December 31, 2008, $116.5 million at
December 31, 2007 and $92.9 million at December 31, 2006. We
expect that substantially all of our backlog at December 31, 2008 will
generate revenue during the year ending December 31, 2009. The funded
backlog generally is subject to possible termination at the convenience of the
contracting party. Contracts are generally funded on an annual basis or
incrementally for shorter time periods. Due to current budgetary
pressures, we have seen an increase in the application of incremental funding,
thereby reducing backlog in proportion to revenue. A portion of our funded
backlog is based on annual purchase contracts and subject to annual governmental
approval or appropriations legislation and the amount of funded backlog as of
any date can be affected by the timing of order receipts and
deliveries.
Our
systems and services business competes with a large number of public and
privately-held firms, which specialize in providing government IT
services.
We also
compete with the government services divisions of large commercial IT service
firms and with government IT service divisions of large defense weapons systems
producers. The competition varies depending on the customer, geographic market
and
required
capabilities. The U.S. Government’s in-house capabilities are also, in effect,
competitors, because various agencies are able to perform services, which might
otherwise be performed by us. The principal competitive factors affecting the
systems and services business are past performance, technical competence and
price.
In the
precision manufacturing business, we compete with other manufacturers of
electroform and suppliers of precision management discs, scales and reticles.
The principal competitive factors affecting the precision manufacturing business
are price, product quality and custom engineering to meet customers’ system
requirements.
Raw
materials and components are purchased from a large number of independent
sources and are generally available in sufficient quantities to meet current
requirements.
As a
defense contractor, we are subject to many levels of audit and review, including
by the Defense Contract Audit Agency, the Defense Contract Management Agency,
the various inspectors general, the Defense Criminal Investigative Service, the
Government Accountability Office, the Department of Justice and Congressional
Committees. These audits and reviews could result in the termination of
contracts, the imposition of fines or penalties, the withholding of payments due
to us or the prohibition from participating in certain U.S. Government contracts
for a specified period of time. Any such action could have a material adverse
effect on our business, financial condition, results of operations and cash
flows.
Governmental
awards of contracts are subject to regulations and procedures that require
formal bidding procedures and allow for protests by losing bidders. Such
protests may result in significant delays in the commencement of expected
contracts, the reversal of a previous award or the reopening of the
competitive-bidding process, which could have a material adverse effect upon our
business, financial condition, results of operations and cash
flows.
The U.S.
Government has the right to terminate contracts for convenience. If the U.S.
Government terminated a contract, we would generally recover costs incurred up
to termination, costs required to be incurred in connection with the termination
and a portion of the fee earned commensurate with the work performed up to
termination. However, significant adverse effects on our indirect cost pools may
not be recoverable in connection with a termination for convenience. Contracts
with state and other governmental entities are subject to the same or similar
risks.
Compliance
with federal, state and local provisions relating to the protection of the
environment has not had and is not expected to have a material effect upon our
capital expenditures, earnings or competitive position.
As of
December 31, 2008, we had approximately 1,500 employees. Approximately 60%
of our employees hold federal government security clearances. We
require all employees to annually complete training on compliance
subjects. We consider our relationship with our employees to be
satisfactory.
Patents,
trademarks and copyrights are not materially important to our business. The
U.S. Government and state government have certain proprietary rights in
software processes and data developed by us in our performance of government and
state contracts.
In
addition to the other information in this Form 10-K, readers should
carefully consider the risks described below before deciding to invest in shares
of our common stock. These are risks and uncertainties we believe are most
important for you to consider. Additional risks and uncertainties not presently
known to us, or which we currently deem immaterial, or which are similar to
those faced by other companies in our industry or business in general, may also
impair our business operations. If any of the following risks or uncertainties
actually occurs, our business, financial condition, results of operations or
cash flows would likely suffer. In that event, the market price of our common
stock could decline.
Our
Revenue is Highly Concentrated on the Do
D
and
Other Federal Agencies, and
a
Significant Portion of Our Revenue is Derived From a Few Customers. Decreases in
Their Budgets, Changes in Program Priorities or Military Base Closures Could
Adversely
Affect
Our Results
.
During
2008 and 2007, approximately 86% and 92%, respectively, of our total revenue was
derived from U.S. Government agencies. Within the DoD, certain individual
programs account for a significant portion of our U.S. Government business. Our
revenue from contracts with the DoD, either as a prime contractor or
subcontractor, accounted for approximately 65% and 78% of our total revenue in
2008 and 2007, respectively. We cannot provide any assurance that any of these
programs will continue as such or will continue at current levels or that
military base closures or realignments will not affect such programs or our
ability to re-staff such programs. Our revenue could be adversely affected by
significant changes in defense spending priorities or declining U.S. defense
budgets.
Current
budget pressures on the U.S. Government caused principally by the conflicts in
Iraq and Afghanistan may have adverse effects on our business. Because war
expenditures are not expected to abate significantly in the near term, we
anticipate continual risks related to expenditures on programs we
support.
It is not
possible for us to predict whether defense budgets will increase or decline in
the future. Further, changing missions and priorities in the defense budget may
have adverse effects on our business. Funding limitations could result in a
reduction, delay or cancellation of existing or emerging programs. We
anticipate there will continue to be significant competition when our defense
contracts are re-bid, as well as significant competitive pressure to lower
prices, which may reduce profitability in this area of our business, which could
adversely affect our business, financial condition, results of operations and
cash flows.
We Must
Bear the Risk of Various Pricing Structures Associated With Government
Contracts
.
We
historically have derived a substantial portion of our revenue from contracts
and subcontracts with the U.S. Government. A significant portion of our federal
and state government contracts are undertaken on a time and materials nature,
with fixed hourly rates that are intended to cover salaries, benefits, other
indirect costs of operating the business and profit. Our time and material
contracts represented 48% and 56% of total revenue in 2008 and 2007,
respectively. The pricing of these contracts is based upon estimates
of future costs and assumptions as to the aggregate volume of business that we
will perform in a given business division or other relevant
unit.
We
undertake various government projects on a fixed-price basis. Our revenues
earned under fixed price contracts have increased as a percentage of total
revenues to approximately 32% in 2008 from approximately 21% in 2007. Under a
fixed-price contract, the government pays an agreed upon price for our services
or products, and we bear the risk that increased or unexpected costs may reduce
our profits or cause us to incur a loss.
Significant
cost overruns can occur if we fail to:
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adequately
estimate the resources required to complete a project;
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properly
determine the scope of an engagement; or
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complete
our contractual obligation in a manner consistent with the project
plan.
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For fixed
price contracts, we must estimate the costs necessary to complete the defined
statement of work and recognize revenue or losses in accordance with such
estimates. Actual costs may vary materially from the estimates made from time to
time, necessitating adjustments to reported revenue and net income.
Underestimates of the costs associated with a project could adversely affect our
overall profitability and could have a material adverse effect on our business,
financial condition, results of operations and cash flows. While we endeavor to
maintain and improve contract profitability, we cannot be certain that any of
our existing or future fixed-price projects will be
profitable. During 2008, we began working on our multi-year, fixed
price engagement with the State of Tennessee and are nearing completion of a
large multi-year, fixed price engagement with the State of
Ohio.
A
substantial portion of our U.S. Government business is as a subcontractor. In
such circumstances, we generally bear the risk that the prime contractor will
meet its performance obligations to the U.S. Government under the prime contract
and that the prime contractor will have the financial capability to pay us
amounts due under the subcontract. The inability of a prime contractor to
perform or make required payments to us could have a material adverse effect on
our business, financial condition, results of operations and cash
flows.
Our
Contracts and Subcontracts with Government Agencies are Subject to a Competitive
Bidding Process and to Termination Without Cause by the Government
.
A
significant portion of our federal and state government contracts are renewable
on an annual basis, or are subject to the exercise of contractual options.
Multi-year contracts often require funding actions by the U.S. Government, a
state legislature or others on an
annual or
more frequent basis. As a result, our business could experience material adverse
consequences should such funding actions or other approvals not be
taken.
Recent
federal regulations and renewed congressional interest in small business set
aside contracts are likely to influence decisions pertaining to contracting
methods for many of our customers. These regulations require more frequent
review and certification of small business contractor status, to ensure that
companies competing for contracts intended for small business are qualified as
such at the time of the competition.
Governmental
awards of contracts are subject to regulations and procedures that permit formal
bidding procedures and protests by losing bidders. Such protests may result in
significant delays in the commencement of expected contracts, the reversal of a
previous award decision or the reopening of the competitive bidding process,
which could have a material adverse effect on our business, financial condition,
results of operations and cash flows.
Because
of the complexity and scheduling of contracting with government agencies, from
time to time we may incur costs before receiving contractual funding by the U.S.
Government. In some circumstances, we may not be able to recover such costs in
whole or in part under subsequent contractual actions. Failure to collect such
amounts may have a material adverse effect on our business, financial condition,
results of operations and cash flows.
In
addition, the U.S. Government has the right to terminate contracts for
convenience. If the government terminated contracts with us, we would generally
recover costs incurred up to termination, costs required to be incurred in
connection with the termination and a portion of the fee earned commensurate
with the work we have performed to termination. However, significant adverse
effects on our indirect cost pools may not be recoverable in connection with a
termination for convenience. Contracts with state and other governmental
entities are subject to the same or similar risks. Any such terminations may
have material adverse consequences on our business, financial condition, results
of operations and cash flows.
We Are
Subject to a High Level of Government Regulations and Audits Under Our
Government Contracts and Subcontracts
.
As a
defense contractor, we are subject to many levels of audit and review, including
by the Defense Contract Audit Agency, Defense Contract Management Agency,
various inspectors general, the Defense Criminal Investigative Service, the
Government Accountability Office, the Department of Justice and Congressional
Committees. These audits and reviews could result in the termination of
contracts, the imposition of fines or penalties, the withholding of payments due
to us or the prohibition from participating in certain U.S. Government contracts
for a specified period of time. Any such action could have a material adverse
effect on our business, financial condition, results of operations and cash
flows.
Loss of
Key Personnel Could Limit Our Growth
.
We are
dependent on our ability to attract and retain highly skilled technical
personnel. Many of our technical personnel may have specific knowledge and
experience related to various government customer operations and these
individuals would be difficult to replace in a timely fashion. In addition,
qualified technical personnel are in high demand worldwide and are likely to
remain a limited resource. The loss of services of key personnel could impair
our ability to perform required services under some of our contracts, to retain
this business after the expiration of the existing contract, or to win new
business in the event that we lost the services of individuals who have been
identified in a given proposal as key personnel in the proposal. Any of these
situations could have a material adverse effect on our business, financial
condition, results of operations and cash flows.
Our
Failure to Obtain and Maintain Necessary Security Clearances May Limit Our
Ability to Perform Classified Work for Government Clients, Which Could Harm Our
Business
.
Some
government contracts require us to maintain facility security clearances, and
require some of our employees to maintain individual security clearances. If our
employees lose or are unable to obtain security clearances on a timely basis, or
we lose a facility clearance, the government client can terminate the contract
or decide not to renew the contract upon its expiration. As a result, to the
extent that we cannot obtain the required security clearances for our employees
working on a particular contract, or we fail to obtain them on a timely basis or
fail to maintain these security clearances, we may not derive the revenue
anticipated from the contract, which could have a material adverse effect on our
business, financial condition, results of operations and cash
flows.
Security
Breaches in Sensitive Government Systems Could Harm Our Business
.
Many of
the systems we develop, install and maintain involve managing and protecting
information involved in intelligence, national security, and other sensitive or
classified government functions. A security breach in one of these systems could
cause serious harm to our business, damage our reputation, and prevent us from
being eligible for further work on sensitive or classified systems for federal
government clients. We could incur losses from a security breach that could
exceed the policy limits under our errors and omissions and product liability
insurance. Damage to our reputation or limitations on our eligibility for
additional work resulting from
a
security breach in one of our systems could have a material adverse effect on
our business, financial condition, results of operations and cash
flows.
Our
Employees May Engage in Misconduct or Other Improper Activities, Which Could
Harm Our Business
.
We are
exposed to the risk that employee fraud or other misconduct could occur.
Misconduct by employees could include intentional failures to comply with
federal government procurement regulations, engaging in unauthorized activities,
or falsifying time records. Employee misconduct could also involve the improper
use of our clients’ sensitive or classified information, which could result
in regulatory sanctions against us and serious harm to our reputation. It is not
always possible to deter employee misconduct, and the precautions we take to
prevent and detect this activity may not be effective in controlling unknown or
unmanaged risks or losses, which could have a material adverse effect on our
business, financial condition, results of operations and cash
flows.
We Are
Involved in Litigation Matters Which, If Not Resolved in Our Favor, Could Harm
Our Business
.
We are
involved in litigation matters which could have a material adverse effect on our
business, financial position, results of operations and cash
flow. These litigation matters are more fully described in
Note 13 of our “Notes to Consolidated Financial Statements” in
Part II, Item 8 of this Form 10-K.
If Our
Internal Control O
ver
Financial Reporting Do
es
Not
Comply with Financial Reporting and Control Management Requirements, There Could
Be a Material Adverse Effect on Our Operations or Financial Results.
Also
, Current
and Potential Stockholders Could Lose Confidence in Our Financial Reporting,
Which Would Harm Our Business and the Trading Price of Our
Common
Stock
.
Effective
internal controls are necessary for us to provide reliable financial reports. If
we cannot provide reliable financial reports, our business and operating results
could be harmed. We have in the past discovered, and may in the future discover,
areas of our internal control over financial reporting that need
improvement.
Although
our management has determined, and our independent registered public accounting
firm has attested, that our internal controls over financial reporting were
effective as of December 31, 2008, we cannot assure you whether or not we
or our independent registered public accounting firm may identify a material
weakness in our internal controls in the future. A material weakness in our
internal controls over financial reporting would require management and our
independent registered public accounting firm to evaluate our internal controls
as ineffective. If our internal controls over financial reporting are not
considered adequate, we may experience a loss of public confidence in our
reported financial information, which could have an adverse effect on our
business and the trading price of our stock.
We
Operate in Highly Competitive Markets and May Have Difficulties Entering New
Markets
.
The
government contracting business is subject to intense competition from numerous
companies. The principal competitive factors are prior performance, previous
experience, technical competence and price. In our efforts to enter new markets
and attract new customers, we generally face significant competition from other
companies that have prior experience with such potential customers. As a result,
we may not achieve the level of success that we expect in our efforts to enter
such new markets.
Competition
in the market for our commercial products is also intense. There is a
significant lead-time for developing this business, and it involves substantial
capital investment including development of prototypes and investment in
manufacturing equipment. Principal competitive factors are product quality, the
ability to specialize our engineering in order to meet our customers’ specific
system requirements and price. Our precision products business has a number of
competitors, many of which have significantly greater financial, technical and
marketing resources than we do.
We May Be
Subject to Product Liability Claims
.
Our
precision manufactured products are generally designed to operate as important
components of complex systems or products. Defects in our products could cause
our customer’s product or systems to fail or perform below expectations.
Although we attempt to contractually limit our liability for such defects or
failures, we cannot assure you that our attempts to limit our liability will be
successful. Like other manufacturing companies, we may be subject to claims for
alleged performance issues related to our products. Such claims, if made, could
damage our reputation and could have a material adverse effect on our business,
financial condition, results of operations and cash flows.
Economic
Events May
Adversely
Affect
Our Business Segments
.
Many of
our precision products are components of commercial products. Factors that
affect the production and demand for such products, including economic events
both domestically and in other regions of the world, competition, technological
change and
production
disruption, could adversely affect demand for our products. Many of our products
are incorporated into capital equipment, including machine tools and other
automated production equipment, used in the manufacture of other products. As a
result, this portion of our business may be subject to fluctuations in the
manufacturing sector of the overall economy. An economic recession, either in
the U.S. or elsewhere in the world, could have a material adverse effect on the
rate of orders received by the commercial division. Significantly lower
production volumes resulting in under-utilization of our manufacturing
facilities would adversely affect our business, financial condition, results of
operations and cash flows.
Our
Products and Services Could Become Obsolete Due to Rapid Technological Changes
in the Industry
.
We offer
sophisticated products and services in areas in which there have been and are
expected to continue to be significant technological changes. Many of our
products are incorporated into sophisticated machinery, equipment or electronic
systems. Technological changes may be incorporated into competitors’ products
that may adversely affect the market for our products. If our competitors
introduce superior technologies or products, we cannot assure you that we will
be able to respond quickly enough to such changes or to offer services that
satisfy our customers’ requirements at a competitive price. Further, we cannot
provide any assurance that our research and product development efforts will be
successful or result in new or improved products or services that may be
required to sustain our market position.
Our
Financing Requirements May Increase and We Could Have Limited Access to Capital
Markets
.
The
United States and worldwide capital and credit markets have recently experienced
significant price volatility, dislocations and liquidity disruptions, which have
caused market prices of many stocks to fluctuate substantially and the spreads
on prospective debt financings to widen considerably. While we believe that our
current resources and access to capital markets are adequate to support
operations over the near term and foreseeable future, we cannot assure you that
these circumstances will remain unchanged. Our need for capital is dependent on
operating results and may be greater than expected. Our ability to maintain our
current sources of debt financing depends on our ability to remain in compliance
with covenants contained in our financing agreements, including, among other
requirements, maintaining a minimum total net worth and minimum cash flow and
debt coverage ratios. If changes in capital markets restrict the availability of
funds or increase the cost of funds, we may be required to modify, delay or
abandon some of our planned expenditures, which could have a material adverse
effect on our business, financial condition, results of operations and cash
flows.
Our
Operating Results May Vary Significantly From Quarter to Quarter
and Such
Fluctuations May Affect the Price of Our Common Stock
.
Our
revenue and earnings may fluctuate from quarter to quarter depending on a number
of factors, including:
|
|
•
|
the
number, size and timing of client projects commenced and completed during
a quarter;
|
|
|
•
|
contract
wins and losses;
|
|
|
•
|
changes
to existing contracts made by our customers;
|
|
|
•
|
bid
and proposal efforts undertaken;
|
|
|
•
|
progress
on fixed-price projects during a given quarter;
|
|
|
•
|
employee
productivity and hiring, attrition and utilization
rates;
|
|
|
•
|
rapid
changes in demand from our precision manufacturing
customers;
|
|
|
•
|
accuracy
of estimates of resources required to complete ongoing
projects;
|
|
|
•
|
the
trend in interest rates; and
|
|
|
•
|
general
economic conditions.
|
We May Not Make or Complete
Future Mergers, Acquisitions or Strategic Alliances or Investments
Which May Adversely Affect
Our Growth
.
In 2008
we acquired Kadix, in 2004 we acquired Impact Innovations Group LLC, and in 2002
we acquired H.J. Ford and Andrulis Corporation. We may seek to continue to
expand our operations through mergers, acquisitions or strategic alliances with
businesses that will complement our existing business. However, we may not be
able to find attractive candidates, or enter into acquisitions on terms that are
favorable to us, or successfully integrate the operations of companies that we
acquire. In addition, we may compete with other companies for these acquisition
candidates, which could make an acquisition more expensive for us. If we are
able to successfully identify and complete an acquisition or similar
transaction, it could involve a number of risks, including, among
others:
|
|
•
|
the
difficulty of assimilating the acquired operations and
personnel;
|
|
|
•
|
the
potential disruption of our ongoing business and diversion of resources
and management time;
|
|
|
•
|
the
potential failure to retain key personnel of the acquired
business;
|
|
|
•
|
the
difficulty of integrating systems, operations and
cultures; and
|
|
|
•
|
the
potential impairment of relationships with customers as a result of
changes in management or otherwise arising out of such
transactions.
|
We cannot
assure that any acquisition will be made, that we will be able to obtain
financing needed to fund any acquisitions and, if any acquisitions are so made,
that the acquired business will be successfully integrated into our operations
or that the acquired business will perform as expected. In addition, if we were
to proceed with one or more significant strategic alliances, acquisitions or
investments in which the consideration consists of cash, a substantial portion
of our available cash could be used to consummate the strategic alliances,
acquisitions or investments. The financial impact of acquisitions, investments
and strategic alliances could have a material adverse effect on our
business, financial condition, results of operations and cash flows and could
cause substantial fluctuations in our quarterly and annual operating
results.
The
Market Price of Our Common Stock May Be Volatile
.
The stock
market in recent years has experienced significant price and volume fluctuations
that often have been unrelated or disproportionate to the operating performance
of particular companies. Many factors that have influenced trading prices will
vary from period to period, including: decreases in our earnings and revenue or
quarterly operating results, changes in estimates by analysts, market conditions
in the industry, announcements and new developments by competitors, and
regulatory reviews.
Any of
these events could have a material adverse effect on the market price of our
common stock. In addition, low trading volume in our common stock may cause
volatility in stock price.
We are Subject to Changes in
United States and Global Market Conditions That Are Beyond
Our
Control and May Have a
Material Effect on
Our
Business and Results of
Operations.
The
United States and global economies are currently experiencing a period of
substantial economic uncertainty with wide-ranging effects, including the
current disruption in global financial markets. Possible effects of these
economic events are described in the preceding risk factors, including those
relating to U.S. Government defense spending, business disruptions caused
by suppliers or subcontractors, impairment of goodwill and other long-lived
assets, pension costs and access to capital and credit markets. Although
governments worldwide, including the U.S. Government, have initiated
sweeping economic plans, the Company is unable to predict the impact, severity,
and duration of these economic events, which could have a material effect on the
Company’s consolidated financial position, results of operations, or cash
flows.
We have
not received any written comments from the staff of the Securities and Exchange
Commission regarding our periodic or current reports that (1) were issued not
less than 180 days before the end of our 2008 fiscal year, (2) remain
unresolved and (3) we believe are material.
As of
December 31, 2008 we leased all of the facilities used in our
operations totaling approximately 430,000 square feet, of which our
Metrigraphics segment occupied approximately 45,000 square feet. All other
facilities, as well as a portion of our Andover, Massachusetts headquarters
facility, are used by the Systems and Services segment. We believe
that our facilities are adequate for our current needs.
ITEM 3. LEGAL
PROCEEDINGS
As a
defense contractor, we are subject to many levels of audit and review from
various government agencies, including the Defense Contract Audit Agency,
Defense Contract Management 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 are subject to litigation and other proceedings referenced in
Note 13 of our “Notes to Consolidated Financial Statements” in
Part II, Item 8 of this Form 10-K. Except as noted therein we do
not presently believe it is reasonably likely that any of these matters would
have a material adverse effect on our business, financial position, results of
operations or cash flows.
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 material adverse effects on our business, financial position,
results of operations and cash flows.
During
the quarter ended December 31, 2008, no matters were submitted to a vote of
security holders through the solicitation of proxies or
otherwise.
Executive Officers of the
Registrant
The
following is a list of the names and ages of our executive officers, all
positions and offices held by each person and each person’s principal
occupations or employment during the past five years. The officers were elected
by the Board of Directors and will hold office until the next annual election of
officers and their successors are elected and qualified, or until their earlier
resignation or removal by the Board of Directors. There are no family
relationships between any executive officers and directors.
|
|
|
|
|
Name
and Position
|
Age
|
|
|
|
|
James
P. Regan
|
68
|
|
|
President,
Chairman and Chief Executive Officer
|
|
|
Richard
A. Covel
|
62
|
|
|
Vice
President, General Counsel and Secretary
|
|
|
David
Keleher
|
59
|
|
|
Senior
Vice President and Chief Financial Officer
|
|
|
Steven
P. Wentzell
|
62
|
|
|
Senior
Vice President and General Manager, Human Resources
|
|
|
Lawrence
H. O’Brien, Jr.
|
57
|
|
|
Senior
Vice President and General Manager, Business Solutions and Business
Development
|
|
Mr. Regan
joined us in 1999 as President, Chief Executive Officer and Director and was
elected Chairman in April 2001. Prior to joining us, he was President and Chief
Executive Officer of CVSI, Inc. from 1997 to October 1999. Prior to
that, he served as Senior Vice President of Litton PRC from 1992 to
1996.
Mr. Covel
joined us as Vice President and General Counsel in December 2000. Prior to
joining us, he was General Counsel, Patent Counsel and Secretary at
Foster-Miller, Inc. from 1985 to 2000.
Mr. Keleher
joined us as Vice President and Chief Financial Officer in January 2000. Prior
to joining us, he was employed by Raytheon Company as Group Controller for the
Commercial Electronics Division in 1999 and Assistant Corporate Controller in
1998. Prior to that, he served in several senior management positions in
corporate finance and operations at Digital Equipment Corporation from 1981 to
1997.
Mr. Wentzell
joined us as Senior Vice President and General Manager, Human Resources, in
October 2004. Prior to joining us, Mr. Wentzell was Senior Vice President
of Human Resources for Brooks Automation, Inc. from 2002 to 2004, following its
acquisition of PRI Automation, Inc., where Mr. Wentzell served as Corporate
Vice President for Human Resources from 1997 through the acquisition. Prior to
that, Mr. Wentzell served as the Corporate Vice President of Human
Resources for Dialogic Corporation from 1993 to 1997.
Mr.
O’Brien joined us in 1978 and has held various senior management positions
during this time. In 2007, Mr. O’Brien became Senior Vice President
and General Manager, Business Solutions and Business Development. From 2004 to
2007, Mr. O’Brien was Vice President for Business Solutions. Prior to
that, Mr. O’Brien was Vice President of Systems Engineering Group from 2001 to
2004.
Our
common stock is traded on the Nasdaq Global Market under the symbol “DRCO”.
The following table sets forth, for the periods indicated, the high and low sale
prices per share of our common stock, as reported by the Nasdaq Global
Market. These market quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not necessarily represent actual
transactions.
|
|
|
High
|
|
|
Low
|
|
|
Fiscal
year ended December 31, 2008
|
|
|
|
|
|
|
|
First
quarter
|
|
$
|
11.30
|
|
|
$
|
8.72
|
|
|
Second
quarter
|
|
$
|
10.75
|
|
|
$
|
9.25
|
|
|
Third
quarter
|
|
$
|
10.50
|
|
|
$
|
7.58
|
|
|
Fourth
quarter
|
|
$
|
9.04
|
|
|
$
|
5.00
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
year ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
First
quarter
|
|
$
|
12.50
|
|
|
$
|
8.55
|
|
|
Second
quarter
|
|
$
|
14.72
|
|
|
$
|
10.66
|
|
|
Third
quarter
|
|
$
|
14.04
|
|
|
$
|
10.19
|
|
|
Fourth
quarter
|
|
$
|
12.98
|
|
|
$
|
9.16
|
|
As of
February 28, 2009, there were 583 shareholders of record of our common
stock.
