form10-k.htm
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, 2007
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OR
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o
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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 000-02479
DYNAMICS
RESEARCH
CORPORATION
(Exact
Name of Registrant as Specified in Its Charter)
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.
EmployerIdentification 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: None
Securities registered pursuant to
Section 12(g) of the Act:
Common
Stock, $0.10 par value
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 þ
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. þ
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 þ
The
aggregate market value of the registrant’s common stock, $0.10 par value,
held by nonaffiliates of the registrant as of June 29, 2007, was
$93,239,179 based on the reported last sale price per share of $13.03 on that
date on the Nasdaq Stock Market. As of February 29, 2008, 9,516,977 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,
2007
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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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15
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1B.
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20
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2.
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20
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3.
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20
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4.
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20
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PART
II
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ITEM
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5.
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22
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6.
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24
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7.
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25
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7A.
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33
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8.
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34
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9.
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66
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9A.
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66
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9B.
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67
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PART
III
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ITEM
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10.
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68
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11.
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68
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12.
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68
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13.
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68
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14.
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68
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PART
IV
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ITEM
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15.
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69
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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, headquartered in Andover, Massachusetts, is a leading,
innovative provider of solutions and services to federal, state and local
governments. We have approximately 1,400 employees located throughout the
United States (“U.S”). DRC operates as a parent corporation and through its
wholly owned subsidiaries, H.J. Ford Associates, Inc. (“HJ Ford”) 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
2007.
We are a
provider of mission-critical technology management 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 customer’s evolving mission needs.
We
provide support to our customers in the primary mission areas of Information
Technology (“IT”), Logistics and Readiness, Systems Integration and Technical
Services, C4ISR (Command, Control, Computers, Communications, Intelligence,
Surveillance and Reconnaissance), Homeland Security, Health and Human Services,
and Intelligence/Space. Military customers include all Department of Defense
(“DoD”) branches, as well as, department level branches. Our federal customers
include the Federal Deposit Insurance Corporation (“FDIC”), Department of
Treasury, and Department of Homeland Security (U.S. Coast Guard, Citizenship and
Immigration Services and Customs and Border Protection). We also provide
solutions to state health and human service organizations.
We offer
seven 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.
Our work
with the Naval Air System Command (“NAVAIR”) involves providing assistance in
implementing AIRSpeed,
its approved Naval aviation maintenance/logistics integration and modernization
system to share best business practices throughout the Naval aviation
enterprise. AIRSpeed 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 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 their 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
Capability
Maturity Model Integration (“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 industry’s most
qualified process engineers with experience in the areas of CMM, CMMI and the IT
Infrastructure Library (“ITIL®”).
Through
the U.S. Navy’s MANTECH and Lean-Pathways Programs, we have been assisting
suppliers of Navy weapons platforms with transformational initiatives and
training in the application of lean manufacturing techniques in meeting quality,
lead time, inventory and delivery goals.
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. Descriptions of sample engagements
follow.
We
designed and built a network for the State of Colorado's Department of Human
Services (“DHS”) 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 level two and above help desk services,
remote patch and service pack upgrades, maintain 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.
The
U.S. National Archives and Records Administration (“NARA”) maintains more
than 2.5 million cubic feet of paper documents and an extensive library of film,
video tape, audio tape, and museum items. We provide IT project
management and technical expertise to the NARA, supporting the agency's
headquarters in Washington, DC, as well as remote sites in 17 states. We
administer IT networks and systems, provide network security services, conduct
software development life cycle oversight, manage the NARA tape library,
complying with stringent data retention guidelines, and develop and implement
web-based applications for records management. We developed an automated system
to which data from an old, at-risk, batch-mode system could be migrated. This
DRC-designed and implemented master location register intranet solution enables
150 internal users to manage 4 million containers of archived
material. We also reorganized help desk operations, providing help
desk institute-certified staff to centralize and manage daily operation of the
NARA enterprise-wide help desk at 39 sites throughout the U.S. Our
seamless upgrade of servers, networks, and standard operating procedures has
improved archivists' ability to access needed data. For example, we designed and
instituted the process for migrating 31 sites to new servers, including
Presidential libraries and record centers.
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.
In
response to a Joint Staff requirement for an automated system to manage its
large military training exercises and operations that take place throughout the
world, we developed the Joint Training Information Management System
(“JTIMS”). JTIMS provides the
framework
for implementing task-based training and can be used directly to support
training readiness assessments. This system received the Defense
Modeling and Simulation Training Functional Area Award for the successful
reengineering of JTIMS into web-based client/server architecture to support
distributed military training management.
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 2007 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 iteratively 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.
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 their 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 2006 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.
DepotSim
is a web-based DRC business intelligence solution with a simulation model at its
core that utilizes aircraft scheduling data and depot constraints such as
facility capacities in order to project the future flow of aircraft through
depots. Aircraft scheduling data can be automatically imported from existing
depot scheduling systems or, alternatively, aircraft schedulers can utilize
DepotSim to input aircraft schedules and produce elaborate schedules and
reports. DepotSim simulates aircraft movement through the entire overhaul
process using scheduled turnaround times for each process, actual/anticipated
gains and delays, and projected facility shut downs. Aircraft movement is
displayed graphically by day with particular emphasis on bottlenecks and delays.
Additionally, Gantt charts of the schedule for each facility (hangar) can be
created and displayed instantly. This system gives management the
ability to conduct realistic what-if analyses to determine the correct courses
of action, and the ability to test the success of previous
decisions. Specific implementations of DepotSim include the Simulation
Modeling Analytical Support System (“SMASS”) for Fleet Readiness Center
Southeast (formerly the National Aviation Depot Jacksonville). SMASS has
recently been selected as a NAVAIR corporate tool applicable to all Fleet
Readiness Centers. Aircraft schedulers at these centers utilize the full
DepotSim scheduling capabilities of DepotSim to perform aircraft level
scheduling.
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 hired 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 73 counties. The requirements and effort needed to
transition from the current environment to the integrated Statewide Automated
Child Welfare Information System 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.
Acquisition
Management Solutions
We
provide Department of Defense 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.
The C-17
System Program Office 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.
The
challenges of providing logistics support for the F-22, a 28-year program, with
277 aircraft transitioning from engineering manufacturing design to production,
are considerable. The F-22 is the U.S. Air Force's most advanced deep strike
fighter. Dedicated high-quality acquisition management and logistics services
are needed for the successful production and sustainment of this
aircraft. We provide the F-22 SPO with mission-critical acquisition
management and logistics, systems engineering, and production/sustainment
support. These analyses involve quantifying requirements for
maintenance manpower, support equipment, spares, and facilities; performing
sensitivity and trade-off analyses, evaluating the impact of policy/program
changes, assessing aircraft readiness, and estimating impacts on modification
programs.
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
perform reverse engineering services for DoD customers such as the USAF, USMC,
Naval Surface Warfare Center in Crane, Indiana, and NAVAIR. 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. Our reverse engineering services include feasibility
studies, repair/production fabrication efforts, and complete and partial
reverse engineering.
We
provide advanced engineering support in radio frequency and mixed signal
modeling, simulation, circuit design, integrated circuit fabrication, and
testing. We provide support in all these areas to a Navy Integrated Circuit
Fabrication Facility (“ICFF”). Our team designs and develops models and
processes for radio frequency, analog, mixed signal, and complementary
metal-oxide semiconductor devices. We develop mathematical models of radio
frequency transmitter sensitivity and power consumption. We also have designed,
fabricated and tested split-lot experiments observing effects of variations in a
set of controllable parameters on a performance metric for the technology, such
as, reliability and radiation hardness. We operate ICFFs for radio frequency
transmitter silicon integrated circuits manufacture. This included radio
frequency transmitter analysis, design, fabrication and
testing.
Our Versa
Module Eurocard Global Positioning System (“VME-GPS”) Receiver has a
flexible design, which allows the integration of any GPS receiver that complies
with the NAVSTAR JPO performance specification for Standard Electronic
Module
Type E
(“SEM-E’) GPS receivers, Critical Item GPS Receiver Application Module-500.
These VME GPS receiver products are powerful and versatile VME modules that
provide robust GPS solutions used for navigation and for hot starting the
embedded GPS receivers of precision guided munitions.
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 11 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 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, federal market demand for vendor-furnished information
systems and services is estimated to increase at a compound annual growth rate
of 5% over the next 5 years. The President of the U.S.’s proposed budget for
fiscal 2008 reflects a 4% increase in expenditures for IT
services.
The need
for effective and efficient utilization of available funds is driving many DoD
priorities. Currently, the Department of Homeland Security is
beginning to focus on key, agency-wide systems. Congressional
attention to civilian agency requirements has increased significantly in recent
years and these agencies are now amply funded.
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 2007.
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 2007
contract revenue delineated by market sector was derived 79.7% from the
national defense and intelligence sector, 13.9% from federal civilian agencies,
6.1% from state and local governments, and 0.3% 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 2007, representing 43.7% of contract revenue, while
U.S. Navy revenue represented 18.6%, U.S. Army revenue represented
11.6% and revenue from other agencies represented 26.1% 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.
U.S. Air Force
Materiel Command, Aeronautical
Systems Center
The
Aeronautical Systems Center (“ASC”), headquartered at Wright-Patterson Air Force
Base in Dayton, Ohio, 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, B-2
Systems Group, as well as the Reconnaissance Sensors and Tanker Systems
Modernization Programs.
Our
Blanket Purchase Agreement contract with the ASC was subject to re-competition
in 2006 as the Consolidated Acquisition of Professional Services (“CAPS”)
contract. CAPS is the primary contract vehicle for delivering
multi-functional support including consulting, program management, logistics,
engineering, financial management and business transformation services to a
variety of ASC, U.S. Air Force Materiel Command, U.S. Air Force Research
Laboratory customers and to other Wright-Patterson Air Force Base
organizations. In April 2006, HMRTech/HJ
Ford SBA JV, LLC (the “Joint Venture”), a joint venture formed by HMRTech,
LLC (“HMRTech”)
(a company 40% owned by HJ Ford) and our HJ Ford subsidiary, was awarded a CAPS
contract.
In July
2007, the Joint Venture was notified that the U.S. Air Force contracting officer
for the CAPS contract had made a determination that it would no longer be
eligible to bid on further contract task orders. In the period from July through
December 2007, we were unable to effectively re-compete for and retain three
task orders with annual revenue of approximately $8 million.
In
January 2008, we purchased from THE CENTECH GROUP, Inc. a CAPS contract.
This purchase now enables us to respond to government solicitations under the
CAPS contract, pending U.S. Air Force approval of the contract
novation.
U.S.
Air Force Electronic Systems Center
The
mission of the U.S. Air Force Electronic Systems Center (“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.
Our
contract with the ESC, which provided approximately $19 million, $20 million and
$30 million of revenue in 2007, 2006 and 2005, respectively, was subject to
re-competition during 2007. The services provided under our former
contract were procured by the ESC under three new contract vehicles, the
Specialized Cost Services (“SCS”) contract, the Professional Acquisition Support
Services (“PASS”) contract and the Engineering Technical Administration Support
Services (“ETASS”) contract. We were awarded a subcontract by
Quantech Services, Inc. to support the SCS contract and the PASS
contract.
The PASS
Indefinite Delivery-Indefinite Quantity (“ID/IQ”) contract is for five years
with a ceiling value of $800 million. Quantech was one of eight small
businesses awarded the PASS contract in May 2007. We will help
provide a wide range of non
technical
acquisition support services, support of research, development and production
activities at Hanscom Air Force Base and other geographically separated units
throughout the country.
U.S.
Air Force 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 $30 million and estimated
annual revenue of approximately $13.6 million. A majority of the
current task orders are expected to be completed during 2008, however, a few
task orders extend through 2012.
U.S.
Air Force Air Mobility Command
The U.S.
Air Force Air Mobility Command (“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.
U.S.
Air Force Development and Fielding System Group
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 Development and
Fielding System Group (“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.
U.S.
Air Force Air Operation Center
In 2006,
we were awarded a subcontract for up to 10 years to integrate, field and sustain
the U.S. Air Force’s Air Operation Center (“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 AOC’s 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 AIRSpeed
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.
Navy
Warfare Development Command
In August
2007, we were awarded one of four ID/IQ prime contracts with a ceiling value of
$25 million to provide modeling and simulation support to the Navy Warfare
Development Command. We will apply the Missions and Means Framework
to support the Navy Concept of Operation, doctrine development, experimentation,
warfare analysis, the Navy Continuous Training Environment and sea trial
coordination.
U.S.
Navy Trident Missile Program
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 also develop and
maintain performance, reliability and logistics databases and management systems
for the inertial guidance instruments housed in the missile guidance
systems.
U.S.
Navy Central HIV Program
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.
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.
U.S.
Army Research Laboratory Lethality Analysis Directorate
In June
2007, we were awarded a five year blanket purchase agreement to provide
analytical support to the U.S. Army Research Laboratory Lethality Analysis
Directorate. Under the initial task order we will apply the Missions and Means
Framework to analyze selected operational scenarios and develop task-based
mission threads. The threads will be used to help determine mission impact of
live fire events on components and systems within a system of systems. Our
support team will also help model behaviors and decision-making processes for
agent-based modeling tools used to support the analysis.
U.S.
Army 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
U.S.
Joint Forces Command
In
January 2007, we were awarded a three-year ID/IQ contract by the U.S. Joint
Forces Command to continue enhancement and support work on the Joint Event
Scheduling System (“JESS”). The new contract is for a base year plus
two option years with a ceiling of $8.3 million. The contract enables
us to continue providing software enhancements to the web-based JESS
application, life cycle maintenance, help desk support, documentation and
training. The JESS application was developed to support the Command’s mission as
the primary joint force provider for all conventional forces. JESS provides
automated event management, force management, scheduling and deconfliction of
joint events such as operations, exercises, experiments and service redline
activities.
U.S.
Transportation Command
In June
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 Program
In 2006,
the Joint Strike Fighter Program (“JSF”) 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 are assisting 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
We were
recently 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, provides a vehicle for obtaining services in support of policy
development, decision-making, management and administration, program and/or
project management and administration. We anticipate in 2008 that our customer
will begin to issue requests for proposals on task orders under this multiple
award contract.
Department of Homeland Security and
Federal Civilian
Agencies
The
U.S. Government Department of Homeland Security and other federal civilian
agencies present an important growth market for us. Growth in spending in this
sector is being driven by the threat of domestic terrorism, as well as the need
for modernization.
Civilian
agencies must also prepare for potential changes in their workforces. According
to industry analysts, approximately half of all federal employees engaged in
program management are estimated to be eligible for retirement over the next
four years. With our core capabilities in the design, development, acquisition,
deployment and support of high technology systems, we believe we are well
positioned to attract new customers in this sector. Our major customer
engagements in this sector are described below.
Federal
Deposit Insurance Corporation
In 2006,
we were awarded a seven year contract to provide Business Analysis and
Management Support Services (“BAMSS”). The contract, initially valued
at $29 million, 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 those system development projects to create a more
efficient and effective deployment program.
Department
of Homeland Security
In 2006,
we were awarded an ID/IQ contract by the Department of Homeland Security (“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:
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enterprise
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security;
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training;
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enterprise
resource management;
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business
process reengineering;
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IT
transformation and strategy;
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organizational
change leadership, and
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enterprise
and program management office support (e.g. business case development and
performance management).
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Department
of Homeland Security, Chief Information Officer
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 Office of the Chief Information
Officer 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 OMB-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.
In August
2007, we were awarded a General Services Administration (“GSA”) Alliant
Government-Wide Acquisition Contract (“GWAC”). Under the terms
of the contract, we will offer a broad range of IT services and business
solutions to the Department of Defense, civilian agencies, and the intelligence
community. We were one of 29 companies awarded an ID/IQ contract with
a 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 has 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.
National
Science Foundation
The NSF
has been a customer of ours since 1996. We provide web design and development
services that visually convey information about the activities, programs,
research results and policies of the NSF. We directly support NSF’s Office of
Legislative and Public Affairs with image and multimedia permission graphic
design support, artistic and technical consulting, image library management and
web development.
National
Archives and Records Administration
Since
2000, we have provided project management and technical expertise to the NARA.
Initially as a prime contractor and currently as a primary subcontractor on a
larger, fully integrated IT contract, we have developed and implemented
web-based applications, administered IT networks and systems, provided network
security services and conducted all of the software development life cycle
activities. Our work includes support at headquarters and at NARA Presidential
Libraries and Record Centers throughout the country.
U.S.
Customs Service National Aviation Center
The U.S.
Customs Service National Aviation Center in Oklahoma City, Oklahoma trains
pilots and other flight personnel for aerial border surveillance. We create
electronic training materials for use in classrooms, on standalone computers,
over the agency’s local area network, and via a secure web site for remote
learning.
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 May
2004, we were awarded a $30 million contract by the State of Ohio to
develop and implement a web-based Statewide Automated Child Welfare Information
System. With change orders since the initial award, the period of performance
for the contract has been extended from three to four and one-half years and the
value of the contract has grown to over $46 million. The system is
currently in production and state-wide roll-out.
In
February 2008, the State of Tennessee announced that we had been selected to
develop and implement a fully automated web-based statewide child welfare system
to manage child welfare cases from intake to closure. Valued at $25.5
million, the project is expected to begin in the second quarter of 2008 with
deployment scheduled to occur in early 2010.
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 DHS to
continue providing infrastructure support and management of the statewide DHS
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 DHS 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 thousand 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, blanket purchase
agreements, agency sponsored multiple award schedules, ID/IQ task order
contracts, GSA contracts and other GWAC vehicles are the predominant forms
of contracting 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.
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, such curtailment could have a material adverse impact on our revenue
and earnings.
Our
funded backlog was $116.5 million at December 31, 2007, $92.9 million at
December 31, 2006 and $144.6 million at December 31, 2005. We
expect that substantially all of our backlog at December 31, 2007 will
generate revenue during the year ending December 31, 2008. 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
GAO, 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, 2007, we had approximately 1,400 employees. Approximately 76%
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 DoD 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
2007 and 2006, approximately 92% and 91%, 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 78% and 80% of our total revenue in
2007 and 2006, 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 war in Iraq
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 56% and 60% of total revenue in 2007 and 2006,
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 21% in 2007 from approximately 19% in 2006. 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:
|
•
|
adequately
estimate the resources required to complete a project;
|
|
•
|
properly
determine the scope of an engagement; or
|
|
•
|
complete
our contractual obligation in a manner consistent with the project
plan.
|
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. We
are nearing completion of a large multi-year fixed price engagement with the
State of Ohio. We have been selected as the awardee for a multi-year
fixed price engagement with the State of Tennessee, which we anticipate
beginning in 2008.
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, so as 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 GAO,
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,
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
Currently
Are
Involved in Three
Litigation Matters Which, If Not Resolved in Our Favor, Could Harm Our
Business.
We are
currently involved in three 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 12 of our “Notes to Consolidated Financial Statements” in
Part II, Item 8 of this Form 10-K and are:
|
•
|
a
civil complaint filed by the U.S. Attorney in the U.S. District Court for
the District of Massachusetts on October 9, 2003. The
U.S. Attorney is asserting claims against the Company, which are not
additive, based on the False Claims Act, the Anti-Kickback Act or breach
of contract, for which the government estimates damages at approximately
$24 million, $20 million and $10 million, respectively. The
U.S. Attorney is also seeking recovery on certain common law claims,
costs, equitable claims, and interest on breach of contract
damages;
|
|
•
|
a
grand jury investigation by the Antitrust Division of the Department of
Justice which began on October 15, 2002; and
|
|
•
|
a
suit characterized as a class action employee suit filed in the U.S.
District Court for the District of Massachusetts on June 28,
2005.
|
If Our
Internal Controls over Financial Reporting Do 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 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, 2007, 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.
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 2004,
we acquired Impact Innovations Group LLC (“Impact Innovations”), and in 2002, we
acquired H.J. Ford Associates, Inc. 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 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 2007 fiscal year, (2) remain
unresolved and (3) we believe are material.
As of
December 31, 2007 we leased all of the facilities used in our
operations totaling approximately 414,000 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, is 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 GAO, 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 12 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, 2007, 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
|
67
|
|
President,
Chairman and Chief Executive Officer
|
|
Richard
A. Covel
|
61
|
|
Vice
President, General Counsel and Secretary
|
|
David
Keleher
|
58
|
|
Senior
Vice President and Chief Financial Officer
|
|
Steven
P. Wentzell
|
61
|
|
Senior
Vice President and General Manager, Human Resources
|
|
Lawrence
H. O’Brien, Jr.
|
56
|
|
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 2006, Mr. O’Brien became Senior Vice President
and General Manager, Business Solutions and Business Development. From 2004 to
2006, 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, 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 |
|
|
|
|
|
|
|
|
|
|
Fiscal
year ended December 31, 2006
|
|
|
|
|
|
|
|
|
First
quarter
|
|
$ |
15.64 |
|
|
$ |
12.65 |
|
Second
quarter
|
|
$ |
15.65 |
|
|
$ |
13.22 |
|
Third
quarter
|
|
$ |
14.00 |
|
|
$ |
9.10 |
|
Fourth
quarter
|
|
$ |
10.17 |
|
|
$ |
9.13 |
|
As of
February 29, 2008, there were 621 shareholders of record of our common
stock.
