Attached files
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-K
(Mark
One)
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þ
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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, 2009
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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 001-34135
DYNAMICS RESEARCH
CORPORATION
(Exact Name of Registrant as
Specified in Its Charter)
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Massachusetts
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04-2211809
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(State
or other Jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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Two
Tech Drive, Andover, Massachusetts
(Address
of Principal Executive Offices)
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01810-2434
(Zip
Code)
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Registrant’s telephone number,
including area code
(978) 289-1500
Securities
registered pursuant to Section 12(b) of the Act:
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Title
of each class
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Name
of exchange on which registered
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Common
Stock, $0.10 par value
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The
NASDAQ Global Market
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Securities registered pursuant to
Section 12(g) of the Act:
None
(Title
of class)
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Indicate
by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
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Yes o No þ
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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.
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Yes o No þ
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Indicate
by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past
90 days.
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Yes þ No o
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Indicate
by check mark whether the registrant has submitted electronically and
posted on its corporate Website, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T
during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). * The
registrant has not yet been phased into the interactive data
requirements.
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Yes o No o
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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.
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þ
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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):
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Large
accelerated filer o Accelerated
filer þ Non-accelerated
filer o Smaller
reporting company o
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Indicate
by check mark whether the registrant is a shell Company (as defined in
Rule 12b-2 of the Exchange Act).
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Yes o No þ
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The
aggregate market value of the registrant’s common stock, $0.10 par
value, held by nonaffiliates of the registrant as of June 30, 2009,
was $79,742,966 based on the reported last sale price per share of $10.01
on that date on the NASDAQ Global Market. As of February 28, 2010,
9,928,208 shares of the registrant’s common stock, $0.10 par value,
were outstanding.
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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, 2009
TABLE OF
CONTENTS
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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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2
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1A.
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17
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1B.
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26
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2.
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27
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3.
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27
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4.
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27
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PART
II
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ITEM
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5.
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28
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6.
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30
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7.
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33
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7A.
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43
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8.
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45
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9.
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80
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9A.
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80
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9B.
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81
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PART
III
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ITEM
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10.
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82
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11.
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83
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12.
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83
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13.
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83
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14.
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83
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PART
IV
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ITEM
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15.
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84
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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.
PART I
Dynamics
Research Corporation is a leading provider of innovative management consulting,
engineering, technical and information technology (“IT”) services and solutions
to federal and state governments. Founded in 1955 and headquartered
in Andover, Massachusetts, DRC has approximately 1,470 employees located
throughout the United States. DRC operates as a parent corporation
and through its wholly owned subsidiaries, Kadix Systems, LLC, H.J. Ford
Associates, Inc. and DRC International Corporation. Unless the context otherwise
requires, references in this Form 10-K to “DRC”, “we”, “us” or “our” refer to
Dynamics Research Corporation and its subsidiaries.
Our
position as a leading mid-size company allows us to bring to bear the personnel,
technology resources and industry standard practices of a large company with the
responsiveness of a small company. Rather than force a pre-packaged solution, we
listen to our customers, and develop a tailored solution based on proven
industry practices and lessons learned in hundreds of successful
engagements. We offer forward-thinking solutions backed by a history
of excellence and customer satisfaction. We provide high quality,
cost-effective services to help meet customers’ evolving mission
needs.
We
provide support to our customers in the primary mission areas of IT, logistics
and readiness, information assurance and cybersecurity, homeland security,
health care, and intelligence and space. Customers include the
Department of Defense (“DoD”), the Department of Homeland Security (“DHS”),
federal civilian agencies and state governments.
We
offer several business solutions to our customers, often combining two or more
solutions to achieve customer goals as further explained below.
As
of December 31, 2009, our only reportable business segment was Systems and
Services. During the fourth quarter of 2009 we entered into a plan to
sell our Metrigraphics division. As of December 31, 2009,
Metrigraphics was classified as held for sale and has been presented as a
discontinued operation.
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 and Theory of Constraints, 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 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.
We
are helping the Defense Logistics Agency implement a continuous process
improvement infrastructure. Our Lean Six Sigma staff provides the methodologies,
tools and expertise to implement business improvement practices.
We
support an enterprise-level system and software engineering process improvement
program for a major intelligence agency. We provide our clients with
organizational assessments and assist the organization in improving their
process capabilities. We provide system engineering and process engineering to
drive the organization to a Capability Maturity Model Integration (“CMMI”) based
engineering organization.
For
the Naval Air System Command we provide assistance in implementing AIRSpeed, its approved Naval
aviation maintenance/logistics integration and modernization
system. We provide Lean Six Sigma training and technical support
services for maintenance facilities around the world.
The
Federal Deposit Insurance Corporation (“FDIC”) is striving to continually
improve the overall operating efficiency and effectiveness of its IT resources.
Through our business analysis and management support services, we identify
opportunities for improved efficiency and effectiveness of its IT
resources. We develop project requirements, manage current IT
projects, plan future projects and prepare business case analyses.
IT
Infrastructure Services
We
provide a comprehensive set of services for managing and implementing IT
infrastructures for Government organizations that is based on the International
Organization for Standardization (“ISO”) 20000-1:2005 for IT Service Management.
In 2009, DRC IT Service Management practices were formally certified by the
British Standards Institute. The ISO 20000 certification provides additional
confirmation of DRC’s industry-leading approach and capability in delivering
world-class IT managed services, including enterprise IT applications, desktop,
helpdesk, and back-office services. We employ an integrated process-based
approach to effectively deliver managed IT services to meet the business and
customer requirements. 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 IT
Infrastructure Library, 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
designed and built a network for the Colorado Department of Human Services,
which connects 7,000 state and county workers at 130 sites with the State’s
child welfare benefits management system. To ensure availability and
operability, we installed and operate remote control access to all desktops. We
provide help desk services, remote patch and service pack upgrades, virus
signatures, and a network management system that continuously monitors and
reports on network availability and stability. The network was designed to
accommodate the addition of new applications, including remote/web file access,
web-based email, thin client access to all core applications, secure sockets
layer security, heterogeneous directory integration, and portal services. The
upgrades increased security, provided additional services, and saved the State
enough operating dollars to pay for the entire upgrade in 18
months. Our support for the Department of Human Services now includes
providing the infrastructure for their citizen facing portal for benefits
management. We also provide infrastructure services for the Colorado Integrated
Tax Architecture and the Colorado’s voter registration system.
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.
We
develop functional Web-based training courseware to meet the training and
simulation needs of Customs and Border Protection Air and Marine (“CBP
A&M”). We work with CBP A&M to implement, expand and maintain their
OpSTAR network, which we designed and developed to meet the training,
distribution and tracking needs of the National Air Training Center. We also
provide flight training support, tactical scenario based instruction, and other
related training needs. We are utilizing our proven instructional system
development processes to provide
computer-based
and web-based training for the pilots and crew members. 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.
We
have a significant history delivering integrated, award winning training
solutions to meet the diverse training needs of a large information management
system end user base. Alongside our partners, we provide the State of
California with an innovative, multidimensional training program to ensure the
highest level of user effectiveness on a new system while minimizing impact on
normal business operations. The Strategic Offender Management System
will encompass multiple, integrated applications along with a single statewide
offender database, allowing the State to replace its current paper-based,
disparate system. We will be providing train-the-trainer courses to over 1,200
state trainers. For the more than 25,000 end users, we will provide a blended
learning approach that combines e-learning, instructor-led webinars, hands-on
practice, and a comprehensive, task-based online help system for just-in-time
user assistance.
Business
Intelligence Solutions
Our
business intelligence solutions are designed to provide the actionable
information needed to make critical decisions and continuously improve
organizational performance. Employing rapid development techniques,
we quickly produce results and arrive at business intelligence solutions that
meet user needs. With deep domain knowledge, we use data engineering
tools to extract and integrate information from legacy data systems. Finally, we
develop and apply modeling and simulation techniques. We are an industry leader
in the development and application of modeling and simulation techniques that
provide the analytical capability to make proactive business decisions. Our
solutions integrate business transformation processes, user interface design,
training, and system operations and maintenance.
The
Federal Bureau of Investigation (“FBI”) initiated a large organizational change
initiative to improve the linguist acquisition process, which required a lengthy
time period to produce proficient linguists. We conducted a process and
workforce assessment and identified inefficiencies, including outdated
technology and underlying environmental and cultural factors. Our team developed
a Web-based workflow management tool called Contract Linguist Automated Support
System (“CLASS”), to help FBI staff manage the linguist acquisition process,
communicate to the applicants, and report on the applicant progress. We built an
access-based human resource solution called the workforce tracking tool that
provides the FBI with a centralized tool for creating and filling position
profiles. Our CLASS system will help the FBI realize a significant
reduction in the cycle time of the linguist acquisition process and increase in
management visibility throughout the process with reporting and candidate
tracking.
We
provide the U.S. Marine Corps (“USMC”) Systems Command with software support
services for Marine Corps' Secure Personnel Accountability
(“SPA”) Module. The SPA Module provides commanders with an effective
tool to accurately and timely account for deployed personnel under their
cognizance. We developed, integrated, tested, demonstrated, deployed, and now
maintain and support the SPA Module. Our system development lifecycle
methodology, which stresses effective usability, provides the USMC with a
collaborative and iterative approach for system development. Our
approach to prototype development allowed the gaps between the prototype and the
target production SPA Module to narrow with each review, reducing the amount of
code being thrown away and resulting in a more economical solution.
The
Army food management information system required modernization to better serve
its customers and to manage food distribution for 350 dining facilities
worldwide. We have assisted in the strategic planning, the functional
requirements gathering, the evaluation of commercial food service software and
leading in the development and integration of commercial and custom-developed
software.
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. The
system we have built and implemented for the State of Ohio supports workers with
over 658,000 client cases in 88 counties. 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.
For
the State of Tennessee we have built a system that is scheduled to be fully
implemented in 2010. We have customized our web-based Ohio solution
to align it with Tennessee’s unique child welfare practices. Our solution
incorporates a proven state-of-the-art user-friendly interface, a comprehensive,
user-driven reporting system, and dashboards to provide users with essential
information when needed.
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 customer needs. Our rapid requirements definition
process creates a set of baseline models and then our model driven architecture,
coupled with our iterative development process quickly generates significant
portions of the application. We employ an integrated process that
combines innovative technological 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. Our technical architecture can easily
adapt to future needs and technology changes. We offer a reusable
model-based case management framework that can be used for other case management
needs, such as adult protection, child care and juvenile
justice.