We did
not declare any cash dividends in the two years ended December 31, 2008 and do
not intend to in the near future. Our present policy is to retain earnings and
preserve cash for our future growth and development of our
business. In addition, our financing arrangements, as described in
“Liquidity and Capital Resources” in Part II, Item 7, and in
Note 7 of our “Notes to Consolidated Financial Statements” in
Part II, Item 8 of this Form 10-K, restrict our ability to
pay dividends.
Issuer
Purchases of Equity Securities
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 fourth 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.
|
|
|
|
|
|
|
|
|
|
|
|
Approximate
|
|
|
|
|
|
|
|
|
|
|
Total Number
|
|
|
Dollar
Value
|
|
|
|
|
|
|
|
|
|
|
of
Shares
|
|
|
of Shares that
|
|
|
|
|
|
|
|
|
|
|
Purchased
as
|
|
|
May
Yet Be
|
|
|
|
|
|
|
|
Average
|
|
|
Part
of
|
|
|
Purchased
|
|
|
|
|
Total Number
|
|
|
Price
|
|
|
Publicly
|
|
|
Under
the
|
|
|
|
|
of
Shares
|
|
|
Paid
Per
|
|
|
Announced
|
|
|
Programs
|
|
|
Period
|
|
Purchased
(1)
|
|
|
Share
|
|
|
Programs
|
|
|
(in
millions
)
|
|
|
October
1, 2008 to October 31, 2008
|
|
|
933
|
|
|
$
|
6.33
|
|
|
|
-
|
|
|
$
|
-
|
|
|
November
1, 2008 to November 30, 2008
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
December
1, 2008 to December 31, 2008
|
|
|
97
|
|
|
|
6.60
|
|
|
|
-
|
|
|
|
-
|
|
|
Total
|
|
|
1,030
|
|
|
$
|
6.35
|
|
|
|
-
|
|
|
$
|
-
|
|
The
following graph compares the cumulative total stockholder return on our common
stock from December 31, 2003 to December 31, 2008 with the cumulative total
return of (i) the NASDAQ Composite U.S. Index and (ii) our industry
peers. This graph assumes the investment of $100.00 at the closing price on
December 31, 2003 in our common stock, the NASDAQ Composite U.S. Index and our
industry peers, and assumes any dividends are reinvested.
|
|
|
December
31,
|
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
Dynamics
Research Corporation
|
|
$
|
100.00
|
|
|
$
|
110.53
|
|
|
$
|
95.79
|
|
|
$
|
60.45
|
|
|
$
|
67.08
|
|
|
$
|
49.60
|
|
|
NASDAQ
Stock Market (US Companies)
|
|
$
|
100.00
|
|
|
$
|
108.84
|
|
|
$
|
111.16
|
|
|
$
|
122.11
|
|
|
$
|
132.42
|
|
|
$
|
63.80
|
|
|
Peer
Group
|
|
$
|
100.00
|
|
|
$
|
133.46
|
|
|
$
|
127.19
|
|
|
$
|
131.01
|
|
|
$
|
144.95
|
|
|
$
|
141.82
|
|
The
performance in the above graph is not necessarily indicative of future stock
price performance. Our peer group consists of industry peers,
including, CACI International, Inc., ICF International, Inc., ManTech
International Corp., NCI, Inc., SI International, Inc., SRA International, Inc.,
Stanley, Inc. and VSE Corp.
The
selected condensed consolidated financial data set forth below should be read in
conjunction with “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” included as Part II, Item 7 of this
Form 10-K, and our consolidated financial statements and notes thereto
included in Part II, Item 8 of this Form 10-K. The historical
results provided below are not necessarily indicative of future
results.
|
|
|
Year
ended December 31,
|
|
|
(in
thousands, except per share data)
|
|
2008
(1)
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
(2)
|
|
|
Revenue
|
|
$
|
242,824
|
|
|
$
|
229,577
|
|
|
$
|
258,987
|
|
|
$
|
300,440
|
|
|
$
|
275,706
|
|
|
Gross
profit
|
|
$
|
39,164
|
|
|
$
|
37,107
|
|
|
$
|
35,116
|
|
|
$
|
49,662
|
|
|
$
|
42,983
|
|
|
Operating
income (loss)
|
|
$
|
(571
|
)
|
|
$
|
12,498
|
|
|
$
|
8,171
|
|
|
$
|
21,305
|
|
|
$
|
17,507
|
|
|
Non-GAAP
operating income
(3)
|
|
$
|
14,248
|
|
|
$
|
12,679
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
$
|
(1,255
|
)
|
|
$
|
7,102
|
|
|
$
|
3,988
|
|
|
$
|
11,433
|
|
|
$
|
9,373
|
|
|
Cumulative
benefit of accounting change
|
|
|
-
|
|
|
|
-
|
|
|
|
84
|
|
|
|
-
|
|
|
|
-
|
|
|
Net
income (loss)
|
|
$
|
(1,255
|
)
|
|
$
|
7,102
|
|
|
$
|
4,072
|
|
|
$
|
11,433
|
|
|
$
|
9,373
|
|
|
Non-GAAP
net income
(3)
|
|
$
|
7,807
|
|
|
$
|
7,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per share — Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations before cumulative effect of accounting
change
|
|
$
|
(0.13
|
)
|
|
$
|
0.76
|
|
|
$
|
0.44
|
|
|
$
|
1.30
|
|
|
$
|
1.10
|
|
|
Cumulative
benefit of accounting change
|
|
|
-
|
|
|
|
-
|
|
|
|
0.01
|
|
|
|
-
|
|
|
|
-
|
|
|
Net
earnings (loss) per share — Basic
|
|
$
|
(0.13
|
)
|
|
$
|
0.76
|
|
|
$
|
0.45
|
|
|
$
|
1.30
|
|
|
$
|
1.10
|
|
|
Non-GAAP
net earnings per share — Basic
(3)
|
|
$
|
0.82
|
|
|
$
|
0.77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per share — Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations before cumulative effect of accounting
change
|
|
$
|
(0.13
|
)
|
|
$
|
0.74
|
|
|
$
|
0.42
|
|
|
$
|
1.24
|
|
|
$
|
1.03
|
|
|
Cumulative
benefit of accounting change
|
|
|
-
|
|
|
|
-
|
|
|
|
0.01
|
|
|
|
-
|
|
|
|
-
|
|
|
Net
earnings (loss) per share — Diluted
|
|
$
|
(0.13
|
)
|
|
$
|
0.74
|
|
|
$
|
0.43
|
|
|
$
|
1.24
|
|
|
$
|
1.03
|
|
|
Non-GAAP
net earnings per share — Diluted
(3)
|
|
$
|
0.80
|
|
|
$
|
0.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
$
|
18,755
|
|
|
$
|
2,945
|
|
|
$
|
17,584
|
|
|
$
|
25,032
|
|
|
$
|
3,961
|
|
|
Capital
expenditures
|
|
$
|
2,010
|
|
|
$
|
1,788
|
|
|
$
|
2,482
|
|
|
$
|
4,571
|
|
|
$
|
4,544
|
|
|
Depreciation
|
|
$
|
3,148
|
|
|
$
|
3,081
|
|
|
$
|
3,203
|
|
|
$
|
3,719
|
|
|
$
|
3,624
|
|
|
EBITDA,
excluding provision for litigation effect
(3)(4)
|
|
$
|
20,051
|
|
|
$
|
19,189
|
|
|
$
|
14,772
|
|
|
$
|
30,339
|
|
|
$
|
23,815
|
|
|
|
|
As
of December 31,
|
|
|
(dollars
in thousands, except per share data)
|
|
2008
(1)
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
(2)
|
|
|
Total
assets
|
|
$
|
208,930
|
|
|
$
|
149,953
|
|
|
$
|
159,852
|
|
|
$
|
187,753
|
|
|
$
|
205,134
|
|
|
Total
debt
|
|
$
|
38,000
|
|
|
$
|
7,737
|
|
|
$
|
15,000
|
|
|
$
|
25,412
|
|
|
$
|
69,842
|
|
|
Stockholders’
equity
|
|
$
|
81,475
|
|
|
$
|
96,504
|
|
|
$
|
84,314
|
|
|
$
|
74,736
|
|
|
$
|
61,867
|
|
|
Return
on invested capital, excluding provision for litigation effect
(3)
(5)
|
|
|
9.9
|
%
|
|
|
7.5
|
%
|
|
|
5.3
|
%
|
|
|
12.9
|
%
|
|
|
8.1
|
%
|
|
Stockholders’
equity per share
(6)
|
|
$
|
8.42
|
|
|
$
|
10.15
|
|
|
$
|
8.99
|
|
|
$
|
8.16
|
|
|
$
|
7.02
|
|
|
Return
on stockholders’ equity, excluding provision for litigation effect
(3)
(7)
|
|
|
9.6
|
%
|
|
|
7.5
|
%
|
|
|
4.9
|
%
|
|
|
15.4
|
%
|
|
|
15.3
|
%
|
|
Funded
backlog
|
|
$
|
149,201
|
|
|
$
|
116,471
|
|
|
$
|
92,903
|
|
|
$
|
144,571
|
|
|
$
|
165,017
|
|
|
Number
of shares outstanding
|
|
|
9,674,512
|
|
|
|
9,509,849
|
|
|
|
9,314,962
|
|
|
|
9,096,893
|
|
|
|
8,737,562
|
|
|
(1)
|
Amounts
include results of operations of Kadix (acquired August 1, 2008) for
the period subsequent to our acquisition.
|
|
(2)
|
Amounts
include results of operations of Impact Innovations (acquired
September 1, 2004) for the period subsequent to our
acquisition.
|
|
(3)
|
Non-GAAP
financial data is discussed under the title “Non-GAAP Financial Measures”,
included within this Item 6.
|
|
(4)
|
Earnings
before interest, taxes, depreciation and amortization, or EBITDA, is
defined as GAAP income from continuing operations plus net interest
expense, income taxes, depreciation expense and amortization
expense. EBITDA as calculated by us may be calculated
differently than EBITDA for other companies.
|
|
(5)
|
Return
on invested capital is calculated by dividing operating income (or
non-GAAP operating income in 2008 and 2007), net of related income taxes,
by the ending invested capital. Invested capital is the sum of
outstanding debt and stockholders’ equity, minus cash, normalized for the
investment made for acquisitions during the year.
|
|
(6)
|
Stockholders’
equity per share is calculated by dividing ending stockholders’ equity by
the number of shares outstanding at the end of the
period.
|
|
(7)
|
Return
on stockholders’ equity is calculated by dividing net income (or non-GAAP
net income in 2008 and 2007) by ending stockholders
equity.
|
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 incurred in
2008 and 2007 and its related tax effect that management believes is
unusual in amount and outside of our ongoing operations for the periods
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.
Non-GAAP
financial measures for the year ended December 31, 2008 and 2007 were as
follows:
|
|
|
Year
Ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
(in
thousands)
|
|
$
|
|
|
%
(1)
|
|
|
$
|
|
|
%
(1)
|
|
|
GAAP
operating income (loss)
|
|
$
|
(571
|
)
|
|
|
(0.2
|
)%
|
|
$
|
12,498
|
|
|
|
5.4
|
%
|
|
Provision
for litigation
|
|
|
14,819
|
|
|
|
6.1
|
%
|
|
|
181
|
|
|
|
0.1
|
%
|
|
Non-GAAP
operating income
|
|
$
|
14,248
|
|
|
|
5.9
|
%
|
|
$
|
12,679
|
|
|
|
5.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP
income (loss) before provision (benefit) for income taxes
|
|
$
|
(1,959
|
)
|
|
|
(0.8
|
)%
|
|
$
|
11,784
|
|
|
|
5.1
|
%
|
|
Provision
for litigation
|
|
|
14,819
|
|
|
|
6.1
|
%
|
|
|
181
|
|
|
|
0.1
|
%
|
|
Non-GAAP
income before provision for income taxes
|
|
$
|
12,860
|
|
|
|
5.3
|
%
|
|
$
|
11,965
|
|
|
|
5.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP
provision (benefit) for income taxes
(2)
|
|
$
|
(704
|
)
|
|
|
35.9
|
%
|
|
$
|
4,682
|
|
|
|
39.7
|
%
|
|
Tax
benefit for provision for litigation
(2)
|
|
|
5,757
|
|
|
|
38.8
|
%
|
|
|
72
|
|
|
|
39.8
|
%
|
|
Non-GAAP
provision for income taxes
(2)
|
|
$
|
5,053
|
|
|
|
39.3
|
%
|
|
$
|
4,754
|
|
|
|
39.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP
net income (loss)
|
|
$
|
(1,255
|
)
|
|
|
(0.5
|
)%
|
|
$
|
7,102
|
|
|
|
3.1
|
%
|
|
Provision
for litigation, net of tax benefit
|
|
|
9,062
|
|
|
|
3.7
|
%
|
|
|
109
|
|
|
|
0.0
|
%
|
|
Non-GAAP
net income
|
|
$
|
7,807
|
|
|
|
3.2
|
%
|
|
$
|
7,211
|
|
|
|
3.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP
Basic
|
|
$
|
(0.13
|
)
|
|
|
|
|
|
$
|
0.76
|
|
|
|
|
|
|
Per
share effect of provision for litigation
|
|
|
0.95
|
|
|
|
|
|
|
|
0.01
|
|
|
|
|
|
|
Non-GAAP
Basic
|
|
$
|
0.82
|
|
|
|
|
|
|
$
|
0.77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP
Diluted
|
|
$
|
(0.13
|
)
|
|
|
|
|
|
$
|
0.74
|
|
|
|
|
|
|
Per
share effect of provision for litigation
|
|
|
0.93
|
|
|
|
|
|
|
|
0.01
|
|
|
|
|
|
|
Non-GAAP
Diluted
|
|
$
|
0.80
|
|
|
|
|
|
|
$
|
0.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
(GAAP diluted for 2008)
|
|
|
9,493,495
|
|
|
|
|
|
|
|
9,326,907
|
|
|
|
|
|
|
Diluted
(Non-GAAP for 2008)
|
|
|
9,704,789
|
|
|
|
|
|
|
|
9,649,897
|
|
|
|
|
|
|
(1)
|
Represents
a percentage of total revenue.
|
|
(2)
|
The
percent 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
provided EBITDA because we believe it is a commonly used measure of financial
performance in comparable companies and is provided to help investors evaluate
performance and to enhance investors’ understanding of our operating results.
EBITDA should not be construed as an alternative measure of net income, income
from continuing operations or cash flows.
Reconciliation
of income (loss) from continuing operations to EBITDA is as
follows:
|
|
|
Year
ended December 31,
|
|
|
(in
thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Income
(loss) from continuing operations
|
|
$
|
(1,255
|
)
|
|
$
|
7,102
|
|
|
$
|
3,988
|
|
|
$
|
11,433
|
|
|
$
|
9,373
|
|
|
Interest
expense, net
|
|
|
1,423
|
|
|
|
1,541
|
|
|
|
2,042
|
|
|
|
4,367
|
|
|
|
2,225
|
|
|
Provision
(benefit) for income taxes
|
|
|
(704
|
)
|
|
|
4,682
|
|
|
|
2,730
|
|
|
|
7,781
|
|
|
|
6,269
|
|
|
Depreciation
expense
|
|
|
3,148
|
|
|
|
3,081
|
|
|
|
3,203
|
|
|
|
3,719
|
|
|
|
3,624
|
|
|
Amortization
expense
|
|
|
2,620
|
|
|
|
2,602
|
|
|
|
2,809
|
|
|
|
3,039
|
|
|
|
2,324
|
|
|
EBITDA
|
|
|
5,232
|
|
|
|
19,008
|
|
|
|
14,772
|
|
|
|
30,339
|
|
|
|
23,815
|
|
|
Add
back: provision for litigation, net of tax benefit
|
|
|
9,062
|
|
|
|
181
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
EBITDA,
excluding provision for litigation effect
|
|
$
|
14,294
|
|
|
$
|
19,189
|
|
|
$
|
14,772
|
|
|
$
|
30,339
|
|
|
$
|
23,815
|
|
Dynamics
Research Corporation, headquartered in Andover, Massachusetts, is a leading
provider of innovative engineering, technical, information technology and
management consulting services and solutions to federal and state
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,
Intelligence/Space, Cyber Security, and Public and Environmental
Health.
On August
1, 2008, we completed the acquisition of Kadix which is more fully
described in Note 3 of our “Notes to Consolidated Financial
Statements” in Part II, Item 8 of this Form 10-K. The
acquisition strengthens and expands our growth as a provider of high-end
services and solutions in the homeland security and other federal civilian
markets. The operating results of Kadix are included in DRC’s results
of operations within the Systems and Services segment for the period subsequent
to the acquisition date.
We have
two reportable business segments: Systems and Services, and Metrigraphics. The
Systems and Services segment accounted for approximately 98% of total revenue
and the Metrigraphics segment accounted for approximately 2% of total revenue in
2008.
We are
cognizant of funding challenges and changing priorities of the federal
government. In February 2009, the President made his initial budget
submission to Congress. While a more detailed budget will be provided
in April, the submission, along with the Federal Stimulus Plan, will provide
clear indications of priorities and direction for the new
administration. Overall, the budget provides for discretionary
spending growth of 7%. Breaking the increase down by sector, the
budget proposal reflects 9% growth in funding for civilian agencies and 4%
growth in funding for defense. However, significant contract awards
have been and will continue to be delayed and new initiatives have been slow to
start.
Customers
are moving away from the GSA schedule time and materials contracts toward
agency sponsored ID/IQ 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 training, business
transformation, lean six sigma, human capital management, cyber security 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.
Outlook
Our
business is conducted primarily with U.S. Government customers under both
short-term and long-term contracts. We have aligned our service
offerings to current economic conditions and customer needs. The
U.S. Government’s budgetary processes give us good visibility regarding
future spending and the threat areas that they are addressing. Management
believes that our current contracts, and backlog of previously awarded contracts
are well aligned with the direction of our customers’ future needs, and this
provides us with good insight regarding future cash flows. Nonetheless,
management recognizes that the current economic situation and significant
changes in priorities under the new administration likely will result in
significant changes in federal spending with increases in some areas and
decreases in others. While we may benefit from the increases, certain
programs in which we participate may be subject to reductions.
Based
primarily on our current portfolio of customers, contracts and funded backlog of
$149.2 million as of December 31, 2008, we expect revenue in 2009 to be in
the range of approximately $280 million to $290 million.
CRITICAL ACCOUNTING
POLICIES
There are
business risks specific to the industries in which we operate. These risks
include: estimates of costs to complete contract obligations, changes in
government policies and procedures, government contracting issues and risks
associated with technological development. The preparation of financial
statements 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. Estimates and
assumptions also affect the amount of revenue and expenses during the reported
period. Actual results could differ from those estimates.
The use
of alternative estimates and assumptions and changes in business strategy or
market conditions may significantly impact our assets or liabilities, and
potentially result in a different impact to our results of
operations. We believe the following critical accounting policies
affect the more significant judgments made and estimates used in the preparation
of our consolidated financial statements.
Our
Systems and Services business segment provides services pursuant to time and
materials, cost reimbursable and fixed-price contracts, including service-type
contracts.
For time
and materials contracts, revenue reflects the number of direct labor hours
expended in the performance of a contract multiplied by the contract billing
rate, as well as reimbursement of other billable direct costs. The risk inherent
in time and materials contracts is that actual costs may differ materially from
negotiated billing rates in the contract, which would directly affect operating
income.
For cost
reimbursable contracts, revenue is recognized as costs are incurred and includes
a proportionate amount of the fee earned. Cost reimbursable contracts specify
the contract fee in dollars or as a percentage of estimated costs. The primary
risk on a cost reimbursable contract is that a government audit of direct and
indirect costs could result in the disallowance of some costs, which would
directly impact revenue and margin on the contract. Historically, such audits
have not had a material impact on our revenue and operating
income.
Revenue
from service-type fixed-price contracts is recognized ratably over the contract
period or by other appropriate output methods to measure service provided, and
contract costs are expensed as incurred. Under fixed-price contracts, other than
service-type contracts, revenue is recognized primarily under the percentage of
completion method in accordance with American Institute of Certified Public
Accountants Statement of Position 81-1,
Accounting for Performance of
Construction-Type and Certain Production-Type Contract
s
. The risk on a
fixed-price contract is estimates of costs to complete the contract may exceed
revenues on the contract.
For all
types of contracts, we recognize anticipated contract losses as soon as they
become known and estimable. Out-of-pocket expenses that are reimbursable by the
customer are included in contract revenue and cost of contract
revenue.
Unbilled
receivables are the amounts of recoverable contract revenue that have not been
billed at the balance sheet date. Unbilled receivables relate principally to
revenue that is billed in the month after services are performed. In certain
instances, billing is deferred in compliance with the contract terms, such as
milestone billing arrangements and withholdings, or delayed for other reasons.
Costs related to certain U.S. Government contracts, including applicable
indirect costs, are subject to audit by the government. Revenue from such
contracts has been recorded at amounts we expect to realize upon final
settlement.
Our
Metrigraphics business segment records revenue from product sales upon transfer
of both title and risk of loss to the customer, provided there is evidence of an
arrangement, fees are fixed or determinable, no significant obligations remain,
collection of the related receivable is reasonably assured and the customer
acceptance criteria have been successfully demonstrated. Product sales are
recorded net of sales taxes and net of returns upon delivery. Amounts
billed to customers related to shipping and handling is classified as product
sales. The cost of shipping products to the customer is recognized at
the time the products are shipped and are recorded as cost of product
sales.
Goodwill and Other Intangible
Assets
With the
acquisition of Kadix and other businesses in prior years, we acquired goodwill
and other intangible assets. The identification and valuation of these
intangible assets and the determination of the estimated useful lives at the
time of acquisition, as well as the completion of annual impairment tests,
require significant management judgments and estimates. These estimates are made
based on, among other things, consultations with an accredited independent
valuation consultant and reviews of projected cash flows.
We
estimate fair value by employing different methodologies, including a comparison
to comparable industry companies and discounted cash flows. The determination of
relevant comparable industry companies impacts our assessment of fair value.
Should the operating performance of our reporting unit change in comparison to
these companies or should the valuation of these companies change, this could
impact our assessment of the fair value of the reporting unit. Our discounted
cash flow analysis factors in assumptions on revenue and expense growth rates.
These estimates are based upon our historical experience and projections of
future activity, factoring in customer demand, changes in technology and a cost
structure necessary to achieve the related revenues. Additionally, the
discounted cash flow analysis factors in expected amounts of working capital and
weighted average cost of capital. Changes in judgments on any of these factors
could materially impact the value of the reporting unit.
As a
result of the annual impairment test performed as of December 31, 2008, we
determined that the carrying amount of goodwill did not exceed its fair value
and, accordingly, did not record a charge for impairment. However, we are unable
to assure that goodwill will not be impaired in subsequent periods. As of
December 31, 2008, we had recorded goodwill and other intangible assets of
$105.0 million in the Consolidated Balance Sheets.
Income Taxes and Deferred
Taxes
On
January 1, 2007, we adopted FASB Interpretation No. 48,
Accounting for Uncertainty in Income
Taxes
(“FIN 48”), which addresses the determination of how tax benefits
claimed or expected to be claimed on a tax return should be recorded in the
financial statements. Under FIN 48, we must recognize the tax benefit from an
uncertain tax position only if it is more likely than not that the tax position
will be sustained on examination by the taxing authorities, based on the
technical merits of the position. The tax benefits recognized in the financial
statements from these positions are measured based on the largest benefit that
has a greater than fifty percent likelihood of being realized upon ultimate
resolution. We review our tax positions on a quarterly basis and more frequently
as facts surrounding tax positions change. Based on these future events,
we may recognize uncertain tax positions or reverse current uncertain tax
positions the impact of which would effect the statement of operations and/or
the balance sheet.
As part
of our process of preparing consolidated financial statements, management is
required to estimate the provision for income taxes, deferred tax assets and
liabilities and future taxable income for purposes of assessing our ability to
realize any future benefits from deferred taxes. This process involves
estimating the current tax liability and assessing temporary and permanent
differences resulting from differing treatment of items for tax and
accounting purposes. These differences result in deferred tax assets and
liabilities, which are included in the Consolidated Balance Sheets. We had a net
deferred asset of $7.7 million at December 31,
2008.
We must
also assess the likelihood that our deferred tax asset will be recovered from
future taxable income and, to the extent a recovery is not likely, a valuation
allowance must be established. At December 31, 2008, we determined that a
valuation allowance was not required.
Accounting
and reporting for our pension plan requires the use of assumptions, including
the discount rate and expected rate of return on assets. These assumptions are
used by independent actuaries to determine the value of our pension obligations
and allocate this cost to the service periods. The actuarial assumptions used to
calculate pension costs are determined and reviewed annually by management after
consulting with outside investment advisors and actuaries.
The
assumed discount rate, which is intended to be the actual rate at which benefits
could effectively be settled, is determined by a spot-rate yield curve method.
The spot-rate yield curve is employed to match the plan assets cash outflows
with the timing and amount of the expected benefit payments. As of December 31,
2008, the pension plan’s measurement date, the weighted average discount rate
used to determine the benefit obligations and net periodic benefit costs was
6.25%. A decrease of 50 basis points in the discount rate would have
resulted in an increase in annual pension expense by approximately
$0.4 million.
The
assumed expected rate of return on plan assets, which is the average return
expected on the funds invested or to be invested to provide future benefits to
pension plan participants, is determined by an annual review of historical
long-term asset returns and consultation with outside investment advisors. As of
the pension plan’s measurement date, the weighted average expected rate of
return was 9.0%. A decrease of 50 basis points in the expected rate of
return would have resulted in an increase in annual pension expense by
approximately $0.3 million.
If
assumptions differ materially from actual results in the future, our obligations
under the pension plan could also differ materially, potentially requiring us to
record an additional pension liability and record additional pension costs. An
actuarial valuation of the pension plan is performed each year. The results of
this actuarial valuation are reflected in the accounting for the pension plan
upon determination. At December 31, 2008, we recorded a pension liability
of $22.6 million in the Consolidated Balance Sheet that represented the
underfunded benefit obligation.
Litigation, Commitments, and
Contingencies
We are
subject to a range of claims, lawsuits and administrative proceedings that arise
in the ordinary course of business. Estimating liabilities and costs associated
with these matters requires judgment and assessment based upon professional
knowledge and experience of management and its internal and external legal
counsel. In accordance with Statement of Financial Accounting Standards (SFAS)
No. 5,
Accounting for
Contingencies,
amounts are recorded as charges to earnings when
management, after taking into consideration the facts and circumstances of
each matter, including any settlement offers, has determined that it is probable
that a liability has been incurred and the amount of the loss can be reasonably
estimated. The ultimate resolution of any such exposure to us may vary from
earlier estimates as further facts and circumstances become
known.