We did
not declare any cash dividends in the two years ended 2007 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
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
Purchased(1)
|
|
|
Share
|
|
|
Programs
|
|
|
(in
millions)
|
|
October
1, 2007 to October 31, 2007
|
|
|
643 |
|
|
$ |
11.64 |
|
|
|
- |
|
|
$ |
- |
|
November
1, 2007 to November 30, 2007
|
|
|
159 |
|
|
|
11.91 |
|
|
|
- |
|
|
|
- |
|
December
1, 2007 to December 31, 2007
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total
|
|
|
802 |
|
|
$ |
11.69 |
|
|
|
- |
|
|
$ |
- |
|
(1)
|
During
the three months ended December 31, 2007, we repurchased 802 shares that
were not part of a publicly announced share repurchase program,
representing shares repurchased to cover payroll withholding taxes in
connection with the vesting of restricted stock
awards.
|
The
following graph compares the cumulative total stockholder return on our common
stock from December 31, 2002 to December 31, 2007 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, 2002 in our common stock, the NASDAQ Composite U.S. Index and our
industry peers, and assumes any dividends are reinvested.
|
|
December
31,
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
Dynamics
Research Corporation
|
|
$ |
100.00 |
|
|
$ |
115.10 |
|
|
$ |
127.30 |
|
|
$ |
110.30 |
|
|
$ |
69.60 |
|
|
$ |
77.20 |
|
NASDAQ
Composite U.S. Index
|
|
$ |
100.00 |
|
|
$ |
149.50 |
|
|
$ |
162.70 |
|
|
$ |
166.20 |
|
|
$ |
182.60 |
|
|
$ |
198.00 |
|
Peer
Group
|
|
$ |
100.00 |
|
|
$ |
139.30 |
|
|
$ |
184.30 |
|
|
$ |
170.00 |
|
|
$ |
170.10 |
|
|
$ |
186.20 |
|
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., MTC Technologies, Inc., 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,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004(2)
|
|
|
2003
|
|
(in
thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
(Restated)(1)
|
|
Revenue
|
|
$ |
229,577 |
|
|
$ |
258,987 |
|
|
$ |
300,440 |
|
|
$ |
275,706 |
|
|
$ |
244,808 |
|
Gross
profit
|
|
$ |
37,107 |
|
|
$ |
35,116 |
|
|
$ |
49,662 |
|
|
$ |
42,983 |
|
|
$ |
40,061 |
|
Operating
income
|
|
$ |
12,679 |
|
|
$ |
8,171 |
|
|
$ |
21,305 |
|
|
$ |
17,507 |
|
|
$ |
15,389 |
|
Income
from continuing operations
|
|
$ |
7,102 |
|
|
$ |
3,988 |
|
|
$ |
11,433 |
|
|
$ |
9,373 |
|
|
$ |
9,204 |
|
Cumulative
benefit of accounting change
|
|
|
- |
|
|
|
84 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Loss
from discontinued operations
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,635 |
) |
Loss
on disposal of discontinued operations
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(348 |
) |
Net
income
|
|
$ |
7,102 |
|
|
$ |
4,072 |
|
|
$ |
11,433 |
|
|
$ |
9,373 |
|
|
$ |
7,221 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share — Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations before cumulative effect of accounting
change
|
|
$ |
0.76 |
|
|
$ |
0.44 |
|
|
$ |
1.30 |
|
|
$ |
1.10 |
|
|
$ |
1.12 |
|
Cumulative
benefit of accounting change
|
|
|
- |
|
|
|
0.01 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Loss
from discontinued operations
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(0.20 |
) |
Loss
on disposal of discontinued operations
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(0.04 |
) |
Net
earnings per share — Basic
|
|
$ |
0.76 |
|
|
$ |
0.45 |
|
|
$ |
1.30 |
|
|
$ |
1.10 |
|
|
$ |
0.88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share — Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations before cumulative effect of accounting
change
|
|
$ |
0.74 |
|
|
$ |
0.42 |
|
|
$ |
1.24 |
|
|
$ |
1.03 |
|
|
$ |
1.04 |
|
Cumulative
benefit of accounting change
|
|
|
- |
|
|
|
0.01 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Loss
from discontinued operations
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(0.18 |
) |
Loss
on disposal of discontinued operations
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(0.04 |
) |
Net
earnings per share — Diluted
|
|
$ |
0.74 |
|
|
$ |
0.43 |
|
|
$ |
1.24 |
|
|
$ |
1.03 |
|
|
$ |
0.82 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities — continuing
operations
|
|
$ |
2,945 |
|
|
$ |
17,584 |
|
|
$ |
25,032 |
|
|
$ |
3,961 |
|
|
$ |
13,186 |
|
Capital
expenditures
|
|
$ |
1,788 |
|
|
$ |
2,482 |
|
|
$ |
4,571 |
|
|
$ |
4,544 |
|
|
$ |
8,163 |
|
Depreciation
|
|
$ |
3,081 |
|
|
$ |
3,203 |
|
|
$ |
3,719 |
|
|
$ |
3,624 |
|
|
$ |
3,007 |
|
EBITDA(4)
|
|
$ |
19,008 |
|
|
$ |
14,772 |
|
|
$ |
30,339 |
|
|
$ |
23,815 |
|
|
$ |
20,574 |
|
|
|
As
of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004(2)
|
|
|
2003
|
|
(in
thousands, except share and per share data)
|
|
|
|
|
(Restated)(1)
|
|
|
(Restated)(1)
|
|
|
(Restated)(1)
|
|
|
(Restated)(1)
|
|
Total
assets
|
|
$ |
149,953 |
|
|
$ |
159,852 |
|
|
$ |
187,753 |
|
|
$ |
205,134 |
|
|
$ |
121,070 |
|
Current
portion of long-term debt
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
10,170 |
|
|
$ |
18,357 |
|
|
$ |
9,000 |
|
Long-term
debt (less current portion)
|
|
$ |
7,737 |
|
|
$ |
15,000 |
|
|
$ |
15,242 |
|
|
$ |
51,485 |
|
|
$ |
7,750 |
|
Stockholders’
equity
|
|
$ |
96,504 |
|
|
$ |
84,314 |
|
|
$ |
74,736 |
|
|
$ |
61,867 |
|
|
$ |
49,200 |
|
Return
on invested capital(3)
|
|
|
7.5 |
% |
|
|
5.3 |
% |
|
|
12.8 |
% |
|
|
8.0 |
% |
|
|
14.0 |
% |
Stockholders’
equity per share
|
|
$ |
10.15 |
|
|
$ |
9.05 |
|
|
$ |
8.22 |
|
|
$ |
7.08 |
|
|
$ |
5.83 |
|
Return
on stockholders’ equity
|
|
|
8.0 |
% |
|
|
5.2 |
% |
|
|
16.8 |
% |
|
|
16.8 |
% |
|
|
15.1 |
% |
Funded
backlog
|
|
$ |
116,471 |
|
|
$ |
92,903 |
|
|
$ |
144,571 |
|
|
$ |
165,017 |
|
|
$ |
123,895 |
|
Number
of shares outstanding
|
|
|
9,509,849 |
|
|
|
9,314,962 |
|
|
|
9,096,893 |
|
|
|
8,737,562 |
|
|
|
8,443,082 |
|
(1)
|
Certain
amounts are restated as referenced in Note 1 of our “Notes to
Consolidated Financial Statements” in Part II, Item 8 of this
Form 10-K.
|
(2)
|
Amounts
include results of operations of Impact Innovations Group
LLC (acquired September 1, 2004) for the period subsequent to
our acquisition.
|
(3)
|
Return
on invested capital is calculated by dividing operating income, net of
related income taxes, by the ending invested capital. Invested
capital is the sum of outstanding debt and stockholders’ equity, minus
cash.
|
(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. 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 from continuing operations to EBITDA is as follows:
|
|
Year
ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004(2)
|
|
|
2003
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Restated)(1)
|
|
Income
from continuing operations
|
|
$ |
7,102 |
|
|
$ |
3,988 |
|
|
$ |
11,433 |
|
|
$ |
9,373 |
|
|
$ |
9,204 |
|
Interest
expense, net
|
|
|
1,541 |
|
|
|
2,042 |
|
|
|
4,367 |
|
|
|
2,225 |
|
|
|
854 |
|
Provision
for income taxes
|
|
|
4,682 |
|
|
|
2,730 |
|
|
|
7,781 |
|
|
|
6,269 |
|
|
|
5,785 |
|
Depreciation
expense
|
|
|
3,081 |
|
|
|
3,203 |
|
|
|
3,719 |
|
|
|
3,624 |
|
|
|
3,007 |
|
Amortization
expense
|
|
|
2,602 |
|
|
|
2,809 |
|
|
|
3,039 |
|
|
|
2,324 |
|
|
|
1,724 |
|
EBITDA
|
|
$ |
19,008 |
|
|
$ |
14,772 |
|
|
$ |
30,339 |
|
|
$ |
23,815 |
|
|
$ |
20,574 |
|
Dynamics
Research Corporation, headquartered in Andover, Massachusetts, is a leading,
innovative provider of solutions and services to federal, state and local
governments. We provide support to our customers in the primary
mission areas of IT, Logistics and Readiness, Systems Integration and Technical
Services, C4ISR, Homeland Security, Health and Human Services, and
Intelligence/Space.
According
to INPUT, Inc. a leading research firm specializing in the market for government
contractors, federal market demand for vendor-furnished information systems and
services is estimated to increase at a compound annual growth rate of 5% over
the next 5 years. The President of the U.S.’s proposed budget for fiscal 2008
reflects a 4% increase in expenditures for IT services. We are
cognizant of funding challenges facing the federal government and the resulting
increase in competitiveness in our industry. Significant contract
awards have been and will continue to be delayed and new initiatives have been
slow to start. There appears to be recent improvement in contract award
and funding decisions with the passage of Federal budgets for fiscal year 2008
for the DoD and DHS. However, contract award and funding decisions for the
Federal civilian agencies have been delayed, as these departments are currently
operating under a continuing resolution for fiscal year 2008. Customers are
moving away from GSA and 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 engineering, training,
business transformation, lean six sigma and business intelligence solutions and
services. Many federal customers are seeking to streamline their
procurement activities by consolidating work under large contract vehicles.
Our competitive strategy is intended to align with these
trends.
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
2007.
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 Contracts. 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 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 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 Impact Innovations in 2004 and other businesses in 2002, 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. As a
result of the annual impairment test performed as of December 31, 2007, 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, 2007, we had recorded goodwill and other intangible assets of
$66.1 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.
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 liability of
$7.0 million at December 31, 2007.
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, 2007, 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 the pension
plan’s measurement date, the weighted average discount rate used to determine
the benefit obligations was 6.25% and the net periodic benefit costs was 5.75%.
A decrease of 50 basis points in the discount rate would result in an
increase in annual pension expense by approximately $0.4 million in
2007.
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
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 result in an increase in annual pension expense by approximately
$0.3 million in 2007.
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, 2007, we recorded a pension asset of
$0.7 million in the Consolidated Balance Sheets that represented the
overfunded benefit obligation.
Operating
results (in millions) and results expressed as a percentage of total revenues
are as follows:
|
|
Year
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
$(1)
|
|
|
%(2)
|
|
|
$(1)
|
|
|
%(2)
|
|
|
$(1)
|
|
|
%(2)
|
|
Contract
revenue
|
|
$ |
224.7 |
|
|
|
97.9 |
% |
|
$ |
252.9 |
|
|
|
97.6 |
% |
|
$ |
293.7 |
|
|
|
97.7 |
% |
Product
sales
|
|
|
4.9 |
|
|
|
2.1 |
|
|
|
6.1 |
|
|
|
2.4 |
|
|
|
6.8 |
|
|
|
2.3 |
|
Total
revenue
|
|
$ |
229.6 |
|
|
|
100.0 |
% |
|
$ |
259.0 |
|
|
|
100.0 |
% |
|
$ |
300.4 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit on contract revenue(3)
|
|
$ |
37.2 |
|
|
|
16.5 |
% |
|
$ |
33.9 |
|
|
|
13.4 |
% |
|
$ |
48.1 |
|
|
|
16.4 |
% |
Gross
profit on product sales(3)
|
|
|
(0.1 |
) |
|
|
(1.1 |
)% |
|
|
1.2 |
|
|
|
19.7 |
% |
|
|
1.6 |
|
|
|
23.1 |
% |
Total
gross profit(3)
|
|
|
37.1 |
|
|
|
16.2 |
% |
|
|
35.1 |
|
|
|
13.6 |
% |
|
|
49.7 |
|
|
|
16.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
21.8 |
|
|
|
9.5 |
% |
|
|
24.1 |
|
|
|
9.3 |
% |
|
|
25.3 |
|
|
|
8.4 |
% |
Amortization
of intangible assets
|
|
|
2.6 |
|
|
|
1.1 |
% |
|
|
2.8 |
|
|
|
1.1 |
% |
|
|
3.0 |
|
|
|
1.0 |
% |
Operating
Income
|
|
|
12.7 |
|
|
|
5.5 |
% |
|
|
8.2 |
|
|
|
3.2 |
% |
|
|
21.3 |
|
|
|
7.1 |
% |
Interest
expense, net
|
|
|
(1.5 |
) |
|
|
(0.7 |
)% |
|
|
(2.0 |
) |
|
|
(0.8 |
)% |
|
|
(4.4 |
) |
|
|
(1.5 |
)% |
Other
income, net
|
|
|
0.6 |
|
|
|
0.3 |
% |
|
|
0.6 |
|
|
|
0.2 |
% |
|
|
2.3 |
|
|
|
0.8 |
% |
Provision
for income taxes
|
|
|
4.7 |
|
|
|
39.7 |
% |
|
|
2.7 |
|
|
|
40.6 |
% |
|
|
7.8 |
|
|
|
40.5 |
% |
Cumulative
benefit of accounting change, net of tax
|
|
|
- |
|
|
|
0.0 |
% |
|
|
0.1 |
|
|
|
0.0 |
% |
|
|
- |
|
|
|
0.0 |
% |
Net
income
|
|
$ |
7.1 |
|
|
|
3.1 |
% |
|
$ |
4.1 |
|
|
|
1.6 |
% |
|
$ |
11.4 |
|
|
|
3.8 |
% |
(1)
|
Totals
may not add due to rounding.
|
(2)
|
The
percentage for provision for income taxes relate to a percentage of income
before provision for income taxes.
|
(3)
|
These
amounts represent a percentage of contract revenues, product sales and
total revenues, respectively.
|
We
reported total revenue of $229.6 million, $259.0 million and
$300.4 million in 2007, 2006 and 2005, respectively. Total revenue
decreased by 11.4% in 2007 compared to 2006 and 13.8% in 2006
compared to 2005 resulting in both comparable periods from a decline in contract
revenue.
Beginning
in August 2006, our work for the ASC transitioned to a new contract vehicle, the
CAPS contract. Under the CAPS contract work performed by other
contractor team members on these programs, which under the predecessor contract
was passed through our revenue and cost of sales at a very low profit margin,
was contracted directly between the Joint Venture and the subcontractor and no
longer was included in our financial results. Revenues for 2007 compared with
2006 decreased approximately $28 million as a result of this
transition. The completion of our contract with the Air National
Guard in May 2006 also reduced 2007 revenues when compared with 2006 by
approximately $6 million. Excluding the effects of the CAPS contract
transition and completion of the Air National Guard contract, the growth in
revenue for 2007 was 2.2%.
Contract
revenues in our Systems and Services segment were earned from the following
sectors (in millions):
|
|
Year
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
$(1)
|
|
|
%(1)
|
|
|
$(1)
|
|
|
%(1)
|
|
|
$(1)
|
|
|
%(1)
|
|
National
defense and intelligence agencies
|
|
$ |
179.1 |
|
|
|
79.7 |
% |
|
$ |
206.0 |
|
|
|
81.4 |
% |
|
$ |
233.9 |
|
|
|
79.7 |
% |
Federal
civilian agencies
|
|
|
31.3 |
|
|
|
13.9 |
|
|
|
30.6 |
|
|
|
12.1 |
|
|
|
33.8 |
|
|
|
11.5 |
|
State
and local government agencies
|
|
|
13.6 |
|
|
|
6.1 |
|
|
|
15.3 |
|
|
|
6.0 |
|
|
|
23.0 |
|
|
|
7.8 |
|
Other
|
|
|
0.7 |
|
|
|
0.3 |
|
|
|
1.1 |
|
|
|
0.4 |
|
|
|
3.0 |
|
|
|
1.0 |
|
Total
contract revenue
|
|
$ |
224.7 |
|
|
|
100.0 |
% |
|
$ |
252.9 |
|
|
|
100.0 |
% |
|
$ |
293.7 |
|
|
|
100.0 |
% |
(1)
|
Totals
may not add due to rounding.
|
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 (“Guard”) contract in May 2006,
partially offset by increased revenues from the Naval Air System Command
AIRSpeed sub-contract
awarded in March 2006. Absent the effects of the CAPS contract
transition and completion of the Air National Guard contract, contract revenue
for 2007 grew 2.8%. The decrease in revenues from national defense
and intelligence agencies in 2006 compared to 2005 was due to curtailment of
work with the Guard, reduced work with the U.S. Air Force Electronic Systems
Center and the loss of the Office of Assistant Secretary of Defense for Public
Affairs work in October 2005.
In July
2007, the Joint Venture was notified that the U.S. Air Force contracting officer
for the CAPS contract had made a determination that it would no longer be
eligible to bid on further contract task orders. In the period from July through
December 2007, we were unable to effectively re-compete for and retain three
task orders with annual revenue of approximately $8 million. As a
result, the $8 million of revenues recognized on these task orders in 2007 will
not recur in 2008.
In
January 2008, we purchased from THE CENTECH GROUP, Inc. a prime CAPS contract,
on which minimal work was being performed. This purchase now enables us to
respond to government solicitations under the CAPS contract. We are
awaiting U.S. Air Force approval of the contract novation.
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
2006. The decrease in revenues from federal civilian agencies in 2006
compared to 2005 was due to the loss of subcontracted revenues with the Internal
Revenue Service (“IRS”).
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. The decrease in revenues from state and local
government agencies in 2006 compared to 2005 was primarily due to lower revenues
under our contract with the State of Ohio.
We
anticipate our 2008 revenues with the State of Ohio will be consistent with 2007
levels as a result of anticipated extensions and expansions of the
contract. In February 2008, we were selected by the State of
Tennessee to develop and implement a statewide child welfare system similar to
the Ohio project. We anticipate revenues with the State of Tennessee
in the vicinity of $6 million in 2008. As a result, we anticipate our
revenues in the market sector will grow in 2008.
Revenues
by contract type as a percentage of Systems and Services segment revenues were
as follows:
|
|
Year
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Time
and materials
|
|
|
57 |
% |
|
|
62 |
% |
|
|
56 |
% |
Cost
reimbursable
|
|
|
22 |
|
|
|
19 |
|
|
|
20 |
|
Fixed
price, including service type contracts
|
|
|
21 |
|
|
|
19 |
|
|
|
24 |
|
|
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Prime
contract
|
|
|
56 |
% |
|
|
67 |
% |
|
|
68 |
% |
Sub-contract
|
|
|
44 |
|
|
|
33 |
|
|
|
32 |
|
|
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
Prime
contract revenues decreased in 2007 compared with 2006 as a result of the
transition to the CAPS contract held by the Joint Venture. We have
classified our revenues derived through the Joint Venture as sub-contract
revenue.
Product
sales for the Metrigraphics segment were $4.9 million, $6.1 million
and $6.8 million for 2007, 2006 and 2005, respectively. 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. In October
2007, Metrigraphics was approved to begin production to a new medical device
customer. Shipments began in the fourth quarter of 2007 and as a
result we are anticipating an increase in Metrigraphics revenue in 2008 compared
with 2007.
Our
funded backlog was $116.5 million at December 31, 2007, $92.9 million at
December 31, 2006 and $144.6 million at December 31, 2005. We
expect that substantially all of our backlog at December 31, 2007 will
generate revenue during the year ending December 31,
2008.
Total
gross profit was $37.1 million, $35.1 million and $49.7 million
resulting in a gross margin of 16.2%, 13.6% and 16.5% for 2007, 2006 and 2005,
respectively.
Our gross
profit on contract revenue was $37.2 million, $33.9 million and $48.1 million
resulting in a gross margin of 16.5%, 13.4% and 16.4% for 2007, 2006 and 2005,
respectively. The increase in gross margin for 2007 compared with 2006 was a
result of an increase in billable labor and lower indirect costs. 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. The decline
in gross profit in 2006 compared to 2005 was primarily attributable to a decline
in revenue and increases in indirect costs including costs related to a
reduction in workforce, an increase in business development efforts, share-based
compensation and changes in revenue mix. Unusually high severance costs of $1.1
million were recorded in cost of contract revenue in 2006 compared to $0.6
million in 2007 and $0.5 million in 2005. In 2007, we implemented
facilities consolidation actions which will lower 2008 costs by an estimated $1
million.
Our gross
profit (loss) on product sales was $(0.1) million, $1.2 million and $1.6 million
resulting in a gross margin of (1.1)%, 19.7% and 23.1% for 2007, 2006 and 2005,
respectively. The decline in gross profit in both comparable periods
was primarily attributable to a lower level of sales.
Selling, General and Administrative
Expenses
Selling,
general and administrative expenses were $21.8 million in 2007,
$24.1 million in 2006, and $25.3 million in 2005. 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. The decrease in
selling, general and administrative expenses in 2006 compared to 2005 was
primarily the result of lower costs for salaries and benefits resulting from the
workforce reductions, as well as other cost reduction efforts. This
decrease was partially offset by an increase in share-based compensation
expenses which were $1.0 million in 2007, $1.2 million in 2006 and $0.9 million
in 2005.
