UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
| þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2005
OR
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 000-02479
DYNAMICS RESEARCH CORPORATION
| Massachusetts | 04-2211809 | |
| (State or other Jurisdiction of | (I.R.S. Employer Identification No.) | |
| Incorporation or Organization) |
| 60 Frontage Road | ||
| Andover, Massachusetts | 01810-5498 | |
| (Address of Principal Executive Offices) | (Zip Code) |
Registrant’s telephone number, including area code (978) 475-9090
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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes þ No o.
As of May 2, 2005, there were 8,919,646 shares of the Registrant’s Common Stock, $0.10 par value, outstanding.
DYNAMICS RESEARCH CORPORATION
INDEX
| Page Number | ||||||||
PART I. FINANCIAL INFORMATION |
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Item 1. Consolidated Financial Statements |
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| 4 | ||||||||
| 5 | ||||||||
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| 7 | ||||||||
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| 46 | ||||||||
| EX-31.1 SECTION 302 CERTIFICATION OF CEO | ||||||||
| EX-31.2 SECTION 302 CERTIFICATION OF CFO | ||||||||
| EX-32.1 SECTION 906 CERTIFICATION OF CEO | ||||||||
| EX-32.2 SECTION 906 CERTIFICATION OF CFO | ||||||||
2
Dynamics Research Corporation
| March 31, | December 31, | |||||||
| 2005 | 2004 | |||||||
| (unaudited) | (audited) | |||||||
Assets |
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Current assets |
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Cash and cash equivalents |
$ | 556 | $ | 925 | ||||
Accounts receivable, net of allowances of $265 at March 31, 2005
and $396 at December 31, 2004 |
37,290 | 45,978 | ||||||
Unbilled expenditures and fees on contracts in process |
51,773 | 48,119 | ||||||
Prepaid expenses and other current assets |
4,999 | 5,668 | ||||||
Total current assets |
94,618 | 100,690 | ||||||
Noncurrent assets |
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Property, plant and equipment, net |
22,413 | 22,139 | ||||||
Goodwill |
63,055 | 63,055 | ||||||
Intangible assets, net |
10,765 | 11,519 | ||||||
Unbilled expenditures and fees on contracts in process |
5,385 | 2,203 | ||||||
Other noncurrent assets |
4,920 | 5,528 | ||||||
Total noncurrent assets |
106,538 | 104,444 | ||||||
Total assets |
$ | 201,156 | $ | 205,134 | ||||
Liabilities and stockholders’ equity |
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Current liabilities
|
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Current portion of long-term debt |
$ | 8,357 | $ | 8,357 | ||||
Revolver |
9,550 | 10,000 | ||||||
Accounts payable |
18,690 | 20,550 | ||||||
Accrued payroll and employee benefits |
15,575 | 17,914 | ||||||
Deferred income taxes |
14,553 | 15,418 | ||||||
Other accrued expenses |
3,694 | 4,447 | ||||||
Discontinued operations |
264 | 422 | ||||||
Total current liabilities |
70,683 | 77,108 | ||||||
Long-term liabilities |
||||||||
Long-term debt, less current portion |
49,396 | 51,485 | ||||||
Deferred income taxes |
1,113 | 591 | ||||||
Accrued pension liability |
10,457 | 11,336 | ||||||
Other long-term liabilities |
5,563 | 3,296 | ||||||
Total long-term liabilities |
66,529 | 66,708 | ||||||
Total liabilities |
137,212 | 143,816 | ||||||
Commitments and contingencies |
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Stockholders’ equity |
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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: |
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8,880,900 shares at March 31, 2005 and 8,737,562 shares
at December 31, 2004 |
888 | 874 | ||||||
Capital in excess of par value |
42,824 | 40,849 | ||||||
Unearned compensation |
(2,614 | ) | (1,572 | ) | ||||
Accumulated other comprehensive loss |
(8,136 | ) | (7,724 | ) | ||||
Retained earnings |
30,982 | 28,891 | ||||||