Litigation
accruals are recorded as charges to earnings when management, after taking into
consideration the facts and circumstances of each matter, including any
settlement offers, has determined that it is probable that a liability has been
incurred and the amount of the loss can be reasonably estimated. The ultimate
resolution of any exposure to the company may vary from earlier estimates as
further facts and circumstances become known.
Operating
results and results expressed as a percentage of total revenues are as
follows:
|
|
|
Year
Ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
(in
millions)
|
|
$
(1)
|
|
|
%
|
|
|
$
(1)
|
|
|
%
|
|
|
$
(1)
|
|
|
%
|
|
|
Contract
revenue
|
|
$
|
236.8
|
|
|
|
97.5
|
%
|
|
$
|
224.7
|
|
|
|
97.9
|
%
|
|
$
|
252.9
|
|
|
|
97.6
|
%
|
|
Product
sales
|
|
|
6.0
|
|
|
|
2.5
|
|
|
|
4.9
|
|
|
|
2.1
|
|
|
|
6.1
|
|
|
|
2.4
|
|
|
Total
revenue
|
|
$
|
242.8
|
|
|
|
100.0
|
%
|
|
$
|
229.6
|
|
|
|
100.0
|
%
|
|
$
|
259.0
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit on contract revenue
(2)
|
|
$
|
39.0
|
|
|
|
16.5
|
%
|
|
$
|
37.2
|
|
|
|
16.5
|
%
|
|
$
|
33.9
|
|
|
|
13.4
|
%
|
|
Gross
profit (loss) on product sales
(2)
|
|
|
0.2
|
|
|
|
2.8
|
%
|
|
|
(0.1
|
)
|
|
|
(1.1
|
)%
|
|
|
1.2
|
|
|
|
19.7
|
%
|
|
Total
gross profit
(2)
|
|
|
39.2
|
|
|
|
16.1
|
%
|
|
|
37.1
|
|
|
|
16.2
|
%
|
|
|
35.1
|
|
|
|
13.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
22.3
|
|
|
|
9.2
|
%
|
|
|
21.8
|
|
|
|
9.5
|
%
|
|
|
24.1
|
|
|
|
9.3
|
%
|
|
Provision
for litigation
|
|
|
14.8
|
|
|
|
6.1
|
%
|
|
|
0.2
|
|
|
|
0.1
|
%
|
|
|
-
|
|
|
|
0.0
|
%
|
|
Amortization
of intangible assets
|
|
|
2.6
|
|
|
|
1.1
|
%
|
|
|
2.6
|
|
|
|
1.1
|
%
|
|
|
2.8
|
|
|
|
1.1
|
%
|
|
Operating
Income (loss)
|
|
|
(0.6
|
)
|
|
|
(0.2
|
)%
|
|
|
12.5
|
|
|
|
5.4
|
%
|
|
|
8.2
|
|
|
|
3.2
|
%
|
|
Interest
expense, net
|
|
|
(1.4
|
)
|
|
|
(0.6
|
)%
|
|
|
(1.5
|
)
|
|
|
(0.7
|
)%
|
|
|
(2.0
|
)
|
|
|
(0.8
|
)%
|
|
Other
income, net
|
|
|
0.0
|
|
|
|
0.0
|
%
|
|
|
0.8
|
|
|
|
0.4
|
%
|
|
|
0.6
|
|
|
|
0.2
|
%
|
|
Provision
(benefit) for income taxes
(3)
|
|
|
(0.7
|
)
|
|
|
35.9
|
%
|
|
|
4.7
|
|
|
|
39.7
|
%
|
|
|
2.7
|
|
|
|
40.6
|
%
|
|
Cumulative
benefit of accounting change, net of tax
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
0.1
|
|
|
|
0.0
|
%
|
|
Net
income (loss)
|
|
$
|
(1.3
|
)
|
|
|
(0.5
|
)%
|
|
$
|
7.1
|
|
|
|
3.1
|
%
|
|
$
|
4.1
|
|
|
|
1.6
|
%
|
|
(1)
|
Totals
may not add due to rounding.
|
|
(2)
|
These
amounts represent a percentage of contract revenues, product sales and
total revenues, respectively.
|
|
(3)
|
The
percentage for provision (benefit) for income taxes relate to a percentage
of income before provision for income
taxes.
|
We
reported total revenue of $242.8 million, $229.6 million and
$259.0 million in 2008, 2007 and 2006, respectively. Total revenue
increased by $13.2 million, or 5.8% in 2008 compared to 2007 due
to the acquisition of Kadix, partially offset by decreased revenues in the
national defense and intelligence sector. The decrease in revenue
in 2007 compared to 2006 resulted from a decline in contract
revenue.
Contract
revenues in our Systems and Services segment were earned from the following
sectors:
|
|
|
Year
Ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
(in
millions)
|
|
$
(1)
|
|
|
%
(1)
|
|
|
$
(1)
|
|
|
%
(1)
|
|
|
$
(1)
|
|
|
%
(1)
|
|
|
National
defense and intelligence agencies
|
|
$
|
156.8
|
|
|
|
66.3
|
%
|
|
$
|
179.1
|
|
|
|
79.7
|
%
|
|
$
|
206.0
|
|
|
|
81.4
|
%
|
|
Federal
civilian agencies
|
|
|
32.9
|
|
|
|
13.9
|
|
|
|
27.5
|
|
|
|
12.2
|
|
|
|
27.9
|
|
|
|
11.0
|
|
|
Homeland
security
|
|
|
19.3
|
|
|
|
8.1
|
|
|
|
3.9
|
|
|
|
1.7
|
|
|
|
2.7
|
|
|
|
1.1
|
|
|
State
and local government agencies
|
|
|
25.8
|
|
|
|
10.9
|
|
|
|
13.6
|
|
|
|
6.1
|
|
|
|
15.3
|
|
|
|
6.0
|
|
|
Other
|
|
|
2.0
|
|
|
|
0.8
|
|
|
|
0.7
|
|
|
|
0.3
|
|
|
|
1.1
|
|
|
|
0.4
|
|
|
Total
contract revenue
|
|
$
|
236.8
|
|
|
|
100.0
|
%
|
|
$
|
224.7
|
|
|
|
100.0
|
%
|
|
$
|
252.9
|
|
|
|
100.0
|
%
|
|
(1)
|
Totals
may not add due to rounding.
|
The
decrease in revenues from national defense and intelligence agencies in 2008
compared to 2007 was due to decreased revenues derived from the U.S. Air Force
ASC small business set-aside Consolidated Acquisition of Professional Services
(“CAPS”) contract, the transition from the U.S. Air Force ESC full and open
Information Technology Services Program (“ITSP”) II contract to the small
business set-aside Professional Acquisition Support Services (“PASS”) contract
and lower revenue related to the U.S. Navy Trident Missile
program. The decrease in revenues from national defense and
intelligence agencies in 2007 compared to 2006 was
due to
the transition into the new CAPS contract in August 2006 and the loss of the Air
National Guard contract in May 2006, partially offset by increased revenues from
the Naval Air System Command AIR
Speed
subcontract awarded in
March 2006.
In
January 2008, we purchased from THE CENTECH GROUP, Inc., a prime CAPS contract,
on which minimal work was being performed. While awaiting the government’s
decision on approval of the contract novation, through the CENTECH contract we
have won numerous task order re-competitions. We have received
notification that CENTECH’s request to novate their CAPS contract to DRC has
been denied. CENTECH and we are currently considering avenues for
reconsideration of this decision and continuing to perform as a subcontractor on
the CENTECH CAPS contract.
The ESC
PASS contract was re-competed in 2007 as a small business set-aside and certain
engineering work previously performed by us under ITSP II was directed to a new
contract for which the Company did not receive an award.
The
increase in revenues from Homeland Security in 2008 compared to 2007 was
primarily due to added revenues related to the Kadix acquisition and new task
orders won in 2008.
The
increase in revenues from other federal civilian agencies in 2008 compared to
2007 was due to added revenues related to the Kadix acquisition and new task
orders won in 2008. The increase in revenues from federal civilian agencies in
2007 compared to 2006 was primarily due to added revenues from the FDIC contract
awarded in November 2007.
The
increase in revenues from state and local government agencies in 2008 compared
to 2007 was primarily due to additional change orders under the State of Ohio
contract during 2007 and 2008. With the completion of the implementation phase
of the Ohio project in October 2008, revenues derived from the project are
anticipated at a reduced level in 2009. In the second quarter of 2008
we began a new child welfare system development project with the State of
Tennessee which generated $7.0 million of revenue in 2008. The
decrease in revenues from state and local government agencies in 2007 compared
to 2006 was primarily due to lower revenues from our contract with the
State of Ohio, under which a significant portion of the work has been completed,
partially offset by higher revenues from our State of Colorado contract awarded
in April 2006.
Revenues
by contract type as a percentage of Systems and Services segment revenues were
as follows:
|
|
|
Year
Ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Time
and materials
|
|
|
49
|
%
|
|
|
57
|
%
|
|
|
62
|
%
|
|
Cost
reimbursable
|
|
|
18
|
|
|
|
22
|
|
|
|
19
|
|
|
Fixed
price, including service type contracts
|
|
|
33
|
|
|
|
21
|
|
|
|
19
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prime
contract
|
|
|
63
|
%
|
|
|
56
|
%
|
|
|
67
|
%
|
|
Sub-contract
|
|
|
37
|
|
|
|
44
|
|
|
|
33
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
Prime
contract revenues increased in 2008 compared with 2007 as a result of an
increasing portion of contracts awarded under DRC’s agency-wide multiple award
schedule ID/IQ contracts. Prime contract revenues decreased in 2007
compared with 2006 as a result of the transition to the CAPS contract which has
been classified as subcontract revenue.
Product
sales for the Metrigraphics segment were $6.0 million, $4.9 million
and $6.1 million for 2008, 2007 and 2006, respectively. The increase in
revenue from product sales for the Metrigraphics segment in 2008 compared to
2007 primarily was due to higher sales to a new medical device customer.
The decrease in revenue from product sales for the Metrigraphics segment in 2007
compared to 2006 primarily was due to a decrease in medical device
sales.
Our
funded backlog was $149.2 million at December 31, 2008, $116.5 million at
December 31, 2007 and $92.9 million at December 31,
2006. For 2008, our book-to-bill ratio was 1.1 to 1.0. We
expect that substantially all of our backlog at December 31, 2008 will
generate revenue during the year ending December 31,
2009.
Total
gross profit was $39.2 million, $37.1 million and $35.1 million
resulting in a gross margin of 16.1% in 2008, 16.2% in 2007 and 13.6% in
2006.
Our gross
profit on contract revenue was $39.0 million, $37.2 million and $33.9 million
resulting in a gross margin of 16.5% in both 2008 and 2007 and 13.4% in 2006.
The increase in gross profit in 2008 compared to 2007 was attributable to higher
revenues primarily related to the Kadix acquisition and lower indirect costs,
partially offset by costs associated with workforce reductions. The
increase in gross profit in 2007 compared to 2006 was primarily attributable to
the reduction in low margin subcontractor revenues resulting from the transition
to the new CAPS contract in August 2006 as noted above. We recorded
severance costs of $1.7 million, $0.6 million and $1.1 million in cost of
contract revenue in 2008, 2007 and 2006, respectively.
Our gross
profit (loss) on product sales was $0.2 million, $(0.1) million and $1.2 million
resulting in a gross margin of 2.8%, (1.1)% and 19.7% for 2008, 2007 and 2006,
respectively. The increase in gross profit in 2008 compared to 2007
was due to higher sales to medical device customers. The decline in gross profit
in 2007 compared to 2006 was primarily attributable to a lower level of
sales.
Selling, General and Administrative
Expenses
Selling,
general and administrative expenses were $22.3 million in 2008,
$21.8 million in 2007, and $24.1 million in 2006. Selling,
general and administrative expenses as a percent of total revenue was 9.2%, 9.5%
and 9.3% for 2008, 2007 and 2006, respectively. The increase in
selling, general and administrative expenses in 2008 compared to 2007 was
primarily due to the addition of Kadix’s selling, general and administrative
expenses partially offset by continuing cost reduction efforts and lower
deferred compensation and stock compensation costs. The decrease in selling,
general and administrative expenses in 2007 compared to 2006 was a result of
cost savings initiatives undertaken in the first half of 2006, which also
included higher severance costs.
During
2008 and 2007 we recorded a provision for litigation of $14.8 million and $0.2
million, respectively. We anticipate paying the $15.0 million
litigation settlement due to the Government in the first half of
2009.
Amortization of Intangible
Assets
Amortization
expense, which relates to the amortization of acquired intangible assets, was
$2.6 million in both 2008 and 2007, and $2.8 million in
2006.
We
incurred interest expense totaling $1.5 million in 2008, $1.6 million
in 2007 and $2.1 million in 2006. The decrease in interest expense in
2008 compared to 2007 was due to lower daily average borrowings and lower
average interest rates on our revolver in 2008, partially offset by interest
expense associated with the addition of the $40 million term loan used to
finance the Kadix acquisition in 2008. The decrease in interest expense in 2007
compared to 2006 was due to a lower outstanding debt balance, partially offset
by a higher average interest rate. The weighted average interest
rates on our outstanding revolver borrowings were 5.41%, 6.66%, and 6.87% at
December 31, 2008, 2007 and 2006, respectively. The average interest
rate on our term loan was 4.21% at December 31, 2008. We recorded
approximately $0.1 million of interest income in each of the three years ended
2008.
We
recorded net other income of $0.8 million and $0.6 million in 2007 and 2006,
respectively. In 2006, we recorded $0.2 million of realized gains
resulting from the sale of shares of common shares of Lucent Technologies,
Inc. In accordance with the equity method of accounting, other income
includes recognition of our portion of income or loss related to our equity
investments. We recorded income related to our equity investments of
$0.5 million in both 2008 and 2007 and $0.2 million in 2006. Other income
also included a deferred compensation plan investment loss of $0.6 million in
2008 and gains of $0.2 million in both 2007 and 2006.
Provision
for Income Taxes
We
recorded income tax provisions (benefit) of $(0.7) million, $4.7 million and
$2.7 million in 2008, 2007 and 2006, respectively. The effective income tax rate
excluding the litigation provision was 39.3% and 39.7% in 2008 and 2007,
respectively, compared to 40.6% in 2006. We have estimated the tax benefits
associated with the litigation provision of $5.8 million and $0.1 million for
2008 and 2007, respectively. The decrease in the income tax rate in
2007 compared to 2006 is due to adjustments to tax accruals and reserves plus
favorable effects of tax credits and state tax audits.
Shares
U
sed in
C
omputing
E
arnings
(Loss) P
er
S
hare
Weighted
average common shares outstanding and common equivalent shares totaled
9.5 million, 9.6 million, and 9.4 million for the years ended
December 31, 2008, 2007 and 2006, respectively. The decrease in shares in
2008 compared to 2007 is due to the net loss recorded in 2008, which did not
include the dilutive effect of stock options or unvested restricted
stock. The increase in shares in both comparable periods was related
to additional shares issued, partially offset by a decreased dilutive effect on
employee stock options due to a lower average annual stock
price.
LIQUIDITY AND CAPITAL
RESOURCES
The
following discussion analyzes liquidity and capital resources by operating,
investing and financing activities as presented in our Consolidated Statements
of Cash Flows. Our principal sources of liquidity are cash flows from operations
and borrowings from our revolving credit facility. At December 31, 2008, the
borrowing capacity available under our revolver was $25.0
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.
In light
of the current economic situation, we have also evaluated our future liquidity
needs, both from a short-term and long-term basis. We believe that cash on hand
plus cash generated from operations along with cash available under credit lines
are expected to be sufficient in 2009 to service debt, finance capital
expenditures, pay the anticipated settlement of litigation, pay federal and
state income taxes and fund the pension plan, if necessary. To provide for
long-term liquidity, we believe we can generate substantial positive cash flow,
as well as obtain additional capital, if necessary, from the use of subordinated
debt or equity. 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.
We
anticipate paying the $15.0 million litigation settlement due to the Government
in the first half of 2009. This litigation settlement is further
described in Note 13 of our “Notes to Consolidated Financial Statements” in
Part II, Item 8 of this Form 10-K. We will
use available cash on hand and borrow the remaining portion from our
revolver. We anticipate to fully repay amounts borrowed under the
revolver related to this borrowing in 2009, however, we may borrow additional
funds from our revolver during this time for working capital
needs.
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.
At
December 31, 2008 and 2007, we had cash and cash equivalents aggregating
$7.1 million and $2.0 million, respectively. Our operating practice is
to apply cash received against any outstanding revolving credit facility
balances. When a revolver balance exists, cash balances at the end of
the year generally reflect the timing and size of cash receipts at the end of
the year.
Net cash
provided by operating activities of $18.8 million during 2008 was primarily
attributable to an increase in income from operations, excluding the litigation
provision. Net cash provided by operating activities totaled $2.9
million and $17.6 million in 2007 and 2006, respectively.
Contract
receivables were $71.4 million and $63.6 million at December 31, 2008 and
December 31, 2007, respectively. Billed receivables increased $3.5 million in
2008 and $3.9 million in 2007, while unbilled receivables increased $4.4 million
in 2008 and decreased $4.6 million in 2007. Contract receivables days sales
outstanding (“DSO”), were 95 days at December 31, 2008 and 101 days at December
31, 2007. Federal business DSO was 86 days at December 31, 2008 and
91 days at December 31, 2007. The difference between consolidated DSO
and federal DSO was primarily due to our contracts with the states of Ohio and
Tennessee which had balances outstanding at December 31, 2008 of $12.7 million
and $7.6 million at December 31, 2007.
Our net
deferred tax asset was $7.7 million at December 31, 2008 compared to a $7.0
million deferred tax liability at December 31, 2007. The change in
deferred taxes was principally associated with the defined benefit pension plan
of $9.2 million and the addition of a deferred tax asset of $5.8 million for the
litigation provision. Our deferred tax liability on unbilled
receivables declined to $6.9 million at December 31, 2008 from $7.5 million at
December 31, 2007. 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 was elevated to the IRS National Office for
determination. On October 23, 2008, we received a notification of
ruling from the IRS National Office. This
correspondence
provided
clarification regarding the IRS position relating to the revenue recognition for
unbilled receivables. We are in the process of evaluating the impact
of this notification. The resolution with the IRS regarding unbilled
receivables could result in a change in our accounting method regarding revenue
recognition. This change could result in an acceleration of taxable income
and a reversal of certain deferred tax items. We paid $2.4 million in
income taxes in 2008 compared to $6.2 million in 2007.
Share-based
compensation decreased to $1.1 million in 2008 from $1.6 million in 2007 and
$2.1 million in 2006. The decrease in 2008 is primarily due to the decline in
our stock price. The decrease in 2007 is primarily due to the
amendment to our Employee Stock Purchase Plan (“ESPP”) during the fourth quarter
of 2006 which resulted in the ESPP being treated as non-compensatory, as more
fully described in Note 10 of our “Notes to Consolidated Financial Statements”
in Part II, Item 8 on this Form 10-K. As of December
31, 2008 the total unrecognized compensation related to restricted stock awards
was $1.1 million to be recognized over two years.
Non-cash
amortization expense of our acquired intangible assets was $2.6 million in both
2008 and 2007 and $2.8 million in 2006. We anticipate that non-cash expense for
the amortization of intangible assets will increase to approximately $3.3
million in 2009 due to a full year of amortization from the Kadix
acquisition.
Our
defined benefit pension plan was underfunded by $22.6 million at December 31,
2008 and overfunded by $0.7 million at December 31, 2007. The decline
in the plan’s funded status in 2008 was primarily attributable to the decline in
the plan asset performance during the year. The improvement in the
plan’s funded status in 2007 was primarily attributable to the change in the
discount rate used to determine benefit obligations to 6.25% from
5.75%. During 2008 and 2007, we recorded pension income of $1.3
million and $0.8 million, respectively, compared to pension expense of $0.6
million in 2006. The decrease in pension costs in both comparable
periods was due to actions approved by the Board of Directors to amend the
pension plan during the fourth quarter of 2006, which removed
the 3% annual benefit inflator for active participants in the plan as
of December 31, 2006. No supplemental employer contributions were
made in 2008 or 2007, and no contribution is required in 2009. We
anticipate pension expense to be approximately $2.0 million in 2009 due to the
decline in plan asset performance in 2008.
Net cash
used in investing activities of $44.3 million during 2008 was primarily
attributable to the purchase of Kadix. Net cash used in investing
activities was $2.8 million in 2007 and $2.3 million in 2006.
On August
1, 2008, we completed the acquisition of Kadix as more fully described in
Note 3 of our “Notes to Consolidated Financial Statements” in
Part II, Item 8 of this Form 10-K. The total purchase
price of $47.3 million included additional contingent consideration related to
achievement of earnout objectives of $4.3 million that was accrued at December
31, 2008 and paid in 2009. At December 31, 2008 the purchase price
allocation was final and all additional cash consideration had been
recorded.
Capital
expenditures for the purchase of property and equipment were $2.0 million,
$1.8 million, and $2.5 million in 2008, 2007 and 2006, respectively.
For all years, capital expenditures were primarily for the purchase of software,
other equipment and leasehold improvements. We expect discretionary
capital expenditures in 2009 to be at similar levels as 2008.
During
2007, we made improvements to our headquarters facility of $1.0 million in
connection with our obligation under the sale and leaseback transaction entered
into in 2005. We have substantially made all required improvements
under the agreement and the letter of credit was released in the first half of
2008.
During
the third quarter of 2008, we entered into a new unsecured credit facility and
an interest rate swap agreement. The new facility restructured and
increased our credit facility to $65.0 million and provided for a
$40.0 million, five-year term loan and a $25.0 million, five-year
revolving credit agreement for working capital. The term loan
requires quarterly repayments of $2.0 million and we expect operating cash flows
to be sufficient to fund these repayments. The swap agreement
effectively fixes our interest rate on an initial notional amount of $20.0
million of the term loan principal at 5.60% (3.60% swap fixed rate plus 2.00%
margin) throughout the term of the facility. The facility and swap
agreements are more fully described in Note 7 and Note 8, respectively, of our
“Notes to Consolidated Financial Statements” in Part II, Item 8 on
this Form 10-K.
During
2008, net cash provided by financing activities of $30.7 million represented net
borrowings under the term loan of $38.0 million and proceeds of $0.9 million
from the issuance of common stock through the exercises of stock options and
employee stock purchase plan transactions, partially offset by net repayments of
$7.7 million under our revolver.
The
average daily borrowing on our revolver for 2008 was $3.2 million at a weighted
average interest rate of 5.41%, compared to an average daily borrowing of $16.7
million at a weighted average interest rate of 7.30% in 2007 and an average
daily borrowing of $10.4 million at a weighted average interest rate of 7.81% in
2006 under our then existing revolver during those periods. Also,
during
2008 we
had $40.0 million outstanding under our term loan for the last five months of
2008 at a weighted average interest rate of 4.67%, compared to our 2006 average
daily outstanding balance under our then existing acquisition term loans was
$14.7 million at a weighted average interest rate of 5.13%.
During
2007, net cash used in financing activities of $6.1 million represented net
repayments under our credit facility of $7.3 million, partially offset by $1.2
million of proceeds from the issuance of common stock through the exercises of
stock options and employee stock purchase plan transactions.
During
2006, net cash used in financing activities of $8.4 million represented
principal payments under the acquisition term loan of $25.4 million, partially
offset by $15.0 million of net borrowings under the revolving credit agreement
and $1.9 million of proceeds from the issuance of common stock through the
exercises of stock options and employee stock purchase plan
transactions. The outstanding balances on our previous credit
facility, which consisted of an acquisition term loan balance of $17.2 million
and a revolving credit facility balance of $4.5 million, were paid off and
re-borrowed under the revolver as part of the credit
facility.
Off-Balance Sheet
Arrangements
We did
not utilize or employ any off-balance sheet arrangements during the three years
ended December 31, 2008, defined as (i) an obligation under a guarantee
contract, (ii) a retained or contingent interest in assets transferred to an
unconsolidated entity or similar arrangement, (iii) an obligation, including a
contingent obligation, under a contract that would be accounted for as a
derivative instrument or (iv) an obligation, including a contingent obligation,
arising out of a variable interest.
Our
contractual obligations as of December 31, 2008 consist of the
following:
|
|
|
Payments
due by period
|
|
|
|
|
|
|
|
Less
than
|
|
|
Two
to
|
|
|
Four
to
|
|
|
|
|
|
(in
millions)
|
|
Total
|
|
|
one
year
|
|
|
three
years
|
|
|
five
years
|
|
|
Thereafter
|
|
|
Long-term
debt
|
|
$
|
38.0
|
|
|
$
|
8.0
|
|
|
$
|
16.0
|
|
|
$
|
14.0
|
|
|
$
|
-
|
|
|
Interest
payments
|
|
|
2.5
|
|
|
|
0.9
|
|
|
|
1.2
|
|
|
|
0.4
|
|
|
|
-
|
|
|
Operating
leases
|
|
|
26.9
|
|
|
|
7.1
|
|
|
|
9.8
|
|
|
|
5.2
|
|
|
|
4.8
|
|
|
Total
contractual obligations
|
|
$
|
67.4
|
|
|
$
|
16.0
|
|
|
$
|
27.0
|
|
|
$
|
19.6
|
|
|
$
|
4.8
|
|
The
contractual amounts above related to interest payments does not include the
portion of interest contractually due on our term loan principal balance
that is not tied to the interest rate swap because those interest rates are
not fixed. During 2008 we entered into an interest rate swap
agreement which effectively fixed half of the term loan’s principal balance at
an interest rate of 5.60%.
The
contractual amounts above related to operating leases do not include the effect
of sublease rentals. The amount of sublease rentals is disclosed in
Note 13 of our “Notes to Consolidated Financial Statements” in
Part II, Item 8 on this Form 10-K.
At
December 31, 2008 we had a $15.0 million litigation reserve recorded in other
accrued expenses. We anticipate paying this settlement in the first
half of 2009. We will use available cash on hand and borrow the
remaining portion from our revolver.
We may be
required to make cash outlays related to our unrecognized tax benefits.
However, due to the uncertainty of the timing of future cash flows
associated with our unrecognized tax benefits, we are unable to make reasonably
reliable estimates of the period of cash settlement, if any, with the respective
taxing authorities. Accordingly, unrecognized tax benefits, including
interest and penalties, of $0.6 million as of December 31, 2008 have been
excluded from the contractual obligations table above. For further
information on unrecognized tax benefits, see Note 6 of our “Notes to
Consolidated Financial Statements” in Part II, Item 8 of this
Form 10-K.