Amortization of Intangible
Assets
Amortization
expense, which relates to the amortization of acquired intangible assets, was
$2.6 million, $2.8 million, and $3.0 million in 2007, 2006, and
2005, respectively. Amortization expense for fiscal 2008 is anticipated at
approximately $2.0 million.
Our
operating income was $12.7 million, or 5.5% of revenue, in 2007, $8.2 million,
or 3.2% of revenue in 2006 and $21.3 million, or 7.1% of revenue in
2005. The increase in the operating margin in 2007 was primarily due
to a favorable increase in total gross margin and lower indirect costs which
resulted from a variety of cost savings initiatives undertaken in
2006. The decline in operating margin in 2006 was primarily due to
indirect overhead costs, employee benefit costs and general and administrative
expenses decreasing at a slower rate than revenues.
We
incurred interest expense totaling $1.6 million in 2007, $2.1 million
in 2006 and $4.4 million in 2005. The decrease in interest expense in
both comparable periods was due to a lower outstanding debt balance, partially
offset by a higher average interest rate. The weighted
average interest rates on our outstanding borrowings were 6.66%, 6.87%, and
6.27% at December 31, 2007, 2006 and 2005, respectively. We recorded
approximately $0.1 million of interest income in each of the three years ended
2007.
We
recorded $0.6 million of net other income in both 2007 and 2006 and
$2.3 million in 2005. In 2006 and 2005, we recorded $0.2 million
and $2.0 million, respectively, of realized gains resulting from the sale of
shares of common shares of Lucent Technologies, Inc. during those
periods. 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 2007 and $0.2 million in each of the two years
ended 2006. Approximately $0.2 million in both 2007 and 2006 and $0.1
million in 2005 were included in other income attributable to gains on our
deferred compensation plan investments.
Provision
for Income Taxes
We
recorded income tax provisions of $4.7 million, $2.7 million and $7.8 million in
2007, 2006 and 2005, respectively. The income tax provision was recorded at
rates of 39.7% in 2007, 40.6% in 2006, and 40.5% in 2005. These rates
reflect the statutory federal rate of 35% in both 2007 and 2006 and 34% in
2005. The 2007 tax rate reflects the implementation of FIN 48 and a
favorable current state blended rate compared to previous years. The 2006
tax rate reflects the implementation of SFAS 123(R) for certain stock awards and
the relative impact of permanent difference due to a lower profit before tax
balance and an increase in tax rates applied to deferred income
taxes. These increases were partially offset by favorable state
income tax audits and tax credits and adjustment of tax accruals and
reserves.
Shares Used in Computing Earnings Per Share
Weighted
average common shares outstanding and common equivalent shares totaled
9.6
million,
9.4 million, and 9.3 million for the years ended December 31,
2007, 2006 and 2005, respectively. 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, 2007, the
borrowing capacity available under our revolver was $41.2
million.
Our
results of operations, cash flows and financial condition are subject to trends,
events and uncertainties, including demands for capital to support growth,
economic conditions, government payment practices and contractual matters. Our
need for access to funds is dependent on future operating results, our growth
and acquisition activity and external conditions.
We
believe that selective acquisitions are an important component of our growth
strategy. We may acquire, from time to time, firms or properties that are
aligned with our core capabilities and which complement our customer base. We
will continue to consider acquisition opportunities that align with our
strategic objectives, along with the possibility of utilizing the credit
facility as a source of financing.
Based
upon our present business plan and operating performance, we believe that cash
provided by operating activities, combined with amounts available for borrowing
under the revolver, will be adequate to fund the capital requirements of our
existing operations during 2008 and for the foreseeable future. In the event
that our current capital resources are not sufficient to fund requirements, we
believe our access to additional capital resources would be sufficient to meet
our needs.
At
December 31, 2007 and 2006, we had cash and cash equivalents aggregating
$2.0 million and $7.9 million, respectively. Our operating practice is
to apply cash received against outstanding revolving credit facility
balances. As a result, cash balances at the end of the year generally
reflect the timing and size of cash receipts at the end of the
year.
Net cash
provided by operating activities of $2.9 million during 2007 was primarily
attributable to an increase in income. Net cash provided by operating
activities totaled $17.6 million and $24.6 million in 2006 and 2005,
respectively.
Contract
receivables were $63.6 million and $64.3 million at December 31, 2007 and
December 31, 2006, respectively. Billed receivables increased $3.9 million in
2007 and decreased $5.8 million in 2006, while unbilled receivables decreased
$4.6 million and $24.5 million in 2007 and 2006, respectively. Contract
receivables days sales outstanding, or DSO, were 101 days at December 31, 2007
and 96 days at December 31, 2006.
At
December 31, 2007 and 2006, the unbilled receivables balance included $7.6
million and $9.4 million, respectively, related to our contract with the State
of Ohio. Under the current terms of the contract, the 2007 amount is anticipated
to be invoiced and collected in accordance with completion of contract
milestones.
Our net
deferred tax liability was $7.0 million at December 31, 2007 compared to $8.4
million at December 31, 2006. The decrease in deferred taxes was
principally due to deferred taxes on unbilled receivables which declined to $7.5
million at December 31, 2007 from $9.2 million at December 31, 2006, partially
offset by a change in deferred taxes associated with the defined benefit
plan. We paid $6.2 million in income taxes in 2007 compared to $12.5
million in 2006. The IRS continues to challenge the deferral of
income for tax purposes related to our unbilled receivables including the
applicability of a Letter Ruling issued by the IRS to us in January 1976 which
granted to us deferred tax treatment of our unbilled
receivables. This issue has been elevated to the IRS National Office
for determination. While the outcome of the audit of the 2004 income
tax return is not expected to be known for several months and remains uncertain,
we may incur interest expense, our deferred tax liabilities may be reduced and
income tax payments may be increased substantially in future
periods.
Share-based
compensation decreased to $1.6 million in 2007 from $2.1 million in 2006 and
$0.9 million in 2005. The decrease in 2007 is primarily due to the amendment to
our Employee Stock Purchase Plan during the fourth quarter of 2006 which
resulted in the ESPP being treated as non-compensatory, as more fully described
in Note 9 of our “Notes to Consolidated Financial Statements” in Part II,
Item 8 on this Form 10-K. The increase in 2006 is due to our
adoption of SFAS 123(R) beginning January 1, 2006. As of
December 31, 2007 the total unrecognized compensation related to restricted
stock awards was $1.3 million to be recognized over 1.9 years, and the total
unrecognized compensation cost related to stock options was $0.3 million, which
is expected to be recognized over five months.
Non-cash
amortization expense of our acquired intangible assets was $2.6 million, $2.8
million and $3.0 million in 2007, 2006 and 2005, respectively. We anticipate
that non-cash expense for the amortization of intangible assets will decrease to
approximately $2.0 million in 2008.
Our
defined benefit pension plan was overfunded by $0.7 million in 2007 and
underfunded by $3.9 million in 2006. The improvement in the plan’s
funded status was primarily attributable to the change in the discount rate used
to determine benefit obligations during 2007 to 6.25% from 5.75% in
2006. During 2007, we recorded pension income of $0.8 million
compared to pension expense of $0.6 million and $1.0 million in 2006 and 2005,
respectively. 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. During 2006, contributions of $5.2 million were
made to fund our pension plan. No employer contributions were made in
2007. We currently anticipate making a $0.5 million contribution in
2008.
Net cash
used in investing activities of $2.8 million during 2007 was primarily
attributable to capital expenditures and payments under the sale and leaseback
transaction for our headquarters facility referenced below. Net cash
provided by investing activities was $2.3 million in 2006 and net cash used in
investing activities was $16.5 million in 2005.
Capital
expenditures for the purchase of property and equipment were $1.8 million,
$2.5 million, and $4.6 million in 2007, 2006 and 2005, respectively.
For all years, capital expenditures were primarily for the purchase of software,
other equipment and leasehold improvements, other than for the Andover facility
renovation. Expenditures for the Andover facility renovation were
$1.5 million in 2005. We expect capital expenditures in 2008 to
be at similar levels as 2007.
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 expect the letter of credit to be
released in the first quarter of 2008.
During
2006 and 2005, we sold our Lucent shares for $0.2 million and $2.0 million,
respectively, realizing a gain on the sale of $0.2 million and
$2.0 million, respectively.
On
December 29, 2005, we sold our headquarters facility in Andover,
Massachusetts and entered into a lease for the same property for a ten-year term
with two five-year renewal options. Proceeds realized from the sale were
$19.3 million resulting in a gain of $6.8 million that will be recognized
over the ten-year term of the lease. In both 2007 and 2006, we
amortized $0.7 million of the deferred gain. We anticipate a similar
benefit in subsequent periods through the end of the lease.
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.
Our
revolving credit facility (the “credit facility”) provides for a $50 million,
three-year revolving credit agreement (the “revolver”) for working capital
needs, which expires in September 2009. On an ongoing basis, the
credit facility requires us to meet financial covenants, including maintaining a
minimum net worth and certain cash flow and debt coverage ratios. The covenants
also limit our ability to incur additional debt, pay dividends, purchase capital
assets, sell or dispose of assets, make additional acquisitions or investments,
or enter into new leases, among other restrictions. In addition, the credit
facility provides that the bank group may accelerate payment of all unpaid
principal and all accrued and unpaid interest under the credit facility, upon
the occurrence and continuance of certain events of default. At
December 31, 2007, the Company was in compliance with its debt
covenants. Additional information related to the credit facility is
referenced in Note 7 of our “Notes to Consolidated Financial Statements” in
Part II, Item 8 on this Form 10-K.
The
average daily borrowing on our revolver for 2007 was $16.7 million at a weighted
average interest rate of 7.30%, compared to an average daily borrowing of $10.4
million at a weighted average interest rate of 7.81% in 2006 and an average
daily borrowing of $7.4 million at a weighted average interest rate of 5.91% in
2005 under our then existing revolver during those periods. Also,
during 2006 and 2005, our average daily outstanding balance under our then
existing term and acquisition term loans was $14.7 million at a weighted average
interest rate of 5.13% and $55.1 million at a weighted average interest rate of
6.14%, respectively.
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. As of
December 31, 2006, we had $15.0 million outstanding under our credit facility
which has been classified as long-term as amounts borrowed under the revolver
are contractually due on the maturity of the credit facility, however we may
repay at any time prior to that date.
During
2005, net cash used in financing activities was $41.0 million, which
consisted of $26.7 million of repayments under the acquisition term loan,
$10.0 million of repayments under the revolver and $7.8 million of
repayments under the term loan, partially offset by $3.4 million of
proceeds from the exercise of stock options and employee stock purchase plan
transactions.
Off-Balance Sheet
Arrangements
We did
not utilize or employ any off-balance sheet arrangements during the three years
ended December 31, 2007, 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, 2007 consist of the following (in
millions):
|
|
Payments
due by period
|
|
|
|
|
|
|
Less
than
|
|
|
Two
to
|
|
|
Four
to
|
|
|
|
|
|
|
Total
|
|
|
one
year
|
|
|
three
years
|
|
|
five
years
|
|
|
Thereafter
|
|
Long-term
debt
|
|
$ |
7.7 |
|
|
$ |
- |
|
|
$ |
7.7 |
|
|
$ |
- |
|
|
$ |
- |
|
Operating
leases
|
|
|
33.7 |
|
|
|
7.5 |
|
|
|
12.9 |
|
|
|
5.9 |
|
|
|
7.4 |
|
Letter
of credit
|
|
|
1.0 |
|
|
|
1.0 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total
contractual obligations
|
|
$ |
42.4 |
|
|
$ |
8.5 |
|
|
$ |
20.6 |
|
|
$ |
5.9 |
|
|
$ |
7.4 |
|
The
contractual amounts above related to long-term debt do not include interest
payments on our revolver’s outstanding principal balance, because the interest
rates are not fixed. The repayment of borrowings under the revolver is
contractually due on September 29, 2009, the maturity of the credit facility,
however, we may repay at any time prior to that date.
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 12 of our “Notes to Consolidated Financial Statements” in
Part II, Item 8 on this Form 10-K
We have
an outstanding letter of credit aggregating $1.0 million at December 31, 2007
related to the sale and leaseback of our headquarters in Andover, Massachusetts,
in 2005. The agreement provided that we pay for some improvements by
the end of the third lease year. At December 31, 2007, the
improvements were substantially completed; however the letter of credit is
required to be maintained until 45 days after the completion of the
improvements. The letter of credit is expected to be released in the
first quarter of 2008.
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, 2007 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 12 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 78% of total revenue
in 2007, 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 revolver, where interest
payments are tied to either the LIBOR or prime rate. The weighted average
interest rate at December 31, 2007 on $7.7 million of outstanding
borrowings under the revolver was 6.66%. 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 our revolver would increase annual interest
expense by approximately $0.1 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 and, accordingly, 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
|
|
|
|
35
|
|
36
|
|
37
|
|
38
|
|
39
|
|
40
|
|
65
|
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, 2007 and 2006, and the related consolidated
statements of operations, changes in stockholders’ equity and comprehensive
income, and cash flows for each of the three years in the period ended
December 31, 2007. 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
schedules are the responsibility of the Company’s management. Our responsibility
is to express an opinion on these consolidated financial statements and
financial statement schedules 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, 2007 and 2006, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2007, 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.
As
discussed in Note 9 of the notes to consolidated financial statements, the
Company adopted SFAS No. 123R “Share-Based Payment,”
effective January 1, 2006.
As discussed in Note 1 of the
notes to consolidated financial statements, an error resulting in an
overstatement of previously reported deferred tax liabilities was discovered by
Company management during the current year. Accordingly, retained earnings have
been restated as of December 31, 2004.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company’s internal control over financial
reporting as of December 31, 2007, 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, 2008 expressed an
unqualified opinion.
(In thousands, except share
data)
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
(restated)
|
|
|
|
|
|
|
(See
Note 1)
|
|
Assets
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
2,006 |
|
|
$ |
7,887 |
|
Contract
receivables, net
|
|
|
63,570 |
|
|
|
64,284 |
|
Prepaid
expenses and other current assets
|
|
|
2,508 |
|
|
|
2,933 |
|
Total
current assets
|
|
|
68,084 |
|
|
|
75,104 |
|
Noncurrent
assets
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
10,182 |
|
|
|
11,509 |
|
Goodwill
|
|
|
63,055 |
|
|
|
63,055 |
|
Intangible
assets, net
|
|
|
3,069 |
|
|
|
5,671 |
|
Deferred
tax asset
|
|
|
1,484 |
|
|
|
1,507 |
|
Other
noncurrent assets
|
|
|
4,079 |
|
|
|
3,006 |
|
Total
noncurrent assets
|
|
|
81,869 |
|
|
|
84,748 |
|
Total
assets
|
|
$ |
149,953 |
|
|
$ |
159,852 |
|
Liabilities
and stockholders' equity
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
12,163 |
|
|
$ |
18,195 |
|
Accrued
compensation and employee benefits
|
|
|
13,728 |
|
|
|
14,473 |
|
Deferred
taxes
|
|
|
8,486 |
|
|
|
9,864 |
|
Other
accrued expenses
|
|
|
3,248 |
|
|
|
5,201 |
|
Total
current liabilities
|
|
|
37,625 |
|
|
|
47,733 |
|
Long-term
liabilities
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
7,737 |
|
|
|
15,000 |
|
Other
long-term liabilities
|
|
|
8,087 |
|
|
|
12,805 |
|
Total
long-term liabilities
|
|
|
15,824 |
|
|
|
27,805 |
|
Total
liabilities
|
|
|
53,449 |
|
|
|
75,538 |
|
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; 9,509,849 and
9,314,962 shares issued and outstanding at December 31, 2007 and 2006,
respectively
|
|
|
951 |
|
|
|
931 |
|
Capital
in excess of par value
|
|
|
50,251 |
|
|
|
47,644 |
|
Accumulated
other comprehensive loss
|
|
|
(6,745 |
) |
|
|
(9,206 |
) |
Retained
earnings
|
|
|
52,047 |
|
|
|
44,945 |
|
Total
stockholders' equity
|
|
|
96,504 |
|
|
|
84,314 |
|
Total
liabilities and stockholders' equity
|
|
$ |
149,953 |
|
|
$ |
159,852 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
(In thousands, except share and per
share data)
|
|
Year
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Contract
revenue
|
|
$ |
224,676 |
|
|
$ |
252,890 |
|
|
$ |
293,662 |
|
Product
sales
|
|
|
4,901 |
|
|
|
6,097 |
|
|
|
6,778 |
|
Total
revenue
|
|
|
229,577 |
|
|
|
258,987 |
|
|
|
300,440 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of contract revenue
|
|
|
187,516 |
|
|
|
218,976 |
|
|
|
245,566 |
|
Cost
of product sales
|
|
|
4,954 |
|
|
|
4,895 |
|
|
|
5,212 |
|
Total
cost of revenue
|
|
|
192,470 |
|
|
|
223,871 |
|
|
|
250,778 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit on contract revenue
|
|
|
37,160 |
|
|
|
33,914 |
|
|
|
48,096 |
|
Gross
profit on product sales
|
|
|
(53 |
) |
|
|
1,202 |
|
|
|
1,566 |
|
Total
gross profit
|
|
|
37,107 |
|
|
|
35,116 |
|
|
|
49,662 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
21,826 |
|
|
|
24,136 |
|
|
|
25,318 |
|
Amortization
of intangible assets
|
|
|
2,602 |
|
|
|
2,809 |
|
|
|
3,039 |
|
Operating
income
|
|
|
12,679 |
|
|
|
8,171 |
|
|
|
21,305 |
|
Interest
expense, net
|
|
|
(1,541 |
) |
|
|
(2,042 |
) |
|
|
(4,367 |
) |
Other
income
|
|
|
646 |
|
|
|
589 |
|
|
|
2,276 |
|
Income
before provision for income taxes
|
|
|
11,784 |
|
|
|
6,718 |
|
|
|
19,214 |
|
Provision
for income taxes
|
|
|
4,682 |
|
|
|
2,730 |
|
|
|
7,781 |
|
Income
before cumulative effect of accounting change
|
|
|
7,102 |
|
|
|
3,988 |
|
|
|
11,433 |
|
Cumulative
benefit of accounting change, net of tax of $62
|
|
|
- |
|
|
|
84 |
|
|
|
- |
|
Net
income
|
|
$ |
7,102 |
|
|
$ |
4,072 |
|
|
$ |
11,433 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before cumulative effect of accounting change
|
|
$ |
0.76 |
|
|
$ |
0.44 |
|
|
$ |
1.30 |
|
Cumulative
effect of accounting change
|
|
|
- |
|
|
|
0.01 |
|
|
|
- |
|
Net
income
|
|
$ |
0.76 |
|
|
$ |
0.45 |
|
|
$ |
1.30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before cumulative effect of accounting change
|
|
$ |
0.74 |
|
|
$ |
0.42 |
|
|
$ |
1.24 |
|
Cumulative
effect of accounting change
|
|
|
- |
|
|
|
0.01 |
|
|
|
- |
|
Net
income
|
|
$ |
0.74 |
|
|
$ |
0.43 |
|
|
$ |
1.24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
9,326,907 |
|
|
|
9,099,897 |
|
|
|
8,809,644 |
|
Diluted
|
|
|
9,649,897 |
|
|
|
9,426,535 |
|
|
|
9,253,522 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
(in
thousands)
|
|
|
|
|
|
|
|
Capital
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In
Excess
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Common
Stock Issued
|
|
|
of
Par
|
|
|
Unearned
|
|
|
Comprehensive
|
|
|
Retained
|
|
|
|
|
|
|
Shares
|
|
|
Par
value
|
|
|
Value
|
|
|
Compensation
|
|
|
Loss
|
|
|
Earnings
|
|
|
Total
|
|
Balance
at December 31, 2004, as previously reported
|
|
|
8,737 |
|
|
$ |
874 |
|
|
$ |
40,849 |
|
|
$ |
(1,572 |
) |
|
$ |
(7,724 |
) |
|
$ |
28,891 |
|
|
$ |
61,318 |
|
Impact
of restatement (Note 1)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
549 |
|
|
|
549 |
|
Balance
December 31, 2004, as restated
|
|
|
8,737 |
|
|
|
874 |
|
|
|
40,849 |
|
|
|
(1,572 |
) |
|
|
(7,724 |
) |
|
|
29,440 |
|
|
|
61,867 |
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
11,433 |
|
|
|
11,433 |
|
Other
comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum
pension liability adjustment
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,509 |
) |
|
|
- |
|
|
|
(1,509 |
) |
Unrealized
gains on investments, net of reclassification adjustment
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,535 |
) |
|
|
- |
|
|
|
(1,535 |
) |
Other
comprehensive income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(3,044 |
) |
Comprehensive
income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
8,389 |
|
Issuance
of common stock through stock option exercises and employee stock purchase
plan transactions
|
|
|
304 |
|
|
|
30 |
|
|
|
3,378 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3,408 |
|
Issuance
of restricted stock
|
|
|
110 |
|
|
|
11 |
|
|
|
1,794 |
|
|
|
(1,805 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Forfeiture
of restricted stock
|
|
|
(42 |
) |
|
|
(4 |
) |
|
|
(667 |
) |
|
|
671 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Release
of restricted stock
|
|
|
(12 |
) |
|
|
(1 |
) |
|
|
(187 |
) |
|
|
(9 |
) |
|
|
- |
|
|
|
- |
|
|
|
(197 |
) |
Amortization
of unearned compensation
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
865 |
|
|
|
- |
|
|
|
- |
|
|
|
865 |
|
Tax
benefit from stock options exercised and employee stock purchase plan
transactions
|
|
|
- |
|
|
|
- |
|
|
|
404 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
404 |
|
Balance
at December 31, 2005, as restated
|
|
|
9,097 |
|
|
|
910 |
|
|
|
45,571 |
|
|
|
(1,850 |
) |
|
|
(10,768 |
) |
|
|
40,873 |
|
|
|
74,736 |
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
4,072 |
|
|
|
4,072 |
|
Other
comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
liability adjustment
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,562 |
|
|
|
- |
|
|
|
1,562 |
|
Comprehensive
income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
5,634 |
|
Issuance
of common stock through stock option exercises and employee stock purchase
plan transactions
|
|
|
192 |
|
|
|
19 |
|
|
|
1,875 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,894 |
|
Issuance
of restricted stock
|
|
|
70 |
|
|
|
7 |
|
|
|
(7 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Forfeiture
of restricted stock
|
|
|
(30 |
) |
|
|
(3 |
) |
|
|
3 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Release
of restricted stock
|
|
|
(14 |
) |
|
|
(2 |
) |
|
|
(191 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(193 |
) |
Share-based
compensation
|
|
|
- |
|
|
|
- |
|
|
|
2,082 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,082 |
|
Tax
benefit from stock options exercised and employee stock purchase plan
transactions
|
|
|
- |
|
|
|
- |
|
|
|
161 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
161 |
|
Reversal
of unearned compensation upon adoption of FASB Statement No.