Total stockholders’ equity |
63,944 | 61,318 | ||||||
Total liabilities and stockholders’ equity |
$ | 201,156 | $ | 205,134 | ||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
3
Dynamics Research Corporation
| Three months ended | ||||||||
| March 31, | ||||||||
| 2005 | 2004 | |||||||
Contract revenue |
$ | 71,839 | $ | 60,637 | ||||
Product sales |
1,703 | 1,431 | ||||||
Total revenue |
73,542 | 62,068 | ||||||
Cost of contract revenue |
60,806 | 51,837 | ||||||
Cost of product sales |
1,409 | 1,141 | ||||||
Selling, general and administrative expenses |
6,021 | 5,335 | ||||||
Amortization of intangible assets |
754 | 381 | ||||||
Total operating costs and expenses |
68,990 | 58,694 | ||||||
Operating income |
4,552 | 3,374 | ||||||
Interest expense, net |
(1,086 | ) | (213 | ) | ||||
Other income |
25 | 381 | ||||||
Income before provision for income taxes |
3,491 | 3,542 | ||||||
Provision for income taxes |
1,400 | 1,498 | ||||||
Net income |
$ | 2,091 | $ | 2,044 | ||||
Earnings per common share
|
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Basic |
$ | 0.24 | $ | 0.24 | ||||
Diluted |
$ | 0.23 | $ | 0.23 | ||||
Weighted average shares outstanding |
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Weighted average shares outstanding — basic |
8,695,638 | 8,394,265 | ||||||
Dilutive effect of options and restricted stock grants |
524,465 | 608,862 | ||||||
Weighted average shares outstanding — diluted |
9,220,103 | 9,003,127 | ||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
4
Dynamics Research Corporation
| Accumulated | ||||||||||||||||||||||||||||
| Common stock | Capital in | other | ||||||||||||||||||||||||||
| Issued | excess of | Unearned | comprehensive | Retained | ||||||||||||||||||||||||
| Shares | Par value | par value | compensation | loss | earnings | Total | ||||||||||||||||||||||
Balance December 31, 2004 (audited) |
8,737 | $ | 874 | $ | 40,849 | $ | (1,572 | ) | $ | (7,724 | ) | $ | 28,891 | $ | 61,318 | |||||||||||||
Issuance of common stock through stock options exercised
and employee stock purchase plan |
79 | 8 | 795 | — | — | — | 803 | |||||||||||||||||||||
Issuance of restricted stock |
76 | 7 | 1,268 | (1,275 | ) | — | — | — | ||||||||||||||||||||
Forfeiture of restricted stock |
(1 | ) | — | (12 | ) | 9 | — | — | (3 | ) | ||||||||||||||||||
Retirement of restricted stock |
(11 | ) | (1 | ) | (166 | ) | — | — | — | (167 | ) | |||||||||||||||||
Amortization of unearned compensation |
— | — | — | 224 | — | — | 224 | |||||||||||||||||||||
Change in unrealized gain on investment in Lucent Technologies,
net of tax |
— | — | — | — | (412 | ) | (412 | ) | ||||||||||||||||||||
Tax benefit from stock options exercised and employee
stock purchase plan |
— | — | 90 | — | — | — | 90 | |||||||||||||||||||||
Net income |
— | — | — | — | — | 2,091 | 2,091 | |||||||||||||||||||||
Balance March 31, 2005 |
8,880 | $ | 888 | $ | 42,824 | $ | (2,614 | ) | $ | (8,136 | ) | $ | 30,982 | $ | 63,944 | |||||||||||||
Comprehensive income is calculated as follows: |
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Net income |
$ | 2,091 | ||||||||||||||||||||||||||
Change in unrealized gain on investment in Lucent
Technologies, net of tax |
(412 | ) | ||||||||||||||||||||||||||
Comprehensive income |
$ | 1,679 | ||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
5
Dynamics Research Corporation
| Accumulated | |||||||||||||||||||||||||||||||||||||||
| Common stock | Capital in | other | |||||||||||||||||||||||||||||||||||||
| Issued | Treasury stock | excess of | Unearned | comprehensive | Retained | ||||||||||||||||||||||||||||||||||
| Shares | Par value | Shares | Par value | par value | compensation | loss | earnings | Total | |||||||||||||||||||||||||||||||
Balance December 31, 2003 (audited) |
9,822 | $ | 982 | (1,379 | ) | $ | (138 | ) | $ | 36,642 | $ | (797 | ) | $ | (7,556 | ) | $ | 19,518 | $ | 48,651 | |||||||||||||||||||
Issuance of common stock through stock options