We are a
party to litigation and other proceedings as referenced in Note 13 of
our “Notes to Consolidated Financial Statements” in Part II,
Item 8 on this Form 10-K. Except as noted therein we do not presently
believe it is reasonably likely that any of these matters would have a material
adverse effect on our business, financial position, results of operations or
cash flows.
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 material adverse effect on our business, financial position,
results of operations and cash flows.
RECENT
ACCOUNTING
PRONOUNCEMENTS
A
description of recent accounting pronouncements are referenced in Note 2 of our
“Notes to Consolidated Financial Statements” in Part II, Item 8 on
this Form 10-K.
IMPACT OF INFLATION AND CHANGING
PRICES
Overall,
inflation has not had a material impact on our operations. Additionally, the
terms of DoD contracts, which accounted for approximately 64% of total revenue
in 2008, are generally one year contracts and include salary increase factors
for future years, reducing the potential impact of inflation.
We are
subject to interest rate risk associated with our term loan and revolver,
where interest payments are tied to either the LIBOR or prime rate. The
interest rate at December 31, 2008 on our $38 million term loan was
4.21%. We entered into an interest rate swap agreement to mitigate the
floating interest rate risk on half of our outstanding term loan. The
swap agreement effectively fixes the interest rate on half of our outstanding
term loan at 3.60% (excluding the applicable margin of 2.00%). At any time, a
sharp rise in interest rates could have an adverse effect on net interest
expense as reported in our Consolidated Statements of Operations. Our potential
loss over one year that would result in a hypothetical and instantaneous
increase of one full percentage point in the interest rate on half of
our term loan would increase annual interest expense by approximately
$0.2 million.
In
addition, historically our investment positions have been relatively small and
short-term in nature. We typically invest excess cash in money market
accounts with original maturities of three months or less with no exposure
to market interest rates. We have no significant exposure to foreign currency
fluctuations. Foreign sales, which are nominal, are primarily denominated in
U.S. dollars.
|
|
|
|
|
Page
|
|
|
|
|
|
42
|
|
|
43
|
|
|
44
|
|
|
45
|
|
|
46
|
|
|
47
|
|
|
73
|
To the
Board of Directors and
Shareholders
of Dynamics Research Corporation:
We have
audited the accompanying consolidated balance sheets of Dynamics Research
Corporation and subsidiaries (a Massachusetts corporation) (collectively the
“Company”) as of December 31, 2008 and 2007, and the related consolidated
statements of operations, changes in stockholders’ equity and comprehensive
income (loss), and cash flows for each of the three years in the period ended
December 31, 2008. Our audits of the basic financial statements
included the financial statement schedule listed in the index appearing under
Item 15 (a)(2). These consolidated financial statements and financial statement
schedule are the responsibility of the Company’s management. Our responsibility
is to express an opinion on these consolidated financial statements and
financial statement schedule based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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 Dynamics Research Corporation and
subsidiaries as of December 31, 2008 and 2007, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2008, in conformity with accounting principles generally
accepted in the United States of America. Also in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
We also have audited, in accordance
with the standards of the Public Company Accounting Oversight Board (United
States), the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2008, based on criteria established in
Internal Control-Integrated
Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) and our report dated March 13, 2009 expressed an
unqualified opinion thereon.
(In thousands, except share
data)
|
|
|
December
31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Assets
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
7,111
|
|
|
$
|
2,006
|
|
|
Contract
receivables, net
|
|
|
71,438
|
|
|
|
63,570
|
|
|
Prepaid
expenses and other current assets
|
|
|
2,491
|
|
|
|
2,508
|
|
|
Total
current assets
|
|
|
81,040
|
|
|
|
68,084
|
|
|
Noncurrent
assets
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
9,349
|
|
|
|
10,182
|
|
|
Goodwill
|
|
|
97,641
|
|
|
|
63,055
|
|
|
Intangible
assets, net
|
|
|
7,379
|
|
|
|
3,069
|
|
|
Deferred
tax asset
|
|
|
10,396
|
|
|
|
1,484
|
|
|
Other
noncurrent assets
|
|
|
3,125
|
|
|
|
4,079
|
|
|
Total
noncurrent assets
|
|
|
127,890
|
|
|
|
81,869
|
|
|
Total
assets
|
|
$
|
208,930
|
|
|
$
|
149,953
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and stockholders' equity
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
|
Current
portion of long-term debt
|
|
$
|
8,000
|
|
|
$
|
-
|
|
|
Accounts
payable
|
|
|
18,095
|
|
|
|
12,163
|
|
|
Accrued
compensation and employee benefits
|
|
|
13,644
|
|
|
|
13,409
|
|
|
Deferred
taxes
|
|
|
2,670
|
|
|
|
8,486
|
|
|
Other
accrued expenses
|
|
|
24,760
|
|
|
|
3,078
|
|
|
Total
current liabilities
|
|
|
67,169
|
|
|
|
37,136
|
|
|
Long-term
liabilities
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
30,000
|
|
|
|
7,737
|
|
|
Other
long-term liabilities
|
|
|
30,286
|
|
|
|
8,576
|
|
|
Total
long-term liabilities
|
|
|
60,286
|
|
|
|
16,313
|
|
|
Total
liabilities
|
|
|
127,455
|
|
|
|
53,449
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.10 par value; 5,000,000 shares authorized; no shares
issued
|
|
|
-
|
|
|
|
-
|
|
|
Common
stock, $0.10 par value; 30,000,000 shares authorized; 9,674,512 and
9,509,849 shares issued and outstanding at December 31, 2008 and 2007,
respectively
|
|
|
967
|
|
|
|
951
|
|
|
Capital
in excess of par value
|
|
|
51,919
|
|
|
|
50,251
|
|
|
Accumulated
other comprehensive loss, net of tax
|
|
|
(22,268
|
)
|
|
|
(6,745
|
)
|
|
Retained
earnings
|
|
|
50,857
|
|
|
|
52,047
|
|
|
Total
stockholders' equity
|
|
|
81,475
|
|
|
|
96,504
|
|
|
Total
liabilities and stockholders' equity
|
|
$
|
208,930
|
|
|
$
|
149,953
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
(In thousands, except share and per
share data)
|
|
|
Year
Ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Contract
revenue
|
|
$
|
236,796
|
|
|
$
|
224,676
|
|
|
$
|
252,890
|
|
|
Product
sales
|
|
|
6,028
|
|
|
|
4,901
|
|
|
|
6,097
|
|
|
Total
revenue
|
|
|
242,824
|
|
|
|
229,577
|
|
|
|
258,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of contract revenue
|
|
|
197,802
|
|
|
|
187,516
|
|
|
|
218,976
|
|
|
Cost
of product sales
|
|
|
5,858
|
|
|
|
4,954
|
|
|
|
4,895
|
|
|
Total
cost of revenue
|
|
|
203,660
|
|
|
|
192,470
|
|
|
|
223,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit on contract revenue
|
|
|
38,994
|
|
|
|
37,160
|
|
|
|
33,914
|
|
|
Gross
profit (loss) on product sales
|
|
|
170
|
|
|
|
(53
|
)
|
|
|
1,202
|
|
|
Total
gross profit
|
|
|
39,164
|
|
|
|
37,107
|
|
|
|
35,116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
22,296
|
|
|
|
21,826
|
|
|
|
24,136
|
|
|
Provision
for litigation
|
|
|
14,819
|
|
|
|
181
|
|
|
|
-
|
|
|
Amortization
of intangible assets
|
|
|
2,620
|
|
|
|
2,602
|
|
|
|
2,809
|
|
|
Operating
income (loss)
|
|
|
(571
|
)
|
|
|
12,498
|
|
|
|
8,171
|
|
|
Interest
expense, net
|
|
|
(1,423
|
)
|
|
|
(1,541
|
)
|
|
|
(2,042
|
)
|
|
Other
income, net
|
|
|
35
|
|
|
|
827
|
|
|
|
589
|
|
|
Income
(loss) before provision (benefit) for income taxes
|
|
|
(1,959
|
)
|
|
|
11,784
|
|
|
|
6,718
|
|
|
Provision
(benefit) for income taxes
|
|
|
(704
|
)
|
|
|
4,682
|
|
|
|
2,730
|
|
|
Income
(loss) before cumulative effect of accounting change
|
|
|
(1,255
|
)
|
|
|
7,102
|
|
|
|
3,988
|
|
|
Cumulative
benefit of accounting change, net of tax of $62
|
|
|
-
|
|
|
|
-
|
|
|
|
84
|
|
|
Net
income (loss)
|
|
$
|
(1,255
|
)
|
|
$
|
7,102
|
|
|
$
|
4,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before cumulative effect of accounting change
|
|
$
|
(0.13
|
)
|
|
$
|
0.76
|
|
|
$
|
0.44
|
|
|
Cumulative
effect of accounting change
|
|
|
-
|
|
|
|
-
|
|
|
|
0.01
|
|
|
Net
income (loss)
|
|
$
|
(0.13
|
)
|
|
$
|
0.76
|
|
|
$
|
0.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before cumulative effect of accounting change
|
|
$
|
(0.13
|
)
|
|
$
|
0.74
|
|
|
$
|
0.42
|
|
|
Cumulative
effect of accounting change
|
|
|
-
|
|
|
|
-
|
|
|
|
0.01
|
|
|
Net
income (loss)
|
|
$
|
(0.13
|
)
|
|
$
|
0.74
|
|
|
$
|
0.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
9,493,495
|
|
|
|
9,326,907
|
|
|
|
9,099,897
|
|
|
Diluted
|
|
|
9,493,495
|
|
|
|
9,649,897
|
|
|
|
9,426,535
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
|
|
|
|
|
|
|
|
|
Capital
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In
Excess
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
Common
Stock Issued
|
|
|
of
Par
|
|
|
Unearned
|
|
|
Comprehensive
|
|
|
Retained
|
|
|
|
|
|
|
|
Shares
|
|
|
Par
value
|
|
|
Value
|
|
|
Compensation
|
|
|
Loss
|
|
|
Earnings
|
|
|
Total
|
|
|
Balance
December 31, 2005
|
|
|
9,097
|
|
|
$
|
910
|
|
|
$
|
45,571
|
|
|
$
|
(1,850
|
)
|
|
$
|
(10,768
|
)
|
|
$
|
40,873
|
|
|
$
|
74,736
|
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,072
|
|
|
|
4,072
|
|
|
Other
comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum
pension liability adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,562
|
|
|
|
-
|
|
|
|
1,562
|
|
|
Comprehensive
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,634
|
|
|
Issuance
of common stock through stock option exercises and employee stock purchase
plan transactions
|
|
|
192
|
|
|
|
19
|
|
|
|
1,875
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,894
|
|
|
Issuance
of restricted stock
|
|
|
70
|
|
|
|
7
|
|
|
|
(7
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Forfeiture
of restricted stock
|
|
|
(30
|
)
|
|
|
(3
|
)
|
|
|
3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Release
of restricted stock
|
|
|
(14
|
)
|
|
|
(2
|
)
|
|
|
(191
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(193
|
)
|
|
Share-based
compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
2,082
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,082
|
|
|
Tax
benefit from stock options exercised and employee stock purchase plan
transactions
|
|
|
-
|
|
|
|
-
|
|
|
|
161
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
161
|
|
|
Reversal
of unearned compensation upon adoption of FASB Statement No. 123(R
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,850
|
)
|
|
|
1,850
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Balance
at December 31, 2006
|
|
|
9,315
|
|
|
|
931
|
|
|
|
47,644
|
|
|
|
-
|
|
|
|
(9,206
|
)
|
|
|
44,945
|
|
|
|
84,314
|
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,102
|
|
|
|
7,102
|
|
|
Other
comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
liability adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,353
|
|
|
|
-
|
|
|
|
2,353
|
|
|
Unrealized
gains on investments, net of reclassification adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
108
|
|
|
|
-
|
|
|
|
108
|
|
|
Other
comprehensive income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,461
|
|
|
Comprehensive
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,563
|
|
|
Issuance
of common stock through stock option exercises and employee stock purchase
plan transactions
|
|
|
135
|
|
|
|
14
|
|
|
|
1,166
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,180
|
|
|
Issuance
of restricted stock
|
|
|
99
|
|
|
|
10
|
|
|
|
(10
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Forfeiture
of restricted stock
|
|
|
(20
|
)
|
|
|
(2
|
)
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Release
of restricted stock
|
|
|
(19
|
)
|
|
|
(2
|
)
|
|
|
(200
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(202
|
)
|
|
Share-based
compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
1,640
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,640
|
|
|
Tax
benefit from stock options exercised and employee stock purchase plan
transactions
|
|
|
-
|
|
|
|
-
|
|
|
|
77
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
77
|
|
|
Tax
deficiency on equity awards
|
|
|
-
|
|
|
|
-
|
|
|
|
(68
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(68
|
)
|
|
Balance
at December 31, 2007, as previously presented
|
|
|
9,510
|
|
|
|
951
|
|
|
|
50,251
|
|
|
|
-
|
|
|
|
(6,745
|
)
|
|
|
52,047
|
|
|
|
96,504
|
|
|
Impact
of change in measurement date from adoption of SFAS 158
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
65
|
|
|
|
65
|
|
|
Balance
at December 31, 2007, adjusted
|
|
|
9,510
|
|
|
|
951
|
|
|
|
50,251
|
|
|
|
-
|
|
|
|
(6,745
|
)
|
|
|
52,112
|
|
|
|
96,569
|
|
|
Comprehensive
loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,255
|
)
|
|
|
(1,255
|
)
|
|
Other
comprehensive loss, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
liability adjustment, net of reclassification adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(14,896
|
)
|
|
|
-
|
|
|
|
(14,896
|
)
|
|
Reclassification
adjustment for gains realized in net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(108
|
)
|
|
|
-
|
|
|
|
(108
|
)
|
|
Unrealized
loss on derivative instruments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(519
|
)
|
|
|
-
|
|
|
|
(519
|
)
|
|
Other
comprehensive loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(15,523
|
)
|
|
Comprehensive
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(16,778
|
)
|
|
Issuance
of common stock through stock option exercises and employee stock purchase
plan transactions
|
|
|
128
|
|
|
|
12
|
|
|
|
843
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
855
|
|
|
Issuance
of restricted stock
|
|
|
92
|
|
|
|
9
|
|
|
|
(9
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Forfeiture
of restricted stock
|
|
|
(13
|
)
|
|
|
(1
|
)
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Release
of restricted stock
|
|
|
(42
|
)
|
|
|
(4
|
)
|
|
|
(418
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(422
|
)
|
|
Share-based
compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
1,148
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,148
|
|
|
Tax
benefit from stock options exercised and employee stock purchase plan
transactions
|
|
|
-
|
|
|
|
-
|
|
|
|
103
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
103
|
|
|
Balance
at December 31, 2008
|
|
|
9,675
|
|
|
$
|
967
|
|
|
$
|
51,919
|
|
|
$
|
-
|
|
|
$
|
(22,268
|
)
|
|
$
|
50,857
|
|
|
$
|
81,475
|
|
The
accompanying notes are an integral part of these consolidated financial
statement.
|
|
|
Year
Ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(1,255
|
)
|
|
$
|
7,102
|
|
|
$
|
4,072
|
|
|
Adjustments
to reconcile net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
3,148
|
|
|
|
3,081
|
|
|
|
3,203
|
|
|
Amortization
of intangible assets
|
|
|
2,620
|
|
|
|
2,602
|
|
|
|
2,809
|
|
|
Share-based
compensation, including cumulative effect of accounting
change
|
|
|
1,148
|
|
|
|
1,640
|
|
|
|
2,082
|
|
|
Investment
income from equity interest
|
|
|
(483
|
)
|
|
|
(516
|
)
|
|
|
(223
|
)
|
|
Tax
benefit from stock options exercised and employee stock purchase plan
transactions, net of tax deficiencies from equity awards
|
|
|
(103
|
)
|
|
|
(9
|
)
|
|
|
(161
|
)
|
|
Provision
for litigation
|
|
|
14,819
|
|
|
|
181
|
|
|
|
-
|
|
|
Deferred
income taxes
|
|
|
(4,572
|
)
|
|
|
(2,972
|
)
|
|
|
(6,744
|
)
|
|
Other
|
|
|
(620
|
)
|
|
|
(497
|
)
|
|
|
(665
|
)
|
|
Change
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract
receivables, net
|
|
|
1,471
|
|
|
|
714
|
|
|
|
30,260
|
|
|
Prepaid
expenses and other current assets
|
|
|
(18
|
)
|
|
|
604
|
|
|
|
(1,341
|
)
|
|
Accounts
payable
|
|
|
3,535
|
|
|
|
(6,032
|
)
|
|
|
(7,473
|
)
|
|
Accrued
compensation and employee benefits
|
|
|
(1,519
|
)
|
|
|
(745
|
)
|
|
|
(4,288
|
)
|
|
Other
accrued expenses
|
|
|
2,280
|
|
|
|
(1,347
|
)
|
|
|
(2,508
|
)
|
|
Other
long-term liabilities
|
|
|
(1,696
|
)
|
|
|
(861
|
)
|
|
|
(1,439
|
)
|
|
Net
cash provided by operating activities
|
|
|
18,755
|
|
|
|
2,945
|
|
|
|
17,584
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
of business, net of cash acquired
|
|
|
(43,016
|
)
|
|
|
-
|
|
|
|
-
|
|
|
Additions
to property and equipment
|
|
|
(2,010
|
)
|
|
|
(1,788
|
)
|
|
|
(2,482
|
)
|
|
Proceeds
from sale of investments and long-lived assets
|
|
|
291
|
|
|
|
6
|
|
|
|
214
|
|
|
Dividends
from equity investment
|
|
|
423
|
|
|
|
180
|
|
|
|
155
|
|
|
Payments
related to sale of building
|
|
|
(35
|
)
|
|
|
(980
|
)
|
|
|
-
|
|
|
Change
in other assets
|
|
|
21
|
|
|
|
(170
|
)
|
|
|
(182
|
)
|
|
Net
cash used in investing activities
|
|
|
(44,326
|
)
|
|
|
(2,752
|
)
|
|
|
(2,295
|
)
|
|
Cash
flow from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings
under term loan agreement
|
|
|
40,000
|
|
|
|
-
|
|
|
|
-
|
|
|
Repayments
under term loan agreements
|
|
|
(2,000
|
)
|
|
|
-
|
|
|
|
(25,412
|
)
|
|
Borrowings
revolving credit agreement
|
|
|
69,225
|
|
|
|
201,918
|
|
|
|
172,981
|
|
|
Repayments
under revolving credit agreement
|
|
|
(76,962
|
)
|
|
|
(209,181
|
)
|
|
|
(157,981
|
)
|
|
Proceeds
from the exercise of stock options and employee stock purchase plan
transactions
|
|
|
855
|
|
|
|
1,180
|
|
|
|
1,894
|
|
|
Tax
benefit from stock options exercised and employee stock purchase plan
transactions, net of tax deficiencies from equity awards
|
|
|
103
|
|
|
|
9
|
|
|
|
161
|
|
|
Payments
of deferred financing costs
|
|
|
(545
|
)
|
|
|
-
|
|
|
|
(65
|
)
|
|
Net
cash provided by (used in) financing activities
|
|
|
30,676
|
|
|
|
(6,074
|
)
|
|
|
(8,422
|
)
|
|
Net
decrease in cash and cash equivalents
|
|
|
5,105
|
|
|
|
(5,881
|
)
|
|
|
6,867
|
|
|
Cash
and cash equivalents, beginning of period
|
|
|
2,006
|
|
|
|
7,887
|
|
|
|
1,020
|
|
|
Cash
and cash equivalents, end of period
|
|
$
|
7,111
|
|
|
$
|
2,006
|
|
|
$
|
7,887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the year for interest
|
|
$
|
973
|
|
|
$
|
1,494
|
|
|
$
|
2,078
|
|
|
Cash
paid during the year for income taxes, net of refunds
|
|
$
|
2,399
|
|
|
$
|
6,206
|
|
|
$
|
12,486
|
|
|
Supplemental
disclosure of noncash financing and investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of restricted stock
|
|
$
|
869
|
|
|
$
|
1,135
|
|
|
$
|
1,000
|
|
|
Increase
(decrease) in pension liability
|
|
$
|
24,682
|
|
|
$
|
(3,899
|
)
|
|
$
|
(2,588
|
)
|
|
Change
in fair value of derivatives
|
|
$
|
860
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Accrual
of earnout on purchase of business
|
|
$
|
4,250
|
|
|
$
|
-
|
|
|
$
|
-
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars
in thousands, except per share amounts)
Dynamics
Research Corporation (the “Company”) is a leading provider of innovative
engineering, technical, information technology (“IT”) and management
consulting services and solutions to federal and state
governments. Founded in 1955 and headquartered in Andover,
Massachusetts, the Company has approximately 1,500 employees located throughout
the United States. The Company operates as a parent corporation and
through its wholly owned subsidiaries, Kadix Systems, LLC, H.J. Ford Associates,
Inc. and DRC International Corporation.
The
Company provides support to its customers in the primary mission areas of IT,
Logistics and Readiness, Systems Integration and Technical Services, Command,
Control, Computers, Communications, Intelligence, Surveillance and
Reconnaissance, Homeland Security, Health and Human Services,
Intelligence/Space, Cyber Security, and Public and Environmental
Health. Customers include the Department of Defense, the
Department of Homeland Security, federal civilian agencies and state
governments.
NOTE
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis
of Presentation
The
consolidated financial statements include the accounts of the Company and all
wholly owned subsidiaries. All significant intercompany accounts and
transactions are eliminated in consolidation. Unless otherwise indicated, all
financial information presented herein refers to continuing operations. The
Company has reclassified certain prior period amounts to conform with the
current period presentation.
On August
1, 2008, the Company completed the acquisition of all membership interest of
Kadix Systems, LLC as more fully described in Note 3. The transaction
was recorded using the purchase method of accounting in accordance with
Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting
Standards (“SFAS”) No. 141,
Business
Combinations
. Accordingly, the results of Kadix are included
in the Company’s Consolidated Statements of Operations and Cash Flows for the
period subsequent to its acquisition.
The
Company, through HJ Ford, has a 40% ownership interest in
HMR
Tech,
LLC (“
HMR
Tech”),
a small disadvantaged business as defined by the Small Business Administration
of the U.S. Government. This investment is accounted for using the
equity method and reported as a component of other noncurrent assets in the
Company’s Consolidated Balance Sheets.
Risks, Uncertainties and Use of
Estimates
There are
business risks specific to the industries in which the Company operates. These
risks include, but are not limited to, estimates of costs to complete contract
obligations, changes in government policies and procedures, government
contracting issues and risks associated with technological development. The U.S.
Government has the right to terminate contracts for convenience in accordance
with government regulations. If the government terminated contracts, the Company
would generally recover costs incurred up to termination, costs required to
be incurred in connection with the termination and a portion of the fee earned
commensurate with the work performed to termination. However, significant
adverse effects on the Company’s indirect cost pools may not be recoverable in
connection with a termination for convenience. Contracts with state and other
governmental entities are subject to the same or similar
risks.
A
majority of the Company’s revenue is derived from U.S. Government agencies,
primarily the Department of Defense. Any cancellations or modifications of the
Company’s significant contracts or subcontracts, or failure by the government to
exercise option periods relating to those contracts or subcontracts, could
adversely affect the Company’s business, financial condition, results of
operations and cash flows. A significant portion of the Company’s federal
government contracts are renewable on an annual basis, or are subject to the
exercise of contractual options. The government has the right to terminate
contracts for convenience. Multi-year contracts often require funding actions by
the government on an annual or more frequent basis. The Company could experience
material adverse consequences should such funding actions or other approvals not
be taken. In addition to contract cancellations and declines in government
budgets, the Company’s business, financial condition, results of operations and
cash flows may be adversely affected by competition within a consolidating
defense industry, increased government regulation and general economic
conditions.
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
The
financial statements have been prepared in conformity with accounting principles
generally accepted in the United States of America and, accordingly, include
amounts based on informed estimates and judgments of management with
consideration given to materiality. Estimates and judgments also affect the
amount of revenue and expenses during the reported period. Actual results could
differ from those estimates. The Company believes the following accounting
policies affect the more significant judgments made and estimates used in the
preparation of its consolidated financial statements.
The
Company also estimates and provides for potential losses that may arise out of
litigation and regulatory proceedings to the extent that such losses are
probable and can be estimated, in accordance with
FASB SFAS No. 5,
Accounting for Contingencies
.
Significant judgment is required in making these estimates and the Company’s
final liabilities may ultimately be materially different. The Company’s total
liability in respect of litigation and regulatory proceedings is determined on a
case-by-case basis and represents an estimate of probable losses after
considering, among other factors, the progress of each case or proceeding, the
Company’s experience and the experience of others in similar cases or
proceedings, and the opinions and views of legal counsel. Given the inherent
difficulty of predicting the outcome of the Company’s litigation and regulatory
matters, particularly in cases or proceedings in which substantial or
indeterminate damages or fines are sought, the Company cannot estimate losses or
ranges of losses for cases or proceedings where there is only a reasonable
possibility that a loss may be incurred. See Note 13 for information on the
Company’s litigation and other proceedings.
The
Company’s Systems and Services business segment provides its services pursuant
to time and materials, cost reimbursable and fixed-price contracts, including
service-type contracts.
For time
and materials contracts, revenue reflects the number of direct labor hours
expended in the performance of a contract multiplied by the contract billing
rate, as well as reimbursement of other billable direct costs. The risk inherent
in time and materials contracts is that actual costs may differ materially from
negotiated billing rates in the contract, which would directly affect operating
income.
For cost
reimbursable contracts, revenue is recognized as costs are incurred and includes
a proportionate amount of the fee earned. Cost reimbursable contracts specify
the contract fee in dollars or as a percentage of estimated costs. The primary
risk on a cost reimbursable contract is that a government audit of direct and
indirect costs could result in the disallowance of certain costs, which would
directly impact revenue and margin on the contract. Historically, such audits
have not had a material impact on the Company’s revenue and operating
income.
Revenue
from service-type fixed-price contracts is recognized ratably over the contract
period or by other appropriate output methods to measure service provided, and
contract costs are expensed as incurred. Under fixed-price contracts, other than
service-type contracts, revenue is recognized primarily under the percentage of
completion method in accordance with American Institute of Certified Public
Accountants Statement of Position (“SOP”) 81-1,
Accounting for Performance of
Construction-Type and Certain Production-Type Contract
s
. The risk on a
fixed-price contract is estimates of costs to complete the contract may exceed
revenues on the contract.
For
each type of contract, the Company recognizes anticipated contract losses
as soon as they become known and estimable. Out-of-pocket expenses that are
reimbursable by the customer are included in contract revenue and cost of
contract revenue.