123(R)
|
|
|
- |
|
|
|
- |
|
|
|
(1,850 |
) |
|
|
1,850 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Balance
at December 31, 2006, as restated
|
|
|
9,315 |
|
|
|
931 |
|
|
|
47,644 |
|
|
|
- |
|
|
|
(9,206 |
) |
|
|
44,945 |
|
|
|
84,314 |
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
7,102 |
|
|
|
7,102 |
|
Other
comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
liability adjustment
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,353 |
|
|
|
- |
|
|
|
2,353 |
|
Unrealized
gain on investment
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
108 |
|
|
|
- |
|
|
|
108 |
|
Other
comprehensive income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,461 |
|
Comprehensive
income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
9,563 |
|
Issuance
of common stock through stock option exercises and employee stock purchase
plan transactions
|
|
|
135 |
|
|
|
14 |
|
|
|
1,166 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,180 |
|
Issuance
of restricted stock
|
|
|
99 |
|
|
|
10 |
|
|
|
(10 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Forfeiture
of restricted stock
|
|
|
(20 |
) |
|
|
(2 |
) |
|
|
2 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Release
of restricted stock
|
|
|
(19 |
) |
|
|
(2 |
) |
|
|
(200 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(202 |
) |
Share-based
compensation
|
|
|
- |
|
|
|
- |
|
|
|
1,640 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,640 |
|
Tax
benefit from stock options exercised and employee stock purchase plan
transactions
|
|
|
- |
|
|
|
- |
|
|
|
77 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
77 |
|
Tax
deficiencies on equity awards
|
|
|
- |
|
|
|
- |
|
|
|
(68 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(68 |
) |
Balance
at December 31, 2007
|
|
|
9,510 |
|
|
$ |
951 |
|
|
$ |
50,251 |
|
|
$ |
- |
|
|
$ |
(6,745 |
) |
|
$ |
52,047 |
|
|
$ |
96,504 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
|
|
Year
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
7,102 |
|
|
$ |
4,072 |
|
|
$ |
11,433 |
|
Adjustments
to reconcile net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
3,081 |
|
|
|
3,203 |
|
|
|
3,719 |
|
Amortization
of intangible assets
|
|
|
2,602 |
|
|
|
2,809 |
|
|
|
3,039 |
|
Share-based
compensation, including cumulative effect of accounting
change
|
|
|
1,640 |
|
|
|
2,082 |
|
|
|
865 |
|
Non-cash
interest expense
|
|
|
147 |
|
|
|
203 |
|
|
|
304 |
|
Amortization
of deferred gain on sale of building
|
|
|
(676 |
) |
|
|
(676 |
) |
|
|
(6 |
) |
Investment
income from equity interest
|
|
|
(516 |
) |
|
|
(223 |
) |
|
|
(166 |
) |
Tax
benefit from stock options exercised and employee stock purchase plan
transactions, net of tax deficiencies on equity awards
|
|
|
(9 |
) |
|
|
(161 |
) |
|
|
404 |
|
Deferred
(prepaid) income taxes
|
|
|
(2,972 |
) |
|
|
(6,744 |
) |
|
|
1,869 |
|
Loss
(gain) on sale of investments and long-lived assets, net
|
|
|
32 |
|
|
|
(192 |
) |
|
|
(1,984 |
) |
Change
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract
receivables, net
|
|
|
714 |
|
|
|
30,260 |
|
|
|
1,647 |
|
Prepaid
expenses and other current assets
|
|
|
604 |
|
|
|
(1,341 |
) |
|
|
4,185 |
|
Accounts
payable
|
|
|
(6,032 |
) |
|
|
(7,473 |
) |
|
|
5,118 |
|
Accrued
compensation and employee benefits
|
|
|
(745 |
) |
|
|
(4,288 |
) |
|
|
847 |
|
Other
accrued expenses
|
|
|
(1,166 |
) |
|
|
(2,508 |
) |
|
|
1,246 |
|
Other
long-term liabilities
|
|
|
(861 |
) |
|
|
(1,439 |
) |
|
|
(7,488 |
) |
Net
cash provided by operating activities
|
|
|
2,945 |
|
|
|
17,584 |
|
|
|
25,032 |
|
Net
cash used in discontinued operations
|
|
|
- |
|
|
|
- |
|
|
|
(422 |
) |
Net
cash provided by operating activities
|
|
|
2,945 |
|
|
|
17,584 |
|
|
|
24,610 |
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
to property, plant and equipment
|
|
|
(1,788 |
) |
|
|
(2,482 |
) |
|
|
(4,571 |
) |
Proceeds
(payments) related to the sale of building, net
|
|
|
(980 |
) |
|
|
- |
|
|
|
19,275 |
|
Proceeds
from sale of investments and long-lived assets
|
|
|
6 |
|
|
|
214 |
|
|
|
2,003 |
|
Purchase
adjustment of business acquisition
|
|
|
- |
|
|
|
- |
|
|
|
(168 |
) |
Dividends
from equity investment
|
|
|
180 |
|
|
|
155 |
|
|
|
60 |
|
Increase
in other assets
|
|
|
(170 |
) |
|
|
(182 |
) |
|
|
(92 |
) |
Net
cash (used in) provided by investing activities
|
|
|
(2,752 |
) |
|
|
(2,295 |
) |
|
|
16,507 |
|
Cash
flow from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings
under revolving credit agreement
|
|
|
201,918 |
|
|
|
172,981 |
|
|
|
138,996 |
|
Repayments
under revolving credit agreement
|
|
|
(209,181 |
) |
|
|
(157,981 |
) |
|
|
(148,996 |
) |
Principal
payments under loan agreements
|
|
|
- |
|
|
|
(25,412 |
) |
|
|
(34,430 |
) |
Proceeds
from the exercise of stock options and employee stock purchase plan
transactions
|
|
|
1,180 |
|
|
|
1,894 |
|
|
|
3,408 |
|
Tax
benefit from stock options exercised and employee stock purchase plan
transactions, net of tax deficiencies on equity awards
|
|
|
9 |
|
|
|
161 |
|
|
|
- |
|
Payments
of deferred financing costs
|
|
|
- |
|
|
|
(65 |
) |
|
|
- |
|
Net
cash used in financing activities
|
|
|
(6,074 |
) |
|
|
(8,422 |
) |
|
|
(41,022 |
) |
Net
increase (decrease) in cash and cash equivalents
|
|
|
(5,881 |
) |
|
|
6,867 |
|
|
|
95 |
|
Cash
and cash equivalents, beginning of period
|
|
|
7,887 |
|
|
|
1,020 |
|
|
|
925 |
|
Cash
and cash equivalents, end of period
|
|
$ |
2,006 |
|
|
$ |
7,887 |
|
|
$ |
1,020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the year for interest
|
|
$ |
1,494 |
|
|
$ |
2,078 |
|
|
$ |
4,302 |
|
Cash
paid during the year for income taxes, net of refunds
|
|
$ |
6,206 |
|
|
$ |
12,486 |
|
|
$ |
(196 |
) |
Supplemental
disclosure of noncash financing and investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of restricted stock
|
|
$ |
1,135 |
|
|
$ |
1,000 |
|
|
$ |
1,805 |
|
Increase
(decrease) in pension liability
|
|
$ |
(3,899 |
) |
|
$ |
(2,588 |
) |
|
$ |
2,485 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars
in thousands, except per share amounts)
Dynamics
Research Corporation (the “Company”), headquartered in Andover, Massachusetts,
provides IT, engineering, logistics and other consulting services to federal
defense, civil and state agency customers. Founded in 1955 and headquartered in
Andover, Massachusetts, the Company has approximately 1,400 employees located
throughout the United States (“U.S.”). The Company operates through
the parent corporation and its wholly owned subsidiaries, H.J. Ford Associates,
Inc. (“HJ Ford”) and DRC International Corporation.
The
Company’s core capabilities are focused on IT, engineering and technical subject
matter expertise that pertain to the knowledge domains relevant to the Company’s
core customers. These capabilities include design, development, operation and
maintenance of IT systems, engineering services, complex logistics planning
systems and services, defense program administrative support services,
simulation, modeling, training systems and services, and custom built electronic
test equipment and services.
The
Company has restated its consolidated financial statements as of December 31,
2004 to correct certain tax liabilities, which resulted in an increase in
stockholders’ equity of $549. The restatement reflects corrections in
the measurement of deferred income tax liabilities relating to property and
equipment. The principal corrections pre-date all periods reported in
the Company’s financial statements, and, as a result, the related financial
statement effects are immaterial to the statements of operations for each of the
years ended December 31, 2006 and 2005. A summary of the aggregate
effect of the restatement on the Company’s consolidated balance sheet as of
December 31, 2006 is shown as follows:
|
|
As
of December 31, 2006
|
|
|
|
Previously
Reported
|
|
|
As
Restated
|
|
Changes
to Consolidated Balance Sheet:
|
|
|
|
|
|
|
Deferred
income taxes
|
|
$ |
11,698 |
|
|
$ |
9,864 |
|
Other
accrued expenses
|
|
$ |
3,916 |
|
|
$ |
5,201 |
|
Total
current liabilities
|
|
$ |
48,282 |
|
|
$ |
47,733 |
|
Total
liabilities
|
|
$ |
76,087 |
|
|
$ |
75,538 |
|
Retained
earnings
|
|
$ |
44,396 |
|
|
$ |
44,945 |
|
Total
stockholders' equity
|
|
$ |
83,765 |
|
|
$ |
84,314 |
|
NOTE
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis
of Presentation
The
consolidated financial statements include the accounts of the Company and all
wholly owned subsidiaries. All significant intercompany accounts and
transactions are eliminated in consolidation. Unless otherwise indicated, all
financial information presented herein refers to continuing operations. The
Company has reclassified certain prior period amounts to conform with the
current period presentation.
The
Company, through HJ Ford, has a 40% ownership interest in HMRTech,
LLC (“HMRTech”),
a small disadvantaged business as defined by the Small Business Administration
of the U.S. Government. This investment is accounted for using the
equity method and reported as a component of other noncurrent assets in the
Company’s Consolidated Balance Sheets.
Risks, Uncertainties and Use of
Estimates
There are
business risks specific to the industries in which the Company operates. These
risks include, but are not limited to, estimates of costs to complete contract
obligations, changes in government policies and procedures, government
contracting issues and risks associated with technological development. The U.S.
Government has the right to terminate contracts for convenience in accordance
with government regulations. If the government terminated contracts, the Company
would generally
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
recover
costs incurred up to termination, costs required to be incurred in connection
with the termination and a portion of the fee earned commensurate with the work
performed to termination. However, significant adverse effects on the Company’s
indirect cost pools may not be recoverable in connection with a termination for
convenience. Contracts with state and other governmental entities are subject to
the same or similar risks.
A
majority of the Company’s revenue is derived from U.S. Government agencies,
primarily the Department of Defense (“DoD”). Any cancellations or modifications
of the Company’s significant contracts or subcontracts, or failure by the
government to exercise option periods relating to those contracts or
subcontracts, could adversely affect the Company’s business, financial
condition, results of operations and cash flows. A significant portion of the
Company’s federal government contracts are renewable on an annual basis, or are
subject to the exercise of contractual options. The government has the right to
terminate contracts for convenience. Multi-year contracts often require funding
actions by the government on an annual or more frequent basis. The Company could
experience material adverse consequences should such funding actions or other
approvals not be taken. In addition to contract cancellations and declines in
government budgets, the Company’s business, financial condition, results of
operations and cash flows may be adversely affected by competition within a
consolidating defense industry, increased government regulation and general
economic conditions.
The
financial statements have been prepared in conformity with accounting principles
generally accepted in the U.S. of America and, accordingly, include amounts
based on informed estimates and judgments of management with consideration given
to materiality. Estimates and judgments also affect the amount of revenue and
expenses during the reported period. Actual results could differ from those
estimates. The Company believes the following accounting policies affect the
more significant judgments made and estimates used in the preparation of its
consolidated financial statements.
The
Company also estimates and provides for potential losses that may arise out of
litigation and regulatory proceedings to the extent that such losses are
probable and can be estimated, in accordance with Financial Accounting Standards
Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 5,
Accounting for
Contingencies. Significant judgment is required in making these estimates
and the Company’s final liabilities may ultimately be materially different. The
Company’s total liability in respect of litigation and regulatory proceedings is
determined on a case-by-case basis and represents an estimate of probable losses
after considering, among other factors, the progress of each case or proceeding,
the Company’s experience and the experience of others in similar cases or
proceedings, and the opinions and views of legal counsel. Given the inherent
difficulty of predicting the outcome of the Company’s litigation and regulatory
matters, particularly in cases or proceedings in which substantial or
indeterminate damages or fines are sought, the Company cannot estimate losses or
ranges of losses for cases or proceedings where there is only a reasonable
possibility that a loss may be incurred. See Note 12 for information on the
Company’s litigation and other proceedings.
The
Company’s Systems and Services business segment provides its services pursuant
to time and materials, cost reimbursable and fixed-price contracts, including
service-type contracts.
For time
and materials contracts, revenue reflects the number of direct labor hours
expended in the performance of a contract multiplied by the contract billing
rate, as well as reimbursement of other billable direct costs. The risk inherent
in time and materials contracts is that actual costs may differ materially from
negotiated billing rates in the contract, which would directly affect operating
income.
For cost
reimbursable contracts, revenue is recognized as costs are incurred and includes
a proportionate amount of the fee earned. Cost reimbursable contracts specify
the contract fee in dollars or as a percentage of estimated costs. The primary
risk on a cost reimbursable contract is that a government audit of direct and
indirect costs could result in the disallowance of certain costs, which would
directly impact revenue and margin on the contract. Historically, such audits
have not had a material impact on the Company’s revenue and operating
income.
Revenue
from service-type fixed-price contracts is recognized ratably over the contract
period or by other appropriate output methods to measure service provided, and
contract costs are expensed as incurred. Under fixed-price contracts, other than
service-type contracts, revenue is recognized primarily under the percentage of
completion method in accordance with American Institute of Certified Public
Accountants Statement of Position (“SOP”) 81-1, Accounting for Performance of
Construction-Type and Certain Production-Type Contracts. The risk on a
fixed-price contract is estimates of costs to complete the contract may exceed
revenues on the contract.
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
For all
types of contracts, the Company recognizes anticipated contract losses as soon
as they become known and estimable. Out-of-pocket expenses that are reimbursable
by the customer are included in contract revenue and cost of contract
revenue.
Unbilled
receivables are the amounts of recoverable contract revenue that have not been
billed at the balance sheet date. Generally, the Company’s unbilled receivables
relate to revenue that is billed in the month after services are performed. In
certain instances, billing is deferred in compliance with contract terms, such
as milestone billing arrangements and withholdings, or delayed for other
reasons. Costs related to certain U.S. Government contracts, including
applicable indirect costs, are subject to audit by the government. Revenue from
such contracts has been recorded at amounts the Company expects to realize upon
final settlement.
The
Company’s Metrigraphics business segment records revenue from product sales upon
transfer of both title and risk of loss to the customer, provided there is
evidence of an arrangement, fees are fixed or determinable, no significant
obligations remain, collection of the related receivable is reasonably assured
and customer acceptance criteria have been successfully demonstrated. Product
sales are recorded net of sales taxes and net of returns upon
delivery. Amounts billed to customers related to shipping and
handling is classified as product sales. The cost of shipping
products to the customer is recognized at the time the products are shipped and
is recorded as cost of product sales.
Cash and Cash
Equivalents
All cash
investments, which consist primarily of money market accounts, have original
maturities of three months or less and are classified as cash
equivalents.
Contract
receivables consisted of the following:
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Contract
receivables, net:
|
|
|
|
|
|
|
Billed
receivables
|
|
$ |
31,884 |
|
|
$ |
27,865 |
|
Unbilled
receivables:
|
|
|
|
|
|
|
|
|
Revenues
recorded in excess of milestone billings on fixed price contract with
State of Ohio
|
|
|
7,572 |
|
|
|
9,377 |
|
Retainages
and fee withholdings
|
|
|
1,529 |
|
|
|
1,119 |
|
Other
unbilled receivables
|
|
|
23,488 |
|
|
|
26,716 |
|
Total
unbilled receivables
|
|
|
32,589 |
|
|
|
37,212 |
|
Allowance
for doubtful accounts
|
|
|
(903 |
) |
|
|
(793 |
) |
Contract
receivables, net
|
|
$ |
63,570 |
|
|
$ |
64,284 |
|
Contract
receivables, net of the established allowance, are stated at amounts expected to
be realized in future periods. Unbilled receivables are amounts that
are expected to be billed in accordance with contract terms and delivery
schedules, as well as amounts expected to become billable upon final execution
of contracts, contract completion, milestones or completion of rate
negotiations. Generally, the Company’s unbilled receivables relate to
revenue that is billed in the month after services are performed. Costs related
to certain U.S. Government contracts, including applicable indirect costs, are
subject to audit by the government. Revenue from such contracts has been
recorded at amounts the Company expects to realize upon final
settlement.
Contract
receivables are classified as current assets in accordance with industry
practice. At December 31, 2006, $493 of the unbilled balance
regarding fixed price contract with the State of Ohio was not scheduled to be
billed within twelve months. In addition, $553 and $545 as of
December 31, 2007 and 2006, respectively, of unbilled retainages and fee
withholdings are not anticipated to be billed within twelve months.
The
allowance for doubtful accounts is determined based upon the Company's best
estimate of a customer's ability to pay. The factors that influence management’s
estimate include historical experience, specific identification and an aging
criteria of
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
potential
uncollectible accounts. The Company writes off contract receivables when such
amounts are determined to be uncollectible. Losses have historically been within
management’s expectations.
Inventories
are stated at the lower of cost (first-in, first-out) or market, and consist of
materials, labor and overhead. There are no amounts in inventories relating to
contracts having production cycles longer than one year. Total inventories
aggregated $584 and $116 at December 31, 2007 and 2006, respectively, and
are included in prepaid expenses and other current assets on the
accompanying balance sheets.
Property
and equipment, including improvements that significantly add to productive
capacity or extend the asset’s useful life are capitalized and recorded at cost.
When items are sold, or otherwise retired or disposed of, operating income is
charged or credited for the difference between the net book value and proceeds
realized thereon. Repairs and maintenance costs are expensed as
incurred. Property and equipment is depreciated on the straight-line basis over
their estimated useful lives. Estimated useful lives of production
equipment typically range from three to five years, while software and
furniture and other equipment typically range from three to ten years. Leasehold
improvements are amortized over the shorter of the remaining expected term of
the lease, considering renewal options, or the life of the related asset. The
Company recorded depreciation expense of $3,081, $3,203 and $3,719 during 2007,
2006 and 2005, respectively.
On
December 29, 2005, the Company entered into a purchase and sale agreement
and lease in connection with a sale and leaseback of its headquarters in
Andover, Massachusetts. The net proceeds from the sale, after transaction and
other related costs, were $19,275 resulting in a gain of $6,765 which is
being recognized over the initial ten year term of the lease. The Company
amortized $676 in both 2007 and 2006 and $6 in 2005 of the deferred gain. As of
December 31, 2007, the current portion of the deferred gain of $676 was included
in other accrued expenses and the remaining $4,733 was included in
long-term liabilities in the accompanying balance sheets.
In
addition to the sale and leaseback transaction in 2005, the Company recorded
disposals of $3,736, $646 and $15,423, during 2007, 2006 and 2005, respectively,
of substantially fully-depreciated machinery, equipment and leasehold
improvements no longer in use.
Internal
Software Development Costs
The
Company follows the provisions of SOP 98-1, Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use, in accounting for development costs of software to be used
internally. SOP 98-1 requires that both internal and external cost
incurred to develop internal-use computer software during the application
development stage be capitalized and subsequently amortized over the estimate
economic useful life of the software. These costs are included with
machinery and equipment, a separate component of property and
equipment.
The
Company accounts for investments in accordance with SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities. Investments, which are
classified as available-for-sale, are carried at fair value and reported as a
component of other noncurrent assets in the Company’s Consolidated Balance
Sheet. Realized gains and losses on investments are determined using
the specific identification method and reported as a component of selling,
general and administrative expenses in the accompanying statements of
operations. Unrealized holding gains and losses, net of related tax
effects, are excluded from earnings and are reported in accumulated other
comprehensive income, a separate component of stockholders’ equity in the
accompanying balance sheets, until realized.