Program
Management Solutions
We
provide a comprehensive set of services to support the management of complex
programs throughout their life cycle, providing expertise in program management,
business, cost, financial management, acquisition management, engineering and
logistics services, audit support and remediation services, communications
services and training.
Engineering
Services
We
provide developmental research supporting the establishment of the Item Unique
Identification (“IUID”) umbrella program for Air Force depots. We provide
comprehensive analysis of tagging and labeling methods, including detailed
studies of adhesives durability in operational environments. Our advanced
engineering support to the IUID program allows the Air Force to better track
critical aviation parts through transportation, supply, repair and overhaul, and
support valuation and life cycle management.
Our
Versa Module Eurocard Global Positioning System (“VME GPS”) Receiver product
line has a flexible design, which allows the integration of any GPS receiver
that complies with the Navigation Satellite Timing and Ranging Joint Program
Office performance specification for standard electronic module Type E GPS
receivers, Critical Item GPS Receiver Application Module-500. These GPS receiver
products are powerful and versatile modules that provide robust GPS solutions
used for navigation and for hot starting the embedded GPS receivers of precision
guided munitions.
Human
Capital Management
We
offer strategic human capital, workforce planning, and performance management
solutions for our customers to transform the cultures of Federal agencies so
they become less hierarchical, process-oriented, and inwardly focused; and more
flat, results-oriented, integrated, and externally focused. Our approach is
based on the Office of Personnel Management (“OPM”) Human Capital Assessment and
Accountability Framework. The Framework provides high level standards for human
capital policies, programs, and practices to achieve a shared vision integrated
with the agency's strategic plan. We combine the best commercial and government
sector approaches to deliver innovative human capital solutions that address the
challenges facing our clients today. Our capabilities include applying private
sector human resource management practices, such as, workforce planning,
succession planning, and competency modeling, to government
organizations. We support the electronic human resource initiative,
deliver electronic official personnel file capabilities, and provide human
capital transformation expertise
based
on successful past support to government clients. We work with our Federal
clients to solve many of the leading human capital issues facing the government
today.
We
provide a broad range of support in the areas of communications and change
management, Defense Civilian Intelligence Personnel System (“DCIPS”) training
coordination and delivery, and performance management. We built a project
governance structure and a project plan to allow clients to see the importance
and impact that key tasks would have on DCIPS implementation. We then
coordinated with client teams in performance management, compensation, training,
communications, policy, and IT to implement the plan. We tracked the
completion of key performance management tasks and provided training on
performance management and pay. We helped create the high-level buy-in and
support needed to successfully implement our proven change methods help clients
meet aggressive timelines for transition from a familiar pay grade system to an
entirely new, pay-for-performance, pay-banded compensation system.
The
DHS CBP Procurement Directorate needed a comprehensive, state-of-the-art
knowledge management system to support the finance acquisition improvement
initiative. We provided a SharePoint-based easy-to-use portal for the
collection, dissemination, and utilization of a standardized, up-to-date body of
knowledge, policies, and procedures. The initial implementation covered 250
procurement personnel dispersed across the country. The project has since been
extended to include development of seven additional knowledge management systems
for each of the Office of Finance Directorates, serving more than 1,200 staff in
total.
The
Battle Command Knowledge System is the Army’s knowledge management system
providing the capability to effectively share, integrate, reuse, and apply
information and experience. Our knowledge managers facilitate,
coordinate, integrate and share knowledge among the eight professional forums in
the leadership, leader development and operating forces knowledge network. Forum
facilitators support online discussions, connect forum members and subject
matter experts and capture new knowledge for future use.
Information
Assurance and Cybersecurity
Our
information assurance and cybersecurity services include management support,
operational support and technical support. We help develop security policies and
plans, provide certification and accreditation assistance, provide management
support to security programs, assist in the identification and mitigation of
security risks, and provide test and evaluation support.
We
fully support the "people" side of information assurance (“IA”) by helping
agencies acquire and train the key IA skills through our proven human capital,
training, and change management practices for the security community. In
addition, we provide a wide range of security operations support to include
incident handling, disaster recovery and continuity of operations, and computer
support and operations.
We
have the skills to provide a broad range of technical support to include program
management, technology assessment, common vocabulary integration, security
architecture design and development, identification and access control,
intrusion detection and penetration testing, and network security design and
assessment.
In
the certification and accreditation area, we conduct certification and
accreditation document reviews to ensure compliance with the Federal Information
Security Management Act (“FISMA”), conduct technical reviews of critical
controls and assess agency IA programs, maintain department-wide FISMA
inventories, and assist in developing and implementing remediation plans and
actions.
DRC’s
IA services combine industry standard practices with our unique processes and
tools and a highly capable staff that is trained and certified in key security
skills. We have experience with a diverse range of government organizations.
This diversity allows us to bring to bear the best practices for meeting the
difficult challenges associated with complying with security requirements,
developing effective staff security practices and skills, and protecting data
and systems from rapidly evolving threats.
Healthcare
Services
In
2008, we were awarded a ten-year indefinite-delivery, indefinite-quantity
(“ID/IQ”) contract by the Office of the Assistant Secretary of Defense for the
TRICARE Evaluation, Analysis, and Management Support, or TEAMS. The contract
provides a vehicle for obtaining services in support of policy development,
decision-making, management and administration, program and/or project
management and administration. We were one of 23 companies awarded the TEAMS
contract, which has a total ceiling value of $5 billion.
We
have won four task orders under the contract supporting the TRICARE Traumatic
Brain Injury and Psychological Health Program, the Defense Center of Excellence,
the National Intrepid Center of Excellence and the Military Medical Support
Office. We are providing program management, program evaluation and
analysis, clinical support services, project coordination and administrative
services for these programs.
Financial
Data and Other Information
Financial
data and other information 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 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.
MARKETS
We
are focused on providing high value solutions and services to government
customers. We believe that our core capabilities are well aligned with the types
of services and solutions for which the government has increasing demands
including: (i) assistance with transforming the delivery of government services
through organizational change, process improvement or developing systems which
deliver a high level of business intelligence to its users; (ii) advanced
training architecture and systems improving information security by
strengthening processes and verifying the effectiveness of controls, (iii)
automation which provides a new level of quality, responsiveness and reliability
in the delivery of citizen services; and (iv) engineering services which enhance
and leverage technology to help our customers efficiently achieve their
mission.
We
are cognizant of funding challenges and changing priorities of the federal
government. With the solid growth in the 2009 federal IT budgets, the
4% growth in the 2010 IT budget request, and President Obama’s favorable view of
technology, the long-term outlook for the federal professional and IT services
industry is good. TechAmerica, a leading trade association in the
industry, estimates that the total federal IT budget will grow at 3.1% annually
over the next five years, down from the 4.9% in the prior five years, from $77.8
billion to $90.7 billion.
Customers
have moved away from using General Services Administration (“GSA”)
schedule contracts in favor of agency-wide multiple-award ID/IQ multi-year
contract vehicles. Over the past several years, we have won or
acquired many of these contracts including the DHS EAGLE and the Program
Management Support Services (“PMSS”) management and IT services contracts, the
military health care TEAMS contract, the Air Force Design and Engineering
Support Program II (“DESP II”) engineering services contract, the DoD-wide
Logistics Management Support Services (“LMSS”) logistics services contract, the
Office of Personnel Management Training and Management Assistance (“TMA”)
contract, and the Alliant government-wide contract. As a result, the
portion of our revenue derived from prime contracts rose to 71% in 2009, up from
63% in 2008.
In
recent years, there has been an increase in the portion of contracts issued on a
fixed price basis, compared with time and materials or cost-plus, in an effort
to reduce the risk to the government of cost overruns. We believe our
contract cost management capabilities are strong and view this trend as
favorable to the company. The amount of our revenue derived from
fixed price contracts in 2009 was 40%, up from 33% in 2008.
The
federal government also has set high priority and is initiating programs focused
on strengthening the government workforce with particular emphasis on personnel
responsible for acquisition, such as, acquiring products and services for the
government. The government has set targets for adding to the
government workforce with some of these positions coming from a reduction in the
number of contractor positions supporting the government, known as
in-sourcing. We have experienced a modest reduction in positions and
revenue from in-sourcing on our business and anticipate continuation of this
program. We also are seeing increasing demand for human capital and
training solutions in support of government initiatives to strengthen the
federal workforce.
In
the state and local government sector, which is less than 10% of our total
business, new contract opportunities are limited as the states address balanced
budget requirements and lower tax revenues. While we are not
expecting major state system procurements in 2010, we anticipate procurement
activities in 2011 as the fiscal environment in some states
stabilizes. 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.
MAJOR CUSTOMERS
Our
2009 revenue was derived approximately 55% from the national defense and
intelligence sector, 20% from homeland security, 16% from other federal civilian
agencies, 9% from state and local governments and the remaining from commercial
customers.
National Defense and Intelligence
Sector
U.S.
Air Force customers constituted the largest component of our national defense
and intelligence revenue in 2009, representing approximately 27% of revenue,
while U.S. Army revenue represented 12%, U.S. Navy revenue represented
8% and revenue from other agencies represented 7% of revenue. The work we
perform for our major customers in this sector is described below.
U.S.
Air Force Customers
Materiel
Command, Aeronautical
Systems Center
The
Aeronautical Systems Center (“ASC”), headquartered at Wright-Patterson Air Force
Base, is responsible for research, development, testing, evaluation, acquisition
and life cycle management of aeronautical systems and related equipment for the
Air Force.
We
support ASC system program offices with program management, logistics,
engineering, acquisition management, analytical, and administrative
services. The active programs we currently support include the
Predator, Global Hawk, RA Sensors, F-16, F-22, B-2 and C-17.
Materiel
Command, 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.
We
provide technical and subject matter experts supporting the implementation of
the Air Force’s Expeditionary Combat Support System. This multi-year
effort is intended to transform Air Force logistics.
We
provide software maintenance, support and enhancement services in support of the
Air Force Weapons Systems Management Information System
(“WSMIS”). WSMIS is the Air Force’s operational system for global
tracking of Air Force parts and weaponry. We also support the
integration of WSMIS with other Air Force systems and
initiatives.
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.