Unbilled
receivables are the amounts of recoverable contract revenue that have not been
billed at the balance sheet date. Generally, the Company’s unbilled receivables
relate to revenue that is billed in the month after services are performed. In
certain instances, billing is deferred in compliance with the contract terms,
such as milestone billing arrangements and withholdings, or delayed for other
reasons. Costs related to certain U.S. Government contracts, including
applicable indirect costs, are subject to audit by the government. Revenue from
such contracts has been recorded at amounts the Company expects to realize upon
final settlement.
The
Company’s Metrigraphics business segment records revenue from product sales upon
transfer of both title and risk of loss to the customer, provided there is
evidence of an arrangement, fees are fixed or determinable, no significant
obligations remain, collection of the related receivable is reasonably assured
and the customer acceptance criteria have been successfully demonstrated.
Product sales are recorded net of sales taxes and net of returns upon
delivery. Amounts billed to customers related to shipping and
handling is classified as product sales. The cost of shipping
products to the customer is recognized at the time the products are shipped and
is recorded as cost of product sales.
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
Cash and Cash
Equivalents
Cash
equivalents, which consist primarily of money market accounts, have original
maturities of three months or less.
Contract
receivables, net of the allowance for doubtful accounts, are stated at amounts
expected to be realized in future periods. Unbilled receivables are
amounts that are expected to be billed in accordance with contract terms and
delivery schedules, as well as amounts expected to become billable upon final
execution of contracts, contract completion, milestones or completion of rate
negotiations. Generally, the Company’s unbilled receivables relate to
revenue that is billed in the month after services are performed. Costs related
to certain U.S. Government contracts, including applicable indirect costs, are
subject to audit by the government. Revenue from such contracts has been
recorded at amounts the Company expects to realize upon final
settlement. Contract receivables are classified as current assets in
accordance with industry practice.
The
allowance for doubtful accounts is determined based upon the Company's best
estimate of a customer's ability to pay. The factors that influence management’s
estimate include historical experience, specific identification and an aging
criteria of potential uncollectible accounts. The Company writes off contract
receivables when such amounts are determined to be uncollectible. Losses have
historically been within management’s expectations.
Inventories
are stated at the lower of cost (first-in, first-out) or market, and consist of
materials, labor and overhead. There are no amounts in inventories relating to
contracts having production cycles longer than one year. Total inventories
aggregated $766 and $584 at December 31, 2008 and 2007, respectively, and
are included in prepaid expenses and other current assets on the
accompanying balance sheets.
Property
and equipment, including improvements that significantly add to productive
capacity or extend the asset’s useful life are capitalized and recorded at cost.
When items are sold, or otherwise retired or disposed of, operating income is
charged or credited for the difference between the net book value and proceeds
realized thereon. Repairs and maintenance costs are expensed as
incurred. Property and equipment is depreciated on the straight-line basis over
their estimated useful lives. Estimated useful lives of production
equipment typically range from three to five years, while software and
furniture and other equipment typically range from three to ten years. Leasehold
improvements are amortized over the shorter of the remaining expected term of
the lease, considering renewal options, or the life of the related asset. The
Company recorded depreciation expense of $3,148, $3,081 and $3,203 during 2008,
2007 and 2006, respectively. The Company recorded disposals of $807,
$3,736 and $646, during 2008, 2007 and 2006, respectively, of substantially
fully-depreciated machinery, equipment and leasehold improvements no longer in
use.
Internal
Software Development Costs
The
Company follows the provisions of SOP 98-1,
Accounting for the
C
osts of Compute
r
Software Developed or Obtained for
Internal Use
, in accounting for development costs of software to be used
internally. SOP 98-1 requires that both internal and external costs
incurred to develop internal-use computer software during the application
development stage be capitalized and subsequently amortized over the estimate
economic useful life of the software. These costs are included with
machinery and equipment, a separate component of property and
equipment.
The
Company accounts for investments in accordance with SFAS No. 115,
Accounting for Certain Investments
in Debt and Equity Securities
. Investments, which are
classified as available-for-sale, are carried at fair value and reported as a
component of other noncurrent assets in the Company’s Consolidated Balance
Sheet. Realized gains and losses on investments are determined using
the specific identification method. Unrealized holding gains and
losses, net of related tax effects, are excluded from earnings and are reported
in accumulated other comprehensive income, a separate component of stockholders’
equity in the accompanying balance sheets, until realized.
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
The
Company owned shares of an actively traded public entity that had a fair market
value of $334 and were included in prepaid expenses and other current assets at
December 31, 2007. The unrealized holding gain of $108, net of a $71
tax effect, was recorded in accumulated other comprehensive income at December
31, 2007. During the first quarter of 2008 the Company sold the
shares realizing a gain of $108.
The
Company also holds investments related to its deferred compensation
plan. These investments, which are classified as trading securities
and held in a Rabbi Trust, are carried at fair value and reported as a component
of other noncurrent assets. Unrealized holding gains and losses are
included in earnings as a component of other income or
expense. During 2008, 2007 and 2006, net unrealized holding gains
(losses) of $(569), $164 and $171, respectively.
The
Company accounts for business acquisitions in accordance with SFAS No. 141,
Business Combinations
,
which requires that the purchase method of accounting be used for all business
combinations completed after June 30, 2001 and before December 31, 2008.
The Company determines and records the fair values of assets acquired and
liabilities assumed as of the dates of acquisition. The Company utilizes an
independent valuation specialist to determine the fair values of identifiable
intangible assets acquired in order to assist in the determination of the
portion of the purchase price allocable to these assets.
Goodwill
and Indefinite-lived Intangible Assets
Goodwill
is recorded when the consideration paid for business acquisitions exceeds the
fair value of net tangible and identifiable intangible assets acquired. The
Company accounts for goodwill and other intangible assets in accordance with
SFAS No. 142,
Goodwill
and Other Intangible Assets
(“SFAS 142”), which requires that
goodwill and other intangible assets with indefinite useful lives no longer be
amortized, but rather, be tested annually for impairment. In accordance with
SFAS 142, goodwill recorded in conjunction with the Company’s business
acquisitions is not being amortized.
The
Company assesses goodwill for impairment annually and when events or
circumstances change that would more likely than not reduce the fair value of a
reporting unit below its carrying value by applying a direct value-based fair
value test. Goodwill could be impaired due to market declines, reduced expected
future cash flows, or other factors or events. Should the fair value of goodwill
at the measurement date fall below its carrying value, a charge for impairment
of goodwill could occur in that period. SFAS 142 requires a two-step
impairment testing approach. Companies must first determine whether goodwill is
impaired and if so, they must value that impairment based on the amount by which
the book value exceeds the estimated fair value. As a result of the annual
impairment test performed as of December 31, 2008, the Company determined
that the carrying amount of goodwill did not exceed its fair value and,
accordingly, did not record a charge for impairment. There can be no
assurance that goodwill will not become impaired in future
periods.
Intangible and Other Long-lived
Assets
The
Company uses assumptions in establishing the carrying value, fair value and
estimated lives of identifiable intangible and other long-lived assets. The
Company accounts for impairments under SFAS No. 144,
Accounting for the Impairment or
Disposal of Long-lived Assets.
Long-lived assets are reviewed for
impairment whenever events or changes in circumstances indicate that the asset
carrying value may not be recoverable. Recoverability is measured by a
comparison of the asset’s continuing ability to generate positive income from
operations and positive cash flow in future periods compared to the carrying
value of the asset. If assets are considered to be impaired, the impairment is
recognized in the period of identification and is measured as the amount by
which the carrying value of the asset exceeds the fair value of the asset. The
useful lives and related amortization of identifiable intangible assets are
based on their estimated residual value in proportion to the economic benefit
consumed. The useful lives and related depreciation of other long-lived assets
are based on the Company’s estimate of the period over which the asset will
generate revenue or otherwise be used by the Company.
Asset Retirement
Obligations
The
Company accounts for obligations associated with retirements of long-lived
assets under SFAS No. 143,
Accounting for Asset Retirement
Obligations
(“SFAS 143”). This statement addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. In March
2006, the FASB issued FASB Interpretation No. 47,
Accounting for Conditional Asset
Retirement Obligations
(“FIN 47”). FIN 47 clarifies
that
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
the term
“conditional asset retirement obligation,” as used in SFAS 143, refers to a
legal obligation to perform an asset retirement activity in which the timing
and/or method of settlement are conditional on a future event that may or may
not be within the control of the entity. However, the obligation to perform the
asset retirement activity is unconditional even though uncertainty exists
about the timing and/or method of settlement. FIN 47 requires that the
uncertainty about the timing and/or method of settlement of a conditional asset
retirement obligation be factored into the measurement of the liability when
sufficient information exists. FIN 47 also clarifies when an entity would
have sufficient information to reasonably estimate the fair value of an asset
retirement obligation. The Company determined that no obligations were required
to be recognized at December 31, 2008 and 2007.
On
January 1, 2007, the Company adopted FASB Interpretation No. 48,
Accounting for Uncertainty in Income
Taxes
(“FIN 48”), which addresses the determination of how tax benefits
claimed or expected to be claimed on a tax return should be recorded in the
financial statements. Under FIN 48, the Company must recognize the tax benefit
from an uncertain tax position only if it is more likely than not that the tax
position will be sustained on examination by the taxing authorities, based on
the technical merits of the position. The tax benefits recognized in the
financial statements from these positions are measured based on the largest
benefit that has a greater than fifty percent likelihood of being realized upon
ultimate resolution. Interest costs and penalties related to uncertain tax
positions continue to be classified as net interest expense and selling, general
and administrative costs, respectively, in the Company’s financial
statements. The Company reviews its tax positions on a quarterly
basis and more frequently as facts surrounding tax positions change. Based
on these future events, the Company may recognize uncertain tax positions or
reverse current uncertain tax positions the impact of which would effect the
statement of operations and/or the balance sheet.
The
Company accounts for income taxes using the asset and liability method in
accordance with SFAS No. 109,
Accounting for Income Taxes
,
pursuant to which deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
the financial statements in the period that includes the enactment date.
Valuation allowances are provided if based upon the weight of available
evidence, it is more likely than not that some or all of the deferred tax assets
will not be realized. The Company has considered future taxable income and
ongoing prudent and feasible tax planning strategies in assessing the need for
the valuation allowance. In the event it is determined that the Company would
not be able to realize its deferred tax asset in excess of their net recorded
amount, an adjustment to the deferred tax asset would increase income in the
period such determination was made. Likewise, should the Company determine it
would not be able to realize all or part of its net deferred tax asset in the
future, an adjustment to the deferred tax asset would be charged to income in
the period such determination was made. The Company determined that no valuation
allowance was required at December 31, 2008 and 2007.
The
Company adopted the accounting requirements of SFAS No. 158,
Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements
No. 87, 88, 106, and 132(R)
, (“SFAS 158”) as of December 31,
2007. As required by SFAS 158, the Company will continue to apply the
provisions in SFAS No. 87,
Employers Accounting for
Pensions
, in
measuring plan assets and benefit obligations associated with its defined
benefit pension plan and in determining the amount of net periodic benefit
cost
.
SFAS 158
requires entities to measure plan assets and benefit obligations as of the date
of their fiscal year end which is effective for the Company’s fiscal year ended
December 31, 2008. The Company adopted the measurement date provision of SFAS
158 at 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 resulted in a positive adjustment of $107 to
retained earnings and an offset to accumulated other comprehensive income for
$65, net of tax of $42, which represented one month of net periodic pension
income.
Accounting
and reporting for the Company’s pension plan requires the use of assumptions,
including but not limited to, a discount rate and an expected return on
assets. These assumptions are reviewed at least annually based on reviews of
current plan information and consultation with the Company’s independent actuary
and the plan’s investment advisor. If these
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
assumptions
differ materially from actual results, the Company’s obligations under the
pension plan could also differ materially, potentially requiring the Company to
record an additional pension liability. An independent actuarial valuation of
the pension plan is performed each year.
Costs
associated with obtaining the Company’s financing arrangements are deferred and
amortized over the term of the financing arrangements using the effective
interest method.
Derivative
Financial Instruments
The
Company accounts for its derivative financial instruments in accordance with
SFAS No. 133,
Accounting for
Derivative Instruments and Hedging Activities
. The Company
recognizes derivatives as either an asset or liability measured at its fair
value. For derivatives that have been formally designated as a cash
flow hedge, the effective portion of changes in the fair value of the
derivatives are recorded in accumulated other comprehensive income
(loss). Amounts in accumulated other comprehensive income (loss) are
reclassified into earnings when interest expense on the underlying borrowings is
recognized.
The
Company has entered into an interest rate swap agreement to manage its exposure
to interest rate changes. The swap effectively converts a portion of
the Company’s variable rate debt under the term loan to a fixed rate, without
exchanging the notional principal amounts. If, at any time, the swap
is determined to be ineffective, in whole or in part, due to changes in the
interest rate swap or underlying debt agreements, the fair value of the portion
of the swap determined to be ineffective will be recognized as a gain or loss in
the statement of operations for the applicable period.
Effective
January 1, 2008, the Company adopted SFAS No. 157,
Fair Value Measurements
, for
its financial assets and liabilities. SFAS No. 157 establishes a new
framework for measuring fair value and expands disclosure requirements. SFAS
No. 157 defines fair value as the price that would be received to sell an
asset, or paid to transfer a liability, in an orderly transaction between market
participants.
SFAS
No. 157’s valuation techniques are based on observable or unobservable
inputs. Observable inputs reflect market data obtained from independent sources,
while unobservable inputs reflect the Company’s market assumptions. These two
types of inputs have created the following fair value hierarchy:
|
•
|
|
Level
1 — Quoted prices for identical instruments in active
markets.
|
|
|
|
|
|
•
|
|
Level
2 — Quoted prices for similar instruments in active markets; quoted prices
for identical or similar instruments in markets that are not active; and
model-derived valuations in which significant value drivers are
observable.
|
|
|
|
|
|
•
|
|
Level
3 — Valuations derived from valuation techniques in which significant
value drivers are unobservable.
|
The
carrying values of cash and cash equivalents, contract receivables and accounts
payable approximate fair value because of the short-term nature of these
instruments. The carrying value of debt also approximates fair
value because the interest rate is variable.
The
Company accounts for operating leases in accordance with the provisions of SFAS
No. 13,
Accounting for
Leases
, which require minimum lease payments be recognized on a
straight-line basis, beginning on the date that the lessee takes possession or
control of the property. When the terms of an operating lease provide
for periods of free rent, rent concessions and/or rent escalations, the Company
establishes a deferred rent liability for the difference between the scheduled
rent payment and the straight-line rent expense recognized. The
deferred rent liability is amortized over the underlying lease term on a
straight-line basis as a reduction of rent expense. The Company had a
deferred rent liability of $857 and $1,177 recorded as of December 31, 2008 and
2007, respectively. The long-term portions of the deferred rent
liability of $698 and $1,037 were recorded in other long-term liabilities as of
December 31, 2008 and 2007, respectively, and the remaining current portions
were recorded in other accrued expenses in the accompanying balance
sheets.
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
The
Company recognizes obligations associated with restructuring activities in
accordance with SFAS No. 146,
Accounting for Costs Associated with
Exit or Disposal Activities
, (“SFAS 146”). SFAS 146
generally requires a liability for costs associated with an exit or disposal
activity be recognized and measured initially at its fair value in the period in
which the liability is incurred. The overall purpose of the Company’s
restructuring actions is to lower overall operating costs and improve
profitability by reducing excess capacities. Restructuring charges are typically
reported in selling, general and administrative expenses in the period in which
the plan is approved by the Company’s senior management and, where material, the
Company’s Board of Directors, and when the liability is
incurred.
During
the first half of 2008, the Company learned that its work on the Navy’s Trident
Missile program would be curtailed significantly in the second half of
2008. During 2008, the Company recorded a restructuring cost of $735
consisting principally of employee termination costs which was included in cost
of contract revenue and paid out in full during the year.
Comprehensive
Income (Loss)
The
Company accounts for comprehensive income (loss) in accordance with SFAS No.
130,
Reporting Comprehensive
Income
. As it relates to the Company, comprehensive income
(loss) is defined as net income (loss) plus other comprehensive income (loss),
which is the sum of changes in additional pension liabilities and unrealized
gains and losses on investments available for sale and derivative
instruments. These amounts are presented net of tax in the
accompanying statements of changes in stockholders’ equity and comprehensive
income (loss).
Basic
earnings (loss) per share are computed by dividing net income by the weighted
average number of shares of common stock outstanding during the period. Diluted
earnings per share is determined by using the weighted average number of common
and dilutive common equivalent shares outstanding during the
period. In years in which a net loss is reported, the dilutive effect
of stock options and restricted stock grants are not included in the computation
as their effect would be anti-dilutive.
Restricted
shares of common stock that vest based on the satisfaction of certain conditions
are treated as contingently issuable shares until the conditions are satisfied.
These shares are excluded from the basic earnings per share calculation and
included in the diluted earnings per share calculation.
Share
-Based
Compensation
The
Company accounts for share-based compensation in accordance with SFAS No. 123
(revised 2004),
Share-Based
Payment
(“SFAS 123(R)”), and related interpretations. SFAS
123(R) requires the measurement and recognition of compensation expense based on
estimated fair value for all share-based payment awards including stock options,
employee stock purchases under employee stock purchase plans, non-vested share
awards (restricted stock) and stock appreciation rights. The Company uses the
Black-Scholes pricing model as the most appropriate method for determining the
estimated fair value of all applicable awards. For share-based awards granted
after January 1, 2006, the Company recognized compensation expense based on the
estimated grant date fair value method required under SFAS 123(R). For all
awards the Company has recognized compensation expense using a straight-line
amortization method over the vesting period of the award. As SFAS 123(R)
requires that share-based compensation expense be based on awards that
ultimately vest, estimated share-based compensation has been reduced for
estimated forfeitures. Pursuant to the income tax provisions included in SFAS
123(R), the Company has elected the “long-form” method of establishing the
beginning balance of the pool of excess tax benefits available to absorb tax
deficiencies recognized subsequent to the adoption of SFAS
123(R).
The
Company adopted the provisions of SFAS 123(R), using the modified prospective
transition method, beginning January 1, 2006. Accordingly, the
Company recorded share-based compensation expense during 2006 for awards granted
prior to but not yet vested as of January 1, 2006 as if the fair value method
required for pro forma disclosure under SFAS 123 were in effect for expense
recognition purposes, adjusted for estimated forfeitures. During the first
quarter of 2006, the Company recorded a pre-tax cumulative benefit of accounting
change of $146 ($84 net of tax effects) related to estimating forfeitures for
restricted stock awards that were unvested as of January 1,
2006.
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
Certain
reclassifications have been made to prior periods, as a result of the current
year presentation with no effect on net earnings.
Recent Accounting
Pronouncements
In
December 2008, the FASB issued FASB Staff Position (“FSP”) FAS No.
132(R)-1, “
Employer’s
Disclosures about Postretirement Benefit Plan Assets
.” This FSP amends
SFAS No. 132(R), “
Employers’ Disclosures about
Pensions and Other Postretirement Benefits — An Amendment of FASB Statements
No. 87, 88, and 106
” to require more detailed disclosures about plan
assets of a defined benefit pension or other postretirement plan, including
investment strategies; major categories of plan assets; concentrations of risk
within plan assets; inputs and valuation techniques used to measure the fair
value of plan assets; and the effect of fair-value measurements using
significant unobservable inputs on changes in plan assets for the period. FSP
132(R)-1 is effective for fiscal years ending after December 15, 2009, with
earlier application permitted. We do not expect the adoption of this standard to
have an effect on our financial position or results of operations.
In June
2008, the FASB issued FSP No. EITF 03-6-1, “
Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating
Securities
.” EITF 03-6-1 gives guidance as to the circumstances when
unvested share-based payment awards should be included in the computation of
EPS. EITF 03-6-1 is effective for fiscal years beginning after
December 15, 2008. The Company does not expect that the adoption of
EITF 03-6-1 will have a material effect on its Consolidated Financial
Statements.
In April
2008, the FASB issued FSP No. 142-3,
Determination of the Useful Life of
Intangible Assets
(“FSP 142-3”), which amends the factors to be
considered in renewal or extension assumptions used to determine the useful life
of a recognized intangible asset. FSP 142-3 is effective for interim
periods and fiscal years beginning after December 15, 2008. The
Company will adopt FSP 142-3 effective January 1, 2009. The Company
is currently assessing the impact of FSP 142-3 on its financial
statements.
In March
2008, the FASB issued SFAS No. 161,
Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No. 133
(“SFAS 161”). SFAS 161 expands the disclosure requirements in SFAS 133
about an entity's derivative instruments and hedging activities. SFAS 161 is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008. The Company is currently evaluating the
impact of adopting FAS 161.
In
February 2008, the FASB issued FSP No. 157-2,
Effective Date of FASB Statement
No. 157,
(“FSP 157-2”). FSP No. 157-2 defers the effective
date provision of SFAS 157 for certain non-financial assets and liabilities
until fiscal years beginning after November 15, 2008. The Company is
currently evaluating the impact of adopting SFAS 157 for certain
non-financial assets and liabilities that are recognized and disclosed at fair
value in the Company’s financial statements on a non-recurring
basis.
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.
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 subsequent to that time.
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
NOTE
3. BUSINESS ACQUISITION
On August
1, 2008, the Company completed the acquisition of Kadix for
$42.3 million in cash including acquisition costs of $408, with the
potential for additional consideration of up to $5 million, such as achievement
of certain 8(a) contract migrations and anticipated 2009 gross margin
targets. During 2008, additional consideration of $750 was earned and
paid. The remaining $4.3 million was earned as of December 31, 2008
and has been accrued as additional purchase price.
Kadix
maintains practice specialties in organizational change, human capital,
information technology and public and environmental health. As a part
of the Company’s System and Services segment, Kadix is focused on the U.S.
Department of Homeland Security, Marine Corps information technology, military
medical health, and federal civilian markets. The acquisition
strengthens and expands the Company’s growth as a provider of high-end services
and solutions in the DHS and other federal civilian markets.
The
purchase price associated with the Kadix acquisition is as follows:
|
Cash
consideration at purchase date
|
|
$
|
44,960
|
|
|
Additional
earnout cash consideration
|
|
|
5,000
|
|
|
Transaction
costs
|
|
|
408
|
|
|
Purchase
price
|
|
|
50,368
|
|
|
Cash
acquired
|
|
|
(3,102
|
)
|
|
Purchase
price, net of cash acquired
|
|
$
|
47,266
|
|
The
purchase price allocation based on an independent appraisal is as
follows:
|
Current
assets, net of cash acquired
|
|
$
|
9,638
|
|
|
|
|
|
Property
and equipment
|
|
|
316
|
|
|
|
|
|
Current
liabilities
|
|
|
(4,200
|
)
|
|
|
|
|
Long-term
liabilities
|
|
|
(4
|
)
|
|
|
|
|
Goodwill
and other intangible assets
|
|
|
41,516
|
|
|
|
|
|
Total
purchase price allocation
|
|
$
|
47,266
|
|
|
|
|
|
|
|
|
|
|
|
amortization
|
|
|
|
|
|
|
|
|
life
(years)
|
|
|
Customer
contracts
|
|
$
|
3,500
|
|
|
|
5
|
|
|
Customer
relationships
|
|
|
1,900
|
|
|
|
6
|
|
|
Non-compete
agreement
|
|
|
1,400
|
|
|
|
3
|
|
|
8(a)
contract transition
|
|
|
130
|
|
|
|
1
|
|
|
Goodwill
|
|
|
34,586
|
|
|
|
-
|
|
|
Total
goodwill and other intangible assets
|
|
$
|
41,516
|
|
|
|
|
|
The
Company estimates that $41,516 of the goodwill and other intangible assets
related to the Kadix acquisition will be tax deductible.
The
following unaudited pro forma results of operations have been prepared as though
the acquisition of Kadix had occurred on January 1, 2007. These pro forma
results include adjustments for interest expense and amortization of deferred
financing costs on the acquisition term loan used to finance the transaction,
amortization expense for the identifiable intangible asset determined in the
preliminary independent appraisal and the effect of income taxes. These
unaudited pro forma results do not include certain nonrecurring costs Kadix paid
at the closing of the sale, including the payout for Kadix’ Phantom Unit Plan
and Ownership Appreciations Rights participants, professional fees related to
the acquisition and discretionary bonuses. This unaudited pro forma
information does not purport to be indicative of the results of operations that
would have been attained had the acquisition been made as of January 1,
2007, or of results of operations that may occur in the future.