At
December 31, 2007, the Company owned shares of an actively traded public entity
that had a fair market value of $334 and were included in prepaid expenses and
other current assets at December 31, 2007. The unrealized holding
gain of $108, net of a $71 tax effect, was recorded in accumulated other
comprehensive income at December 31, 2007.
During
2005, the Company sold its shares of common stock in Lucent Technologies,
Inc. (the “Lucent shares”) for $1,997, net of transaction costs,
realizing a gain on the sale in the same amount. At December 31, 2005, an
additional 74,724 Lucent
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
shares
were held in escrow for indemnification related to Lucent’s acquisition of
Telica. During the first quarter of 2006, the shares held in escrow were
released to the Company in which the Company subsequently sold all of the shares
and realized a gain of $211.
The
Company also holds investments related to its deferred compensation
plan. These investments, which are classified as trading securities
and held in a Rabbi Trust, are carried at fair value and reported as a component
of other noncurrent assets. Unrealized holding gains and losses are
included in earnings as a component of other income or
expense. During 2007, 2006 and 2005, net unrealized holding gains of
$164, $171 and $121, respectively, related to Rabbi Trust investments were
recorded.
The
Company accounts for business acquisitions in accordance with SFAS No. 141,
Business Combinations,
which requires that the purchase method of accounting be used for all business
“combinations” completed after June 30, 2001. The Company determines and
records the fair values of assets acquired and liabilities assumed as of the
dates of acquisition. The Company utilizes an independent valuation specialist
to determine the fair values of identifiable intangible assets acquired in order
to determine the portion of the purchase price allocable to these
assets. The Company has not acquired any business since
2004.
Goodwill
and Indefinite-lived Intangible Assets
Goodwill
is recorded when the consideration paid for business acquisitions exceeds the
fair value of net tangible and identifiable intangible assets acquired. The
Company accounts for goodwill and other intangible assets in accordance with
SFAS No. 142, Goodwill
and Other Intangible Assets (“SFAS 142”), which requires that
goodwill and other intangible assets with indefinite useful lives no longer be
amortized, but rather, be tested annually for impairment. In accordance with
SFAS 142, goodwill recorded in conjunction with the Company’s business
acquisitions is not being amortized.
The
Company assesses goodwill for impairment at least once each year by applying a
direct value-based fair value test. Goodwill could be impaired due to market
declines, reduced expected future cash flows, or other factors or events. Should
the fair value of goodwill at the measurement date fall below its carrying
value, a charge for impairment of goodwill would occur in that period.
SFAS 142 requires a two-step impairment testing approach. Companies must
first determine whether goodwill is impaired and if so, they must value that
impairment based on the amount by which the book value exceeds the estimated
fair value. As a result of the annual impairment test performed as of
December 31, 2007, the Company determined that the carrying amount of
goodwill did not exceed its fair value and, accordingly, did not record a charge
for impairment. There can be no assurance that goodwill will not
become impaired in future periods.
Intangible and Other Long-lived
Assets
The
Company uses assumptions in establishing the carrying value, fair value and
estimated lives of identifiable intangible and other long-lived assets. The
Company accounts for impairments under SFAS No. 144, Accounting for the Impairment or
Disposal of Long-lived Assets. Long-lived assets are reviewed for
impairment whenever events or changes in circumstances indicate that the asset
carrying value may not be recoverable. Recoverability is measured by a
comparison of the asset’s continuing ability to generate positive income from
operations and positive cash flow in future periods compared to the carrying
value of the asset. If assets are considered to be impaired, the impairment is
recognized in the period of identification and is measured as the amount by
which the carrying value of the asset exceeds the fair value of the asset. The
useful lives and related amortization of identifiable intangible assets are
based on their estimated residual value in proportion to the economic benefit
consumed. The useful lives and related depreciation of other long-lived assets
are based on the Company’s estimate of the period over which the asset will
generate revenue or otherwise be used by the Company.
Asset Retirement
Obligations
The
Company accounts for obligations associated with retirements of long-lived
assets under SFAS No. 143, Accounting for Asset Retirement
Obligations (“SFAS 143”). This statement addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. In March
2005, the FASB issued FASB Interpretation No. 47, Accounting for Conditional Asset
Retirement Obligations (“FIN 47”). FIN 47 clarifies that the
term “conditional asset retirement obligation,” as used in SFAS 143, refers
to a legal obligation to perform an asset retirement activity in which the
timing and/or method of settlement are conditional on a future event that may or
may not be within the control of the entity. However, the obligation to perform
the asset retirement activity is unconditional even
though
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
uncertainty
exists about the timing and/or method of settlement. FIN 47 requires that
the uncertainty about the timing and/or method of settlement of a conditional
asset retirement obligation be factored into the measurement of the liability
when sufficient information exists. FIN 47 also clarifies when an entity
would have sufficient information to reasonably estimate the fair value of an
asset retirement obligation. The Company determined that no obligations were
required to be recognized at December 31, 2007 and 2006.
On
January 1, 2007, the Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (“FIN 48”), which addresses the determination of how tax benefits
claimed or expected to be claimed on a tax return should be recorded in the
financial statements. Under FIN 48, the Company must recognize the tax benefit
from an uncertain tax position only if it is more likely than not that the tax
position will be sustained on examination by the taxing authorities, based on
the technical merits of the position. The tax benefits recognized in the
financial statements from these positions are measured based on the largest
benefit that has a greater than fifty percent likelihood of being realized upon
ultimate resolution. Interest costs and penalties related to uncertain tax
positions continue to be classified as net interest expense and selling, general
and administrative costs, respectively, in the Company’s financial
statements.
The
Company accounts for income taxes using the asset and liability method in
accordance with SFAS No. 109, Accounting for Income Taxes,
pursuant to which deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
the financial statements in the period that includes the enactment date.
Valuation allowances are provided if based upon the weight of available
evidence, it is more likely than not that some or all of the deferred tax assets
will not be realized. The Company has considered future taxable income and
ongoing prudent and feasible tax planning strategies in assessing the need for
the valuation allowance. In the event it is determined that the Company would
not be able to realize its deferred tax asset in excess of their net recorded
amount, an adjustment to the deferred tax asset would increase income in the
period such determination was made. Likewise, should the Company determine it
would not be able to realize all or part of its net deferred tax asset in the
future, an adjustment to the deferred tax asset would be charged to income in
the period such determination was made. The Company determined that no valuation
allowance was required at December 31, 2007 and 2006.
The
Company adopted the accounting requirements of SFAS No. 158, Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements
No. 87, 88, 106, and 132(R), (“SFAS 158”) as of December 31,
2006. As required by SFAS 158, the Company will continue to apply the
provisions in SFAS No. 87, Employers Accounting for
Pensions, in
measuring plan assets and benefit obligations associated with its defined
benefit pension plan in determining the amount of net periodic benefit cost. SFAS 158 requires
entities to measure plan assets and benefit obligations as of the date of their
fiscal year end which is effective for the Company’s fiscal year ending on
December 31, 2008. Early application is allowed, however, the Company
has elected not to change the measurement date provision as of December 31,
2007.
Accounting
and reporting for the Company’s pension plan requires the use of assumptions,
including but not limited to, a discount rate and an expected return on
assets. These assumptions are reviewed at least annually based on reviews of
current plan information and consultation with the Company’s independent actuary
and the plan’s investment advisor. If these assumptions differ materially from
actual results, the Company’s obligations under the pension plan could also
differ materially, potentially requiring the Company to record an additional
pension liability. An independent actuarial valuation of the pension plan is
performed each year.
Costs
associated with obtaining the Company’s financing arrangements are deferred and
amortized over the term of the financing arrangements using the effective
interest method.
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
Fair Value of Financial
Instruments
The
carrying values of cash and cash equivalents, contract receivables and accounts
payable approximate fair value because of the short-term nature of these
instruments. Investment securities are carried at fair value. The
fair value of debt instruments approximates carrying value because these
agreements bear interest at variable market rates.
The
Company accounts for operating leases in accordance with the provisions of SFAS
No. 13, Accounting for
Leases, which require minimum lease payments be recognized on a
straight-line basis, beginning on the date that the lessee takes possession or
control of the property. When the terms of an operating lease provide
for periods of free rent, rent concessions and/or rent escalations, the Company
establishes a deferred rent liability for the difference between the scheduled
rent payment and the straight-line rent expense recognized. The
deferred rent liability is amortized over the underlying lease term on a
straight-line basis as a reduction of rent expense. The Company had a
deferred rent liability of $1,177 and $1,031 recorded as of December 31, 2007
and 2006, respectively. The long-term portions of the deferred rent
liability of $1,037 and $953 were recorded in other long-term liabilities as of
December 31, 2007 and 2006, respectively, and the remaining current portions
were recorded in other accrued expenses in the accompanying balance
sheets.
The
Company recognizes obligations associated with restructuring activities in
accordance with SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities, (“SFAS 146”). SFAS 146
generally requires a liability for costs associated with an exit or disposal
activity be recognized and measured initially at its fair value in the period in
which the liability is incurred. The overall purpose of the Company’s
restructuring actions is to lower overall operating costs and improve
profitability by reducing excess capacities. Restructuring charges are typically
reported in selling, general and administrative expenses in the period in which
the plan is approved by the Company’s senior management and, where material, the
Company’s Board of Directors, and when the liability is
incurred.
The
Company accounts for comprehensive income in accordance with SFAS No. 130, Reporting Comprehensive
Income. As it relates to the Company, comprehensive income is
defined as net income plus other comprehensive income, which is the sum of
changes in additional pension liabilities and unrealized gains and losses on
investments available for sale, and is presented net of tax in the
accompanying statements of changes in stockholders’ equity and comprehensive
income.
Basic
earnings per share are computed by dividing net income by the weighted average
number of shares of common stock outstanding during the period. Diluted earnings
per share is determined by using the weighted average number of common and
dilutive common equivalent shares outstanding during the period.
Restricted
shares of common stock that vest based on the satisfaction of certain conditions
are treated as contingently issuable shares until the conditions are satisfied.
These shares are excluded from the basic earnings per share calculation and
included in the diluted earnings per share calculation.
The
Company accounts for share-based compensation in accordance with SFAS No. 123
(revised 2004), Share-Based
Payment (“SFAS 123(R)”), and related interpretations. SFAS
123(R) requires the measurement and recognition of compensation expense based on
estimated fair value for all share-based payment awards including stock options,
employee stock purchases under employee stock purchase plans, non-vested share
awards (restricted stock) and stock appreciation rights. The Company uses the
Black-Scholes pricing model as the most appropriate method for determining the
estimated fair value of all applicable awards. For share-based awards granted
after January 1, 2006, the Company recognized compensation expense based on the
estimated grant date fair value method required under SFAS 123(R). For all
awards the Company has recognized compensation expense using a straight-line
amortization method over the vesting period of the award. As SFAS 123(R)
requires that share-based compensation expense be based on awards that
ultimately vest, estimated share-based compensation
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
for 2007
and 2006 has been reduced for estimated forfeitures. Pursuant to the income tax
provisions included in SFAS 123(R), the Company has elected the “long-form”
method of establishing the beginning balance of the pool of excess tax benefits
available to absorb tax deficiencies recognized subsequent to the adoption of
SFAS 123(R).
The
Company adopted the provisions of SFAS 123(R), using the modified prospective
transition method, beginning January 1, 2006. Accordingly, the
Company recorded share-based compensation expense during 2006 for awards granted
prior to but not yet vested as of January 1, 2006 as if the fair value method
required for pro forma disclosure under SFAS 123 were in effect for expense
recognition purposes, adjusted for estimated forfeitures. During the first
quarter of 2006, the Company recorded a pre-tax cumulative benefit of accounting
change of $146 ($84 net of tax effects) related to estimating forfeitures for
restricted stock awards that were unvested as of January 1,
2006. In accordance with that transition method, the Company
has not restated prior periods for the effect of compensation expense calculated
under SFAS 123(R). Prior to the adoption of SFAS 123(R), the Company
provided the disclosures required under SFAS 123, as amended by SFAS No. 148,
“Accounting for Stock-Based Compensation – Transition and Disclosures.”
Forfeitures of awards were recognized as they occurred. The pro forma
information for the year ended December 31, 2005 was as follows:
Net
income, as reported
|
|
$ |
11,433 |
|
Add:
Share-based employee compensation expense included in reported net income,
net of related tax effects
|
|
|
515 |
|
Deduct:
Total share-based employee compensation expense determined under the fair
value based method for all awards, net of related tax
effects
|
|
|
(1,204 |
) |
Pro
forma net income
|
|
$ |
10,744 |
|
|
|
|
|
|
Earnings
per common share:
|
|
|
|
|
As
reported:
|
|
|
|
|
Basic
|
|
$ |
1.30 |
|
Diluted
|
|
$ |
1.24 |
|
Pro
forma:
|
|
|
|
|
Basic
|
|
$ |
1.22 |
|
Diluted
|
|
$ |
1.16 |
|
Change
in Accounting Principle
The
modified prospective transition method of SFAS 123(R) requires an adjustment to
record the cumulative effect of a change in accounting principle to reflect the
compensation cost that would not have been recognized in prior periods had
forfeitures been estimated during those periods. This adjustment
applies only to compensation costs previously recognized in the financial
statements for awards that were unvested on the adoption date. Upon
the adoption of SFAS 123(R), the Company recorded a cumulative benefit of
accounting change of $84, net of income taxes of $62, related to estimating
forfeitures for restricted stock awards that were unvested as of January 1,
2006.
Certain reclassifications have been
made to prior periods, as a result of the current year presentation with no
effect on net earnings.
Recent Accounting
Pronouncements
In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements
(“SFAS 157”). SFAS 157 clarifies the principle that fair value should be based
on the assumptions market participants would use when pricing an asset or
liability and establishes a fair value hierarchy that prioritizes the
information used to develop those assumptions. Under SFAS 157, fair value
measurements would be separately disclosed by level within the fair value
hierarchy. The provisions of SFAS 157, as issued, are effective for the fiscal
years beginning after November 15, 2007. However, in February 2008, the
FASB issued FASB Staff Position No. 157-2, Effective Date of FASB Statement No.
157, (“FSP 157-2”) that amended SFAS 157
to delay the effective date of for all non-financial assets and non-financial
liabilities, except those that are recognized or disclosed at fair value in the
financial statements on a recurring basis (that is, at least annually). FSP
157-2 defers the effective date of SFAS 157 to fiscal years beginning after
November 15, 2008, and interim periods within those fiscal years for items
within the scope
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
of FSP
157-2. The Company adopted the required provision of SFAS 157 as of
January 1, 2008. The Company does not expect the adoption of SFAS 157 to
have a material impact on its consolidated financial statements.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities - Including an amendment of FASB Statement No.
115 (“SFAS 159”). SFAS 159 permits entities to choose to
measure many financial instruments and certain other items at fair value. The
objective is to improve financial reporting by providing entities with the
opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex hedge
accounting provisions. SFAS 159 is effective as of the beginning of an entity's
first fiscal year that begins after November 15, 2007. Although the Company
adopted SFAS 159 as of January 1, 2008, the Company has not yet elected the
fair value option for any items permitted under SFAS 159.
In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations (“SFAS
141(R)”), which amends SFAS No. 141, and provides revised guidance for
recognizing and measuring identifiable assets and goodwill acquired, liabilities
assumed, and any noncontrolling interest in the acquiree. It also provides
disclosure requirements to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. SFAS 141(R) is
effective for fiscal years beginning after December 15, 2008 and is to be
applied prospectively. SFAS 141(R) will have an impact on accounting for
business combinations once adopted but the effect is dependent upon acquisitions
at that time.
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements—An Amendment of ARB No. 51 (“SFAS
160”). SFAS 160 establishes new accounting and reporting standards for the
non-controlling interest in a subsidiary and for the deconsolidation of a
subsidiary. SFAS 160 is effective for fiscal years beginning on or after
December 15, 2008 and early adoption is prohibited. The Company does not
currently expect the adoption of SFAS 160 to have a material impact on its
consolidated financial statements.
NOTE
3. DISCONTINUED OPERATIONS
During
2005, the Company charged $422 in expenditures against the remaining lease exit
cost accrual for its discontinued Encoder Division operations, which was sold in
2003. The lease on the Encoder facility expired in August 2005.
Accordingly, lease payments and payments for other associated costs were made
and charged to the accrual through that date. The difference between the fair
value of the total lease costs and the total cash payments were charged to
discontinued operations as expense through the expiration of the lease term,
including sublease income initially estimated at the time the accrual was
recorded, but not subsequently realized.
NOTE 4. SUPPLEMENTAL BALANCE
SHEET INFORMATION
The
composition of selected balance sheet accounts is as follows:
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Property
and equipment, net:
|
|
|
|
|
|
|
Production
equipment
|
|
$ |
11,917 |
|
|
$ |
11,942 |
|
Software
|
|
|
11,052 |
|
|
|
11,283 |
|
Furniture
and other equipment
|
|
|
6,862 |
|
|
|
8,792 |
|
Leasehold
improvements
|
|
|
2,375 |
|
|
|
2,137 |
|
Property
and equipment
|
|
|
32,206 |
|
|
|
34,154 |
|
Less
accumulated depreciation
|
|
|
(22,024 |
) |
|
|
(22,645 |
) |
Property
and equipment, net
|
|
$ |
10,182 |
|
|
$ |
11,509 |
|
|
|
|
|
|
|
|
|
|
Other
noncurrent assets:
|
|
|
|
|
|
|
|
|
Deferred
compensation plan investments
|
|
$ |
1,747 |
|
|
$ |
1,627 |
|
Equity
investment
|
|
|
1,119 |
|
|
|
787 |
|
Prepaid
pension asset
|
|
|
718 |
|
|
|
- |
|
Other
|
|
|
495 |
|
|
|
592 |
|
Other
noncurrent assets
|
|
$ |
4,079 |
|
|
$ |
3,006 |
|
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Accrued
compensation and employee benefits:
|
|
|
|
|
|
|
Accrued
payroll and payroll taxes
|
|
$ |
6,967 |
|
|
$ |
5,956 |
|
Accrued
vacation
|
|
|
4,273 |
|
|
|
4,343 |
|
Accrued
pension liability
|
|
|
- |
|
|
|
2,000 |
|
Other
|
|
|
2,488 |
|
|
|
2,174 |
|
Accrued
compensation and employee benefits
|
|
$ |
13,728 |
|
|
$ |
14,473 |
|
|
|
|
|
|
|
|
|
|
Other
accrued expenses:
|
|
|
|
|
|
|
|
|
Deferred
gain on sale of building
|
|
$ |
676 |
|
|
$ |
676 |
|
Accrued
income taxes
|
|
|
585 |
|
|
|
946 |
|
Amount
outstanding under letter of credit
|
|
|
36 |
|
|
|
1,016 |
|
Other
|
|
|
1,951 |
|
|
|
2,563 |
|
Other
accrued expenses
|
|
$ |
3,248 |
|
|
$ |
5,201 |
|
|
|
|
|
|
|
|
|
|
Other
long-term liabilities:
|
|
|
|
|
|
|
|
|
Deferred
gain on sale of building
|
|
$ |
4,733 |
|
|
$ |
5,407 |
|
Deferred
compensation plan liability
|
|
|
1,747 |
|
|
|
1,627 |
|
Long-term
contract payments
|
|
|
- |
|
|
|
2,700 |
|
Accrued
pension liability
|
|
|
- |
|
|
|
1,933 |
|
Other
|
|
|
1,607 |
|
|
|
1,138 |
|
Other
long-term liabilities
|
|
$ |
8,087 |
|
|
$ |
12,805 |
|
NOTE
5. GOODWILL AND INTANGIBLE ASSETS
The
Company’s identifiable intangible assets consisted solely of customer
relationships as of December 31, 2007 and 2006. The carrying cost of
customer relationships for both periods was $12,800, offset by accumulated
amortization of $9,731 and $7,129 as of December 31, 2007 and 2006,
respectively. The Company recorded amortization expense for its
identifiable intangible assets of $2,602, $2,809 and $3,039 in the years ended
December 31, 2007, 2006 and 2005, respectively. At December 31, 2007,
estimated future amortization expense for the identifiable intangible assets to
be recorded by the Company in subsequent fiscal years was as
follows:
Year
ending December 31:
|
|
|
|
2008
|
|
$ |
2,038 |
|
2009
|
|
$ |
1,031 |
|
There
were no changes in the carrying amount of goodwill for the years ended
December 31, 2007 and 2006. The carrying amount of goodwill of $63,055 at
December 31, 2007 and December 31, 2006 was included in the Systems
and Services segment.