Materiel
Command, Depot Operations
We
perform engineering logistics, IT management, operations analyses, systems
engineering and technical services 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, supporting the B-1B, the B-2, the B-52, the C-5, the KC-135
and the E-3A aircraft programs.
We
provide developmental research and engineering services and solutions for the
IUID umbrella program for Air Force depots. We provide comprehensive analysis of
tagging and labeling methods, including detailed studies of adhesives durability
in operational environments. Our efforts assist in the identification of
state-of-the-art asset tracking technology and help improve asset tracking
throughout the life cycle of all DoD assets.
Materiel
Command, Global Logistics
Support Center
We
provide data quality support services that identify and eradicate faulty data
anomalies. As part of this ongoing program, we determine the extent
of interface and system data quality problems, identify discrepancies, initiate
corrections, and provide visibility of data as well as maintain web
applications, which assist in the tracking, scanning and organizing of data to
identify anomalies in the system and correct them.
Air
Combat Command
Since
2006, we have been assisting Lockheed Martin with the development and
implementation of a new Air Operations Center operating system which integrates
more than 20 systems into a common hardware and software baseline. We
also provide on-going support to current Air Operations Center systems at
Langley Air Force Base in Hampton, Virginia.
We
provide the Global Cyberspace Integration Center with engineering services and
program management support for the Air Combat Command Tactical Satellite
Terminals and the Single Integrated Air Picture programs. We also provide
scientific and technical services for the engineering and integration of
warfighter vocabularies.
Air
Mobility Command
We
provide program planning, decision support, logistics analysis and financial
analysis services to the Air Mobility Command.
U.S.
Army Customers
Training
and Doctrine Command
In
February 2009, we were one of 22 companies awarded a prime contract under the
U.S. Army Program Executive Office Simulation, Training and Instrumentation
Omnibus Contract, known as STOC II. The contract is for one base period and
three option periods. With a total ceiling value for all awardees of $17.5
billion over a 10-year period, STOC II is the largest DoD multiple-award, ID/IQ
contract for training and simulation. Under STOC II the Army will procure a
broad range of modeling, simulation, and instrumentation solutions.
We
are one of five prime contractors awarded the Training, Doctrine and Combat
Development ID/IQ contract, which has a ceiling of $97 million to provide
training, doctrine and combat development to the U.S. Army
Armor
Center
at Fort Knox, Kentucky. We provide training development support to the Heavy
Brigade Combat Teams as the Army transitions the Armor Center from Fort Knox to
the Maneuver Center of Excellence at Fort Benning, Georgia. We also support the
Maneuver Force by developing a Tactical Leaders Course.
We
assist the U.S. Army Training and Doctrine Command Analysis Center at Fort
Leavenworth, Kansas in conducting 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
develop, manage, operate, and maintain the tools, scenarios, data and simulation
needed to enable analysis. We also support the Army’s Battle Command Knowledge
System, which supports soldiers and leaders in the performance of operational
missions.
Army
Research Institute
For
the Army Research Institute we evaluate training courses and materials and gauge
their ability to train soldiers to achieve mission objectives.
Medical
Research Institute for Chemical Defense
The
mission of the U.S. Army Medical Research Institute for Chemical Defense is to
develop medical countermeasures to chemical warfare agents and to train medical
personnel in the medical management of chemical casualties.
We
maintain courseware, modify course content and descriptions, and track
courses. We provide academic outreach and communications program
support to retain, recruit, transition, and provide outreach and education to
new talent acquired through internships, the Oak Ridge Institute for Science and
Education, and the National Research Council.
Software
Engineering Center
The
Army Food Management Information System required modernization to better serve
its customers and to manage food distribution for 350 dining facilities
worldwide. We have assisted in the strategic planning, the functional
requirements gathering, the evaluation of commercial food service software and
leading in the development and integration of commercial and custom-developed
software.
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.
U.S.
Navy Customers
Naval
Air System Command
For
the Naval Air System Command we provide assistance in implementing AIRSpeed, its approved Naval
aviation maintenance/logistics integration and modernization
system. We provide Lean Six Sigma training and technical support
services for maintenance facilities around the world.
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, which
supports clinical and patient management at field, hospital and branch clinical
locations worldwide and processes approximately 10,000 records each
day.
Office
of Naval Research
We
provide engineering, IT, and business transformation services to two Office of
Naval Research programs, Manufacturing Technology and Lean
Pathways.
Office
of Naval Intelligence
We
assisted and continue to support the Office of Naval Intelligence with
government structure, planning, development, training and implementation of
Defense Civilian Intelligence Personnel Systems, known as
DCIPS.
Naval
Supply Systems Command
We
provide IA services, including secure system testing/modeling as systems
transition from layered protection to true Multi-Level Security systems for
current and future Naval Operational Logistics Support Center systems and
networks. Our team provides systems engineering and integration support public
key infrastructure, secure operating systems, secure databases, and security
certification and accreditation support.
United
States Marine Corps Systems Command
We
provide project management and full life cycle software support for the
Web-based Manpower Assignment Support System (“Web MASS”) and Web-based PCS
Orders Delivery System. Web MASS provides an automated and integrated workflow
tool to access information essential for making assignment and career management
decisions.
We
provide the USMC Systems Command with software support services for Marine
Corps' SPA Module. The SPA Module provides Operational Force
commanders with an effective tool to accurately and timely account for deployed
personnel under their cognizance. We developed, integrated, tested,
demonstrated, deployed, and now maintain and support the SPA
Module.
Other
Defense Agency Customers
Defense
Logistics Agency
We
are helping Defense Logistics Agency fully
implement a continuous process improvement infrastructure, which will achieve
better efficiency, effectiveness and flexibility of the agency's logistical and
technological services. Our Lean Six Sigma staff provides the methodologies,
tools and expertise to implement business improvement
practices
Office
of Assistant Secretary of Defense for Health Affairs
In
2008, we were awarded a ten-year ID/IQ contract by the Office of the
Assistant Secretary of Defense for Health Affairs, which includes TRICARE
Management Activity. The TEAMS contract provides a vehicle for obtaining
services in support of policy development, decision-making, management and
administration, program and/or project management and administration. We were
one of 23 companies awarded the TEAMS contract, which has a total ceiling value
of $5 billion.
We
have won four task orders under the contract supporting the TRICARE Traumatic
Brain Injury and Psychological Health Program, the Defense Center of Excellence,
the National Intrepid Center of Excellence and the Military Medical Support
Office. We are providing program management, program evaluation and
analysis, clinical support services, project coordination and administrative
services.
Office
of Public Communication
We
provide the Office of Public Communications with thought leadership, analysis,
and technical expertise on emerging media options and creative services in the
form of writing, editing, videography and web site design and
development.
U.S.
Transportation Command
We
provide logical and physical data modeling expertise, data engineering and
management support services to the U.S. Transportation Command.
Missile
Defense Agency
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 (F-35) Program
Our
work for the Joint Strike Fighter program encompasses a variety of services in
the areas of autonomics logistics, strategic planning, business operations
management and technical assessment and analysis. We assist in the
evaluation and development of acquisition and sustainment strategies, provide
analytical support for government validation and verification of the autonomic
logistics system and provide technical support for models enhancement, business
process improvement initiatives and recommendations for performance-based
program metrics that capture operational and supportability
requirements.
Department
of Homeland Security
DHS
revenue represents 20% of total revenues. We provide solutions and
services to all six major DHS agencies, as well as, several directorates and
department level offices.
Department
of Homeland Security Headquarters, Office of the Chief Information
Officer
We
deliver management services assisting the DHS Office of the Chief Information
Officer (“OCIO”) of
Operations, Coordination and Planning with IT policy and planning, investment
and portfolio management, enterprise architecture, information assurance and IT
security, and information sharing. We also provide oversight and
assessment services for the IT Services Office. We work closely with
portfolio owners to resolve conflicts and facilitate agreements among competing
interests and provide a neutral perspective to decision-makers who need to
choose specific technology and mission targets.
We
provide the DHS OCIO with integrated technical, schedule and cost performance
best practices, as well as providing a systematic approach to selecting,
managing, and evaluating IT investments. We provide training for the Capital
Planning and Investment Control, Earned Value Management System disciplines and
the Office of Management and Budget-300 process.
Department
of Homeland Security Headquarters, Information Security
Office
We
provide a wide array of information security services to the DHS Information
Security Office’s Compliance Division, including supporting the DHS Information
Security Performance Plan and ensuring compliance with the FISMA. We are
responsible for conducting Certification and Accreditation document reviews,
technical reviews of critical controls, as well as reviews of information
security programs within DHS agencies. DRC personnel maintain the DHS FISMA
inventory, provide technical subject matter expertise to assist in developing
and implementing remediation Plans of Action and Milestones in response to audit
findings, and provide training to information security personnel across DHS
agencies.
Department
of Homeland Security Headquarters, Office of Intelligence and
Analysis
We
support to the DHS Office of I&A with technology assessment, mission-related
planning, deployment, operations and critical project services.
Immigration
and Customs Enforcement
We
provide business engineering services, technical support, design, and
architectural support required to assist with the development of enterprise and
system-level architectures for the Office of the Chief Information Officer for
Immigration and Customs Enforcement (“ICE”). The tasks include system and
software engineering systems, integration, system security, and program
documentation required for continued software support and requirements
management. We support the ongoing development and subsequent maintenance
of the ICE enterprise architecture planning artifacts. The enterprise solution
we are helping to develop provides the framework for fully integrating ICE
systems and provides the basis for continuously evaluating and assessing
transformation efforts.
Using
an IT investment management framework and value-driven reengineering methodology
we provide the ICE OCIO program executive office with the resources, processes
and expertise required to better manage the ICE IT investment portfolio. We also
assist in implementing project management best practices that encourage
collaboration and integration for improved project performance.
United
States Coast Guard
We
assist the Coast Guard information system security manager in responding to
notices of findings and recommendations from recent audits. We provide support
to the Coast Guard in the analysis of their recent audit results and development
of improvements to IT policies, procedures, and practices in order to ensure
that the audit results are adequately addressed and compliance with DHS
requirements is achieved.
U.S.
Citizenship and Immigration Services
We
provide the U.S. Citizenship and Immigration Services (“USCIS”) with
comprehensive quality assurance program management services for the USCIS
Application Support Centers biometrics system. USCIS requires
applicants and petitioners for certain immigration benefits to be photographed
and fingerprinted for the purpose of conducting criminal background checks. To
facilitate this effort, DRC provides support in data management, scheduling,
trends analysis, equipment utilization, personnel support, special projects,
standard operating procedures and project reporting.