exercised and employee stock purchase plan |
52 | 5 | — | — | 596 | — | — | — | 601 | ||||||||||||||||||||||||||||||
Issuance of restricted stock |
71 | 7 | — | — | 1,286 | (1,293 | ) | — | — | — | |||||||||||||||||||||||||||||
Forfeiture of restricted stock |
(10 | ) | (1 | ) | — | — | (91 | ) | 92 | — | — | — | |||||||||||||||||||||||||||
Repurchase and retirement of restricted stock |
(3 | ) | — | — | — | (36 | ) | — | — | — | (36 | ) | |||||||||||||||||||||||||||
Amortization of unearned compensation, net of forfeiture |
— | — | — | — | — | 65 | — | — | 65 | ||||||||||||||||||||||||||||||
Tax benefit from stock options exercised
and employee stock purchase plan |
— | — | — | — | 99 | — | — | — | 99 | ||||||||||||||||||||||||||||||
Net income |
— | — | — | — | — | — | — | 2,044 | 2,044 | ||||||||||||||||||||||||||||||
Balance March 31, 2004 |
9,932 | $ | 993 | (1,379 | ) | $ | (138 | ) | $ | 38,496 | $ | (1,933 | ) | $ | (7,556 | ) | $ | 21,562 | $ | 51,424 | |||||||||||||||||||
Comprehensive income is calculated as follows: |
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Net income |
$ | 2,044 | |||||||||||||||||||||||||||||||||||||
Adjustments to Accumulated other comprehensive loss |
— | ||||||||||||||||||||||||||||||||||||||
Comprehensive income |
$ | 2,044 | |||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
6
Dynamics Research Corporation
| Three months ended | ||||||||
| March 31, | ||||||||
| 2005 | 2004 | |||||||
Operating activities
|
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Net income |
$ | 2,091 | $ | 2,044 | ||||
Adjustments to reconcile net cash provided by (used in) operating activities
|
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Depreciation |
942 | 874 | ||||||
Amortization of intangible assets |
754 | 381 | ||||||
Stock compensation expense |
224 | 65 | ||||||
Non-cash interest expense |
49 | 31 | ||||||
Investment income from equity interest |
(55 | ) | (59 | ) | ||||
Tax benefit from stock options exercised |
90 | 99 | ||||||
Deferred income taxes |
(76 | ) | (198 | ) | ||||
Loss on disposal of long-lived assets |
2 | — | ||||||
Change in operating assets and liabilities
|
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Accounts receivable, net |
8,688 | 3,771 | ||||||
Unbilled expenditures and fees on contracts in process |
(7,041 | ) | (15,521 | ) | ||||
Prepaid expenses and other current assets |
669 | (1,100 | ) | |||||
Accounts payable |
493 | 763 | ||||||
Accrued payroll and employee benefits |
(2,339 | ) | 405 | |||||
Other accrued expenses |
(1,572 | ) | 131 | |||||
Net cash provided by (used in) continuing operations |
2,919 | (8,314 | ) | |||||
Net cash used in discontinued operations |
(158 | ) | (103 | ) | ||||
Net cash provided by (used in) operating activities |
2,761 | (8,417 | ) | |||||
Investing activities |
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Additions to property, plant and equipment |
(1,218 | ) | (1,157 | ) | ||||
Purchase of business |
(111 | ) | — | |||||
Dividends from equity investment |
60 | 60 | ||||||
Increase in other assets |
(125 | ) | (326 | ) | ||||
Net cash used in investing activities |
(1,394 | ) | (1,423 | ) | ||||
Financing activities |
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Net borrowings (repayments) under revolving credit agreement |
(450 | ) | 6,726 | |||||
Principal payments under loan agreements |
(2,089 | ) | (125 | ) | ||||
Proceeds from the exercise of stock options and issuance of common stock |
803 | 565 | ||||||
Net cash provided by (used in) financing activities |
(1,736 | ) | 7,166 | |||||
Net decrease in cash and cash equivalents |
(369 | ) | (2,674 | ) | ||||
Cash and cash equivalents, beginning of period |
925 | 2,724 | ||||||
Cash and cash equivalents, end of period |
$ | 556 | $ | 50 | ||||
Supplemental information |
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Cash paid for interest |
$ | 1,004 | $ | 167 | ||||
Cash paid (refunded) for income taxes, net |