Total
income tax expense was allocated as follows:
|
|
Year
ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Income
from operations
|
|
$ |
4,682 |
|
|
$ |
2,730 |
|
|
$ |
7,781 |
|
Cumulative
benefit of accounting change
|
|
|
- |
|
|
|
62 |
|
|
|
- |
|
Stockholders’
equity for compensation expense for tax purposes in excess of amounts
recognized for financial reporting purposes
|
|
|
(77 |
) |
|
|
(161 |
) |
|
|
(404 |
) |
Other
comprehensive income
|
|
|
1,617 |
|
|
|
1,026 |
|
|
|
(1,969 |
) |
|
|
$ |
6,222 |
|
|
$ |
3,657 |
|
|
$ |
5,408 |
|
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
The
components of the provision for federal and state income taxes from operations
were as follows:
|
|
Year
ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Currently
payable
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$ |
6,623 |
|
|
$ |
8,041 |
|
|
$ |
4,902 |
|
State
|
|
|
1,031 |
|
|
|
1,433 |
|
|
|
1,010 |
|
Total
currently payable
|
|
|
7,654 |
|
|
|
9,474 |
|
|
|
5,912 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
(prepaid)
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(2,490 |
) |
|
|
(5,174 |
) |
|
|
1,493 |
|
State
|
|
|
(482 |
) |
|
|
(1,570 |
) |
|
|
376 |
|
Total
deferred (prepaid)
|
|
|
(2,972 |
) |
|
|
(6,744 |
) |
|
|
1,869 |
|
Provision
for income taxes
|
|
$ |
4,682 |
|
|
$ |
2,730 |
|
|
$ |
7,781 |
|
The major
items contributing to the difference between the statutory U.S. federal income
tax rate and the Company’s effective tax rate on income from continuing
operations were as follows:
|
|
Year
ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Provision
at statutory rate
|
|
$ |
4,124 |
|
|
|
35.0 |
% |
|
$ |
2,351 |
|
|
|
35.0 |
% |
|
$ |
6,533 |
|
|
|
34.0 |
% |
State
income taxes, net of federal tax benefit
|
|
|
512 |
|
|
|
4.3 |
|
|
|
355 |
|
|
|
5.3 |
|
|
|
923 |
|
|
|
4.8 |
|
Permanent
differences, net
|
|
|
166 |
|
|
|
1.4 |
|
|
|
177 |
|
|
|
2.6 |
|
|
|
170 |
|
|
|
0.9 |
|
SFAS
123(R) expense
|
|
|
73 |
|
|
|
0.6 |
|
|
|
166 |
|
|
|
2.5 |
|
|
|
- |
|
|
|
- |
|
Change
in deferred tax rate
|
|
|
- |
|
|
|
- |
|
|
|
186 |
|
|
|
2.8 |
|
|
|
- |
|
|
|
- |
|
Adjustments
to tax accruals and reserves
|
|
|
(201 |
) |
|
|
(1.7 |
) |
|
|
(266 |
) |
|
|
(4.0 |
) |
|
|
127 |
|
|
|
0.7 |
|
Tax
credits and state audits
|
|
|
(82 |
) |
|
|
(0.7 |
) |
|
|
(226 |
) |
|
|
(3.4 |
) |
|
|
- |
|
|
|
- |
|
Other,
net
|
|
|
90 |
|
|
|
0.8 |
|
|
|
(13 |
) |
|
|
(0.2 |
) |
|
|
28 |
|
|
|
0.1 |
|
Provision
for income taxes
|
|
$ |
4,682 |
|
|
|
39.7 |
% |
|
$ |
2,730 |
|
|
|
40.6 |
% |
|
$ |
7,781 |
|
|
|
40.5 |
% |
The tax
effects of significant temporary differences that comprise deferred tax assets
and liabilities are as follows:
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Pension
liability
|
|
$ |
4,465 |
|
|
$ |
6,010 |
|
Deferred
gain on sale of building
|
|
|
2,680 |
|
|
|
2,768 |
|
Accrued
vacation
|
|
|
1,152 |
|
|
|
1,163 |
|
Accrued
expenses
|
|
|
1,050 |
|
|
|
689 |
|
Employee
share-based compensation
|
|
|
903 |
|
|
|
713 |
|
Receivables
reserves
|
|
|
477 |
|
|
|
314 |
|
Other
|
|
|
5 |
|
|
|
- |
|
Deferred
tax assets
|
|
|
10,732 |
|
|
|
11,657 |
|
|
|
|
|
|
|
|
|
|
Unbilled
receivables
|
|
|
(7,476 |
) |
|
|
(9,207 |
) |
Pension
funding
|
|
|
(4,749 |
) |
|
|
(5,675 |
) |
Fixed
assets and intangibles
|
|
|
(3,348 |
) |
|
|
(3,052 |
) |
Domestic
International Sales Corporation
|
|
|
(1,973 |
) |
|
|
(1,961 |
) |
Investment
available for sale
|
|
|
(132 |
) |
|
|
- |
|
Other
|
|
|
(56 |
) |
|
|
(119 |
) |
Deferred
tax liability
|
|
|
(17,734 |
) |
|
|
(20,014 |
) |
Deferred
tax liability, net
|
|
$ |
(7,002 |
) |
|
$ |
(8,357 |
) |
Management
believes that it is more likely than not that these deferred tax assets will be
realized.
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
On
January 1, 2007, the Company adopted the provisions of FIN 48. The
implementation of FIN 48 did not have a material impact on the amount of the
Company’s tax liability for unrecognized tax benefits. As of the date of
adoption, the Company had $291 of unrecognized tax benefits, of which
approximately $100 would affect its effective tax rate if recognized. As of the
date of adoption, the Company had approximately $89 of accrued interest and
penalties related to unrecognized tax
benefits.
At December 31,
2007, the Company had unrecognized tax benefits of $517, which if recognized in
future periods, could favorably impact the effective tax rate by approximately
$154. The total amount of accrued interest and penalties resulting
from such unrecognized tax benefits was $115 at December 31,
2007. The change in the unrecognized tax benefits was as
follows:
Balance
at January 1, 2007
|
|
$ |
291 |
|
Additions
for current year tax positions
|
|
|
237 |
|
Reductions
for prior year tax positions
|
|
|
(9 |
) |
Lapse
of statute of limitations
|
|
|
(2 |
) |
Balance
at December 31, 2007
|
|
|
517 |
|
Interest
and penalties
|
|
|
115 |
|
Total
unrecognized tax benefits, including interest and
penalties
|
|
$ |
632 |
|
The
Internal Revenue Service (“IRS”) has initiated an audit of the Company’s 2004
income tax return. The IRS continues to challenge the deferral of
income for tax purposes related to unbilled receivables including the
applicability of a Letter Ruling issued by the IRS to the Company in January
1976 which granted to the Company deferred tax treatment of the unbilled
receivables. This issue has been elevated to the IRS National Office
for determination. While the outcome of the audit is not expected to
be known for several months and remains uncertain, the Company may incur
interest expense, its deferred tax liabilities may be reduced and income tax
payments may be increased substantially in future periods.
The
Company files income tax returns in the U.S. federal jurisdiction and numerous
state jurisdictions. Federal and state tax returns for all years
after 2003 are subject to future examination.
NOTE
7. FINANCING ARRANGEMENTS
The
Company’s revolving credit facility (the “credit facility”) provides for a
$50,000 three-year revolving credit agreement (the “revolver”) for working
capital needs. The bank group, led by Brown Brothers Harriman & Co. as a
lender and as administrative agent, also includes TD Banknorth, N.A. and Bank of
America, N.A. The revolver matures on September 29, 2009.
The fee
on the unused portion of the revolver ranges from 0.25% to 0.50% per annum,
depending on the Company’s leverage ratio, and is payable quarterly in arrears.
The Company has the option of selecting an annual interest rate for the revolver
equal to either: (i) the then applicable LIBOR rate plus 1.50% to 2.50% per
annum, depending on the Company’s most recently reported leverage ratio; or
(ii) the Base Rate. The Base Rate means the higher of the base rate as
announced from time to time by Brown Brothers Harriman & Co. or the Federal
Funds Effective Rate plus one-half percent (.50%) per annum. For
those portions of the revolver accruing at the LIBOR rate, the Company has the
option of selecting interest periods of 30, 60, 90 or
180 days.
On an
ongoing basis, the credit facility requires the Company to meet certain
financial covenants, including maintaining a minimum net worth and certain cash
flow and debt coverage ratios. The covenants also limit the Company’s ability to
incur additional debt, pay dividends, purchase capital assets, sell or dispose
of assets, make additional acquisitions or investments, or enter into new
leases, among other restrictions. In addition, the credit facility provides that
the bank group may accelerate payment of all unpaid principal and all accrued
and unpaid interest under the credit facility, upon the occurrence and
continuance of certain events of default, including, among others, the
following:
|
•
|
Any
failure by the Company and its subsidiaries to make any payment of
principal, interest and other sums due under the credit facility within
three (3) calendar days of the date when the payment is
due;
|
|
•
|
Any
breach by the Company or any of its subsidiaries of certain covenants,
representations and warranties;
|
|
•
|
Any
default and acceleration of any indebtedness owed by the Company or any of
its subsidiaries to any person (other than the bank group) which is in
excess of $1,000;
|
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
|
•
|
Any
final judgment against the Company or any of its subsidiaries in excess of
$1,000 which has not been insured to the reasonable satisfaction of Brown
Brothers Harriman & Co. as administrative agent;
|
|
•
|
Any
bankruptcy (voluntary or involuntary) of the Company or any of its
subsidiaries;
|
|
•
|
Any
material adverse change in the business or financial condition of the
Company and its subsidiaries; or
|
|
•
|
A
change in control of the Company, as described in the credit
facility.
|
At
December 31, 2007, the Company was in compliance with its debt
covenants.
The
Company’s outstanding debt of $7,737 and $15,000 at December 31, 2007 and 2006,
respectively, consisted of net borrowings against the revolver. The
interest rate on $5,000 of the outstanding balance at December 31, 2007 was
6.34% based on the 60-day LIBOR option elected on December 31,
2007. The interest rate on the remaining $2,737 outstanding balance
at December 31, 2007 was 7.25% based on a base rate option that was in effect on
December 31, 2007. The interest rate for the outstanding debt at December 31,
2006 was 6.87% based on the 90-day LIBOR option elected on October 5,
2006. Borrowings under the revolver have been classified as a
long-term liability. The repayment of borrowings under the revolver
is contractually due on the maturity of the credit facility, however the Company
may repay at any time prior to that date. At December 31, 2007, the
remaining available balance to borrow against the revolver was
$41,232.
NOTE
8. EMPLOYEE BENEFIT PROGRAMS
Defined
Benefit Pension Plan
On
October 25, 2006, the Company’s Board of Directors approved amendments to the
Company’s Defined Benefit Pension Plan (the “Pension Plan”) and to the Company’s
401(k) Savings and Investment Plan (the “401(k) Plan”). The Pension
Plan amendment removed the 3% annual benefit inflator for active
participants in the Pension Plan which froze each participant's calculated
pension benefit as of December 31, 2006. The Pension Plan amendment
resulted in a curtailment to the Pension Plan which was accounted for under the
provisions of SFAS No. 88, Employers’ Accounting for
Settlements and Curtailments and for Termination Benefits.
The
Company’s Pension Plan is non-contributory, covering substantially all employees
of the Company who had completed a year of service prior to July 1,
2002. Membership in the Pension Plan was frozen effective July 1,
2002 by approved actions by the Company’s Board of Directors in
2001.
The
Company’s funding policy is to contribute at least the minimum amount required
by the Employee Retirement Income Security Act of 1974. Additional amounts are
contributed to assure that plan assets will be adequate to provide retirement
benefits. The Company expects to contribute $500 to fund the Pension Plan in
2008.
In 2003,
the Company changed its Pension Plan measurement date to November 30 to
facilitate its fiscal year-end accounting for and disclosure of its Plan assets,
liabilities, income and expense. As required by SFAS No. 158, the
Company’s Pension Plan measurement date will be changed to December 31 beginning
in 2008.
Net
Periodic Pension Cost
|
|
Year
ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Interest
cost
|
|
$ |
3,955 |
|
|
$ |
3,995 |
|
|
$ |
3,937 |
|
Expected
return on plan assets
|
|
|
(5,811 |
) |
|
|
(5,117 |
) |
|
|
(4,407 |
) |
Recognized
actuarial loss
|
|
|
1,104 |
|
|
|
1,717 |
|
|
|
1,503 |
|
Net
periodic pension cost (income)
|
|
$ |
(752 |
) |
|
$ |
595 |
|
|
$ |
1,033 |
|
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
Obligations
and Funded Status
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
Change
in benefit obligation
|
|
|
|
|
|
|
Benefit
obligation at beginning of year
|
|
$ |
70,006 |
|
|
$ |
70,761 |
|
Curtailment
|
|
|
- |
|
|
|
(3,012 |
) |
Interest
cost
|
|
|
3,955 |
|
|
|
3,995 |
|
Benefits
paid
|
|
|
(2,760 |
) |
|
|
(2,625 |
) |
Actuarial
(gain) loss
|
|
|
(3,859 |
) |
|
|
887 |
|
Benefit
obligation at end of year
|
|
|
67,342 |
|
|
|
70,006 |
|
Change
in plan assets
|
|
|
|
|
|
|
|
|
Fair
value of plan assets at beginning of year
|
|
|
66,073 |
|
|
|
56,260 |
|
Actual
return on plan assets
|
|
|
4,747 |
|
|
|
7,218 |
|
Employer
contributions
|
|
|
- |
|
|
|
5,220 |
|
Benefits
paid
|
|
|
(2,760 |
) |
|
|
(2,625 |
) |
Fair
value of plan assets at end of year
|
|
|
68,060 |
|
|
|
66,073 |
|
Funded
status
|
|
$ |
718 |
|
|
$ |
(3,933 |
) |
Amounts
recognized in the consolidated balance sheets consist of:
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
Other
noncurrent assets
|
|
$ |
718 |
|
|
$ |
- |
|
Accrued
compensation and employee benefits
|
|
|
- |
|
|
|
(2,000 |
) |
Other
long-term liabilities
|
|
|
- |
|
|
|
(1,933 |
) |
Net
amount recognized
|
|
$ |
718 |
|
|
$ |
(3,933 |
) |
The
accumulated benefit obligation for the Pension Plan was $67,342 and $70,006 at
December 31, 2007 and 2006, respectively. During 2006, the
accumulated benefit obligation was in excess of plan assets. The
Company reduced its additional liability by $3,899 to reflect the required
pension liability of $11,260 at December 31, 2007. In 2006, the
additional liability was reduced by $2,588 to reflect the required pension
liability of $15,159. These amounts are reflected, net of related tax
effects, in the caption “Accumulated other comprehensive loss” a separate
component of stockholders’ equity in the accompanying balance
sheets.
The
reconciliation of the unrecognized net actuarial loss was as
follows:
|
|
Beginning
|
|
|
|
|
|
Experience
|
|
|
Effect
of
|
|
|
Ending
|
|
|
|
Balance
|
|
|
Amortization
|
|
|
Loss/(Gain)
|
|
|
Curtailment
|
|
|
Balance
|
|
2007
|
|
$ |
15,159 |
|
|
$ |
(1,104 |
) |
|
$ |
(2,795 |
) |
|
$ |
- |
|
|
$ |
11,260 |
|
2006
|
|
$ |
21,102 |
|
|
$ |
(1,717 |
) |
|
$ |
(1,214 |
) |
|
$ |
(3,012 |
) |
|
$ |
15,159 |
|
The
Company expects to recognize amortization expense related to the net actuarial
loss of approximately $585 in 2008.
The
assumed discount rate, which is intended to be the actual rate at which benefits
could effectively be settled, is determined by a spot-rate yield curve method.
The spot-rate yield curve is employed to match the plan assets cash outflows
with the timing and amount of the expected benefit payments.
The
assumed expected rate of return on plan assets, which is the average return
expected on the funds invested or to be invested to provide future benefits to
pension plan participants, is determined by an annual review of historical plan
assets returns and consulting with outside investment advisors. In
selecting the expected long-term rate of return on assets, the Company
considered its investment return goals stated in the Pension Plan’s investment
policy. The Company, with input from
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
the
Pension Plan’s professional investment managers, also considered the average
rate of earnings expected on the funds invested or to be invested to provide
Pension Plan benefits. This process included determining expected returns for
the various asset classes that comprise the Pension Plan’s target asset
allocation. Based on this analysis, the Company’s overall expected long-term
rate of return on assets was over 9.0%; however, the Company determined that the
selection of a 9.0% long-term asset return assumption is appropriate and
prudent. This basis for selecting the expected long-term asset return assumption
is consistent with the prior year.
The
following assumptions were used to determine the benefit obligations and net
periodic benefit costs:
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
Used
to determine benefit obligations
|
|
|
|
|
|
|
Discount
rate
|
|
|
6.25 |
% |
|
|
5.75 |
% |
Rate
of compensation increase
|
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
Year
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Used
to determine net periodic benefit costs
|
|
|
|
|
|
|
|
|
|
|
|
Discount
rate
|
|
|
5.75 |
% |
|
|
5.75 |
% |
|
|
6.00 |
% |
Expected
rate of return on assets
|
|
|
9.00 |
% |
|
|
9.00 |
% |
|
|
9.00 |
% |
Rate
of compensation increase
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
The
Company’s investment policy includes a periodic review of the Pension Plan’s
investment in the various asset classes. The Company’s asset allocations by
asset category are as follows:
|
|
Target
|
|
|
December
31,
|
|
|
|
Allocation
|
|
|
2007
|
|
|
2006
|
|
Equity
securities
|
|
|
60 |
% |
|
|
64 |
% |
|
|
66 |
% |
Debt
securities
|
|
|
38 |
|
|
|
31 |
|
|
|
27 |
|
Other
|
|
|
2 |
|
|
|
5 |
|
|
|
7 |
|
|
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
The
Pension Plan’s assets did not include any of the Company’s common stock at
December 31, 2007 and 2006.
Estimated
Future Benefit Payments
The
following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid:
Year
ending December 31:
|
|
|
|
2008
|
|
$ |
3,315 |
|
2009
|
|
$ |
3,497 |
|
2010
|
|
$ |
3,665 |
|
2011
|
|
$ |
3,894 |
|
2012
|
|
$ |
4,182 |
|
Five
subsequent fiscal years ending December 31, 2017
|
|
$ |
23,595 |
|
The
Company also maintains a cash or deferred savings plan, the 401(k) Plan. All
employees are eligible to elect to defer a portion of their salary and
contribute the deferred portion to the 401(k) Plan.
On
January 1, 2007, the 401(k) Plan was restructured with two components:
(i) a Company matching contribution to 100% of the first 2% of the employee
contribution and an additional 50% of the next 4% of the employee contribution;
and (ii) a discretionary profit sharing contribution by the Company, even
if the employee does not contribute to the 401(k) Plan.
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
Employee
contributions and the Company’s matching and past core contributions are
invested in one or more collective investment funds at the participant’s
direction. The Company’s matching and past core contributions are subject to
forfeitures of any non-vested portion if termination occurs. The
vesting of the Company’s matching and future profit sharing contribution was
also restructured effective January 1, 2007. The restructured vesting
of the Company’s matching contribution is 25% after one year and 100% after the
second year. The restructured vesting of future profit sharing
contributions is 100% cliff vesting after three years. The Company’s
contributions, net of forfeitures, charged to expense aggregated $3,188, $3,383
and $3,033 in 2007, 2006 and 2005, respectively.
Supplemental
Executive Retirement Plan
The
Company has a Supplemental Executive Retirement Plan, or SERP, for certain
former key employees providing for annual benefits commencing on the sixth
anniversary of the executive’s retirement. The cost of these benefits is being
charged to expense and accrued using a projected unit credit method. Expense
related to this plan was $36 in 2007, $80 in 2006, and $25 in 2005. The
liability related to the SERP, which is unfunded, was $383 and $417 at
December 31, 2007 and 2006, respectively. These amounts represent the
amounts the Company estimates to be the present value of the obligation at each
respective date.
Deferred
Compensation Plans
The
Company has a deferred compensation plan approved by the Board of Directors that
allows certain employees the ability to annually elect to defer up to 100% of
any cash incentive payments from the Company and any salary in excess of the
FICA earnings ceiling. Employee contributions are invested in selected mutual
funds held within a Rabbi Trust. These investments, which the Company has
classified as trading securities as permitted by SFAS No. 115, are recorded
at fair value and reported as a component of other noncurrent assets in the
accompanying balance sheets. Amounts recorded as deferred compensation
liabilities are adjusted to reflect the fair value of investments held by the
Rabbi Trust. Changes in obligations to participants as a result of gains or
losses on the fair value of the investments are reflected as a component of
compensation expense. At December 31, 2007 and 2006, $1,747 and $1,627,
respectively, had been deferred under the plan.
The
Company also has a deferred compensation plan under which non-employee directors
may elect to defer their directors’ fees. Amounts deferred for each participant
are credited to a separate account, and interest at the lowest rate at which the
Company borrowed money during each quarter or, if there was no such borrowing,
at the prime rate, is credited to each account quarterly. The balance in a
participant’s account is payable in a lump sum or in installments when the
participant ceases to be a director.
NOTE
9. SHARE–BASED COMPENSATION
Share-Based
Compensation Plans
The
Company has four shareholder approved equity incentive plans, which are
administered by the Compensation Committee of the Board of Directors (the
“Committee”). The Committee determines which employees receive grants, the
number of shares or options granted and the exercise prices of the shares
covered by each grant.
The
Company’s 1993 Equity Incentive Plan (the “1993 Plan”) expired in April
2003. The 1993 Plan permitted the Company to grant incentive stock
options, nonqualified stock options, stock appreciation rights, awards of
nontransferable shares of restricted common stock and deferred grants of common
stock. The option price of incentive stock options was not less than the fair
market value at the time the option was granted. The option period was not
greater than 10 years from the date the option was granted. Normally the
stock options were exercisable in three equal installments beginning one year
from the date of the grant. Through shareholder approval, 580,800 shares
were reserved for the 1993 Plan. A total of 30,000, 83,180 and 108,081 stock
options were outstanding under the 1993 Plan, of which 30,000, 83,180 and
107,580 stock options were exercisable, at December 31, 2007, 2006 and 2005,
respectively.