Customs
and Border Protection
We
develop functional Web-based training courseware to meet the training and
simulation needs of CBP A&M. We work with CBP A&M to implement, expand
and maintain their OpSTAR network, which we designed and developed to meet the
training, distribution and tracking needs of the National Air Training Center.
We also provide flight training support, tactical scenario based instruction,
and other related training needs. We also developed and support CBP
Procurement Directorate Knowledge Management System.
Federal
Emergency Management Agency
We
support the Federal Emergency Management Agency (“FEMA”) by providing guidance,
training, and feedback to the components on the development and maintenance of
plans of action and milestones in response to audit findings. We also review
plan of action and milestones data and present current information to FEMA
system security officers, managers, and owners, utilizing existing audit
database and shared network drive to track audit requests and remediation
efforts to further ensure timely delivery of information.
We
provide the FEMA Office of External Affairs with communications strategy,
message coordination, analyses and guidance, relationship-building and decision
support services.
Transportation
Security Administration
We
provide project and program management, business process improvement and
knowledge management solutions to the Transportation Security
Administration's National Explosives Detection Canine Team Program which
deters and detects the introduction of explosives devices into the
transportation system.
Federal
Civilian Agencies
Pension
Benefit Guaranty Corporation
The
Pension Benefit Guaranty Corporation Enterprise Program Management Office has a
mission to maintain corporate integrated IT Governance and Management framework
policies, processes, procedures, standards, and guidelines. We help the Office
meet its quality management objectives through the conduct of compliance audits
and the development and implementation of continuous improvement
programs.
Federal
Deposit Insurance Corporation
The
FDIC is striving to continually improve the overall operating efficiency and
effectiveness of its IT resources. Through our business analysis and management
support services, we identify opportunities for improved efficiency and
effectiveness of its IT resources. We develop project requirements,
manage current IT projects, plan future projects and prepare business case
analyses.
Federal
Bureau of Investigation
For
the Department of Justice FBI Training Division we provide design, development
and deployment services for an automated application system for FBI linguist
applicants. We support the FBI’s Consolidated Linguist Automated Support
System-08, an optimal applicant process system that is based on real-time,
web-based technology and third-party test center integration. We perform
software development and workflow automation services to the system, which
dramatically reduces linguist application processing time.
Office
of Personnel Management
We
assist OPM in establishing its financial systems modernization project
management office by providing support in program planning and management,
contract management, financial management, risk management, quality management,
and management change and communication. We are implementing an integrated
project management methodology and establishing project management principles
consistent with OPM standard policies, procedures, standards, and
toolsets.
United
States Department of Agriculture
We
provide IT consulting services to the three United States Department of
Agriculture (“USDA”) Plant and Protection Quarantines (“PPQs”). We develop
recommendations to redesign PPQs IT organization which align the PPQs IT
organization with the new USDA enterprise architecture and also perform
independent reviews of faltering IT projects.
The
USDA Food Safety and Inspection Service (“FSIS”) is responsible for ensuring the
safety of the nation's food supply, including developing robust processing plant
hazard analysis critical control point plans. We assist FSIS in leveraging
eLearning technology to improve the plans quality and overall compliance across
processing plants.
We
provide recommendations to the Animal and Plant Health Inspection Service for
the redesign of the Agriculture Quarantine Activity System.
Internal
Revenue Service
We
provide IT infrastructure support to a number of critical programs including:
(i) the Collection Services Systems where we provide full life cycle development
support including Security Certification support and enterprise architecture
analysis to; (ii) the Credit Card Initiative where we provide independent
verification and validation (“IV&V”) of Web and Interactive Voice Response
applications and network security assessment; and (iii) the Enforcement Revenue
Information System where we provide independently-assessed CMM Level 3 IV&V
support.
We
support the Internal Revenue Service (“IRS”) Transition Management Office by
helping implement a large-scale IRS strategic plan that addresses modernization
needs across its six business domains.
State
and Local Government Sector
State
of California
Under
a sub-contract, we provide the training and performance support solution
component of a $245 million project for the California Department of Corrections
and Rehabilitation's Strategic Offender Management System Project. We also
provide the State of California with an innovative, multidimensional training
program to ensure the highest level of user effectiveness on the new system
while minimizing impact on normal business operations. Our team will be
providing train-the-trainer courses to over 1,200 state trainers. For the more
than 25,000 end users, we will provide a blended learning approach that combines
e-learning, instructor-led webinars, hands-on practice, and a comprehensive,
task-based online help system for just-in-time user assistance.
State
of Ohio
In
2009, we completed the implementation of a child welfare system in one of the
largest and most complex, county administered states in the nation. The Ohio
child welfare system is now operating in all 88 Ohio counties. The system allows
a caseworker to track a child across county lines and is accessible 24 hours a
day to more than 6,000 county caseworkers. The system, which supports cases from
intake to closure, is accessible to workers anywhere Internet access is
available and includes alerts and reminders which will help in day-to-day case
management.
State
of Tennessee
For
the State of Tennessee, we have customized our web-based Ohio solution to align
it with Tennessee’s unique child welfare practices. The new system which is
called TFACTS is scheduled to be fully implemented in 2010. Our
solution incorporates a proven state-of-the-art user-friendly interface, a
comprehensive, user-driven reporting system, and dashboards to provide users
with essential information when needed.
State
of Colorado
We
designed and built a network for the Colorado Department of Human Services,
which connects 7,000 state and county workers at 130 sites with the State’s
child welfare benefits management system. Our support for the Department of
Human Services now includes providing the infrastructure for their citizen
facing portal for benefits management. We also provide infrastructure services
for the Colorado Integrated Tax Architecture and the Colorado’s voter
registration system.
BUSINESS
DEVELOPMENT
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. Our business development group operates with disciplined
processes and information systems that provide transparency to pipeline and bid
status. Our business development account managers are experienced and
well trained in the solutions we offer. The business development
group also maintains a proposal development and publication
capability.
GOVERNMENT
CONTRACTS
The
federal procurement process has changed significantly in recent years. The
traditional method of federal government procurement had been to conduct a
lengthy competitive bidding process for each award. Today, agency sponsored
multiple award schedule and ID/IQ task order contracts are the predominant form
by which the federal government contracts for IT and technical services. These
vehicles have enabled contracting officers to accelerate the pace of awards.
Concurrently, under current budgetary pressures, our customers have the
flexibility to delay
awards,
reduce funding or fund work on an incremental basis. Foreseeing this
trend, the acquisition of these contracts is a strategic priority for
DRC. Today, we hold a broad portfolio of these contracts, including
the following:
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Government
Wide – GSA Alliant, Information Technology Services
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Department
of Homeland Security – EAGLE Category 5, Management
Services
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Department
of Homeland Security – PMSS, Professional Services
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Air
Force Depot – DESP II, Engineering Services
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Army/Navy/Marine
Corps – LMSS, Logistics Services
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Office
of Personnel Management – TMA, Human Resource Services
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Army
Training and Doctrine Command – STOC II, Training, Modeling and
Simulation
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Military
Health Care – TEAMS, Professional and Management
Services
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Our
U.S. Government contracts fall into one of three categories:
(i) fixed-price, both completion and term (which operate similar to
time-and-material), including service-type contracts,
(ii) time-and-materials, and (iii) cost reimbursable. Under a
fixed-price contract, the U.S. Government pays an agreed upon price for our
services or products, and we bear the risk that increased or unexpected costs
may reduce our profits or cause us to incur a loss. Conversely, to the extent we
incur actual costs below anticipated costs on these contracts, we could realize
greater profits. Under a time-and-materials contract, the U.S. Government pays
us a fixed hourly rate, which is intended to cover salary costs and related
indirect expenses, to include a profit margin. Under a cost-reimbursable
contract, the U.S. Government reimburses us for our allowable direct expenses
and allowable and allocable indirect costs and pays a negotiated
fee.
Our
state and local contracts are generally either fixed-price completion, including
service-type contracts, or time-and-materials. In certain instances, these
contracts are subject to annual state-legislative funding approval and to
termination provisions.
Our
contracts with the U.S. Government and state customers generally are subject to
termination at the convenience of the U.S. Government or the state. However, in
the event that a contract is terminated by the respective government, we would
be reimbursed for our allowable costs up to the time of termination and would be
paid a proportionate amount of the stipulated profit attributable to the work
actually performed. Although U.S. Government or state contracts may extend for
several years, they are generally funded on an annual basis, or incrementally
for shorter time periods, and are subject to reduction or cancellation in the
event of changes in U.S. Government or state requirements due to appropriations
or budgetary concerns. In addition, if the federal or state government curtail
expenditures for research, development and consulting activities, the
curtailment could have a material adverse impact on our revenue and
earnings.
COMPETITION
The
Company competes with a large number of public and privately-held firms that
specialize in providing information technology, engineering and management
consulting services to government customers.
High-end
solutions and services such as business transformation, human capital
management, training and performance support systems, business intelligence, IT
infrastructure, program management and engineering represent the majority of the
Company’s business. With federal and state customers procuring these
services, generally the Company competes with consulting firms and with
government IT service divisions of large defense weapons systems producers. In
these competitions the Company believes that its competitive advantage is that
it offers similar people, process and capabilities with the responsiveness of a
smaller company. To the extent that these larger firms have extensive
relationships with customers on selected competitions, this would be a
disadvantage for the Company.
The
Department of Defense advisory and assistance services represent approximately
13% of the Company’s business. Procurements for this work are
increasingly being restricted to small businesses. Also,
strengthening the acquisition capabilities of the government’s workforce is a
federal priority and the primary driver of federal in-sourcing (i.e. conversion
of jobs performed by contractors to government employee positions)
initiatives. In this market the Company competes as a subcontractor
with small businesses and generally is seen by customers as
having
outstanding capabilities and qualifications. However, this market is
price competitive, which can be a disadvantage when competing with small
businesses.
GOVERNMENT
REGULATION
As
a defense contractor, we are subject to many levels of audit and review,
including by the Defense Contract Audit Agency, the Defense Contract Management
Agency, the various inspectors general, the Defense Criminal Investigative
Service, the Government Accountability Office, the Department of Justice and
Congressional Committees. These audits and reviews could result in the
termination of contracts, the imposition of fines or penalties, the withholding
of payments due to us or the prohibition from participating in certain U.S.