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
|
|
|
Year
Ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
(unaudited)
|
|
|
Revenue
|
|
$
|
267,586
|
|
|
$
|
252,548
|
|
|
Gross
profit
|
|
$
|
48,288
|
|
|
$
|
45,929
|
|
|
Operating
income
|
|
$
|
3,807
|
|
|
$
|
14,310
|
|
|
Net
income (loss)
|
|
$
|
(196
|
)
|
|
$
|
6,848
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.02
|
)
|
|
$
|
0.73
|
|
|
Diluted
|
|
$
|
(0.02
|
)
|
|
$
|
0.71
|
|
NOTE 4. SUPPLEMENTAL BALANCE SHEET
INFORMATION
The
composition of selected balance sheet accounts is as follows:
|
|
|
December
31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Contract
receivables, net
|
|
|
|
|
|
|
|
Billed
receivables
|
|
$
|
35,423
|
|
|
$
|
31,884
|
|
|
Unbilled
receivables
(1)
:
|
|
|
|
|
|
|
|
|
|
Revenues
recorded in excess of milestone billings on fixed price contracts with the
States of Ohio and Tennessee
|
|
|
8,907
|
|
|
|
7,572
|
|
|
Retainages
and fee withholdings
|
|
|
1,179
|
|
|
|
1,529
|
|
|
Other
unbilled receivables
|
|
|
26,858
|
|
|
|
23,488
|
|
|
Total
unbilled receivables
|
|
|
36,944
|
|
|
|
32,589
|
|
|
Allowance
for doubtful accounts
|
|
|
(929
|
)
|
|
|
(903
|
)
|
|
Contract
receivables, net
|
|
$
|
71,438
|
|
|
$
|
63,570
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid
expenses and other current assets:
|
|
|
|
|
|
|
|
|
|
Inventory
|
|
$
|
766
|
|
|
$
|
584
|
|
|
Restricted
cash
|
|
|
150
|
|
|
|
-
|
|
|
Investments
available for sale
|
|
|
-
|
|
|
|
334
|
|
|
Other
|
|
|
1,575
|
|
|
|
1,590
|
|
|
Prepaid
expenses and other current assets
|
|
$
|
2,491
|
|
|
$
|
2,508
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net:
|
|
|
|
|
|
|
|
|
|
Production
equipment
|
|
$
|
11,530
|
|
|
$
|
11,917
|
|
|
Software
|
|
|
11,602
|
|
|
|
11,052
|
|
|
Furniture
and other equipment
|
|
|
7,644
|
|
|
|
6,862
|
|
|
Leasehold
improvements
|
|
|
2,949
|
|
|
|
2,375
|
|
|
Property
and equipment
|
|
|
33,725
|
|
|
|
32,206
|
|
|
Less
accumulated depreciation
|
|
|
(24,376
|
)
|
|
|
(22,024
|
)
|
|
Property
and equipment, net
|
|
$
|
9,349
|
|
|
$
|
10,182
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
noncurrent assets:
|
|
|
|
|
|
|
|
|
|
Equity
investments
|
|
$
|
1,180
|
|
|
$
|
1,119
|
|
|
Deferred
compensation plan investments
|
|
|
1,107
|
|
|
|
1,747
|
|
|
Prepaid
pension asset
|
|
|
-
|
|
|
|
718
|
|
|
Other
|
|
|
838
|
|
|
|
495
|
|
|
Other
noncurrent assets
|
|
$
|
3,125
|
|
|
$
|
4,079
|
|
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
|
|
|
December
31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Accrued
compensation and employee benefits:
|
|
|
|
|
|
|
|
Accrued
compensation and related taxes
|
|
$
|
7,504
|
|
|
$
|
6,967
|
|
|
Accrued
vacation
|
|
|
4,391
|
|
|
|
4,273
|
|
|
Other
|
|
|
1,749
|
|
|
|
2,169
|
|
|
Accrued
compensation and employee benefits
|
|
$
|
13,644
|
|
|
$
|
13,409
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
accrued expenses:
|
|
|
|
|
|
|
|
|
|
Accrued
litigation reserve
|
|
$
|
15,000
|
|
|
$
|
181
|
|
|
Accrued
acquisition costs
|
|
|
4,265
|
|
|
|
-
|
|
|
Accrued
income taxes
|
|
|
2,042
|
|
|
|
585
|
|
|
Deferred
gain on sale of building
|
|
|
676
|
|
|
|
676
|
|
|
Other
|
|
|
2,777
|
|
|
|
1,636
|
|
|
Other
accrued expenses
|
|
$
|
24,760
|
|
|
$
|
3,078
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
long-term liabilities:
|
|
|
|
|
|
|
|
|
|
Accrued
pension liability
|
|
$
|
22,570
|
|
|
$
|
-
|
|
|
Deferred
gain on sale of building
|
|
|
4,057
|
|
|
|
4,733
|
|
|
Deferred
compensation plan liability
|
|
|
1,107
|
|
|
|
1,747
|
|
|
Other
|
|
|
2,552
|
|
|
|
2,096
|
|
|
Other
long-term liabilities
|
|
$
|
30,286
|
|
|
$
|
8,576
|
|
|
(1)
|
At
December 31, 2008 and 2007, $495 and $553, respectively, of unbilled
retainages and fee withholdings are not anticipated to be billed within
twelve months. Additionally, at December 31, 2008, $4,557 of
the unbilled balance under the Company’s contract with the State of
Tennessee is not scheduled to be invoiced within one
year.
|
NOTE
5. GOODWILL AND INTANGIBLE ASSETS
Components
of the Company’s identifiable intangible assets are as follows:
|
|
|
December
31, 2008
|
|
|
December 31,
2007
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
Cost
|
|
|
Amortization
|
|
|
Net
|
|
|
Cost
|
|
|
Amortization
|
|
|
Net
|
|
|
Customer
relationships
|
|
$
|
14,700
|
|
|
$
|
(11,769
|
)
|
|
$
|
2,931
|
|
|
$
|
12,800
|
|
|
$
|
(9,731
|
)
|
|
$
|
3,069
|
|
|
Customer
contracts
|
|
|
3,500
|
|
|
|
(522
|
)
|
|
|
2,978
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Non-competition
agreements
|
|
|
1,400
|
|
|
|
-
|
|
|
|
1,400
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
8(a)
contract transition
|
|
|
130
|
|
|
|
(60
|
)
|
|
|
70
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Total
|
|
$
|
19,730
|
|
|
$
|
(12,351
|
)
|
|
$
|
7,379
|
|
|
$
|
12,800
|
|
|
$
|
(9,731
|
)
|
|
$
|
3,069
|
|
The
Company recorded amortization expense for its identifiable intangible assets of
$2,620, $2,602 and $2,809 in the years ended December 31, 2008, 2007 and
2006, respectively. At December 31, 2008, estimated future amortization expense
for the identifiable intangible assets to be recorded by the Company in
subsequent fiscal years was as follows:
|
Year
ending December 31:
|
|
|
|
|
2009
|
|
$
|
3,305
|
|
|
2010
|
|
$
|
1,542
|
|
|
2011
|
|
$
|
1,188
|
|
|
2012
|
|
$
|
492
|
|
|
2013
|
|
$
|
349
|
|
|
2014
and thereafter
|
|
$
|
503
|
|
The
increase in the carrying amount of goodwill for the year ended December 31,
2008 related to the acquisition of Kadix. The carrying amount
of goodwill of $97,641 and $63,055 at December 31, 2008 and
December 31, 2007, respectively, was included in the Systems and Services
segment.
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
Total
income tax expense was allocated as follows:
|
|
|
Year
ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Income
(loss) from operations
|
|
$
|
(704
|
)
|
|
$
|
4,682
|
|
|
$
|
2,730
|
|
|
Cumulative
benefit of accounting change
|
|
|
-
|
|
|
|
-
|
|
|
|
62
|
|
|
Stockholders’
equity for compensation expense for tax purposes in excess of amounts
recognized for financial reporting purposes
|
|
|
(103
|
)
|
|
|
(77
|
)
|
|
|
(161
|
)
|
|
Other
comprehensive income (loss)
|
|
|
(10,198
|
)
|
|
|
1,617
|
|
|
|
1,026
|
|
|
|
|
$
|
(11,005
|
)
|
|
$
|
6,222
|
|
|
$
|
3,657
|
|
The
components of the provision (benefit) for federal and state income taxes from
operations were as follows:
|
|
|
Year
ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Currently
payable
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
3,353
|
|
|
$
|
6,623
|
|
|
$
|
8,041
|
|
|
State
|
|
|
515
|
|
|
|
1,031
|
|
|
|
1,433
|
|
|
Total
currently payable
|
|
|
3,868
|
|
|
|
7,654
|
|
|
|
9,474
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(3,690
|
)
|
|
|
(2,490
|
)
|
|
|
(5,174
|
)
|
|
State
|
|
|
(882
|
)
|
|
|
(482
|
)
|
|
|
(1,570
|
)
|
|
Total
deferred
|
|
|
(4,572
|
)
|
|
|
(2,972
|
)
|
|
|
(6,744
|
)
|
|
Provision
(benefit) for income taxes
|
|
$
|
(704
|
)
|
|
$
|
4,682
|
|
|
$
|
2,730
|
|
The major
items contributing to the difference between the statutory U.S. federal income
tax rate and the Company’s effective tax rate on income from continuing
operations were as follows:
|
|
|
Year
ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Provision
(benefit) at statutory rate
|
|
$
|
(686
|
)
|
|
|
(35.0
|
)%
|
|
$
|
4,124
|
|
|
|
35.0
|
%
|
|
$
|
2,351
|
|
|
|
35.0
|
%
|
|
State
income taxes, net of federal tax benefit
|
|
|
(147
|
)
|
|
|
(7.5
|
)
|
|
|
512
|
|
|
|
4.3
|
|
|
|
355
|
|
|
|
5.3
|
|
|
Permanent
differences, net
|
|
|
141
|
|
|
|
7.2
|
|
|
|
166
|
|
|
|
1.4
|
|
|
|
177
|
|
|
|
2.6
|
|
|
SFAS
123(R) expense
|
|
|
71
|
|
|
|
3.6
|
|
|
|
73
|
|
|
|
0.6
|
|
|
|
166
|
|
|
|
2.5
|
|
|
Change
in deferred tax rate
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
186
|
|
|
|
2.8
|
|
|
Adjustments
to tax accruals and reserves
|
|
|
(196
|
)
|
|
|
(10.0
|
)
|
|
|
(201
|
)
|
|
|
(1.7
|
)
|
|
|
(266
|
)
|
|
|
(4.0
|
)
|
|
Tax
credits and state audits
|
|
|
12
|
|
|
|
0.6
|
|
|
|
(82
|
)
|
|
|
(0.7
|
)
|
|
|
(226
|
)
|
|
|
(3.4
|
)
|
|
Other,
net
|
|
|
101
|
|
|
|
5.2
|
|
|
|
90
|
|
|
|
0.8
|
|
|
|
(13
|
)
|
|
|
(0.2
|
)
|
|
Provision
(benefit) for income taxes
|
|
$
|
(704
|
)
|
|
|
(35.9
|
)%
|
|
$
|
4,682
|
|
|
|
39.7
|
%
|
|
$
|
2,730
|
|
|
|
40.6
|
%
|
The tax
effects of significant temporary differences that comprise deferred tax assets
and liabilities are as follows:
|
|
|
December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Pension
liability
|
|
$
|
14,250
|
|
|
$
|
4,465
|
|
|
Deferred
gain on sale of building
|
|
|
2,163
|
|
|
|
2,680
|
|
|
Accrued
vacation
|
|
|
1,050
|
|
|
|
1,152
|
|
|
Accrued
expenses
|
|
|
7,126
|
|
|
|
1,050
|
|
|
Employee
share-based compensation
|
|
|
700
|
|
|
|
903
|
|
|
Receivables
reserves
|
|
|
392
|
|
|
|
477
|
|
|
Other
|
|
|
200
|
|
|
|
5
|
|
|
Deferred
tax assets
|
|
|
25,881
|
|
|
|
10,732
|
|
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
|
|
|
December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Unbilled
receivables
|
|
|
(6,911
|
)
|
|
|
(7,476
|
)
|
|
Pension
funding
|
|
|
(5,302
|
)
|
|
|
(4,749
|
)
|
|
Fixed
assets and intangibles
|
|
|
(3,814
|
)
|
|
|
(3,348
|
)
|
|
Domestic
International Sales Corporation
|
|
|
(2,119
|
)
|
|
|
(1,973
|
)
|
|
Investment
available for sale
|
|
|
-
|
|
|
|
(132
|
)
|
|
Other
|
|
|
(9
|
)
|
|
|
(56
|
)
|
|
Deferred
tax liability
|
|
|
(18,155
|
)
|
|
|
(17,734
|
)
|
|
Deferred
tax asset (liability), net
|
|
$
|
7,726
|
|
|
$
|
(7,002
|
)
|
Management
believes that it is more likely than not that these deferred tax assets will be
realized.
The
Internal Revenue Service (“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 was elevated to the IRS National Office for
determination. On October 23, 2008, the Company received a
notification of ruling from the IRS National Office. This ruling
provided clarification regarding the IRS position relating to revenue
recognition for unbilled receivables. The Company is in the process
of evaluating the impact of this recent notification. The resolution
with the IRS regarding unbilled receivables could result in a change in the
Company’s accounting method regarding revenue recognition. This change
could result in an acceleration of taxable income and a reversal of certain
deferred tax items.
The
Company does not believe that any adjustment to taxable income in prior years
resulting from this ruling will result in the payment of any interest or
penalties.
On
January 1, 2007, the Company adopted the provisions of FIN 48. The
implementation of FIN 48 did not have a material impact on the amount of the
Company’s tax liability for unrecognized tax benefits. The change in the
unrecognized tax benefits was as follows:
|
Balance
at January 1, 2007
|
|
$
|
291
|
|
|
Additions
for current year tax positions
|
|
|
237
|
|
|
Reductions
for prior year tax positions
|
|
|
(9
|
)
|
|
Lapse
of statute of limitations
|
|
|
(2
|
)
|
|
Balance
at December 31, 2007
|
|
|
517
|
|
|
Reductions
for current year tax positions
|
|
|
(87
|
)
|
|
Balance
at December 31, 2008
|
|
$
|
430
|
|
At
December 31, 2008, the Company’s unrecognized tax benefits, which if recognized
in future periods, could favorably impact the effective tax rate by
approximately $234. The total amount of accrued interest and
penalties resulting from such unrecognized tax benefits was $164 and $115 at
December 31, 2008 and 2007, respectively. The amount of unrecognized
tax benefits may change over the next twelve months pending the outcome of the
IRS examination. However, the Company cannot reasonably estimate when and
how much the unrecognized tax benefits would change.
The
Company files income tax returns in the U.S. federal jurisdiction and numerous
state jurisdictions. Federal tax returns for all years after 2003 are
subject to future examinations. State tax returns for all years after
2004 are subject to future examination. The IRS is currently
examining the Company’s 2004 income tax return.
NOTE
7. FINANCING ARRANGEMENTS
On August
1, 2008, the Company entered into a new unsecured credit facility (the
“facility”) with its bank group to restructure and increase the Company’s credit
facility to $65.0 million, which matures on August 1, 2013. The facility
provides for a $40.0 million, five-year term loan (the “term loan”) and a
$25.0 million, five-year revolving credit agreement for working capital
(the “revolver”). The bank group, led by Brown Brothers Harriman & Co. as a
lender and as administrative agent, also includes TD Bank, N.A. and Bank of
America, N.A. The term loan and the revolver replace the Company’s previous
$50.0 million revolving credit agreement, which was entered into in
2006.
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
On an
ongoing basis, the facility requires the Company to meet certain financial
covenants, including maintaining a minimum net worth and certain cash flow and
debt coverage ratios. The covenants also limit the Company’s ability to incur
additional debt, pay dividends, purchase capital assets, sell or dispose of
assets, make additional acquisitions or investments, or enter into new leases,
among other restrictions. In addition, the facility provides that the bank group
may accelerate payment of all unpaid principal and all accrued and unpaid
interest under the facility, upon the occurrence and continuance of certain
events of default, including, among others, the following:
|
|
•
|
|
Any
failure by the Company and its subsidiaries to make any payment of
principal, interest and other sums due under the facility within three
calendar days of the date when such payment is due;
|
|
|
|
|
|
•
|
|
Any
breach by the Company or any of its subsidiaries of certain covenants,
representations and warranties;
|
|
|
|
|
|
•
|
|
Any
default and acceleration of any indebtedness owed by the Company or any of
its subsidiaries to any person (other than the bank group) which is in
excess of $1.0 million;
|
|
|
|
|
|
•
|
|
Any
final judgment against the Company or any of its subsidiaries in excess of
$1.0 million which has not been insured to the reasonable satisfaction of
Brown Brothers as administrative agent;
|
|
|
|
•
|
|
Any
bankruptcy (voluntary or involuntary) of the Company or any of its
subsidiaries;
|
|
|
|
|
|
•
|
|
Any
material adverse change in the business or financial condition of the
Company and its subsidiaries; or
|
|
|
|
|
|
•
|
|
Any
change in control of the Company.
|
|
On
December 31, 2008, the Company amended the facility with its bank group
primarily to modify the loan covenants by excluding the $14.8 million provision
for litigation from its calculations. At December 31, 2008, the
Company was in compliance with its amended loan covenants.
The
Company used the $40 million term loan proceeds to fund the acquisition
of Kadix. The facility requires quarterly principal payments on the term
loan of $2 million, which commenced December 31, 2008. The Company has the
option of selecting an interest rate for the term loan equal to either: (a) the
then applicable LIBOR rate plus 1.50% per annum to 2.50% per annum, depending on
the Company’s most recently reported leverage ratio (currently 2.00%); or (b)
the base rate as announced from time to time by the administrative agent plus
0.00% per annum to 0.25% per annum, depending on the Company’s most recently
reported leverage ratio (currently 0.00%). For those portions of the term loan
accruing at the LIBOR rate, the Company has the option of selecting interest
periods of 30, 60, 90 or 180 days. The facility also required the Company,
within thirty days of the closing date, to secure interest rate protection in an
amount not less than fifty percent of the outstanding principal balance of the
term loan, as more fully described in Note 8.
The
revolver has a five-year term and is available to the Company for general
corporate purposes, including strategic acquisitions. The interest rate terms on
the revolver are similar to those of the term
loan.
Outstanding
Debt
The
Company’s outstanding debt at December 31, 2008 was $38.0 million which
consisted of borrowings under the term loan. The interest rate on the
outstanding balance at December 31, 2008 was 4.21% based on the 90-day LIBOR
rate option that was in effect on December 4, 2008. The outstanding
debt at December 31, 2007 was $7,737 which consisted of net borrowings under the
Company’s previous $50 million revolving credit facility. The interest rate on
$5,000 of the outstanding balance at December 31, 2007 was 6.34% based on the
60-day LIBOR rate option elected on December 31, 2007. The interest
rate on the remaining $2,737 outstanding balance at December 31, 2007 was 7.25%
based on a base rate option that was in effect on December 31,
2007. The repayment of borrowings under the revolver is contractually
due on August 1, 2013; however, the Company may repay at any time prior to that
date. At December 31, 2008, the remaining available balance to borrow
against the revolver was $25.0 million.
As noted
above, the facility requires quarterly principal payments on the term loan of $2
million, which commenced December 31, 2008. The Company’s contractual
obligations for principal payments on the term loan is $8 million in each year
ending December 31, 2009 through 2012 and $6 million in the year ending December
31, 2013. However, the Company has the option to prepay principal at
anytime during the term of the facility without penalty.
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
NOTE
8. DERIVATIVE FINANCIAL INSTRUMENTS
In
September 2008, the Company entered into an interest rate swap agreement with an
initial notional amount of $20.0 million of the term loan principal and matures
on August 1, 2013. Under this agreement, the Company receives a
floating rate based on the 90-day LIBOR rate and pays a fixed rate of 3.60%
(both excluding the applicable margin of 2.00%) on the outstanding notional
amount. The swap fixed rate was based on a 90-day LIBOR rate and is structured
to mirror the payment terms of the term loan. The fair value of the
swap at inception was zero. It is not expected that any gains or
losses will be reported in the statement of operations during the term of the
agreement as the swap is assumed to be highly effective through its maturity
based on the matching terms of the swap and facility agreements.
As of
December 31, 2008, the total notional amount committed to the swap agreement was
$19.0 million. On that date, the floating rate of a loan based on a 90-day LIBOR
rate was 1.43%. The Company recorded a liability of $861 to recognize the fair
value of the swap using level 2 inputs as described by SFAS No. 157 which has
been accounted for as a component of other comprehensive loss.
NOTE
9. EMPLOYEE BENEFIT PROGRAMS
Defined
Benefit Pension Plan
On
October 25, 2006, the Company’s Board of Directors approved amendments to the
Company’s Defined Benefit Pension Plan (the “Pension Plan”) and to the Company’s
401(k) Savings and Investment Plan (the “401(k) Plan”). The Pension
Plan amendment removed the 3% annual benefit inflator for active
participants in the Pension Plan which froze each participant's calculated
pension benefit as of December 31, 2006. The Pension Plan amendment
resulted in a curtailment to the Pension Plan which was accounted for under the
provisions of SFAS No. 88,
Employers’ Accounting for
Settlements and Curtailments and for Termination Benefits
.
The
Company’s Pension Plan is non-contributory, covering substantially all employees
of the Company who had completed a year of service prior to July 1,
2002. Membership in the Pension Plan was frozen effective July 1,
2002 by approved actions by the Company’s Board of Directors in
2001.
The
Company’s funding policy is to contribute at least the minimum amount required
by the Employee Retirement Income Security Act of 1974. Additional amounts are
contributed to assure that plan assets will be adequate to provide retirement
benefits. The Company does not expect any required payments will be needed to
fund the Pension Plan in 2009.
As
required by SFAS No. 158, the Company’s Pension Plan measurement date was
changed to December 31 from November 30 in 2008.
Net
Periodic Pension Cost
|
|
|
Year
ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Interest
cost
|
|
$
|
4,103
|
|
|
$
|
3,955
|
|
|
$
|
3,995
|
|
|
Expected
return on plan assets
|
|
|
(5,975
|
)
|
|
|
(5,811
|
)
|
|
|
(5,117
|
)
|
|
Recognized
actuarial loss
|
|
|
586
|
|
|
|
1,104
|
|
|
|
1,717
|
|
|
Net
periodic pension cost (income)
|
|
$
|
(1,286
|
)
|
|
$
|
(752
|
)
|
|
$
|
595
|
|
Obligations
and Funded Status
|
|
|
December
31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
in benefit obligation
|
|
|
|
|
|
|
|
Benefit
obligation at beginning of year
|
|
$
|
67,342
|
|
|
$
|
70,006
|
|
|
Interest
cost
|
|
|
4,444
|
|
|
|
3,955
|
|
|
Benefits
paid
|
|
|
(3,516
|
)
|
|
|
(2,760
|
)
|
|
Actuarial
(gain) loss
|
|
|
1,421
|
|
|
|
(3,859
|
)
|
|
Benefit
obligation at end of year
|
|
|
69,691
|
|
|
|
67,342
|
|
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
|
|
|
December
31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
in plan assets
|
|
|
|
|
|
|
|
Fair
value of plan assets at beginning of year
|
|
|
68,060
|
|
|
|
66,073
|
|
|
Actual
return on plan assets
|
|
|
(17,423
|
)
|
|
|
4,747
|
|
|
Benefits
paid
|
|
|
(3,516
|
)
|
|
|
(2,760
|
)
|
|
Fair
value of plan assets at end of year
|
|
|
47,121
|
|
|
|
68,060
|
|
|
Funded
status
|
|
$
|
(22,570
|
)
|
|
$
|
718
|
|
Amounts
recognized in the consolidated balance sheets consist of:
|
|
|
December
31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Other
noncurrent assets
|
|
$
|
-
|
|
|
$
|
718
|
|
|
Other
long-term liabilities
|
|
|
22,570
|
|
|
|
-
|
|
|
Net
amount recognized
|
|
$
|
22,570
|
|
|
$
|
718
|
|
The
Company increased its additional liability by $24,682 to reflect the required
pension liability of $35,942 at December 31, 2008. In 2007, the Company
reduced its additional liability by $3,899 to reflect the required pension
liability of $11,260. These amounts are reflected, net of related tax
effects, as a component of “Accumulated other comprehensive loss” as part
of stockholders’ equity in the accompanying balance
sheets.
The
reconciliation of the unrecognized net actuarial loss was as
follows:
|
|
|
Beginning
|
|
|
|
|
|
Experience
|
|
|
Effect
of
|
|
|
Ending
|
|
|
|
|
Balance
|
|
|
Amortization
|
|
|
Loss/(Gain)
|
|
|
Curtailment
|
|
|
Balance
|
|
|
2008
|
|
$
|
11,260
|
|
|
$
|
(635
|
)
|
|
$
|
25,317
|
|
|
$
|
-
|
|
|
$
|
35,942
|
|
|
2007
|
|
$
|
15,159
|
|
|
$
|
(1,104
|
)
|
|
$
|
(2,795
|
)
|
|
$
|
-
|
|
|
$
|
11,260
|
|
|
2006
|
|
$
|
21,102
|
|
|
$
|
(1,717
|
)
|
|
$
|
(1,214
|
)
|
|
$
|
(3,012
|
)
|
|
$
|
15,159
|
|
The
Company expects to recognize amortization expense related to the net actuarial
loss of approximately $1,159 in 2009.
The
assumed discount rate, which is intended to be the actual rate at which benefits
could effectively be settled, is determined by a spot-rate yield curve method.
The spot-rate yield curve is employed to match the plan assets cash outflows
with the timing and amount of the expected benefit payments.
The
assumed expected rate of return on plan assets, which is the average return
expected on the funds invested or to be invested to provide future benefits to
pension plan participants, is determined by an annual review of historical plan
assets returns and consulting with outside investment advisors. In
selecting the expected long-term rate of return on assets, the Company
considered its investment return goals stated in the Pension Plan’s investment
policy. The Company, with input from the Pension Plan’s professional
investment managers, also considered the average rate of earnings expected on
the funds invested or to be invested to provide Pension Plan benefits. This
process included determining expected returns for the various asset classes that
comprise the Pension Plan’s target asset allocation. Based on this analysis, the
Company’s overall expected long-term rate of return on assets was 8.5%,
which will be used to determine net periodic benefit costs in
2009.
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
The
following assumptions were used to determine the benefit obligations and net
periodic benefit costs:
|
|
|
December
31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Used
to determine benefit obligations
|
|
|
|
|
|
|
|
Discount
rate
|
|
|
6.25
|
%
|
|
|
6.25
|
%
|
|
Rate
of compensation increase
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
Year
Ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Used
to determine net periodic benefit costs
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount
rate
|
|
|
6.25
|
%
|
|
|
5.75
|
%
|
|
|
5.75
|
%
|
|
Expected
rate of return on assets
|
|
|
9.00
|
%
|
|
|
9.00
|
%
|
|
|
9.00
|
%
|
|
Rate
of compensation increase
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
The
Company’s investment policy includes a periodic review of the Pension Plan’s
investment in the various asset classes. The Company’s asset allocations by
asset category are as follows:
|
|
|
Target
|
|
|
December
31,
|
|
|
|
|
Allocation
|
|
|
2008
|
|
|
2007
|
|
|
Equity
securities
|
|
|
60
|
%
|
|
|
56
|
%
|
|
|
64
|
%
|
|
Debt
securities
|
|
|
38
|
|
|
|
37
|
|
|
|
31
|
|
|
Other
|
|
|
2
|
|
|
|
7
|
|
|
|
5
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
The
Pension Plan’s assets did not include any of the Company’s common stock at
December 31, 2008 and 2007.
Estimated
Future Benefit Payments
The
following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid:
|
Year
ending December 31:
|
|
|
|
|
2009
|
|
$
|
3,525
|
|
|
2010
|
|
$
|
3,703
|
|
|
2011
|
|
$
|
3,934
|
|
|
2012
|
|
$
|
4,238
|
|
|
2013
|
|
$
|
4,493
|
|
|
Five
subsequent fiscal years ending December 31, 2018
|
|
$
|
24,749
|
|
The
Company also maintains a cash or deferred savings plan, the 401(k) Plan. All
employees are eligible to elect to defer a portion of their salary and
contribute the deferred portion to the 401(k) Plan.
The
401(k) Plan is structured with two components: (i) a Company matching
contribution to 100% of the first 2% of the employee contribution and an
additional 50% of the next 4% of the employee contribution; and (ii) a
discretionary profit sharing contribution by the Company, even if the employee
does not contribute to the 401(k) Plan.