The
Company’s 1995 Stock Option Plan for Non-employee Directors (the “1995 Plan”)
expired in April 2005. The 1995 Plan provided for each outside
director to receive options to purchase 5,000 shares of common stock at the
first annual meeting at which the director was elected. As long as he or she
remained an eligible director, the director received options to purchase
1,000 shares of common stock at each annual meeting. Eligible directors
could not be an employee of the Company or one of its subsidiaries or a holder
of five percent or more of the Company’s common stock. The exercise price of
these options was the
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
fair
market value of the common stock on the date of grant. Each option was
non-transferable except upon death and expires 10 years after the date of
grant. The options became exercisable in three equal installments on the first,
second and third anniversaries of the date of grant. A total of
132,000 shares were reserved for issuance. A total of 14,614, 20,614 and
20,614 stock options were outstanding under the 1995 Plan, of which 14,614,
18,947 and 15,613 stock options were exercisable, at December 31, 2007, 2006 and
2005, respectively.
The
Company’s 2000 Incentive Plan (the “2000 Plan”) allows the Company to grant
incentive stock options, nonqualified stock options, stock appreciation rights,
restricted stock awards and deferred grants of common stock. In the case of
incentive stock options, the option price will not be less than the fair market
value of the stock at the date of grant. The option period will not exceed
10 years from the date of grant. The terms of the 2000 Plan are
substantially similar to those of the 1993 Plan. A total of 1.5 million
shares were reserved for issuance, of which 96,434 shares remained
available at December 31, 2007. A total of 717,464, 786,885 and 860,698
stock options were outstanding under the 2000 Plan, of which 222,464, 236,217
and 273,362 stock options were exercisable, at December 31, 2007, 2006 and 2005,
respectively.
All
restricted stock awards granted by the Company were issued under the 2000 Plan.
Shares of restricted stock of the Company may be granted at no cost to
employees. Recipients are entitled to cash dividends and to vote
their respective shares. Restrictions limit the sale or transfer of
these shares until they vest, which is typically over three
years. The Company granted 99,300, 69,900 and 111,580 restricted
stock awards during the years ended December 31, 2007, 2006 and 2005,
respectively, of which 223,330, 212,264 and 221,816 awards were unvested and
outstanding as of December 31, 2007, 2006 and 2005,
respectively.
During
2001, the Board of Directors approved the Executive Long Term Incentive Program
(the “ELTIP”), implemented under the provisions of the 2000 Plan. The ELTIP
provides incentives to program participants through a combination of stock
options and restricted stock grants, which vest fully in seven years. The ELTIP
allows for accelerated vesting based on the Company’s achievement of specified
financial performance goals. During 2001, the Company granted stock options
totaling 750,000 shares of common stock at fair market value and awarded
121,000 shares of restricted common stock under the
ELTIP. Included in the 2000 Plan amounts stated above, a total
of 495,000, 540,000 and 565,000 stock options and 77,000, 84,000 and 89,000
restricted stock awards were outstanding and not yet vested under the ELTIP at
December 31, 2007, 2006 and 2005, respectively. The ELTIP stock option and
restricted stock awards will fully vest in May 2008.
The
Company’s 2003 Incentive Plan (the “2003 Plan”) allows the Company to grant
incentive stock options, non-qualified stock options, stock appreciation rights,
awards of nontransferable shares of restricted common stock and deferred grants
of common stock up to a total of 400,000 shares to directors or key
employees of the Company. The terms of the 2003 Plan are substantially similar
to those of the 2000 Plan. There were no awards granted under the 2003 Plan from
its inception.
During
1999, the Company granted a key executive officer 250,000 non-qualified stock
options that were not part of an approved shareholder plan. Twenty percent of
the options vested immediately and an additional twenty percent vested in each
successive year from the date of the grant. The option price for these grants
was the fair market value at the time of the grant. For the three years ended
December 31, 2007, a total of 250,000 stock options were outstanding and
exercisable. These stock options expire in November
2009.
Employee
Stock Purchase Plan
The
Company’s shareholders approved the 2000 Employee Stock Purchase Plan (the
“ESPP”) which is designed to give eligible employees an opportunity to purchase
common stock of the Company through accumulated payroll deductions. All
employees of the Company or designated subsidiaries who customarily work at
least 20 hours per week and do not own five percent or more of the
Company’s common stock are eligible to participate in the ESPP. A total of
1,300,000 shares are available for issuance under the ESPP, of which 484,434
shares were remaining at December 31, 2007. In 2007, 2006 and
2005, a total of 59,662, 140,542 and 129,545 shares were issued,
respectively, under the ESPP.
On
October 25, 2006, the Company’s Board of Directors approved an amendment to
eliminate the “look-back” option and to reduce the stock purchase discount from
15% to 5% under the ESPP effective November 1, 2006. Under SFAS
123(R), this amendment results in the Company accounting for shares purchased in
connection with the ESPP as non-compensatory as of the effective
date.
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
Share-Based
Compensation Costs
Total
share-based compensation cost reported in the Consolidated Statements of
Operations was as follows:
|
|
Year
ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Cost
of products and services
|
|
$ |
605 |
|
|
$ |
1,065 |
|
|
$ |
- |
|
Selling,
general and administrative
|
|
|
1,035 |
|
|
|
1,163 |
|
|
|
865 |
|
Cumulative
effect of accounting change
|
|
|
- |
|
|
|
(146 |
) |
|
|
- |
|
Total
share-based compensation expense
|
|
$ |
1,640 |
|
|
$ |
2,082 |
|
|
$ |
865 |
|
Valuation
Assumptions
The fair
value of share-based awards for employee stock option awards and employee stock
purchases made under the ESPP was estimated using the Black-Scholes pricing
model. During 2005, the Company realigned its approach to share-based
compensation by increasing the issuance of restricted stock awards and reducing
the issuance of stock options. As a result, no stock options were
awarded during 2007 and 2006. The following weighted average
assumptions were used for stock option issued during 2005: risk-free
rate of 3.87%; dividend yield of zero; volatility of 66.38%; and expected life
of 6.5 years.
During
2007, valuation assumptions were not required for employee stock purchases due
to the amendment to the ESPP. The following weighted average
assumptions were used for employee stock purchases under the ESPP during 2006
and 2005: risk-free rate of 4.77% and 3.00%, respectively; dividend
yield of zero for both periods; volatility of 27.09% and 33.05%, respectively;
and expected life of three months for both periods.
The
Company selected the assumptions used in the Black-Scholes pricing model using
the following criteria:
Risk-free interest
rate. The Company bases the risk-free interest rate on implied
yields available on a U.S. Treasury note with a maturity term equal to or
approximating the expected term of the underlying award.
Dividend
yield. The Company does not intend to pay dividends on its
common stock for the foreseeable future and, accordingly, uses a dividend yield
of zero.
Volatility. The
expected volatility of the Company’s shares was estimated based upon the
historical volatility of the Company’s share price with consideration given to
the expected life of the award.
Expected life. For stock
options, the expected term was estimated based upon exercise experience made in
the past to employees. For employee stock purchase plan transactions,
the expected term was based on the purchase period of three
months.
Stock
Option Award Activity
The
following table summarizes stock option activity under all plans:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
Aggregate
|
|
|
|
Number
of
|
|
|
Exercise
|
|
|
Term
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Price
|
|
|
(in
years)
|
|
|
Value
|
|
Outstanding
at December 31, 2006
|
|
|
1,140,679 |
|
|
$ |
8.37 |
|
|
|
|
|
|
|
|
|
Granted
|
|
|
- |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(74,917 |
) |
|
$ |
7.45 |
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(53,684 |
) |
|
$ |
10.29 |
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2007
|
|
|
1,012,078 |
|
|
$ |
8.34 |
|
|
|
3.0 |
|
|
$ |
3,030 |
|
Exercisable
at December 31, 2007
|
|
|
517,078 |
|
|
$ |
7.76 |
|
|
|
2.7 |
|
|
$ |
2,100 |
|
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
The
weighted-average grant-date fair value of stock options granted during 2005 was
$12.08. No stock options were granted during the years ended December
31, 2007 and 2006. Cash proceeds received, the intrinsic value and
the total tax benefits realized resulting from stock option exercises were as
follows:
|
|
Year
ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Amounts
realized or received from stock option exercises:
|
|
|
|
|
|
|
|
|
|
Cash
proceeds received
|
|
$ |
558 |
|
|
$ |
351 |
|
|
$ |
1,635 |
|
Intrinsic
value realized
|
|
$ |
279 |
|
|
$ |
384 |
|
|
$ |
1,147 |
|
Income
tax benefit realized
|
|
$ |
70 |
|
|
$ |
134 |
|
|
$ |
353 |
|
The total
income tax benefit realized from exercised stock options and ESPP transactions
for 2007, 2006 and 2005 was $77, $161 and $404, respectively. These
amounts were reported as a financing cash inflow with a corresponding operating
cash outflow in 2007 and 2006 and as an operating cash inflow in 2005 in the
accompanying Consolidated Statement of Cash Flows. During
2007, the Company also recorded SFAS 123(R) tax deficiencies on its equity
awards of $68 against its pool of excess tax benefits. At December
31, 2007, the remaining pool of excess tax benefits was depleted and as a result
any future SFAS 123(R) tax deficiencies will be recorded directly to
earnings. As of December 31, 2007, the total unrecognized
compensation cost related to stock options was $257, which is expected to be
recognized over a weighted-average period of approximately five
months.
Restricted
Stock Award Activity
The
following table summarizes restricted stock activity under the 2000
Plan:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Number
of
|
|
|
Grant-Date
|
|
|
|
Shares
|
|
|
Fair
Value
|
|
Nonvested
at December 31, 2006
|
|
|
212,264 |
|
|
$ |
12.86 |
|
Granted
|
|
|
99,300 |
|
|
$ |
11.43 |
|
Vested
|
|
|
(68,510 |
) |
|
$ |
15.45 |
|
Cancelled
|
|
|
(19,724 |
) |
|
$ |
12.82 |
|
Nonvested
at December 31, 2007
|
|
|
223,330 |
|
|
$ |
11.43 |
|
The total
fair value of restricted shares vested during 2007, 2006 and 2005 was $1,059,
$833 and $629, respectively. As of December 31, 2007, the total unrecognized
compensation cost related to restricted stock awards was $1,311, which is
expected to be amortized over a weighted-average period of approximately 1.9
years.
NOTE
10. SHAREHOLDERS’ EQUITY
Preferred
Stock Purchase Rights
On
February 17, 1998, the Company declared a dividend distribution of one
preferred stock purchase right (the “Right”) for every outstanding share of
common stock, effective July 27, 1998. The Rights attach to all outstanding
shares of common stock, and no separate right certificates will be issued. The
Rights will become exercisable upon the tenth business day following the earlier
of: (i) the date of a public announcement that a person or group of
affiliated or associated persons has acquired, or obtained the right to acquire,
beneficial ownership of 15% or more of the outstanding shares of common stock of
the Company; or (ii) the commencement or announcement of an intention to
make a tender offer or exchange offer that would result in a person or group
owning 15% or more of the outstanding common stock of the
Company.
When
exercisable, each Right entitles the registered holder to purchase from the
Company one-twelfth of a share of its Series B Participating Preferred
Stock, $0.10 par value, at a price of $54.17 per each one-twelfth
share of preferred stock. Until a Right is exercised, the holder thereof, as
such, will have no rights as a shareholder of the Company, including, without
limitation, the right to vote or to receive dividends. Under certain
circumstances, each share of the Series B Participating Preferred Stock
would be convertible into a number of shares of the Company’s common stock
having a value equal to twice the exercise price of the preferred stock purchase
right. The Rights may be redeemed by the Company at the discretion of the Board
of Directors at a price of $0.0083 per Right. The Rights are scheduled to
expire on July 27, 2008.
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
As
required by SFAS 123(R), the unearned compensation balance of $1,850 as of
December 31, 2005, which was accounted for under APB 25, was reclassified into
capital in excess of par value upon the Company’s adoption of SFAS
123(R).
Accumulated Other Comprehensive
Loss
Accumulated
other comprehensive loss of $6,745 as of December 31, 2007 consisted of
aggregate additional pension liability adjustments of $6,853, net of a $4,407
tax effect, partially offset by unrealized holding gain on investments of $108,
net of a $71 tax effect. Accumulated other comprehensive loss as of
December 31, 2006 consisted solely of an aggregate additional pension liability
adjustments of $9,206, net of a $5,953 tax effect.
The
related tax effects allocated to each component of other comprehensive income
(loss) was as follows:
|
|
Before
|
|
|
Tax
|
|
|
Net
of
|
|
|
|
Tax
|
|
|
(Expense)
|
|
|
Tax
|
|
|
|
Amount
|
|
|
Benefit
|
|
|
Amount
|
|
Year
ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
Minimum
pension liability adjustment
|
|
$ |
(2,485 |
) |
|
$ |
976 |
|
|
$ |
(1,509 |
) |
Unrealized
gains on investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
holding losses arising during the period
|
|
|
(531 |
) |
|
|
207 |
|
|
|
(324 |
) |
Less:
reclassification adjustment for gains realized in net
income
|
|
|
(1,997 |
) |
|
|
786 |
|
|
|
(1,211 |
) |
Net
unrealized gains
|
|
|
(2,528 |
) |
|
|
993 |
|
|
|
(1,535 |
) |
Other
comprehensive loss
|
|
$ |
(5,013 |
) |
|
$ |
1,969 |
|
|
$ |
(3,044 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
liability adjustment
|
|
$ |
2,588 |
|
|
$ |
(1,026 |
) |
|
$ |
1,562 |
|
Unrealized
gains on investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
holding gains arising during the period
|
|
|
211 |
|
|
|
(89 |
) |
|
|
122 |
|
Less:
reclassification adjustment for gains realized in net
income
|
|
|
(211 |
) |
|
|
89 |
|
|
|
(122 |
) |
Net
unrealized gains
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Other
comprehensive income
|
|
$ |
2,588 |
|
|
$ |
(1,026 |
) |
|
$ |
1,562 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
liability adjustment
|
|
$ |
3,899 |
|
|
$ |
(1,546 |
) |
|
$ |
2,353 |
|
Unrealized
holding gains arising during the period
|
|
|
179 |
|
|
|
(71 |
) |
|
|
108 |
|
Other
comprehensive income
|
|
$ |
4,078 |
|
|
$ |
(1,617 |
) |
|
$ |
2,461 |
|
Due to
their antidilutive effect, approximately 80,500, 77,000 and 96,800 options to
purchase common stock were excluded from the calculation of diluted earnings per
share for the years ended December 31, 2007, 2006 and 2005, respectively.
However, these options could become dilutive in future periods. The following
table sets forth the reconciliation of the weighted average shares
outstanding:
|
|
Year
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Weighted
average shares outstanding - Basic
|
|
|
9,326,907 |
|
|
|
9,099,897 |
|
|
|
8,809,644 |
|
Dilutive
effect of stock options and restricted stock grants
|
|
|
322,990 |
|
|
|
326,638 |
|
|
|
443,878 |
|
Weighted
average shares outstanding - Diluted
|
|
|
9,649,897 |
|
|
|
9,426,535 |
|
|
|
9,253,522 |
|
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
NOTE
11. BUSINESS SEGMENT, GEOGRAPHIC, MAJOR CUSTOMER AND RELATED PARTY
INFORMATION
Business
Segment
The
Company has two reportable business segments: Systems and Services, and
Metrigraphics.
The
Systems and Services segment provides support in the primary mission areas
of Information Technology (“IT”), Logistics and Readiness, Systems
Integration and Technical Services, C4ISR, Homeland Security, Health and Human
Services, and Intelligence/Space to government customers. The segment is
comprised of three operating groups that provide similar services and solutions
and are subject to similar regulations. These services and solutions include:
(i) design, development, operation and maintenance of Business Intelligence
Systems, Business Transformation Services, Engineering Services, Acquisition
Management Services, Training and Performance Support Systems and Services, (ii)
Automated Case Management Systems; and (iii) IT Infrastructure
Services.
The
Metrigraphics segment develops and produces components for original equipment
manufacturers in the medical electronics, computer peripheral device,
telecommunications and other industries, with the focus on the custom design and
manufacture of miniature electronic parts that are designed to meet ultra-high
precision requirements through the use of electroforming, thin film deposition
and photolithography technologies.
The
Company evaluates performance and allocates resources based on operating income.
The operating income for each segment includes selling, general and
administrative expenses and amortization of intangible assets directly
attributable to the segment. All corporate operating expenses, including
depreciation, are allocated between the segments based on segment revenues.
However, depreciation related to corporate assets that is subsequently allocated
to the segment operating results is included in the table below. Sales between
segments represent less than 1% of total revenue and are accounted for at
cost.
Results
of operations information for the Company’s business segments were as
follows:
|
|
Year
ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Revenues
from external customers
|
|
|
|
|
|
|
|
|
|
Systems
and Services
|
|
$ |
224,676 |
|
|
$ |
252,890 |
|
|
$ |
293,662 |
|
Metrigraphics
|
|
|
4,901 |
|
|
|
6,097 |
|
|
|
6,778 |
|
|
|
$ |
229,577 |
|
|
$ |
258,987 |
|
|
$ |
300,440 |
|
Gross
margin
|
|
|
|
|
|
|
|
|
|
|
|
|
Systems
and Services
|
|
$ |
37,160 |
|
|
$ |
33,914 |
|
|
$ |
48,096 |
|
Metrigraphics
|
|
|
(53 |
) |
|
|
1,202 |
|
|
|
1,566 |
|
|
|
$ |
37,107 |
|
|
$ |
35,116 |
|
|
$ |
49,662 |
|
Operating
income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
Systems
and Services
|
|
$ |
13,826 |
|
|
$ |
8,066 |
|
|
$ |
20,819 |
|
Metrigraphics
|
|
|
(1,147 |
) |
|
|
105 |
|
|
|
486 |
|
|
|
$ |
12,679 |
|
|
$ |
8,171 |
|
|
$ |
21,305 |
|
Depreciation
and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
Systems
and Services
|
|
$ |
4,755 |
|
|
$ |
5,385 |
|
|
$ |
5,821 |
|
Metrigraphics
|
|
|
212 |
|
|
|
365 |
|
|
|
347 |
|
Segment
depreciation and amortization
|
|
|
4,967 |
|
|
|
5,750 |
|
|
|
6,168 |
|
Corporate
depreciation and amortization
|
|
|
716 |
|
|
|
262 |
|
|
|
590 |
|
|
|
$ |
5,683 |
|
|
$ |
6,012 |
|
|
$ |
6,758 |
|
Capital
expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
Systems
and Services
|
|
$ |
1,267 |
|
|
$ |
2,243 |
|
|
$ |
3,664 |
|
Metrigraphics
|
|
|
112 |
|
|
|
17 |
|
|
|
63 |
|
Segment
capital expenditures
|
|
|
1,379 |
|
|
|
2,260 |
|
|
|
3,727 |
|
Corporate
capital expenditures
|
|
|
409 |
|
|
|
222 |
|
|
|
844 |
|
|
|
$ |
1,788 |
|
|
$ |
2,482 |
|
|
$ |
4,571 |
|
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
Asset
information for the Company’s business segments and a reconciliation of segment
assets to the corresponding consolidated amounts is as
follows:
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Segment
assets
|
|
|
|
|
|
|
Systems
and Services
|
|
$ |
136,541 |
|
|
$ |
143,793 |
|
Metrigraphics
|
|
|
2,229 |
|
|
|
1,756 |
|
Total
segment assets
|
|
|
138,770 |
|
|
|
145,549 |
|
Corporate
assets
|
|
|
11,183 |
|
|
|
14,303 |
|
|
|
$ |
149,953 |
|
|
$ |
159,852 |
|
Corporate
assets are primarily comprised of cash and cash equivalents, the
PeopleSoft-based enterprise business system, deferred tax assets, certain
corporate prepaid expenses and other current assets and valuation
allowances.
Geographic
Revenue
is attributed to geographic areas based on the customer’s location. The Company
does not have locations outside the U.S.; however, in rare instances, it may
have contracts with sales representatives located in foreign countries and
provide services at customer locations outside the U.S. Domestic revenues
comprised approximately 99% of revenues in the three years ended December 31,
2007. The Company’s long-lived assets of $80,385 and $83,241, at
December 31, 2007 and 2006, respectively, were located in the
U.S. Long-lived assets included property and equipment, goodwill,
intangible assets and other noncurrent assets.
Major
Customers
Revenues
from DoD customers accounted for approximately 78%, 80% and 78% of total
revenues in 2007, 2006 and 2005, respectively. Revenues earned from a
significant DoD customer, as a percentage of the Company’s total revenues, was
as follows:
|
|
Year
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
Revenue
|
|
|
%
|
|
|
Revenue
|
|
|
%
|
|
|
Revenue
|
|
|
%
|
|
Air
Force Aeronautical Systems Center
|
|
$ |
24,565 |
|
|
|
11 |
% |
|
$ |
47,870 |
|
|
|
18 |
% |
|
$ |
48,693 |
|
|
|
16 |
% |
The
outstanding contract receivables balance of this customer was as
follows:
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Air
Force Aeronautical Systems Center
|
|
$ |
5,261 |
|
|
$ |
5,433 |
|
The
Company had no other customer in any of the three years ended December 31,
2007 that accounted for more than 10% of revenues.
Related
Party
Through
its wholly owned subsidiary, HJ Ford, the Company has a 40% interest in HMRTech
which is accounted for using the equity method. The Company,
through HJ Ford, also had a 40% ownership interest in HMRTech/HJ
Ford SBA JV, LLC, (the “Joint Venture”). The Joint Venture was formed
with
HMRTech. Revenues from HMRTech
included in contract revenues for 2007, 2006 and 2005 were $365, $406 and $540,
respectively. The amounts due from HMRTech
included in contract receivables at December 31, 2007 and 2006 were $52 and $50,
respectively.