Government contracts for a specified period of time. Any such action could have
a material adverse effect on our business, financial condition, results of
operations and cash flows.
Governmental
awards of contracts are subject to regulations and procedures that require
formal bidding procedures and allow for protests by losing bidders. Such
protests may result in significant delays in the commencement of expected
contracts, the reversal of a previous award or the reopening of the
competitive-bidding process, which could have a material adverse effect upon our
business, financial condition, results of operations and cash
flows.
The
U.S. Government has the right to terminate contracts for convenience. If the
U.S. Government terminated a contract, we would generally recover costs incurred
up to termination, costs required to be incurred in connection with the
termination and a portion of the fee earned commensurate with the work performed
up to termination. However, significant adverse effects on our indirect cost
pools may not be recoverable in connection with a termination for convenience.
Contracts with state and other governmental entities are subject to the same or
similar risks.
Compliance
with federal, state and local provisions relating to the protection of the
environment has not had and is not expected to have a material effect upon our
capital expenditures, earnings or competitive position.
EMPLOYEES
Our
customers value the skills of our employees. We believe our
compensation and benefit plans are competitive within our industry, and we
develop the skills of our employees through formal training and certification
programs.
As
of December 31, 2009, we had approximately 1,470 employees. Approximately
67% of our employees hold federal government security
clearances. Nearly all of our employees are located in the United
States. We require all employees to annually complete training on
compliance subjects. None of our employees are represented by a labor
union or subject to a collective bargaining agreement.
PROPRIETARY
INFORMATION
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 Dependant on the Federal Government. Changes in Federal
Spending Priorities or Policies Could Adversely Affect Our Results.
During
2009 and 2008, approximately 90% and 88%, respectively, of our total revenue was
derived from U.S. Government agencies. 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 55% and 66% of our total revenue in 2009 and 2008, respectively.
We cannot provide any assurance that any of these programs will continue at
current levels. Our revenue could be adversely affected by significant changes
in federal spending priorities or policies such as:
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decreases
in spending by agencies or programs we support;
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increased
allocation of federal contracts to small minority owned or disadvantaged
businesses;
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replacement
of professional services contractors with federal employees (i.e.,
in-sourcing);
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federal
government shutdowns due to weather, security threats, lack of budget
funding, or other reasons;
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delays
in payment of our invoices due to policy changes or problems with
government information systems;
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failure
of Congress to timely pass sufficient appropriations to fund our
programs;
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diversion
of funds to pay for international conflicts or reconstruction;
or
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DoD
Base realignment and closures.
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It
is not possible for us to predict whether federal budgets will increase or
decline in the future. As a result, changes in federal priorities or policies
may have adverse effects on our business, financial condition or results of
operations.
We Must
Bear the Risk of Various Pricing Structures Associated With Government
Contracts.
We
derive most 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 42% and 49% of
total revenue in 2009 and 2008, respectively. The pricing of these
contracts is based upon estimates of future salaries and 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 40% in 2009 from 33% in 2008. Under a fixed-price
contract, the government pays an agreed upon price for our services or products,
and we bear the risk that increased or unexpected costs may reduce our profits
or cause us to incur a loss.
Significant
cost overruns can occur if we fail to:
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adequately
estimate the resources required to complete a project;
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properly
determine the scope of an engagement; or
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complete
our contractual obligation in a manner consistent with the project
plan.
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For
fixed price contracts, we must estimate the costs necessary to complete the
defined statement of work and recognize revenue or losses in accordance with
such estimates. Actual costs may vary materially from the estimates made from
time to time, necessitating adjustments to reported revenue and net income.
Underestimates of the costs associated with a project could adversely affect our
overall profitability and could have a material adverse effect on our business,
financial condition, results of operations and cash flows. While we endeavor to
maintain and improve contract profitability, we cannot be certain that any of
our existing or future fixed-price projects will be
profitable.
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. We May Be Unsuccessful in Re-Competition for Work We Are
Currently Performing.
Most
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.
We
operate in a highly competitive market, and routinely we must compete to re-win
work we are currently performing. On all of these re-competitions
there exists reasonable possibility that we will not be the winner, in which
event future revenues, operating results and cash flows could be materially
adversely affected.
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.
Federal Government
In-Sourcing Could Result in Loss of Business Opportunities and
Personnel.
Recently
the Federal Government announced it would reduce the percentage of contracted
services in favor of more federal employees. This initiative is called
“in-sourcing.” Over time in-sourcing could have a materially adverse
affect on the Company’s business, financial condition and results of operations.
Specifically, as a result of in-sourcing federal procurements for
services could be fewer and smaller in the future. In addition, work DRC
currently performs could be in-sourced by the federal government and as a
result, the Company’s revenues could be reduced. Moreover, DRC employees
working on contract could also be hired by the government. This loss of
DRC employees would necessitate the need to retain new employees.
Accordingly, the effect of in-sourcing could have a materially adverse
affect on the Company’s business, financial condition and results of operations
over time.
Inability
to Hire or the Loss of 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 personnel could impair our
ability to perform required services under some of our contracts, to retain this
business after the expiration of the existing contract, or to win new business
in the event that we lost the services of individuals who have been identified
in a given proposal as key personnel in the proposal. Any of these situations
could have a material adverse effect on our business, financial condition,
results of operations and cash flows.
Our
Failure to Obtain and Maintain Necessary Security Clearances May Limit Our
Ability to Perform Classified Work for Government Clients, Which Could Harm Our
Business.
Some
government contracts require us to maintain facility security clearances, and
require some of our employees to maintain individual security clearances. If our
employees lose or are unable to obtain security clearances on a timely basis, or
we lose a facility clearance, the government client can terminate the contract
or decide not to renew the contract upon its expiration. As a result, to the
extent that we cannot obtain the required security clearances for our employees
working on a particular contract, or we fail to obtain them on a timely basis or
fail to maintain these security clearances, we may not derive the revenue
anticipated from the contract, which could have a material adverse effect on our
business, financial condition, results of operations and cash
flows.
Security
Breaches in Sensitive Government Systems Could Harm Our Business.
Many
of the systems we develop, install and maintain involve managing and protecting
information involved in intelligence, national security, and other sensitive or
classified government functions. A security breach in one of these systems could
cause serious harm to our business, damage our reputation, and prevent us from
being eligible
for
further work on sensitive or classified systems for federal government clients.
We could incur losses from a security breach that could exceed the policy limits
under our errors and omissions and product liability insurance. Damage to our
reputation or limitations on our eligibility for additional work resulting from
a security breach in one of our systems could have a material adverse effect on
our business, financial condition, results of operations and cash
flows.
The Failure by Congress to
Approve Budgets on a Timely Basis for the Federal Agencies We Support Could
Delay Procurement of Our Services and Solutions and Cause Us to Lose Future
Revenues.
On
an annual basis, Congress must approve budgets that govern spending by the
federal agencies that we support. In years when Congress is not able to complete
its budget process before the end of the federal government’s fiscal year on
September 30, Congress typically funds government operations pursuant to a
continuing resolution. A continuing resolution allows federal government
agencies to operate at spending levels approved in the previous budget cycle.
When the U.S. government operates under a continuing resolution, it may delay
funding we expect to receive from clients on work we are already performing and
will likely result in new initiatives being delayed or in some cases
cancelled.
Federal Government Contracts
Contain Provisions Giving Government Customers a Variety of Rights that are
Unfavorable to Us, Including the Ability to Terminate a Contract at Any Time for
Convenience.
Federal
government contracts contain provisions and are subject to laws and regulations
that give the government rights and remedies not typically found in commercial
contracts. These provisions may allow the government to
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terminate
existing contracts for convenience, as well as for
default;
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reduce
orders under, or otherwise modify contracts or
subcontracts;
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cancel
multi-year contracts and related orders if funds for contract performance
for any subsequent year become unavailable;
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decline
to exercise an option to renew a multi-year contract;
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suspend
or debar us from doing business with the federal government or with a
governmental agency;
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prohibit
future procurement awards with a particular agency as a result of a
finding of an organizational conflict of interest based upon prior related
work performed for the agency that would give a contractor an unfair
advantage over competing contractors;
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subject
the award of contracts to protest by competitors, which may require the
contracting federal agency or department to suspend our performance
pending the outcome of the protest;
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claim
rights in products and systems produced by us;
and
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If
the government terminates a contract for convenience, we may recover only our
incurred or committed costs, settlement expenses and profit on work completed
prior to the termination. If the government terminates a contract for default,
we may not recover even those amounts and instead may be liable for excess costs
incurred by the government in procuring undelivered items and services from
another source. If one of our government customers were to unexpectedly
terminate, cancel or decline to exercise an option to renew one or more of our
significant contracts or programs, our revenues and operating results would be
materially harmed.
Failure to Maintain Strong
Relationships with Other Contractors Could Result in a Decline in Our
Revenues.
In
2009 and 2008, we derived 29% and 37% of our revenues, respectively, from
contracts in which we acted as a subcontractor to other contractors or to joint
ventures that we and other contractors formed to bid on and execute particular
contracts or programs. We expect to continue to depend on relationships with
other contractors for a portion of our revenues for the foreseeable future. Our
business, prospects, financial condition or operating results could be harmed if
other contractors eliminate or reduce their subcontracts or joint venture
relationships with us because they choose to establish relationships with our
competitors; they choose to directly offer services that compete with our
business; the government terminates or reduces these other contractors’
programs; or the government does not award them new contracts.
Many of Our Federal
Government Customers Execute Their Procurement Budgets Through Multiple Award
Contracts Under Which We Are Required to Compete for Post-Award Orders,
Potentially Limiting Our Ability to Win New Contracts and Increase
Revenue.
Changes
in the Federal procurement process have caused many U.S. federal government
customers to increasingly purchase goods and services through multiple award
ID/IQ contracts and other multiple award and/or GWAC vehicles.
These
contract vehicles require that we make sustained post-award efforts to obtain
task orders under the relevant contract. There can be no assurance that we will
obtain revenues or otherwise sell successfully under these contract vehicles.
Our failure to compete effectively in this procurement environment could harm
our operating results.
Our
inability to win re-competitions of the multiple award contracts we currently
hold, including the DHS EAGLE and Air Force DESP II contracts, which are subject
to re-competition in 2010, could have a material adverse effect on future
revenues, operating results and cash flows. Also our inability to win
newly competed multiple award schedule contracts, which we do not currently
hold, may impede our ability to grow.