Employee
contributions and the Company’s matching and past core contributions are
invested in one or more collective investment funds at the participant’s
direction. The Company’s matching and past core contributions are subject to
forfeitures of any non-vested portion if termination occurs. The
vesting of the Company’s matching contribution is 25% after one year and 100%
after the second year. The vesting of future profit sharing
contributions is 100% cliff vesting after three years. The Company’s
contributions, net of forfeitures, charged to expense aggregated $3,062, $3,188
and $3,383 in 2008, 2007 and 2006, respectively.
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
Supplemental
Executive Retirement Plan
The
Company has a Supplemental Executive Retirement Plan, or SERP, for certain
former key employees providing for annual benefits commencing on the sixth
anniversary of the executive’s retirement. The cost of these benefits is being
charged to expense and accrued using a projected unit credit method. Expense
related to this plan was $56 in 2008, $36 in 2007, and $80 in 2006. The
liability related to the SERP, which is unfunded, was $381 and $383 at
December 31, 2008 and 2007, respectively. These amounts represent the
amounts the Company estimates to be the present value of the obligation at each
respective date.
Deferred
Compensation Plans
The
Company has a deferred compensation plan approved by the Board of Directors that
allows certain employees the ability to annually elect to defer up to 100% of
any cash incentive payments from the Company and any salary in excess of the
FICA earnings ceiling. Employee contributions are invested in selected mutual
funds held within a Rabbi Trust. These investments, which the Company has
classified as trading securities as permitted by SFAS No. 115, are recorded
at fair value and reported as a component of other noncurrent assets in the
accompanying balance sheets. Amounts recorded as deferred compensation
liabilities are adjusted to reflect the fair value of investments held by the
Rabbi Trust, which are valued using level one inputs. Changes in obligations to
participants as a result of gains or losses on the fair value of the investments
are reflected as a component of compensation expense. At December 31, 2008
and 2007, $1,107 and $1,747, respectively, had been deferred under the
plan.
The
Company also has a deferred compensation plan under which non-employee directors
may elect to defer their directors’ fees. Amounts deferred for each participant
are credited to a separate account, and interest at the lowest rate at which the
Company borrowed money during each quarter or, if there was no such borrowing,
at the prime rate, is credited to each account quarterly. The balance in a
participant’s account is payable in a lump sum or in installments when the
participant ceases to be a director.
NOTE
10. SHARE–BASED COMPENSATION
Share-Based
Compensation Plans
The
Company has four shareholder approved equity incentive plans, which are
administered by the Compensation Committee of the Board of Directors (the
“Committee”). The Committee determines which employees receive grants, the
number of shares or options granted and the exercise prices of the shares
covered by each grant.
The
Company’s 1993 Equity Incentive Plan (the “1993 Plan”) expired in April
2003. The 1993 Plan permitted the Company to grant incentive stock
options, nonqualified stock options, stock appreciation rights, awards of
nontransferable shares of restricted common stock and deferred grants of common
stock. The option price of incentive stock options was not less than the fair
market value at the time the option was granted. The option period was not
greater than 10 years from the date the option was granted. Normally the
stock options were exercisable in three equal installments beginning one year
from the date of the grant. Through shareholder approval, 580,800 shares
were reserved for the 1993 Plan. A total of 12,000, 30,000 and 83,180 stock
options were outstanding and exercisable under the 1993 Plan at December 31,
2008, 2007 and 2006, respectively.
The
Company’s 1995 Stock Option Plan for Non-employee Directors (the “1995 Plan”)
expired in April 2006. The 1995 Plan provided for each outside
director to receive options to purchase 5,000 shares of common stock at the
first annual meeting at which the director was elected. As long as he or she
remained an eligible director, the director received options to purchase
1,000 shares of common stock at each annual meeting. Eligible directors
could not be an employee of the Company or one of its subsidiaries or a holder
of five percent or more of the Company’s common stock. The exercise price of
these options was the fair market value of the common stock on the date of
grant. Each option was non-transferable except upon death and expires
10 years after the date of grant. The options became exercisable in three
equal installments on the first, second and third anniversaries of the date of
grant. A total of 132,000 shares were reserved for issuance. A total of
12,214 and 14,614 stock options were outstanding and exercisable under the 1995
Plan at December 31, 2008 and 2007, respectively, and 20,614 stock options were
outstanding of which 18,947 stock options were exercisable at December 31,
2006.
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
The
Company’s 2000 Incentive Plan (the “2000 Plan”) allows the Company to grant
incentive stock options, nonqualified stock options, stock appreciation rights,
restricted stock awards and deferred grants of common stock. In the case of
incentive stock options, the option price will not be less than the fair market
value of the stock at the date of grant. The option period will not exceed
10 years from the date of grant. The terms of the 2000 Plan are
substantially similar to those of the 1993 Plan. A total of 1.5 million
shares were reserved for issuance, of which 49,804 shares remained
available at December 31, 2008. A total of 664,894 stock options were
outstanding and exercisable under the 2000 Plan at December 31, 2008, and
717,464 and 786,885 stock options were outstanding of which 222,464 and 236,217
stock options were exercisable at December 31, 2007 and 2006,
respectively.
All
restricted stock awards granted by the Company were issued under the 2000 Plan.
Shares of restricted stock of the Company may be granted at no cost to
employees. Recipients are entitled to cash dividends and to vote
their respective shares. Restrictions limit the sale or transfer of
these shares until they vest, which is typically over three
years. The Company granted 92,000, 99,300 and 69,900 restricted stock
awards during the years ended December 31, 2008, 2007 and 2006, respectively, of
which 158,476, 223,330 and 212,264 awards were unvested and outstanding as of
December 31, 2008, 2007 and 2006, respectively.
During
2001, the Board of Directors approved the Executive Long Term Incentive Program
(the “ELTIP”), implemented under the provisions of the 2000 Plan. The ELTIP
provides incentives to program participants through a combination of stock
options and restricted stock grants. The ELTIP allows for accelerated vesting
based on the Company’s achievement of specified financial performance goals.
During 2001, the Company granted stock options under the ELTIP totaling
750,000 shares of common stock at fair market value and awarded
121,000 shares of restricted common stock which vest fully in seven years
from the grant date. Included in the 2000 Plan amounts stated above,
a total of 475,000 stock options were outstanding and exercisable at December
31, 2008, and 495,000 and 540,000 stock options and 77,000 and 84,000
restricted stock awards were outstanding and not yet vested under the ELTIP at
December 31, 2007 and 2006, respectively. The ELTIP stock option and restricted
stock awards fully vested in May 2008.
The
Company’s 2003 Incentive Plan (the “2003 Plan”) allows the Company to grant
incentive stock options, non-qualified stock options, stock appreciation rights,
awards of nontransferable shares of restricted common stock and deferred grants
of common stock up to a total of 400,000 shares to directors or key
employees of the Company. The terms of the 2003 Plan are substantially similar
to those of the 2000 Plan. There were no awards granted under the 2003 Plan from
its inception.
During
1999, the Company granted a key executive officer 250,000 non-qualified stock
options that were not part of an approved shareholder plan. Twenty percent of
the options vested immediately and an additional twenty percent vested in each
successive year from the date of the grant. The option price for these grants
was the fair market value at the time of the grant. At December 31, 2008, a
total of 200,000 stock options were outstanding and exercisable. For
each of the two years in the period ended December 31, 2007, a total of 250,000
stock options were outstanding and exercisable. These stock options
expire in November 2009.
Employee
Stock Purchase Plan
The
Company’s shareholders approved the 2000 Employee Stock Purchase Plan (the
“ESPP”) which is designed to give eligible employees an opportunity to purchase
common stock of the Company through accumulated payroll deductions. All
employees of the Company or designated subsidiaries who customarily work at
least 20 hours per week and do not own five percent or more of the
Company’s common stock are eligible to participate in the ESPP. A total of
1,300,000 shares are available for issuance under the ESPP, of which 437,554
shares were remaining at December 31, 2008. In 2008, 2007 and
2006, a total of 46,880, 59,662 and 140,542 shares were issued,
respectively, under the ESPP.
On
October 25, 2006, the Company’s Board of Directors approved an amendment to
eliminate the “look-back” option and to reduce the stock purchase discount from
15% to 5% under the ESPP effective November 1, 2007. Under SFAS
123(R), this amendment results in the Company accounting for shares purchased in
connection with the ESPP as non-compensatory as of the effective
date.
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
Share-Based
Compensation Costs
Total
share-based compensation cost reported in the Consolidated Statements of
Operations was as follows:
|
|
|
Year
ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Cost
of products and services
|
|
$
|
483
|
|
|
$
|
605
|
|
|
$
|
1,065
|
|
|
Selling,
general and administrative
|
|
|
665
|
|
|
|
1,035
|
|
|
|
1,163
|
|
|
Cumulative
effect of accounting change
|
|
|
-
|
|
|
|
-
|
|
|
|
(146
|
)
|
|
Total
share-based compensation expense
|
|
$
|
1,148
|
|
|
$
|
1,640
|
|
|
$
|
2,082
|
|
Valuation
Assumptions
The fair
value of share-based awards for employee stock option awards and employee stock
purchases made under the ESPP was estimated using the Black-Scholes pricing
model. During 2006, the Company realigned its approach to share-based
compensation by increasing the issuance of restricted stock awards and reducing
the issuance of stock options. As a result, no stock options have
been awarded since 2005.
Since
2007, valuation assumptions were not required for employee stock purchases due
to the amendment to the ESPP. The following weighted average
assumptions were used for employee stock purchases under the ESPP during
2006: risk-free rate of 4.77%; dividend yield of zero; volatility of
27.09%; and expected life of three months.
The
Company selected the assumptions used in the Black-Scholes pricing model using
the following criteria:
Risk-free interest
rate.
The Company bases the risk-free interest rate on implied
yields available on a U.S. Treasury note with a maturity term equal to or
approximating the expected term of the underlying award.
Dividend
yield.
The Company does not intend to pay dividends on its
common stock for the foreseeable future and, accordingly, uses a dividend yield
of zero.
Volatility.
The
expected volatility of the Company’s shares was estimated based upon the
historical volatility of the Company’s share price with consideration given to
the expected life of the award.
Expected
life
. For stock
options, the expected term was estimated based upon exercise experience made in
the past to employees. For employee stock purchase plan transactions,
the expected term was based on the purchase period of three
months.
Stock
Option Award Activity
The
following table summarizes stock option activity under all
plans:
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
Aggregate
|
|
|
|
|
Number
of
|
|
|
Exercise
|
|
|
Term
|
|
|
Intrinsic
|
|
|
|
|
Shares
|
|
|
Price
|
|
|
(in
years)
|
|
|
Value
|
|
|
Outstanding
at December 31, 2007
|
|
|
1,012,078
|
|
|
$
|
8.34
|
|
|
|
3.0
|
|
|
$
|
3,030
|
|
|
Granted
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(81,117
|
)
|
|
$
|
5.53
|
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(41,853
|
)
|
|
$
|
12.15
|
|
|
|
|
|
|
|
|
|
|
Outstanding
and exercisable at December 31, 2008
|
|
|
889,108
|
|
|
$
|
8.42
|
|
|
|
2.1
|
|
|
$
|
729
|
|
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
Cash
proceeds received, the intrinsic value and the total tax benefits realized
resulting from stock option exercises were as follows:
|
|
|
Year
ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Amounts
realized or received from stock option exercises:
|
|
|
|
|
|
|
|
|
|
|
Cash
proceeds received
|
|
$
|
449
|
|
|
$
|
558
|
|
|
$
|
351
|
|
|
Intrinsic
value realized
|
|
$
|
267
|
|
|
$
|
279
|
|
|
$
|
384
|
|
|
Income
tax benefit realized
|
|
$
|
101
|
|
|
$
|
70
|
|
|
$
|
134
|
|
The total
income tax benefit realized from exercised stock options and ESPP transactions
for 2008, 2007 and 2006 was $103, $77 and $161, respectively. These
amounts were reported as a financing cash inflow with a corresponding operating
cash outflow in the accompanying Consolidated Statement of Cash Flows. During
2007, the Company also recorded SFAS 123(R) tax deficiencies on its equity
awards of $68 against its pool of excess tax benefits. At December
31, 2007, the remaining pool of excess tax benefits was depleted and as a result
any future SFAS 123(R) tax deficiencies will be recorded directly to
earnings.
Restricted
Stock Award Activity
The
following table summarizes restricted stock activity under the 2000
Plan:
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
Number
of
|
|
|
Grant-Date
|
|
|
|
|
Shares
|
|
|
Fair
Value
|
|
|
Nonvested
at December 31, 2007
|
|
|
223,330
|
|
|
$
|
11.43
|
|
|
Granted
|
|
|
92,000
|
|
|
$
|
9.45
|
|
|
Vested
|
|
|
(143,437
|
)
|
|
$
|
11.06
|
|
|
Cancelled
|
|
|
(13,417
|
)
|
|
$
|
11.63
|
|
|
Nonvested
at December 31, 2008
|
|
|
158,476
|
|
|
$
|
10.61
|
|
The total
fair value of restricted shares vested during 2008, 2007 and 2006 was $1,586,
$1,059 and $833, respectively. As of December 31, 2008, the total unrecognized
compensation cost related to restricted stock awards was $1,133 which is
expected to be amortized over a weighted-average period of approximately two
years.
NOTE
11. SHAREHOLDERS’ EQUITY
Preferred
Stock Purchase Rights
On June
5, 2008, the Board of Directors of the Company approved a shareholder Rights
Agreement, subject to finalization of price, which was approved by the Board on
July 23, 2008 at $59.09 per one one-hundredth of a Preferred
Share. The Rights replaced preferred share purchase rights which were
attached to common shares (the “Old Rights”), that expired on July 27,
2008. The Old Rights were issued pursuant to a Rights Agreement,
dated as of February 17, 1998, as amended, between the Company and the Rights
Agent. Subsequent to July 27, 2008, the Old Rights were no longer in
force or effect.
On July
23, 2008, the Board of Directors of the Company authorized and declared a
dividend distribution of one right (a “Right”) for each outstanding share of the
Company’s common stock, par value $0.10 per share to stockholders of record at
the close of business on such date. Each Right entitles the registered holder to
purchase from the Company one one-hundredth of a share of Series B Preferred
Stock, par value $.10 per share, of the Company (the “Preferred Stock”), at a
price of $59.09 per one one-hundredth of a Preferred Share, subject to
adjustment. The definitive terms of the Rights are set forth in a
Rights Agreement, dated as of July 23, 2008, between the Company and American
Stock Transfer & Trust Company, LLC, as Rights Agent.
The
Rights become exercisable upon the earlier of the following events: (i) 10 days
following a public announcement that a person or group of affiliated or
associated persons have acquired beneficial ownership of 15% or more of the
outstanding Common Stock or (ii) 10 business days (or such later date as may be
determined by action of the Board of Directors of the Company prior to such time
as any person or group of affiliated or associated persons becomes an acquiring
person) following
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
the
commencement of, or announcement of an intention to make, a tender offer or
exchange offer the consummation of which would result in the beneficial
ownership by a person or group of 15% or more of the outstanding Common Stock
(the earlier of such dates being the distribution date). The Rights will
expire on July 27, 2018.
As
required by SFAS 123(R), the unearned compensation balance of $1,850 as of
December 31, 2006, which was accounted for under APB 25, was reclassified into
capital in excess of par value upon the Company’s adoption of SFAS
123(R).
Accumulated Other Comprehensive
Loss
Accumulated
other comprehensive loss as of December 31, 2008 of $22,268 consisted of
aggregate additional pension liability adjustments of $21,749, net of a $14,193
tax benefit and an unrealized holding loss on a derivative instrument of $519,
net of a tax benefit of $341. Accumulated other comprehensive loss as
of December 31, 2007 consisted of an aggregate additional pension liability
adjustments of $6,853, net of a $4,407 tax benefit, partially offset by
unrealized holding gain on investments of $108, net of a $71 tax
benefit.
The
related tax effects allocated to each component of other comprehensive income
(loss) was as follows:
|
|
|
Before
|
|
|
Tax
|
|
|
Net
of
|
|
|
|
|
Tax
|
|
|
(Expense)
|
|
|
Tax
|
|
|
|
|
Amount
|
|
|
Benefit
|
|
|
Amount
|
|
|
Year
ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
Minimum
pension liability adjustment
|
|
$
|
2,588
|
|
|
$
|
(1,026
|
)
|
|
$
|
1,562
|
|
|
Unrealized
gains on investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
holding gains arising during the period
|
|
|
211
|
|
|
|
(89
|
)
|
|
|
122
|
|
|
Less:
reclassification adjustment for gains realized in net
income
|
|
|
(211
|
)
|
|
|
89
|
|
|
|
(122
|
)
|
|
Net
unrealized gains
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Other
comprehensive income
|
|
$
|
2,588
|
|
|
$
|
(1,026
|
)
|
|
$
|
1,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum
pension liability adjustment
|
|
$
|
3,899
|
|
|
$
|
(1,546
|
)
|
|
$
|
2,353
|
|
|
Unrealized
holding gains arising during the period
|
|
|
179
|
|
|
|
(71
|
)
|
|
|
108
|
|
|
Other
comprehensive income
|
|
$
|
4,078
|
|
|
$
|
(1,617
|
)
|
|
$
|
2,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
liability adjustment
|
|
$
|
(25,268
|
)
|
|
$
|
10,018
|
|
|
$
|
(15,250
|
)
|
|
Less:
reclassification adjustment for costs realized in net loss
|
|
|
586
|
|
|
|
(232
|
)
|
|
|
354
|
|
|
Net
pension liability adjustment
|
|
|
(24,682
|
)
|
|
|
9,786
|
|
|
|
(14,896
|
)
|
|
Unrealized
holding loss on derivative instruments arising during the
period
|
|
|
(860
|
)
|
|
|
341
|
|
|
|
(519
|
)
|
|
Reclassification
adjustment for gains on investments realized in net loss
|
|
|
(179
|
)
|
|
|
71
|
|
|
|
(108
|
)
|
|
Other
comprehensive loss
|
|
$
|
(25,721
|
)
|
|
$
|
10,198
|
|
|
$
|
(15,523
|
)
|
Due to
their antidilutive effect, approximately 279,200, 80,500 and 77,000 options to
purchase common stock were excluded from the calculation of diluted earnings per
share for the years ended December 31, 2008, 2007 and 2006, respectively.
However, these options could become dilutive in future periods. The following
table sets forth the reconciliation of the weighted average shares
outstanding:
|
|
|
Year
Ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Weighted
average shares outstanding - Basic
|
|
|
9,493,495
|
|
|
|
9,326,907
|
|
|
|
9,099,897
|
|
|
Dilutive
effect of stock options and restricted stock grants
|
|
|
-
|
|
|
|
322,990
|
|
|
|
326,638
|
|
|
Weighted
average shares outstanding - Diluted
|
|
|
9,493,495
|
|
|
|
9,649,897
|
|
|
|
9,426,535
|
|
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
NOTE
12. BUSINESS SEGMENT, GEOGRAPHIC, MAJOR CUSTOMER AND RELATED PARTY
INFORMATION
Business
Segment
The
Company has two reportable business segments: Systems and Services, and
Metrigraphics.
The
Systems and Services segment provides support to its customers in the
primary mission areas of Information Technology, Logistics and Readiness,
Systems Integration and Technical Services, Command, Control, Computers,
Communications, Intelligence, Surveillance and Reconnaissance, Homeland
Security, Health and Human Services, Intelligence/Space, Cyber Security,
and Public and Environmental Health. The segment is comprised of five
operating groups that provide similar services and solutions and are subject to
similar regulations. These services and solutions include: (i) design,
development, operation and maintenance of Business Intelligence Systems,
Business Transformation Services, Engineering Services, Acquisition Management
Services, Training and Performance Support Systems and Services; (ii)
Automated Case Management Systems; (iii) IT Infrastructure Services; (iv) Human
Capital Management Services; and (v) Cyber Security Services.
The
Metrigraphics segment develops and produces components for original equipment
manufacturers in the medical electronics, computer peripheral device,
telecommunications and other industries, with the focus on the custom design
and manufacture of miniature electronic parts that are designed to meet
ultra-high precision requirements through the use of electroforming, thin film
deposition and photolithography technologies.
The
Company evaluates performance and allocates resources based on operating income.
The operating income for each segment includes selling, general and
administrative expenses and amortization of intangible assets directly
attributable to the segment. All corporate operating expenses, including
depreciation, are allocated between the segments based on segment revenues.
However, depreciation related to corporate assets that is subsequently allocated
to the segment operating results is included in the table below. Sales between
segments represent less than 1% of total revenue and are accounted for at
cost.
Results
of operations information for the Company’s business segments were as
follows:
|
|
|
Year
ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Revenues
from external customers
|
|
|
|
|
|
|
|
|
|
|
Systems
and Services
|
|
$
|
236,796
|
|
|
$
|
224,676
|
|
|
$
|
252,890
|
|
|
Metrigraphics
|
|
|
6,028
|
|
|
|
4,901
|
|
|
|
6,097
|
|
|
|
|
$
|
242,824
|
|
|
$
|
229,577
|
|
|
$
|
258,987
|
|
|
Gross
margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Systems
and Services
|
|
$
|
38,994
|
|
|
$
|
37,160
|
|
|
$
|
33,914
|
|
|
Metrigraphics
|
|
|
170
|
|
|
|
(53
|
)
|
|
|
1,202
|
|
|
|
|
$
|
39,164
|
|
|
$
|
37,107
|
|
|
$
|
35,116
|
|
|
Operating
income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Systems
and Services
|
|
$
|
408
|
|
|
$
|
13,826
|
|
|
$
|
8,066
|
|
|
Metrigraphics
|
|
|
(979
|
)
|
|
|
(1,147
|
)
|
|
|
105
|
|
|
|
|
$
|
(571
|
)
|
|
$
|
12,679
|
|
|
$
|
8,171
|
|
|
Depreciation
and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Systems
and Services
|
|
$
|
4,731
|
|
|
$
|
4,755
|
|
|
$
|
5,385
|
|
|
Metrigraphics
|
|
|
187
|
|
|
|
212
|
|
|
|
365
|
|
|
Segment
depreciation and amortization
|
|
|
4,918
|
|
|
|
4,967
|
|
|
|
5,750
|
|
|
Corporate
depreciation and amortization
|
|
|
850
|
|
|
|
716
|
|
|
|
262
|
|
|
|
|
$
|
5,768
|
|
|
$
|
5,683
|
|
|
$
|
6,012
|
|
|
Capital
expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Systems
and Services
|
|
$
|
1,954
|
|
|
$
|
1,267
|
|
|
$
|
2,243
|
|
|
Metrigraphics
|
|
|
37
|
|
|
|
112
|
|
|
|
17
|
|
|
Segment
capital expenditures
|
|
|
1,991
|
|
|
|
1,379
|
|
|
|
2,260
|
|
|
Corporate
capital expenditures
|
|
|
19
|
|
|
|
409
|
|
|
|
222
|
|
|
|
|
$
|
2,010
|
|
|
$
|
1,788
|
|
|
$
|
2,482
|
|
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
Asset
information for the Company’s business segments and a reconciliation of segment
assets to the corresponding consolidated amounts is as
follows:
|
|
|
December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Segment
assets
|
|
|
|
|
|
|
|
Systems
and Services
|
|
$
|
184,032
|
|
|
$
|
136,541
|
|
|
Metrigraphics
|
|
|
1,922
|
|
|
|
2,229
|
|
|
Total
segment assets
|
|
|
185,954
|
|
|
|
138,770
|
|
|
Corporate
assets
|
|
|
22,976
|
|
|
|
11,183
|
|
|
|
|
$
|
208,930
|
|
|
$
|
149,953
|
|
Corporate
assets are primarily comprised of cash and cash equivalents, the
PeopleSoft-based enterprise business system, deferred tax assets, certain
corporate prepaid expenses and other current assets and valuation
allowances.
Geographic
Revenue
is attributed to geographic areas based on the customer’s location. The Company
does not have locations outside the U.S.; however, in rare instances, it may
have contracts with sales representatives located in foreign countries and
provide services at customer locations outside the U.S. Domestic revenues
comprised approximately 99% of revenues in each of the three years ended
December 31, 2008. The Company’s long-lived assets of $117,494 and
$80,385, at December 31, 2008 and 2007, respectively, were located in the
U.S. Long-lived assets included property and equipment, goodwill,
intangible assets and other noncurrent assets.
Major
Customers
Revenues
from Department of Defense customers accounted for approximately 65%, 78% and
80% of total revenues in 2008, 2007 and 2006, respectively. Revenues earned
from the U.S. Air Force Aeronautical Systems Center in 2007 and 2006 were
$24,565, or 11% of total revenue, and $47,870, or 18% of total revenue,
respectively. No other customers accounted for more than 10% of
revenue in each of the three years ended December 31, 2008. The
outstanding contract receivable balance with the State of Ohio as of December
31, 2007 was $7,572. No other customers accounted for more than 10%
of the outstanding contract receivable balance.
Related
Party
Through
its wholly owned subsidiary, HJ Ford, the Company has a 40% interest in
HMR
Tech
which is accounted for using the equity method. The Company,
through HJ Ford, also had a 40% ownership interest in
HMR
Tech/HJ
Ford SBA JV, LLC, (the “Joint Venture”) which was formed with
HMR
Tech. Revenues from
HMR
Tech
included in contract revenues for 2008, 2007 and 2006 were $65, $365 and $406,
respectively. The amounts due from
HMR
Tech
included in contract receivables at December 31, 2008 and 2007 were $4 and $52,
respectively. In addition,
HMR
Tech
charged the Company $1,430, $126 and $1,267 in 2008, 2007 and 2006,
respectively, relating to contract work. At December 31, 2008 and
2007, the Company had a related payable of $238 and 0,
respectively.
In
September 2007, the Company sold its 40% ownership interest in the Joint
Venture. The Joint Venture, which was formed under the SBA
Mentor-Protégé program, was accounted for using the equity method of
accounting.
Revenues
recognized by the Company as a subcontractor to the Joint Venture for 2008, 2007
and 2006 were $4,462, $20,935 and $1,837, respectively. Charges by
the Company for administrative services to the Joint Venture under the terms of
the Services Agreement for 2008, 2007 and 2006 were $125, $1,155 and $102,
respectively.
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
The table
below presents the various amounts included in the accompanying balance sheets
related to the above mentioned transactions with the Joint Venture:
|
|
|
December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Contract
receivables
|
|
$
|
785
|
|
|
$
|
4,486
|
|
|
Other
receivables, net
|
|
$
|
-
|
|
|
$
|
314
|
|
NOTE
13. COMMITMENTS AND CONTINGENCIES
The
Company conducts its operations in facilities that are under long-term operating
leases. These leases expire at various dates through 2015, with options to renew
as negotiated between the Company and its landlords. The Company does not
believe that exercise of any of its lease renewal options are reasonably assured
and, accordingly, the exercise of such options has not been assumed in the
accounting for leasehold improvements and the deferred gain on the sale of the
corporate office facility. Rent expense under these leases (inclusive of real
estate taxes and insurance) was $5,751 in 2008, $6,326 in 2007 and $6,815 in
2006.