In
September 2007, the Company sold its 40% interest in the Joint Venture back to
the Joint Venture. The Joint Venture, which was formed by HMRTech
and HJ Ford under the SBA Mentor-Protégé program, was accounted for using the
equity method of accounting. The Company received $4 in proceeds from
the transaction, representing the Company’s original
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
investment
in the Joint Venture. The Company continues to be a subcontractor to the Joint
Venture on existing CAPS contract task orders until such task orders are
completed.
Revenues
recognized by the Company as a subcontractor to the Joint Venture for 2007 and
2006 were $20,935 and $1,837, respectively. Charges by the Company
for administrative services to the Joint Venture under the terms of the Services
Agreement for 2007 and 2006 were $1,155 and $102, respectively. A new
Services Agreement was entered into effective October 1, 2007 under which the
Company charges HMRTech
for administrative services at 2.8% of revenues derived from the CAPS
contract. Revenues under this arrangement were $281 in
2007.
The table
below presents the various amounts included in the accompanying balance sheets
related to the above mentioned transactions with the Joint Venture:
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Contract
receivables
|
|
$ |
4,486 |
|
|
$ |
1,837 |
|
Other
receivables, net
|
|
$ |
314 |
|
|
$ |
110 |
|
NOTE
12. COMMITMENTS AND CONTINGENCIES
The
Company conducts its operations in facilities that are under long-term operating
leases. These leases expire at various dates through 2015, with options to renew
as negotiated between the Company and its landlords. The Company does not
believe that exercise of any of its lease renewal options are reasonably assured
and, accordingly, the exercise of such options has not been assumed in the
accounting for leasehold improvements and the deferred gain on the sale of the
corporate office facility. Rent expense under these leases (inclusive of real
estate taxes and insurance) was $6,132 in 2007, $6,600 in 2006 and $5,446 in
2005.
Minimum
lease commitments, primarily for facilities under non-cancelable operating
leases and related sublease income in effect at December 31, 2007 were as
follows:
|
|
Operating
|
|
|
|
|
|
|
Lease
|
|
|
Sublease
|
|
|
|
Commitment
|
|
|
Income
|
|
Year
ended December 31:
|
|
|
|
|
|
|
2008
|
|
$ |
7,462 |
|
|
$ |
1,360 |
|
2009
|
|
|
6,888 |
|
|
|
1,507 |
|
2010
|
|
|
6,006 |
|
|
|
1,474 |
|
2011
|
|
|
3,377 |
|
|
|
642 |
|
2012
|
|
|
2,561 |
|
|
|
- |
|
2013
and thereafter
|
|
|
7,388 |
|
|
|
- |
|
|
|
$ |
33,682 |
|
|
$ |
4,983 |
|
The
Company has an outstanding letter of credit aggregating $1,031 at December 31,
2007 related to the sale and leaseback of the Company’s headquarters in
2005. The agreement provides that the Company pay for certain
improvements by the end of the third lease year. At December 31,
2007, the improvements were substantially completed; however the letter of
credit is required to be maintained until 45 days after the completion of the
improvements.
As a
defense contractor, the Company is subject to many levels of audit and review
from various government agencies, including the Defense Contract Audit Agency,
various inspectors general, the Defense Criminal Investigation Service, the
Government Accountability Office, the Department of Justice and Congressional
Committees. Both related to and unrelated to its defense industry involvement,
the Company is, from time to time, involved in audits, lawsuits, claims,
administrative proceedings and investigations. The Company accrues for
liabilities associated with these activities when it becomes probable that
future expenditures will be made and such expenditures can be reasonably
estimated. Except as noted below, the Company
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
does not
presently believe it is reasonably likely that any of these matters would have a
material adverse effect on the Company’s business, financial position, results
of operations or cash flows. The Company’s evaluation of the likelihood of
expenditures related to these matters is subject to change in future periods,
depending on then current events and circumstances, which could have material
adverse effects on the Company’s business, financial position, results of
operations and cash flows.
On
October 26, 2000, two former Company employees were indicted and charged with
conspiracy to defraud the U.S. Air Force and wire fraud, among other charges,
arising out of a scheme to defraud the U.S. out of approximately $10 million.
Both men subsequently pled guilty to the principal charges against them. On
October 9, 2003, the U.S. Attorney filed a civil complaint in the U.S. District
Court for the District of Massachusetts against the Company based in substantial
part upon the actions and omissions of the former employees that gave rise to
the criminal cases against them. In the civil action, the U.S. Attorney has
asserted three claims against the Company, which are not
additive. These claims, which would not be duplicately awarded, are
based on the False Claims Act, the Anti-Kickback Act, or breach of contract for
which the government estimates damages at approximately $24 million, $20 million
and $10 million, respectively. The U.S. Attorney is also seeking
recovery on certain common law claims, costs, equitable claims, and interest on
breach of contract damages. On February 14, 2007, the U.S. Attorney
filed a motion for summary judgment as to liability and as to damages in this
matter. The Company filed an opposition to the government’s motion which
includes substantive defenses. The Company is awaiting a decision
from the court at this time. While there can be no assurance as to
the ultimate disposition of this case, the Company considers it to be probable
that the court may grant summary judgment as to the breach of contract liability
claim and more likely than not, but not probable, that the court may grant
summary judgment as to the False Claims Act liability claim. For the
claim in which management believes an unfavorable outcome is probable, the
Company has recognized its estimated liability. The Company believes,
however, that it is unlikely the court would grant summary judgment as to the
government’s claim of damages, in which circumstance the case would proceed to
trial as to damages. If, upon conclusion of summary judgment,
liability claims are entered against the Company, the Company estimates that it
would become liable for repayment of certain contract billings and penalties
that together are expected to range from approximately $181 to $1,750, excluding
the outcome as to damages. Regarding the alleged actual damages, the
Company believes that it has substantive defenses and intends to vigorously
defend itself. The Company presently has insufficient information to
quantify potential actual damages, if any. As a result, the ultimate
outcome of the litigation as to damages remains indeterminate. If an
unfavorable determination is rendered, the outcome would have a material adverse
effect on the Company’s business, financial position, results of operations and
cash flows.
The
Company has provided documents in response to a previously disclosed grand jury
subpoena issued on October 15, 2002 by the U.S. District Court for the District
of Massachusetts, directing the Company to produce specified documents dating
back to 1996. The subpoena relates to an investigation, which focused on the
period from 1996 to 1999, by the Antitrust Division of the Department of Justice
in New York into the bidding and procurement activities involving the Company
and several other defense contractors who have received similar subpoenas and
may also be subjects of the investigation. On February 7, 2007, the Company
learned that the Antitrust Division has communicated to the Department of
Justice in Washington, D.C. the results of its investigation which have not been
made available to the Company. The Company has cooperated in the investigation;
however, it does not have a sufficient basis to predict the outcome of the
investigation. Should the Company be found to have violated the
antitrust laws, the matter could have a material adverse effect on the Company’s
business, financial position, results of operations and cash flows.
On June
28, 2005, a suit, characterized as a class action employee suit, was filed in
the U.S. District Court for the District of Massachusetts alleging violations of
the Fair Labor Standards Act and certain provisions of Massachusetts General
Laws. The Company believes that its practices complied with the Fair Labor
Standards Act and Massachusetts General Laws. The Company intends to vigorously
defend itself and has sought to have the complaint dismissed from District Court
and addressed in accordance with the Company’s mandatory dispute resolution
program for the arbitration of workplace complaints. On April 10, 2006, the U.S.
District Court for the District of Massachusetts entered an order granting in
part the Company’s motion to dismiss the civil action filed against the Company,
and to compel compliance with its mandatory dispute resolution program,
directing that the parties arbitrate the aforementioned claims, and striking the
class action waiver which was part of the dispute resolution program. Following
the District Court’s decision, the plaintiffs commenced an arbitration before
the American Arbitration Association, asserting the same claims as they asserted
in the District Court. An arbitrator has been selected, but no
substantive action has occurred in the arbitration. On January 26, 2007 the
Company filed an appeal with the United States Court of Appeals for the Second
Circuit appealing the portion of the District Court’s decision that the class
action waiver is not enforceable. The U.S. Court of Appeals on November 19, 2007
concurred with the District Court’s opinion that the matter should proceed in
arbitration and remanded the matter to the District Court. The
parties have informed the District Court that they will proceed in arbitration
as a class action.
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
NOTE
13. QUARTERLY RESULTS (UNAUDITED)
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
Fiscal
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Year
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
56,780 |
|
|
$ |
58,010 |
|
|
$ |
58,328 |
|
|
$ |
56,459 |
|
|
$ |
229,577 |
|
Cost
of contract revenue and product sales
|
|
$ |
48,081 |
|
|
$ |
48,660 |
|
|
$ |
49,020 |
|
|
$ |
46,709 |
|
|
$ |
192,470 |
|
Gross
profit
|
|
$ |
8,699 |
|
|
$ |
9,350 |
|
|
$ |
9,308 |
|
|
$ |
9,750 |
|
|
$ |
37,107 |
|
Operating
income
|
|
$ |
2,451 |
|
|
$ |
2,936 |
|
|
$ |
3,396 |
|
|
$ |
3,896 |
|
|
$ |
12,679 |
|
Net
income
|
|
$ |
1,123 |
|
|
$ |
1,514 |
|
|
$ |
1,919 |
|
|
$ |
2,546 |
|
|
$ |
7,102 |
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic(1)
|
|
$ |
0.12 |
|
|
$ |
0.16 |
|
|
$ |
0.21 |
|
|
$ |
0.27 |
|
|
$ |
0.76 |
|
Diluted(1)
|
|
$ |
0.12 |
|
|
$ |
0.16 |
|
|
$ |
0.20 |
|
|
$ |
0.26 |
|
|
$ |
0.74 |
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
68,213 |
|
|
$ |
67,278 |
|
|
$ |
63,161 |
|
|
$ |
60,335 |
|
|
$ |
258,987 |
|
Cost
of contract revenue and product sales
|
|
$ |
58,243 |
|
|
$ |
59,609 |
|
|
$ |
54,973 |
|
|
$ |
51,046 |
|
|
$ |
223,871 |
|
Gross
profit
|
|
$ |
9,970 |
|
|
$ |
7,669 |
|
|
$ |
8,188 |
|
|
$ |
9,289 |
|
|
$ |
35,116 |
|
Operating
income
|
|
$ |
2,635 |
|
|
$ |
930 |
|
|
$ |
1,927 |
|
|
$ |
2,679 |
|
|
$ |
8,171 |
|
Income
before cumulative effect of accounting change
|
|
$ |
1,390 |
|
|
$ |
176 |
|
|
$ |
921 |
|
|
$ |
1,501 |
|
|
$ |
3,988 |
|
Net
income
|
|
$ |
1,474 |
|
|
$ |
176 |
|
|
$ |
921 |
|
|
$ |
1,501 |
|
|
$ |
4,072 |
|
Earnings
per share on income before cumulative effect of accounting
change:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic(1)
|
|
$ |
0.15 |
|
|
$ |
0.02 |
|
|
$ |
0.10 |
|
|
$ |
0.16 |
|
|
$ |
0.44 |
|
Diluted(1)
|
|
$ |
0.15 |
|
|
$ |
0.02 |
|
|
$ |
0.10 |
|
|
$ |
0.16 |
|
|
$ |
0.42 |
|
Earnings
per share on net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic(1)
|
|
$ |
0.16 |
|
|
$ |
0.02 |
|
|
$ |
0.10 |
|
|
$ |
0.16 |
|
|
$ |
0.45 |
|
Diluted(1)
|
|
$ |
0.16 |
|
|
$ |
0.02 |
|
|
$ |
0.10 |
|
|
$ |
0.16 |
|
|
$ |
0.43 |
|
(1)
|
Basic
and diluted earnings per common share is computed independently for each
of the quarters presented; accordingly, the sum of the quarterly earnings
per common share may not equal the total computed for the
year.
|
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(A)
|
|
|
Write-Offs
|
|
|
Period
|
|
Allowance
for doubtful accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
$ |
793 |
|
|
$ |
212 |
|
|
$ |
- |
|
|
$ |
(102 |
) |
|
$ |
903 |
|
2006
|
|
$ |
588 |
|
|
$ |
215 |
|
|
$ |
- |
|
|
$ |
(10 |
) |
|
$ |
793 |
|
2005
|
|
$ |
644 |
|
|
$ |
107 |
|
|
$ |
70 |
|
|
$ |
(233 |
) |
|
$ |
588 |
|
(A)
|
Recovery
of previously reserved amounts and other
adjustments.
|
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, 2007; and, based
on this review, the Company’s CEO and CFO concluded that, as of December 31,
2007, 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, 2007. Based on this assessment, management
concluded that, as of December 31, 2007, the Company’s internal control
over financial reporting was effective.
Attestation
Report of Registered Public Accounting Firm
The
Company’s internal control over financial reporting as of December 31, 2007
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, 2007 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 (a Massachusetts corporation) internal
control over financial reporting as of December 31, 2007, 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.
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, 2007,
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, 2007 and 2006, and the related
consolidated statements of operations, changes in stockholders’ equity and
comprehensive income, and cash flows for each of the three years in the period
ended December 31, 2007 and our report dated March 13, 2008 expressed an
unqualified opinion.
/s/ Grant
Thornton LLP
Boston,
Massachusetts
March 13,
2008
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 17,
2008
|
James
P. Regan
|
|
|
|
|
|
|
|
/s/
David Keleher
|
|
Senior
Vice President and Chief Financial Officer (Principal Financial Officer
and Principal Accounting Officer)
|
March 17,
2008
|
David
Keleher
|
|
|
|
|
|
|
|
/s/
John S. Anderegg, Jr.
|
|
Director
|
March 17,
2008
|
John
S. Anderegg, Jr.
|
|
|
|
|
|
|
|
/s/
Francis J. Aguilar
|
|
Director
|
March 17,
2008
|
Francis
J. Aguilar
|
|
|
|
|
|
|
|
/s/
Gen. George T. Babbitt, Jr.
|
|
Director
|
March 17,
2008
|
Gen.
George T. Babbitt, Jr.
|
|
|
|
|
|
|
|
/s/
Kenneth F. Kames
|
|
Director
|
March 17,
2008
|
Kenneth
F. Kames
|
|
|
|
|
|
|
|
/s/
Lt. Gen. Charles P. McCausland
|
|
Director
|
March 17,
2008
|
Lt.
Gen. Charles P. McCausland
|
|
|
|
|
|
|
|
/s/
Nickolas Stavropoulos
|
|
Director
|
March 17,
2008
|
Nickolas
Stavropoulos
|
|
|
|
|
|
|
|
Filed
|
|
Incorporated
by Reference**
|
Exhibit
No.
|
|
Description
|
|
Herewith
|
|
Form
|
|
Date
|
2.1
|
|
Stock
Purchase Agreement, dated December 12, 2002, by and among Dynamics
Research Corporation, Andrulis Corporation and the individuals listed on
the signature page thereto.
|
|
|
|
8-K
|
|
January
6, 2003
|
|
|
|
|
|
|
|
|
|
2.2
|
|
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
|
|
|
|
|
|
|
|
|
|
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 A Preferred Stock, dated
July 14, 1988.
|
|
|
|
10-K
|
|
December
31, 2002
|
|
|
|
|
|
|
|
|
|
3.4
|
|
Certificate
of Vote of Directors Establishing Series B Preferred Stock, dated
February 17, 1998.
|
|
|
|
8-A12G
|
|
June
25, 1998
|
|
|
|
|
|
|
|
|
|
3.5
|
|
Amendment,
dated September 10, 1998, to the Certificate of Vote of Directors
Establishing Series B Preferred Stock.
|
|
|
|
8-A12G/A
|
|
September
30, 1998
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
4.1
|
|
Specimen
certificate for shares of the Company’s common stock.
|
|
|
|
S-8
|
|
April
27, 2001
|
|
|
|
|
|
|
|
|
|
4.2
|
|
Rights
Agreement, dated February 17, 1998, between Dynamics Research
Corporation and the American Stock Transfer & Trust Company, as
Rights Agent.
|
|
|
|
8-A12G
|
|
June
25, 1998
|
|
|
|
|
|
|
|
|
|
10.1
|
|
Form
of indemnification agreement for directors of the Company.
|
|
|
|
10-K
|
|
December
31, 1991
|
|
|
|
|
|
|
|
|
|
10.2*
|
|
Severance
Agreement between John S. Anderegg, Jr. and the
Company.
|
|
|
|
10-K
|
|
December
31, 1991
|
|
|
|
|
|
|
|
|
|
10.3*
|
|
Deferred
Compensation Plan for Non-Employee Directors of the
Company.
|
|
|
|
10-K
|
|
December
31, 1991
|
|
|
|
|
|
|
|
|
|
10.4*
|
|
Form
of Supplemental Retirement Pension Agreement by and between the Company
and Albert Rand.
|
|
|
|
10-Q
|
|
March
31, 1997
|
|
|
|
|
|
|
|
|
|
10.5*
|
|
Amended
1993 Equity Incentive Plan.
|
|
|
|
10-K
|
|
December
31, 1998
|
|
|
|
|
|
|
|
|
|
10.6*
|
|
Amended
1995 Stock Option Plan for Non-Employee Directors.
|
|
|
|
10-Q
|
|
March
31, 1997
|
|
|
|
|
|
|
|
|
|
10.7*
|
|
Employment
Agreement between the Company and James P. Regan.
|
|
|
|
10-K
|
|
December
31, 1999
|
|
|
|
|
Filed
|
|
Incorporated
by Reference**
|
Exhibit
No.
|
|
Description
|
|
Herewith
|
|
Form
|
|
Date
|
10.8*
|
|
Change
of Control Agreement between the Company and James P.
Regan.
|
|
|
|
10-K
|
|
December
31, 1999
|
|
|
|
|
|
|
|
|
|
10.9*
|
|
2000
Incentive Plan.
|
|
|
|
DEFS14A
|
|
December
6, 1999
|
|
|
|
|
|
|
|
|
|
10.10*
|
|
Form
of grant of stock options under the 2000 Incentive Plan.
|
|
|
|
10-Q
|
|
September
30, 2004
|
|
|
|
|
|
|
|
|
|
10.11*
|
|
Forms
of grant of restricted stock under the 2000 Incentive
Plan.
|
|
|
|
10-K
|
|
December
31, 2005
|
|
|
|
|
|
|
|
|
|
10.12*
|
|
Non-qualified
Stock Option Agreement between the Company and James P.
Regan.
|
|
|
|
S-8
|
|
October
12, 2000
|
|
|
|
|
|
|
|
|
|
10.13*
|
|
2000
Employee Stock Purchase Plan.
|
|
|
|
S-8
|
|
April
27, 2001
|
|
|
|
|
|
|
|
|
|
10.14*
|
|
Special
Severance Plan.
|
|
|
|
10-K
|
|
December
31, 2001
|
|
|
|
|
|
|
|
|
|
10.15*
|
|
Senior
Management Deferred Compensation Plan.
|
|
|
|
10-Q
|
|
March
31, 2002
|
|
|
|
|
|
|
|
|
|
10.16
|
|
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
|
|
|
|
|
|
|
|
|
|
10.17*
|
|
Dynamics
Research Corporation Special Severance Plan, as amended on May 14,
2003.
|
|
|
|
10-K
|
|
December
31, 2003
|
|
|
|
|
|
|
|
|
|
10.18*
|
|
2003
Incentive Plan.
|
|
|
|
10-K
|
|
December
31, 2003
|
|
|
|
|
|
|
|
|
|
10.19*
|
|
Form
of grant of stock options under the 2003 Incentive Plan.
|
|
|
|
10-Q
|
|
September
30, 2004
|
|
|
|
|
|
|
|
|
|
10.20*
|
|
Form
of grant of restricted stock under the 2003 Incentive
Plan.
|
|
|
|
10-Q
|
|
September
30, 2004
|
|
|
|
|
|
|
|
|
|
10.21
|
|
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
|
|
|
|
|
|
|
|
|
|
10.22*
|
|
Deferred
Stock Compensation Plan for Non-Employee Directors, as amended for
deferrals on or after January 1, 2005.
|
|
|
|
10-K
|
|
December
31, 2004
|
|
|
|
|
|
|
|
|
|
10.23*
|
|
Amendment
to Deferred Stock Compensation Plan for Non-Employee
Directors.
|
|
|
|
10-K
|
|
December
31, 2004
|
|
|
|
|
|
|
|
|
|
10.24*
|
|
Beneficiary
Designation Form for the Deferred Compensation Plan for Non-Employee
Directors.
|
|
|
|
10-K
|
|
December
31, 2004
|
|
|
|
|
|
|
|
|
|
10.25
|
|
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
|
|
|
|
|
Filed
|
|
Incorporated
by Reference**
|
Exhibit
No.
|
|
Description
|
|
Herewith
|
|
Form
|
|
Date
|
10.26
|
|
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
|
|
|
|
|
|
|
|
|
|
10.27
|
|
Lease,
dated December 28, 2005, by and between Dynamics Research Corporation
and Direct Invest-60 Frontage, LLC.
|
|
|
|
8-K
|
|
January
4, 2006
|
|
|
|
|
|
|
|
|
|
10.28
|
|
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
|
|
|
|
|
|
|
|
|
|
21.1
|
|
Subsidiaries
of the registrant.
|
|
|
|
10-K
|
|
December
31, 2005
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
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31.2
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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.
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X
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32.1
|
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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.
|
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X
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32.2
|
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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.
|
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X
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*
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Management
contract or compensatory plan or arrangement.
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**
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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.
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73