We May Lose Revenue and Our
Cash Flow and Profitability Could Be Negatively Affected if Expenditures Are
Incurred Prior to Final Receipt of a Contract or Contract Funding
Modification.
We
provide professional services and sometimes procure materials on behalf of our
government clients under various contract arrangements. From time to time, in
order to ensure that we satisfy our clients’ delivery requirements and
schedules, we may elect to initiate procurements or provide services in advance
of receiving formal contractual authorization from the government client or a
prime contractor. If our government or prime contractor requirements should
change or the government directs the anticipated procurement to a contractor
other than us, or if the materials become obsolete or require modification
before we are under contract for the procurement, our investment might be at
risk. If we do not receive the required funding, our cost of services incurred
in excess of contractual funding may not be recoverable. This could reduce
anticipated revenue or result in a loss, negatively affecting our cash flow and
profitability.
We May Be Liable for Systems
and Service Failures.
We
create, implement and maintain IT and technical services solutions that are
often critical to our customers’ operations, including those of federal, state
and local governments. We may in the future experience some systems and service
failures, schedule or delivery delays and other problems in connection with our
work. If our solutions, services, products or other applications have
significant defects or errors, are subject to delivery delays or fail to meet
our customers’ expectations, we may:
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lose
revenues due to adverse customer reaction;
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be
required to provide additional services to a customer at no
charge;
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receive
negative publicity that could damage our reputation and adversely affect
our ability to attract or retain customers; and
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suffer
claims for substantial damages against
us.
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In
addition to any costs resulting from product warranties, contract performance or
required corrective action, these failures may result in increased costs or loss
of revenues if they result in customers postponing subsequently scheduled work,
canceling contracts or failing to renew contracts.
While
many of our contracts with the federal government limit our liability for
damages that may arise from negligence in rendering services to our customers,
we cannot be sure that these contractual provisions will protect us from
liability for damages if we are sued. Even if unsuccessful, these claims could
result in significant legal and other costs that may be a distraction to our
management and/or may harm our reputation.
If We Fail to Comply with
Complex Procurement Laws and Regulations, We Could Lose Business and Be Subject
to Various Penalties or Sanctions.
We
must comply with laws and regulations relating to the formation, administration
and performance of federal government contracts. These laws and regulations
affect how we conduct business with our federal government contracts. In
complying with these laws and regulations, we may incur additional costs.
Non-compliance may also allow for the assignment of additional fines and
penalties, including contractual damages. Among the more significant laws and
regulations affecting our business are the following:
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the
Federal Acquisition Regulation, which comprehensively regulates the
formation, administration and performance of federal government
contracts;
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the
Truth in Negotiations Act, which requires certification and disclosure of
all cost and pricing data in connection with contract
negotiations;
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the
Cost Accounting Standards and Cost Principles, which impose accounting
requirements that govern our right to reimbursement under certain
cost-based federal government contracts;
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laws,
regulations and executive orders restricting the use and dissemination of
information classified for national security purposes and the export of
certain products, services and technical data; and
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U.S
export controls, which apply when we engage in international
work.
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Failure
to comply with these control regimes can lead to severe penalties, both civil
and criminal, and can include debarment from contracting with the U.S.
government.
Our
contracting agency customers periodically review our performance under and
compliance with the terms of our federal government contracts. If a government
review or investigation uncovers improper or illegal activities, we may be
subject to civil or criminal penalties or administrative sanctions,
including:
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termination
of contracts;
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forfeiture
of profits;
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cost
associated with triggering of price reduction clauses;
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suspension
of payments;
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fines;
and
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suspension
or debarment from doing business with federal government
agencies.
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Additionally,
the civil False Claims Act provides for potentially substantial civil penalties
where, for example, a contractor presents a false or fraudulent claim to the
government for payment or approval. Actions under the civil False Claims Act may
be brought by the government or by other persons on behalf of the government,
who may then share a portion of any recovery.
If
we fail to comply with these laws and regulations, we may also suffer harm to
our reputation, which could impair our ability to win awards of contracts in the
future or receive renewals of existing contracts. If we are subject to civil and
criminal penalties and administrative sanctions or suffer harm to our
reputation, our current business, future prospects, financial condition or
operating results could be materially harmed.
The
government may also revise its procurement practices or adopt new contracting
rules and regulations, including cost accounting standards, at any time. Any new
contracting methods could be costly to satisfy, be administratively difficult
for us to implement and could impair our ability to obtain new
contracts.
Our Contracts and
Administrative Processes and Systems Are Subject to Government Regulations,
Audits and Cost Adjustments By the Federal Government, Which Could Reduce Our
Revenue, Disrupt Our Business or Otherwise Adversely Affect Our Results of
Operations.
Federal
government agencies, including the Defense Contract Audit Agency (“DCAA”), the
Defense Contract Management Agency, various inspectors general, the Defense
Criminal Investigative Service, the Government Accountability Office and the
Department of Justice, routinely audit and investigate government contracts and
government contractors’ administrative processes and systems. These agencies
review our performance on contracts,
pricing
practices, cost structure and compliance with applicable laws, regulations and
standards. They also review our compliance with government regulations and
policies and the adequacy of our internal control systems and policies,
including our purchasing, accounting, estimating, compensation and management
information processes and systems. Any costs found to be improperly allocated to
a specific contract will not be reimbursed, and any such costs already
reimbursed must be refunded and certain penalties may be imposed.
DCAA
audits for costs incurred on work performed after December 31, 2004 have not yet
been completed. In addition, DCAA audits for costs incurred by our recent
acquisitions for certain periods prior
to acquisition have not yet been completed.
An
unfavorable outcome of an audit by the DCAA or another government agency
adversely effect our financial results. Moreover, if any of the administrative
processes and systems are found not to comply with requirements, we may be
subjected to increased government scrutiny and approval that could delay or
otherwise adversely affect our ability to compete for or perform contracts or
collect our revenue in a timely manner. Such possibilities include that (i) we
would be required to reimburse the government for amounts previously received,
(ii) our pricing on contracts may be prospectively reduced, (iii) payments to us
may be significant delayed or withheld, and (iv) our ability to compete may be
impaired by negative audit reports or by the failure to receive audit
reports.
If
a government investigation uncovers improper or illegal activities, we may be
subject to civil and criminal penalties and administrative sanctions, including
termination of contracts, forfeitures of profits, suspension of payments, fines
and suspension or debarment from doing business with the federal government. In
addition, we could suffer serious reputational harm if allegations of
impropriety were made against us.
Each
of these results could cause actual results to differ materially and adversely
from those anticipated. We do not know the outcome of pending or future
audits.
Our Markets are Highly
Competitive, and Many of the Companies We Compete Against Have Substantially
Greater Resources.
The
markets in which we operate include a large number of participants and are
highly competitive. Many of our competitors may compete more effectively than we
can because they are larger, better financed and better known companies than we
are. In order to stay competitive in our industry, we must also keep pace with
changing technologies and client preferences. If we are unable to differentiate
our services from those of our competitors, our revenue may decline. In
addition, our competitors have established relationships among themselves or
with third parties to increase their ability to address client needs. As a
result, new competitors or alliances among competitors may emerge and compete
more effectively than we can. There is also a significant industry trend towards
consolidation, which may result in the emergence of companies who are better
able to compete against us. The results of these competitive pressures could
cause our actual results to differ materially and adversely from those
anticipated.
Our Failure to Adequately
Protect Our Confidential Information and Proprietary Rights May Harm Our
Competitive Position.
Our
success depends, in part, upon our ability to protect our proprietary
information and other intellectual property. Although our employees are subject
to confidentiality obligations, this protection may be inadequate to deter
misappropriation of our confidential information. In addition, we may be unable
to detect unauthorized use of our intellectual property in order to take
appropriate steps to enforce our rights. If we are unable to prevent third
parties from infringing or misappropriating our copyrights, trademarks or other
proprietary information, our competitive position could be harmed and our actual
results could differ materially and adversely from those
anticipated.
Loss of Our Position as a
Qualified Contractor Under One or More General Services Administration
Schedules, Would Impair Our Operating Results and Our Ability to Keep Our
Existing Business or Win New Business.
If
we were to lose any of our GSA schedules or our prime contractor position on any
of our contracts, we could lose revenues, and our ability to win new business
and our operating results could decline as a result.
A Preference for
Minority-Owned, Small and Small Disadvantaged Businesses Could Impact Our
Ability to be a Prime Contractor on Certain Governmental
Procurements.
As
a result of the Small Business Administration, or SBA, set-aside program, the
federal government may decide to restrict certain procurements only to bidders
that qualify as minority-owned, small or small disadvantaged businesses. As a
result, we would not be eligible to perform as a prime contractor on those
programs and would be restricted to a maximum of 49% of the work as a
subcontractor on those programs. An increase in the amount of procurements under
the SBA set-aside program may impact our ability to bid on new procurements as a
prime contractor or restrict our ability to recompete on incumbent work that is
placed in the set-aside program.
If Our
Employees Engage in Misconduct or Other Improper Activities, Our Business Could
Be Harmed.
We
are exposed to the risk that employee fraud or other misconduct could occur.
Misconduct by employees could include intentional failures to comply with
federal government procurement regulations, engaging in unauthorized activities,
or falsifying time records. Employee misconduct could also involve the improper
use of our clients’ sensitive or classified information, which could result in
regulatory sanctions against us and serious harm to our reputation. It is not
always possible to deter employee misconduct, and the precautions we take to
prevent and detect this activity may not be effective in controlling unknown or
unmanaged risks or losses, which could have a material adverse effect on our
business, financial condition, results of operations and cash
flows.
We Are
Involved in Litigation Matters Which, If Not Resolved in Our Favor, Could Harm
Our Business.
We
are involved in litigation matters which could have a material adverse effect on
our business, financial position, results of operations and cash
flow. These litigation matters are more fully described in
Note 15 of our “Notes to Consolidated Financial Statements” in
Part II, Item 8 of this Form 10-K.
If Our
Internal Control Over Financial Reporting Does Not Comply with Financial
Reporting and Control Management Requirements, There Could Be a Material Adverse
Effect on Our Operations or Financial Results. Also, Current and Potential
Stockholders Could Lose Confidence in Our Financial Reporting, Which Would Harm
Our Business and the Trading Price of Our Common Stock.