$ | 89 | $ | (457 | ) | |||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
7
DYNAMICS RESEARCH CORPORATION
NOTE 1. BASIS OF PRESENTATION
The unaudited consolidated financial statements of Dynamics Research Corporation (“DRC” or the “company”) and its subsidiary included herein have been prepared in accordance with accounting principles generally accepted in the United States of America. The company operated through the parent corporation and its wholly owned subsidiaries, HJ Ford Associates, Inc. (“HJ Ford”), Andrulis Corporation (“ANRULIS”) and Impact Innovations Group LLC (“Impact Innovations”) through December 31, 2004, at which time ANDRULIS and Impact Innovations merged with and into the company. Effective January 1, 2005, the company operates through the parent corporation and its wholly owned subsidiary, HJ Ford.
In the opinion of management, all material adjustments that are of a normal and recurring nature necessary for a fair presentation of the results for the periods presented have been reflected. All material intercompany transactions and balances have been eliminated in consolidation. The results of the three month period ended March 31, 2005 may not be indicative of the results that may be expected for the year ended December 31, 2005. The accompanying financial information should be read in conjunction with the consolidated financial statements and notes thereto contained in the company’s Annual Report on Form 10-K/A, Amendment No. 1 to Form 10-K, filed with the U.S. Securities and Exchange Commission (“SEC”) for the year ended December 31, 2004.
On September 1, 2004, the company acquired Impact Innovations from J3 Technology Services Corp. (“J3 Technology”). Impact Innovations, based in the Washington, D.C. area, offers solutions in business intelligence, enterprise software, application development, information technology service management and other related areas. The results of this acquired entity are included in the company’s Consolidated Statements of Operations and of Cash Flows for the three months ended March 31, 2005.
The company has a 40% ownership interest in a small disadvantaged business, as defined by the United States Government, which is accounted for using the equity method. This ownership interest is reported as a component of Other noncurrent assets in the company’s Consolidated Balance Sheets.
Earnings Per Share
Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. For periods in which there is net income, diluted earnings per share is determined by using the weighted average number of common and dilutive common equivalent shares outstanding during the period, unless the effect is antidilutive.
Restricted shares of common stock that are subject to 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.
Due to their antidilutive effect, approximately 78,000 and 67,000 options to purchase common stock were excluded from the calculation of diluted earnings per share for the first quarters of 2005 and 2004, respectively. However, these options could become dilutive in future periods.
Stock-Based Compensation
The company accounts for stock option plans under APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. The following table illustrates the effect on earnings per common share if the company had applied the fair value based method of Statement of Financial Accounting Standards (“SFAS”)
8
DYNAMICS RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
No. 123, Accounting for Stock-Based Compensation (“SFAS 123”), to all outstanding and unvested awards in each period for the purpose of recording expense for stock option compensation (in thousands of dollars, except per share data).
| Three months ended | ||||||||
| March 31, | ||||||||
| 2005 | 2004 | |||||||
Net income, as reported |
$ | 2,091 | $ | 2,044 | ||||
Deduct: Total stock-based employee
compensation determined under fair-value-based
method for all awards, net of related tax
effects |
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