Minimum
lease commitments, primarily for facilities under non-cancelable operating
leases and related sublease income in effect at December 31, 2008 were as
follows:
|
|
|
Lease
|
|
|
Sublease
|
|
|
|
|
Commitment
|
|
|
Income
|
|
|
Year
ending December 31:
|
|
|
|
|
|
|
|
2009
|
|
$
|
7,074
|
|
|
$
|
1,617
|
|
|
2010
|
|
|
6,237
|
|
|
|
1,481
|
|
|
2011
|
|
|
3,544
|
|
|
|
642
|
|
|
2012
|
|
|
2,654
|
|
|
|
-
|
|
|
2013
|
|
|
2,577
|
|
|
|
-
|
|
|
2014
and thereafter
|
|
|
4,850
|
|
|
|
-
|
|
|
|
|
$
|
26,936
|
|
|
$
|
3,740
|
|
As a
defense contractor, the Company is subject to many levels of audit and review
from various government agencies, including the Defense Contract Audit Agency,
various inspectors general, the Defense Criminal Investigation Service, the
Government Accountability Office, the Department of Justice and Congressional
Committees. Both related to and unrelated to its defense industry involvement,
the Company is, from time to time, involved in audits, lawsuits, claims,
administrative proceedings and investigations. The Company accrues for
liabilities associated with these activities when it becomes probable that
future expenditures will be made and such expenditures can be reasonably
estimated. Except as noted below, the Company 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. 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. Regarding the alleged actual damages,
the Company believes that it has substantive defenses. On March 31,
2008, the Company recognized an
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
estimated
liability for all claims related to this matter in the amount of $9
million. Prior to a scheduled September 3, 2008 status
conference on the amount of damages alleged by the Government, the Government
and the Company agreed to attempt to mediate their differing positions on such
alleged damages. The Company and the Government have reached an
agreement on principal settlement terms, including a settlement amount of $15
million and, accordingly, the Company increased its accrued litigation reserve
from $9 million to $15 million during the quarter ended September 30,
2008. The Company is awaiting the final approval of the agreement
from the Department of Justice.
On June
28, 2005, 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 plaintiff’s claim
was for $8 million. 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 the Company’s mandatory dispute resolution program, directing
that the parties arbitrate the claims, and striking the class action waiver
which was part of the dispute resolution program. In the arbitration, the
Company filed a Motion to Dismiss and/or for Summary Disposition. The
motion was denied and the arbitrator has requested the parties to proceed to
discovery. The Company believes it has substantive legal and factual
defenses to this matter and intends to vigorously defend against the
action. Nevertheless, the outcome remains uncertain, and an adverse
outcome could have a material adverse effect on the Company’s results of
operations, financial position or cash flows.
NOTE
14. QUARTERLY RESULTS (UNAUDITED)
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
Fiscal
|
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Year
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
56,478
|
|
|
$
|
55,293
|
|
|
$
|
63,491
|
|
|
$
|
67,562
|
|
|
$
|
242,824
|
|
|
Cost
of contract revenue and product sales
|
|
$
|
47,817
|
|
|
$
|
46,992
|
|
|
$
|
53,527
|
|
|
$
|
55,324
|
|
|
$
|
203,660
|
|
|
Gross
profit
|
|
$
|
8,661
|
|
|
$
|
8,301
|
|
|
$
|
9,964
|
|
|
$
|
12,238
|
|
|
$
|
39,164
|
|
|
Operating
income (loss)
(1)
|
|
$
|
(6,068
|
)
|
|
$
|
2,644
|
|
|
$
|
(2,283
|
)
|
|
$
|
5,136
|
|
|
$
|
(571
|
)
|
|
Net
income (loss)
|
|
$
|
(5,256
|
)
|
|
$
|
1,629
|
|
|
$
|
(232
|
)
|
|
$
|
2,604
|
|
|
$
|
(1,255
|
)
|
|
Earnings
(loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
(2)
|
|
$
|
(0.56
|
)
|
|
$
|
0.17
|
|
|
$
|
(0.02
|
)
|
|
$
|
0.27
|
|
|
$
|
(0.13
|
)
|
|
Diluted
(2)
|
|
$
|
(0.56
|
)
|
|
$
|
0.17
|
|
|
$
|
(0.02
|
)
|
|
$
|
0.27
|
|
|
$
|
(0.13
|
)
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
56,780
|
|
|
$
|
58,010
|
|
|
$
|
58,328
|
|
|
$
|
56,459
|
|
|
$
|
229,577
|
|
|
Cost
of contract revenue and product sales
|
|
$
|
48,081
|
|
|
$
|
48,660
|
|
|
$
|
49,020
|
|
|
$
|
46,709
|
|
|
$
|
192,470
|
|
|
Gross
profit
|
|
$
|
8,699
|
|
|
$
|
9,350
|
|
|
$
|
9,308
|
|
|
$
|
9,750
|
|
|
$
|
37,107
|
|
|
Operating
income
|
|
$
|
2,270
|
|
|
$
|
2,936
|
|
|
$
|
3,396
|
|
|
$
|
3,896
|
|
|
$
|
12,498
|
|
|
Net
income
|
|
$
|
1,123
|
|
|
$
|
1,514
|
|
|
$
|
1,919
|
|
|
$
|
2,546
|
|
|
$
|
7,102
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
(2)
|
|
$
|
0.12
|
|
|
$
|
0.16
|
|
|
$
|
0.21
|
|
|
$
|
0.27
|
|
|
$
|
0.76
|
|
|
Diluted
(2)
|
|
$
|
0.12
|
|
|
$
|
0.16
|
|
|
$
|
0.20
|
|
|
$
|
0.26
|
|
|
$
|
0.74
|
|
|
(1)
|
Operating
income includes a provision for litigation of $8,819 and $6,000 in the
first quarter and third quarter of 2008, respectively.
|
|
|
|
|
(2)
|
Basic
and diluted earnings per share is computed independently for each of the
quarters presented; accordingly, the sum of the quarterly earnings per
share may not equal the total computed for the
year.
|
SCHEDULE II — VALUATION AND
QUALIFYING ACCOUNTS AND RESERVES
|
|
|
|
|
|
Additions
|
|
|
|
|
|
|
|
|
|
|
Balance
at
|
|
|
Charged
to
|
|
|
Charged
to
|
|
|
Deductions
|
|
|
Balance
at
|
|
|
|
|
Beginning
|
|
|
Costs
and
|
|
|
Other
|
|
|
and
|
|
|
End
of
|
|
|
|
|
of
Period
|
|
|
Expenses
|
|
|
Accounts
|
|
|
Write-Offs
|
|
|
Period
|
|
|
Allowance
for doubtful accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
$
|
903
|
|
|
$
|
258
|
|
|
$
|
-
|
|
|
$
|
(232
|
)
|
|
$
|
929
|
|
|
2007
|
|
$
|
793
|
|
|
$
|
212
|
|
|
$
|
-
|
|
|
$
|
(102
|
)
|
|
$
|
903
|
|
|
2006
|
|
$
|
588
|
|
|
$
|
215
|
|
|
$
|
-
|
|
|
$
|
(10
|
)
|
|
$
|
793
|
|
Disclosure Controls and
Procedures
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 December 31, 2008; and, based
on this review, the Company’s CEO and CFO concluded that, as of December 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.
Management
Annual Report
on Internal Control over Financial
Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act
Rules 13a-15(f) and 15d-15(f). Our management conducted an assessment of
the effectiveness of our internal control over financial reporting. This
assessment was based upon the criteria for effective internal control over
financial reporting established in
Internal Control — Integrated
Framework
, issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
The
Company’s internal control over financial reporting involves a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. Internal control over financial
reporting includes the controls themselves, as well as monitoring of the
controls and internal auditing practices and actions to correct deficiencies
identified. Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements.
A
material weakness is a deficiency (within the meaning of Public Company
Accounting Oversight Board Auditing Standard No. 5), or combination of
deficiencies in internal control over financial reporting, such that there is a
reasonable possibility that a material misstatement of the annual or interim
financial statements will not be prevented or detected on a timely
basis.
Management
assessed the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2008. Based on this assessment, management
concluded that, as of December 31, 2008, the Company’s internal control
over financial reporting was effective.
The
Company completed its acquisition of Kadix on August 1, 2008. As permitted by
the Securities and Exchange Commission, management’s assessment did not include
the internal control of the acquired operations of Kadix, which results are
included in the Company’s audited consolidated financial statements as of
December 31, 2008 and for the period from August 1, 2008 through
December 31, 2008. The Company’s consolidated revenues for the year ended
December 31, 2008, were $242.8 million, of which Kadix represented
$25.1 million. The Company’s total assets as of December 31, 2008,
were $208.9 million, of which Kadix represented $58.5 million,
including intangible assets and goodwill recorded in connection with the
acquisition aggregating $40.9 million, net of accumulated
amortization.
Attestation
Report of Registered Public Accounting Firm
The
Company’s internal control over financial reporting as of December 31, 2008
has been audited by Grant Thornton LLP, an independent registered public
accounting firm, as stated in their report, which is included
herein.
Changes in Internal Control over
Financial Reporting
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 December 31, 2008 that has materially effected, or is
reasonably likely to materially effect, the Company’s internal control over
financial reporting.
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the
Board of Directors and
Shareholders
of Dynamics Research Corporation:
We have
audited Dynamics Research Corporation’s internal control over financial
reporting as of December 31, 2008, based on criteria established in
Internal Control—Integrated
Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Dynamics Research Corporation’s management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Management’s Annual Report on Internal
Control over Financial Reporting. Our responsibility is to express an opinion on
Dynamics Research Corporation’s internal control over financial reporting based
on our audit. Our audit of, and opinion on, the effectiveness of Dynamics
Research Corporation’s internal control over financial reporting does not
include internal control over financial reporting of Kadix Systems, LLC, a
wholly owned subsidiary, whose financial statements reflect total assets and
revenues constituting 28 and 10 percent, respectively, of the related
consolidated financial statement amounts as of and for the year ended
December 31, 2008. As indicated in Management’s Report, Kadix Systems, LLC
was acquired during 2008 and therefore, management’s assertion on the
effectiveness of Dynamics Research Corporation’s internal control over financial
reporting excluded internal control over financial reporting of Kadix Systems,
LLC.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, Dynamics Research Corporation maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2008,
based on criteria established in
Internal Control—Integrated
Framework
issued by COSO.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Dynamics
Research Corporation as of December 31, 2008 and 2007, and the related
consolidated statements of operations, changes in stockholders’ equity and
comprehensive income (loss), and cash flows for each of the three years in the
period ended December 31, 2008 and our report dated March 13, 2009
expressed an unqualified opinion.
Boston,
Massachusetts
March 13,
2009
Information
with respect to Directors of the Company required by this item is hereby
incorporated by reference to the Company’s definitive proxy statement to be
filed by the Company within 120 days after the close of its fiscal year.
Information with respect to the Executive Officers of the Company is included in
Part I, Item 4 of this Annual Report on
Form 10-K.
The
Company has adopted a code of ethics applicable to all of its directors,
officers and employees including its CEO, CFO and principle accounting
officer. A copy of the Company’s Standards of Ethics and Conduct may
be obtained free of charge through the Company’s internet website at
http://www.drc.com
by
choosing the “Corporate Governance” link under Corporate Information and
then choosing the “Conduct” link.
The
information required by this Item 11 is hereby incorporated by reference to
the Company’s definitive proxy statement to be filed by the Company within
120 days after the close of its fiscal year.
The
information required by this Item 12 is hereby incorporated by reference to
the Company’s definitive proxy statement to be filed by the Company within
120 days after the close of its fiscal year.
The
information required by this Item 13 is hereby incorporated by reference to
the Company’s definitive proxy statement to be filed by the Company within
120 days after the close of its fiscal year.
The
information required by this Item 14 is hereby incorporated by reference to
the Company’s definitive proxy statement to be filed by the Company within
120 days after the close of its fiscal year.
|
(a)
|
Documents
filed as part of the report:
|
The
consolidated financial statements of the Company are listed in the index under
Part II, Item 8 of this Annual Report on
Form 10-K.
|
(2)
|
Financial
Statement Schedules
|
The
Schedule II Valuation and Qualifying Accounts and Reserves of the Company
are listed in the index under Part II, Item 8 of this Annual Report on
Form 10-K. Other financial statements schedules are omitted because of the
absence of conditions under which they are required or because the required
information is given in the supplementary consolidated financial statements or
notes thereto.
The
exhibits that are filed with this Annual Report on Form 10-K, or that are
incorporated herein by reference, are set forth in the Exhibit Index
hereto.
Pursuant
to the requirements of Section 13 or 15(d) 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
|
|
|
|
|
|
|
|
/s/
James P. Regan
|
|
|
|
James
P. Regan
|
|
|
|
President,
Chairman and Chief Executive Officer
|
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
|
/s/
James P. Regan
|
|
President,
Chairman and Chief Executive Officer (Principal Executive
Officer)
|
|
March 16,
2009
|
|
James
P. Regan
|
|
|
|
|
|
|
|
|
|
/s/
David Keleher
|
|
Senior
Vice President and Chief Financial Officer (Principal Financial
Officer)
|
|
March 16,
2009
|
|
David
Keleher
|
|
|
|
|
|
|
|
|
|
/s/
Shaun McCarthy
|
|
Vice
President, Corporate Controller and Chief Accounting Officer (Principal
Accounting Officer)
|
|
March 16,
2009
|
|
Shaun
McCarthy
|
|
|
|
|
|
|
|
|
|
/s/
John S. Anderegg, Jr.
|
|
Director
|
|
March 16,
2009
|
|
John
S. Anderegg, Jr.
|
|
|
|
|
|
|
|
|
|
/s/
Francis J. Aguilar
|
|
Director
|
|
March 16,
2009
|
|
Francis
J. Aguilar
|
|
|
|
|
|
|
|
|
|
/s/
Gen. George T. Babbitt, Jr.
|
|
Director
|
|
March 16,
2009
|
|
Gen.
George T. Babbitt, Jr.
|
|
|
|
|
|
|
|
|
|
/s/
Kenneth F. Kames
|
|
Director
|
|
March 16,
2009
|
|
Kenneth
F. Kames
|
|
|
|
|
|
|
|
|
|
/s/
Lt. Gen. Charles P. McCausland
|
|
Director
|
|
March 16,
2009
|
|
Lt.
Gen. Charles P. McCausland
|
|
|
|
|
|
|
|
|
|
/s/
Nickolas Stavropoulos
|
|
Director
|
|
March 16,
2009
|
|
Nickolas
Stavropoulos
|
|
|
|
|
|
|
|
Filed
|
|
Incorporated
by Reference**
|
|
Exhibit
No.
|
|
Description
|
|
Herewith
|
|
Form
|
|
Date
|
|
2.1
|
|
Equity
Purchase Agreement among Dynamics Research Corporation and Impact
Innovations Group LLC and J3 Technology Services Corp., dated
August 2, 2004.
|
|
|
|
8-K
|
|
September
8, 2004
|
|
|
|
|
|
|
|
|
|
|
|
2.2
|
|
Membership
Interest Purchase Agreement among Dynamics Research Corporation
and Kadix Systems, LLC and Daisy D. Layman, The Sole Member of Kadix
Systems, LLC, dated July 30, 2008.
|
|
|
|
8-K
|
|
August
5, 2008
|
|
|
|
|
|
|
|
|
|
|
|
3.1
|
|
Restated
Articles of Organization of the Company, dated May 22,
1987.
|
|
|
|
10-Q
|
|
June
17, 1987
|
|
|
|
|
|
|
|
|
|
|
|
3.2
|
|
By-Laws
of the Company, dated May 22, 1987.
|
|
|
|
10-Q
|
|
June
17, 1987
|
|
|
|
|
|
|
|
|
|
|
|
3.3
|
|
Certificate
of Vote of Directors Establishing Series B Preferred Stock, dated
February 17, 1998.
|
|
|
|
8-A12G
|
|
June
25, 1998
|
|
|
|
|
|
|
|
|
|
|
|
3.4
|
|
Amendment,
dated September 10, 1998, to the Certificate of Vote of Directors
Establishing Series B Preferred Stock.
|
|
|
|
8-A12G/A
|
|
September
30, 1998
|
|
|
|
|
|
|
|
|
|
|
|
3.5
|
|
Certificate
of Vote of Directors Establishing Series A Preferred Stock, dated
July 14, 1988.
|
|
|
|
10-K
|
|
December
31, 2002
|
|
|
|
|
|
|
|
|
|
|
|
3.6
|
|
Amendment,
dated April 28, 1998, to the restated Articles of Organization of the
Company.
|
|
|
|
10-K
|
|
December
31, 2002
|
|
|
|
|
|
|
|
|
|
|
|
3.7
|
|
Amendment,
dated April 25, 2000, to the restated Articles of Organization of the
Company.
|
|
|
|
10-K
|
|
December
31, 2002
|
|
|
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|
|
|
|
|
|
|
|
3.8
|
|
Certificate
of Designation with respect to the Series B Preferred Stock, par value
$.10 per share, of the Company (attached as Exhibit A to the Rights
Agreement).
|
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|
|
8-K
|
|
July
25, 2008
|
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|
|
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|
|
4.1
|
|
Specimen
certificate for shares of the Company’s common stock.
|
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|
S-8
|
|
April
27, 2001
|
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|
|
4.2
|
|
Rights
Agreement dated as of July 23, 2008 ("Rights Agreement") between the
Company and American Stock Transfer & Trust Company, as Rights
Agent.
|
|
|
|
8-K
|
|
July
25, 2008
|
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|
|
|
|
|
10.1
|
|
Form
of indemnification agreement for directors of the Company.
|
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|
10-K
|
|
December
31, 1991
|
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|
10.2*
|
|
Severance
Agreement between John S. Anderegg, Jr. and the
Company.
|
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|
10-K
|
|
December
31, 1991
|
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|
|
10.3*
|
|
Deferred
Compensation Plan for Non-Employee Directors of the
Company.
|
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|
|
10-K
|
|
December
31, 1991
|
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|
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|
|
10.4*
|
|
Form
of Supplemental Retirement Pension Agreement by and between the Company
and Albert Rand.
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10-Q
|
|
March
31, 1997
|
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|
10.5*
|
|
Amended
1995 Stock Option Plan for Non-Employee Directors.
|
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|
10-Q
|
|
March
31, 1997
|
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|
|
Filed
|
|
Incorporated
by Reference**
|
|
Exhibit
No.
|
|
Description
|
|
Herewith
|
|
Form
|
|
Date
|
|
10.6*
|
|
Amended
1993 Equity Incentive Plan.
|
|
|
|
10-K
|
|
December
31, 1998
|
|
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|
|
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|
|
|
|
|
|
10.7*
|
|
2000
Incentive Plan.
|
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|
DEFS14A
|
|
December
6, 1999
|
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10.8*
|
|
Employment
Agreement between the Company and James P. Regan.
|
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|
10-K
|
|
December
31, 1999
|
|
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|
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10.9*
|
|
Change
of Control Agreement between the Company and James P.
Regan.
|
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|
10-K
|
|
December
31, 1999
|
|
|
|
|
|
|
|
|
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|
|
10.10*
|
|
Non-qualified
Stock Option Agreement between the Company and James P.
Regan.
|
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|
S-8
|
|
October
12, 2000
|
|
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|
|
|
|
|
|
|
|
|
10.11*
|
|
2000
Employee Stock Purchase Plan.
|
|
|
|
S-8
|
|
April
27, 2001
|
|
|
|
|
|
|
|
|
|
|
|
10.12*
|
|
Special
Severance Plan.
|
|
|
|
10-K
|
|
December
31, 2001
|
|
|
|
|
|
|
|
|
|
|
|
10.13*
|
|
Senior
Management Deferred Compensation Plan.
|
|
|
|
10-Q
|
|
March
31, 2002
|
|
|
|
|
|
|
|
|
|
|
|
10.14*
|
|
Dynamics
Research Corporation Special Severance Plan, as amended on May 14,
2003.
|
|
|
|
10-K
|
|
December
31, 2003
|
|
|
|
|
|
|
|
|
|
|
|
10.15*
|
|
2003
Incentive Plan.
|
|
|
|
10-K
|
|
December
31, 2003
|
|
|
|
|
|
|
|
|
|
|
|
10.16*
|
|
Form
of grant of stock options under the 2003 Incentive Plan.
|
|
|
|
10-Q
|
|
September
30, 2004
|
|
|
|
|
|
|
|
|
|
|
|
10.17*
|
|
Form
of grant of restricted stock under the 2003 Incentive
Plan.
|
|
|
|
10-Q
|
|
September
30, 2004
|
|
|
|
|
|
|
|
|
|
|
|
10.18*
|
|
Form
of grant of stock options under the 2000 Incentive Plan.
|
|
|
|
10-Q
|
|
September
30, 2004
|
|
|
|
|
|
|
|
|
|
|
|
10.19*
|
|
Deferred
Stock Compensation Plan for Non-Employee Directors, as amended for
deferrals on or after January 1, 2005.
|
|
|
|
10-K
|
|
December
31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
10.20*
|
|
Amendment
to Deferred Stock Compensation Plan for Non-Employee
Directors.
|
|
|
|
10-K
|
|
December
31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
10.21*
|
|
Beneficiary
Designation Form for the Deferred Compensation Plan for Non-Employee
Directors.
|
|
|
|
10-K
|
|
December
31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
10.22*
|
|
Forms
of grant of restricted stock under the 2000 Incentive
Plan.
|
|
|
|
10-K
|
|
December
31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
10.23
|
|
Purchase
and Sale Agreement, dated November 18, 2005, by and between Dynamics
Research Corporation and Direct Invest Property Acquisition,
LLC.
|
|
|
|
8-K
|
|
January
4, 2006
|
|
|
|
|
|
|
|
|
|
|
|
10.24
|
|
Amendment
to Purchase and Sale Agreement, dated December 28, 2005, by and
between Dynamics Research Corporation and Direct Invest Property
Acquisition, LLC.
|
|
|
|
8-K
|
|
January
4, 2006
|
|
|
|
|
|
|
|
|
|
|
|
10.25
|
|
Lease,
dated December 28, 2005, by and between Dynamics Research Corporation
and Direct Invest-60 Frontage, LLC.
|
|
|
|
8-K
|
|
January
4, 2006
|
|
|
|
|
|
Filed
|
|
Incorporated
by Reference**
|
|
Exhibit
No.
|
|
Description
|
|
Herewith
|
|
Form
|
|
Date
|
|
|
|
|
|
|
|
|
|
|
|
10.26
|
|
Consent,
Waiver and Amendment Agreement, dated December 28, 2005, by and among
Dynamics Research Corporation, Brown Brothers Harriman & Co.,
KeyBank National Association, TD Banknorth, N.A., and Bank of America,
N.A.
|
|
|
|
8-K
|
|
January
4, 2006
|
|
|
|
|
|
|
|
|
|
|
|
10.27
|
|
Third
Amended and Restated Loan Agreement, as of September 29, 2006, by and
among Dynamics Research Corporation, DRC International Corporation and
H.J. Ford Associates, Inc. and Brown Brothers Harriman & Co., TD
Banknorth, N.A., Bank of America, N.A.
|
|
|
|
8-K
|
|
October
4, 2006
|
|
|
|
|
|
|
|
|
|
|
|
10.28
|
|
Master
Unlimited Guaranty, dated as of September 29, 2006, by each of Dynamics
Research Corporation, DRC International Corporation, and H.J. Ford
Associates Inc., in favor of Brown Brothers Harriman & Co., for itself
and as Administrative Agent for each of the Lenders which are and which
may become parties to the Loan Agreement.
|
|
|
|
8-K
|
|
October
4, 2006
|
|
|
|
|
|
|
|
|
|
|
|
10.29
|
|
First
Amendment to Third Amended and Restated Loan Agreement by and among
Dynamics Research Corporation, DRC International Corporation, and H.J.
Ford Associates, Inc. and Brown Brothers Harriman & Co., TD Banknorth,
N.A. and Bank of America, N.A.
|
|
|
|
8-K
|
|
May
14, 2008
|
|
|
|
|
|
|
|
|
|
|
|
10.30
|
|
Fourth
Amended and Restated Loan Agreement by and among Dynamics Research
Corporation, DRC International Corporation, H.J. Ford Associates,
Inc., Kadix Systems, LLC as the Borrowers, and The Lenders Party
hereto and Brown Brothers Harriman & Co., as Administrative Agent and
TD Bank, N.A. as Documentation Agent and Bank of America, N.A. as
Syndication Agent, as of August 1, 2008.
|
|
|
|
8-K
|
|
August
5, 2008
|
|
|
|
|
|
|
|
|
|
|
|
10.31
|
|
Pledge
Agreement by and between Dynamics Research Corporation and Brown Brothers
Harriman & Co., for itself and as Administrative Agent for each of the
Lenders which are and which may become parties to the Loan Agreement, as
of August 1, 2008.
|
|
|
|
8-K
|
|
August
5, 2008
|
|
|
|
|
|
|
|
|
|
|
|
10.32
|
|
First
Amendment to Fourth Amended and Restated Loan Agreement by and among
Dynamics Research Corporation, DRC International Corporation, H.J. Ford
Associates, Inc., Kadix Systems, LLC as the Borrowers, and The
Lenders Party hereto and Brown Brothers Harriman & Co., as
Administrative Agent and TD Bank, N.A. as Documentation Agent and Bank of
America, N.A. as Syndication Agent, as of December 31,
2008.
|
|
X
|
|
|
|
|
|
|
|
|
|
Filed
|
|
Incorporated
by Reference**
|
|
Exhibit
No.
|
|
Description
|
|
Herewith
|
|
Form
|
|
Date
|
|
21.1
|
|
Subsidiaries
of the registrant.
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23.1
|
|
Consent
of Independent Registered Public Accounting Firm (Grant Thornton
LLP).
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
|
|
X
|
|
|
|
|
|
*
|
|
Management
contract or compensatory plan or arrangement.
|
|
|
|
|
|
**
|
|
In
accordance with Rule 12b-32 under the Securities Exchange Act of
1934, as amended, reference is made to the documents previously filed with
the Securities and Exchange Commission, which documents are hereby
incorporated by reference. The dates listed for Forms 8-A12G,
Forms 8-K, Forms DEFS14A and Forms S-8 are dates the respective forms were
filed on, and dates listed for Forms 10-Q and Forms 10-K are for the
quarterly or annual period ended
dates.
|
82