Effective
internal controls are necessary for us to provide reliable financial reports. If
we cannot provide reliable financial reports, our business and operating results
could be harmed. We have in the past discovered, and may in the future discover,
areas of our internal control over financial reporting that need
improvement.
Although
our management has determined, and our independent registered public accounting
firm has attested, that our internal controls over financial reporting were
effective as of December 31, 2009, 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.
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.
Our
Financing Requirements May Increase and We Could Have Limited Access to Capital
Markets.
The
United States and worldwide capital and credit markets have recently experienced
significant price volatility, dislocations and liquidity disruptions, which have
caused market prices of many stocks to fluctuate substantially and the spreads
on prospective debt financings to widen considerably. While we believe that our
current resources and access to capital markets are adequate to support
operations over the near term and foreseeable future, we cannot assure you that
these circumstances will remain unchanged. Our need for capital is dependent on
operating results and may be greater than expected. Our ability to maintain our
current sources of debt financing depends on our ability to remain in compliance
with covenants contained in our financing agreements, including, among other
requirements, maintaining a minimum total net worth and minimum cash flow and
debt coverage ratios. If changes in capital markets restrict the availability of
funds or increase the cost of funds, we may be required to modify, delay or
abandon some of our planned expenditures, which could have a material adverse
effect on our business, financial condition, results of operations and cash
flows.
Our
Operating Results May Vary Significantly From Quarter to Quarter and Such
Fluctuations May Affect the Price of Our Common Stock.
Our
revenue and earnings may fluctuate from quarter to quarter depending on a number
of factors, including:
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the
number, size and timing of client projects commenced and completed during
a quarter;
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contract
wins and losses;
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changes
to existing contracts made by our customers;
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bid
and proposal efforts undertaken;
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progress
on fixed-price projects during a given quarter;
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employee
productivity and hiring, attrition and utilization
rates;
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rapid
changes in demand from our precision manufacturing
customers;
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accuracy
of estimates of resources required to complete ongoing
projects;
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the
trend in interest rates; and
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general
economic conditions.
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We May Not Make or Complete
Future Mergers, Acquisitions or Strategic Alliances or Investments Which May
Adversely Affect Our Growth. Additionally, Acquired Operations May
Perform at Levels Below Our Financial Projections or We May Be Unable to
Successfully Integrate the Acquired Operations.
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:
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the
difficulty of assimilating the acquired operations and
personnel;
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the
potential disruption of our ongoing business and diversion of resources
and management time;
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the
potential failure to retain key personnel of the acquired
business;
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the
difficulty of integrating systems, operations and
cultures; and
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the
potential impairment of relationships with customers as a result of
changes in management or otherwise arising out of such
transactions.
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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 Company Has Substantial
Investments in Recorded Goodwill as a Result of Prior Acquisitions, and Changes
in Future Business Conditions Could Cause These Investments to Become Impaired,
Requiring Substantial Write-Downs That Would Reduce the Company’s Operating
Income.
As
of December 31, 2009, goodwill accounted for approximately $98 million, or
approximately 48%, of the Company’s recorded total assets. Under generally
accepted accounting principles, the Company reviews its goodwill for impairment
annual or when events or changes in circumstances indicate the carrying value
may not be recoverable. If goodwill becomes impaired, the Company would record a
significant charge to earnings in our financial statements during the period in
which any impairment of our goodwill is determined, which may significantly
reduce or eliminate our profits.
The
Market Price of Our Common Stock May Be Volatile.
The
stock market in recent years has experienced significant price and volume
fluctuations that often have been unrelated or disproportionate to the operating
performance of particular companies. Many factors that have influenced trading
prices will vary from period to period, including: decreases in our earnings and
revenue or quarterly operating results, changes in estimates by analysts, market
conditions in the industry, announcements and new developments by competitors,
and regulatory reviews.
Any
of these events could have a material adverse effect on the market price of our
common stock. In addition, low trading volume in our common stock may cause
volatility in stock price.
We are Subject to Changes in
United States and Global Market Conditions That Are Beyond Our Control and May
Have a Material Effect on Our Business and Results of
Operations.
The
United States and global economies are currently experiencing a period of
substantial economic uncertainty with wide-ranging effects. The Company is
unable to predict the impact, severity, and duration of these economic events,
which could have a material effect on the Company’s consolidated financial
position, results of operations, or cash flows.
We
have not received any written comments from the staff of the Securities and
Exchange Commission regarding our periodic or current reports that (1) were
issued not less than 180 days before the end of our 2009 fiscal year,
(2) remain unresolved and (3) we believe are
material.
As
of December 31, 2009 we leased all of the facilities used in our operations
totaling approximately 480,000 square feet, of which Metrigraphics occupied
approximately 45,000 square feet and we sublease approximately 181,000 square
feet. We have principal offices in Andover, Massachusetts and in the
Washington, D.C. area. We believe that our facilities are adequate
for our current needs.
As
a defense contractor, we are subject to many levels of audit and review from
various government agencies, including the Defense Contract Audit Agency,
Defense Contract Management Agency, various inspectors general, the Defense
Criminal Investigation Service, the Government Accountability Office, the
Department of Justice and Congressional Committees. Both related to and
unrelated to our defense industry involvement, we are, from time to time,
involved in audits, lawsuits, claims, administrative proceedings and
investigations. We accrue for liabilities associated with these activities when
it becomes probable that future expenditures will be made and such expenditures
can be reasonably estimated.
We
are a party to or are subject to litigation and other proceedings referenced in
Note 15 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.
PART II
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, 2009
|
||||||||
|
First
quarter
|
$ | 9.00 | $ | 5.86 | ||||
|
Second
quarter
|
$ | 10.61 | $ | 6.80 | ||||
|
Third
quarter
|
$ | 14.32 | $ | 10.01 | ||||
|
Fourth
quarter
|
$ | 13.80 | $ | 9.36 | ||||
|
Fiscal
year ended December 31, 2008
|
||||||||
|
First
quarter
|
$ | 11.30 | $ | 8.72 | ||||
|
Second
quarter
|
$ | 10.75 | $ | 9.25 | ||||
|
Third
quarter
|
$ | 10.50 | $ | 7.58 | ||||
|
Fourth
quarter
|
$ | 9.04 | $ | 5.00 | ||||
Number of
Shareholders
As
of February 28, 2010, there were 539 shareholders of record of our common
stock.
Dividend Policy
We
did not declare any cash dividends in the two years ended December 31, 2009 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
Note 8 of our “Notes to Consolidated Financial Statements” in Part II,
Item 8 of this Form 10-K, restrict our ability to pay
dividends.
Issuer
Purchases of Equity Securities
The
following table sets forth all purchases made by us or on our behalf by any
"affiliated purchaser," as defined in Rule 10b-18(a)(3) under the Exchange Act,
of shares of our common stock during each month in the fourth quarter of
2009. All shares repurchased were not part of a publicly announced
share purchase program and with the exception of one transaction represent
shares repurchased to cover payroll withholding taxes in connection with the
vesting of restricted stock awards. During the month of October we
repurchased 66,081 shares to cover the option cost and 54,917 shares to cover
payroll withholding taxes in connection with the exercise of non-qualified stock
options by a key executive officer.
|
Approximate
|
||||||||||||||||
| Dollar | ||||||||||||||||
|
Total
|
Value
|
|||||||||||||||
| Number | of Shares | |||||||||||||||
|
of
Shares
|
that
May
|
|||||||||||||||
|
Purchased
|
Yet
Be
|
|||||||||||||||
|
Average
|
as
Part of
|
Purchased
|
||||||||||||||
|
Total Number
|
Price
|
Publicly
|
Under
the
|
|||||||||||||
|
of
Shares
|
Paid
Per
|
Announced
|
Programs
|
|||||||||||||
|
Purchased
(1)
|
Share
|
Programs
|
(in
millions)
|
|||||||||||||
|
October
1, 2009 to October 31, 2009
|
122,097 | $ | 13.44 | - | $ | - | ||||||||||
|
November
1, 2009 to November 30, 2009
|
261 | $ | 12.74 | - | - | |||||||||||
|
December
1, 2009 to December 31, 2009
|
97 | $ | 10.90 | - | - | |||||||||||
|
Total
|
122,455 | $ | 13.43 | - | $ | - | ||||||||||
Stock
Performance Graph
The
following graph compares the cumulative total stockholder return on our common
stock from December 31, 2004 to December 31, 2009 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, 2004 in our common stock, the NASDAQ Composite U.S. Index and our
industry peers, and assumes any dividends are reinvested.
|
December
31,
|
||||||||||||||||||||||||
|
2004
|
2005
|
2006
|
2007
|
2008
|
2009
|
|||||||||||||||||||
|
Dynamics
Research Corporation
|
$ | 100.00 | $ | 86.65 | $ | 54.68 | $ | 60.68 | $ | 44.87 | $ | 59.51 | ||||||||||||
|
NASDAQ
Stock Market (US Companies)
|
$ | 100.00 | $ | 101.37 | $ | 111.03 | $ | 121.92 | $ | 72.49 | $ | 104.31 | ||||||||||||
|
Peer
Group
|
$ | 100.00 | $ | 96.54 | $ | 98.02 | $ | 101.36 | $ | 100.39 | $ | 100.69 | ||||||||||||
The
performance in the above graph is not necessarily indicative of future stock
price performance. Our peer group consists of industry peers,
including, CACI International, Inc., ICF International, Inc., ManTech
International Corp., NCI, Inc., 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,
|
||||||||||||||||||||
|
(dollars
in thousands, except per share data)
|
2009
|
2008(1)
|
2007
|
2006
|
2005
|
|||||||||||||||
|
Revenue
|
$ | 268,661 | $ | 236,796 | $ | 224,676 | $ | 252,890 | $ | 293,662 | ||||||||||
|
Gross
profit
|
$ | 44,967 | $ | 38,994 | $ | 37,160 | $ | 33,914 | $ | 48,096 | ||||||||||
|
Operating
income (loss)
|
$ | 17,908 | $ | (150 | ) | $ | 13,104 | $ | 7,507 | $ | 20,247 | |||||||||
|
Non-GAAP
operating income(2)
|
$ | 14,669 | $ | 13,285 | ||||||||||||||||
|
Income
(loss) from continuing operations
|
$ | 10,313 | $ | (1,084 | ) | $ | 7,413 | $ | 3,578 | $ | 10,791 | |||||||||
|
Income
(loss) from discontinued operations
|
(141 | ) | (171 | ) | (311 | ) | 410 | 642 | ||||||||||||
|
Cumulative
benefit of accounting change
|
- | - | - | 84 | - | |||||||||||||||
|
Net
income (loss)
|
$ | 10,172 | $ | (1,255 | ) | $ | 7,102 | $ | 4,072 | $ | 11,433 | |||||||||
|
Non-GAAP
net income(2)
|
$ | 7,807 | $ | 7,211 | ||||||||||||||||
|
Earnings
(loss) per share - Basic
|
||||||||||||||||||||
|
Income
(loss) from continuing operations before cumulative effect of accounting
change
|
$ | 1.08 | $ | (0.11 | ) | $ | 0.79 | $ | 0.39 | $ | 1.22 | |||||||||
|
Income
(loss) from discontinued operations
|
(0.02 | ) | (0.02 | ) | (0.03 | ) | 0.05 | 0.07 | ||||||||||||
|
Cumulative
benefit of accounting change
|
- | - | - | 0.01 | - | |||||||||||||||
|
Net
earnings (loss) per share - Basic
|
$ | 1.06 | $ | (0.13 | ) | $ | 0.76 | $ | 0.45 | $ | 1.30 | |||||||||
|
Non-GAAP
net earnings per share - Basic(2)
|
$ | 0.82 | $ | 0.77 | ||||||||||||||||
|
Earnings
(loss) per share - Diluted
|
||||||||||||||||||||
|
Income
(loss) from continuing operations before cumulative effect of accounting
change
|
$ | 1.06 | $ | (0.11 | ) | $ | 0.77 | $ | 0.38 | $ | 1.17 | |||||||||
|
Income
(loss) from discontinued operations
|
(0.02 | ) | (0.02 | ) | (0.03 | ) | 0.04 | 0.07 | ||||||||||||
|
Cumulative
benefit of accounting change
|
- | - | - | 0.01 | - | |||||||||||||||
|
Net
earnings (loss) per share - Diluted
|
$ | 1.04 | $ | (0.13 | ) | $ | 0.74 | $ | 0.43 | $ | 1.24 | |||||||||
|
Non-GAAP
net earnings per share - Diluted(2)
|
$ | 0.80 | $ | 0.75 | ||||||||||||||||
|
Net
cash provided by operating activities from continuing
operations
|
$ | 7,929 | $ | 18,582 | $ | 3,487 | $ | 18,301 | $ | 24,739 | ||||||||||
|
Capital
expenditures
|
$ | 4,906 | $ | 1,973 | $ | 1,676 | $ | 1,887 | $ | 4,484 | ||||||||||
|
Depreciation
|
$ | 2,987 | $ | 2,961 | $ | 2,869 | $ | 2,837 | $ | 3,372 | ||||||||||
|
EBITDA,
excluding litigation settlement effect(2)(3)
|
$ | 24,891 | $ | 20,285 | $ | 19,585 | $ | 13,742 | $ | 28,935 | ||||||||||
|
As
of December 31,
|
||||||||||||||||||||
|
(dollars
in thousands, except per share data)
|
2009
|
2008(1)
|
2007
|
2006
|
2005
|
|||||||||||||||
|
Total
assets
|
$ | 203,601 | $ | 208,930 | $ | 149,953 | $ | 159,852 | $ | 187,753 | ||||||||||
|
Total
debt
|
$ | 31,973 | $ | 38,000 | $ | 7,737 | $ | 15,000 | $ | 25,412 | ||||||||||
|
Stockholders’
equity
|
$ | 94,096 | $ | 81,475 | $ | 96,504 | $ | 84,314 | $ | 74,736 | ||||||||||
|
Return
on invested capital, excluding litigation settlement effect(2)(4)
|
8.8 | % | 7.8 | % | 7.8 | % | 4.9 | % | 12.1 | % | ||||||||||
|
Stockholders’
equity per share(5)
|
$ | 9.48 | $ | 8.42 | $ | 10.15 | $ | 9.05 | $ | 8.22 | ||||||||||
|
Return
on stockholders’ equity, excluding litigation settlement effect(2)(6)
|
10.8 | % | 9.6 | % | 7.5 | % | 4.8 | % | 15.3 | % | ||||||||||
|
Funded
backlog
|
$ | 158,518 | $ | 146,619 | $ | 115,155 | $ | 91,884 | $ | 143,026 | ||||||||||
|
Number
of shares outstanding
|
9,923,357 | 9,674,512 | 9,509,849 | 9,314,962 | 9,096,893 | |||||||||||||||
|
(1)
|
Amounts
include results of operations of Kadix (acquired August 1, 2008) for
the period subsequent to our acquisition.
|
|
(2)
|
Non-GAAP
financial data is discussed under the title “Non-GAAP Financial Measures”,
included within this Item 6.
|
|
(3)
|
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.
|
|
(4)
|
Return
on invested capital is calculated by dividing operating income (or
non-GAAP operating income in 2008 and 2007), net of related income taxes,
by the ending invested capital. Invested capital is the sum of
outstanding debt and stockholders’ equity, minus cash, normalized for the
investment made for acquisitions during the year.
|
|
(5)
|
Stockholders’
equity per share is calculated by dividing ending stockholders’ equity by
the number of shares outstanding at the end of the
period.
|
|
(6)
|
Return
on stockholders’ equity is calculated by dividing net income (or non-GAAP
net income in 2008 and 2007) by ending stockholders
equity.
|
NON-GAAP
FINANCIAL MEASURES
In
evaluating our operating performance, management uses certain non-GAAP financial
measures to supplement the consolidated financial statements prepared under
generally accepted accounting principles in the United States
(“GAAP”).
More
specifically, we use the following non-GAAP financial measures: non-GAAP
operating profit, non-GAAP income before income taxes, non-GAAP provision for
income taxes, non-GAAP net income and non-GAAP earnings per
share.
Management
believes these non-GAAP measures help indicate our operating performance before
charges that are considered by management to be outside our ongoing operating
results. Accordingly, management uses these non-GAAP measures to gain a better
understanding of our comparative operating performance from period-to-period and
as a basis for planning and forecasting future periods. Management believes
these non-GAAP measures, when read in conjunction with our GAAP financials,
provide useful information to investors by offering:
|
•
|
the
ability to make more meaningful period-to-period comparisons of our
ongoing operating results;
|
|
|
•
|
the
ability to better identify trends in our underlying business and perform
related trend analysis;
|
|
|
•
|
a
higher degree of transparency for certain expenses (particularly when a
specific charge impacts multiple line items);
|
|
|
•
|
a
better understanding of how management plans and measures our underlying
business; and
|
|
|
•
|
an
easier way to compare our most recent results of operations against
investor and analyst financial
models.
|
The
non-GAAP measures we use exclude the litigation settlement charge incurred in
2008 and 2007and its related tax effect that management believes is unusual
in amount and outside of our ongoing operations for the periods
presented.
We
have also 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.
These
non-GAAP measures have limitations, however, because they do not include all
items of expense that impact our operations. Management compensates for these
limitations by also considering our GAAP results. The non-GAAP financial
measures we use are not prepared in accordance with, and should not be
considered an alternative to, measurements required by GAAP, such as operating
loss, net loss and loss per share, and should not be considered measures of our
liquidity. The presentation of this additional information is not meant to be
considered in isolation or as a substitute for the most directly comparable GAAP
measures. In addition, these non-GAAP financial measures may not be comparable
to similar measures reported by other companies. Non-GAAP financial
measures for the year ended December 31, 2008 and 2007 were as
follows:
|
Year
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
|||||||||||
|
(in
thousands)
|
$ | %(1) | $ | %(1) | ||||||||
|
GAAP
operating income (loss) from continuing operations
|
$ | (150 | ) | (0.1 | )% | $ | 13,104 | 5.8 | % | |||
|
Litigation
settlement
|
14,819 | 6.3 | % | 181 | 0.1 | % | ||||||
|
Non-GAAP
operating income from continuing operations
|
$ | 14,669 | 6.2 | % | $ | 13,285 | 5.9 | % | ||||
|
GAAP
income (loss) from continuing operations before provision (benefit) for
income taxes
|
$ | (1,538 | ) | (0.6 | )% | $ | 12,392 | 5.5 | % | |||
|
Litigation
settlement
|
14,819 | 6.3 | % | 181 | 0.1 | % | ||||||
|
Non-GAAP
income from continuing operations before provision for income
taxes
|
$ | 13,281 | 5.6 | % | $ | 12,573 | 5.6 | % | ||||
|
GAAP
provision (benefit) for income taxes from continuing operations(2)
|
$ | (454 | ) | 29.5 | % | $ | 4,979 | 40.2 | % | |||
|
Tax
benefit for litigation settlement(2)
|
5,757 | 38.8 | % | 72 | 39.8 | % | ||||||
|
Non-GAAP
provision for income taxes from continuing operations(2)
|
$ | 5,303 | 39.9 | % | $ | 5,051 | 40.2 | % | ||||
|
GAAP
net income (loss)
|
$ | (1,255 | ) | (0.5 | )% | $ | 7,102 | 3.2 | % | |||
|
Litigation
settlement, net of tax benefit
|
9,062 | 3.8 | % | 109 | 0.0 | % | ||||||
|
Non-GAAP
net income
|
$ | 7,807 | 3.3 | % | $ | 7,211 | 3.2 | % | ||||
|
Earnings
(loss) per share
|
||||||||||||
|
GAAP
Basic
|
$ | (0.13 | ) | $ | 0.76 | |||||||
|
Per
share effect of litigation settlement
|
0.95 | 0.01 | ||||||||||
|
Non-GAAP
Basic
|
$ | 0.82 | $ | 0.77 | ||||||||
|
GAAP
Diluted
|
$ | (0.13 | ) | $ | 0.74 | |||||||
|
Per
share effect of litigation settlement
|
0.93 | 0.01 | ||||||||||
|
Non-GAAP
Diluted
|
$ | 0.80 | $ | 0.75 | ||||||||
|
Weighted
average shares outstanding
|
||||||||||||
|
Basic
(GAAP diluted for 2008)
|
9,493,495 | 9,326,907 | ||||||||||
|
Diluted
(Non-GAAP for 2008)
|
9,704,789 | 9,649,897 | ||||||||||
|
(1)
|
Represents
a percentage of total revenue.
|
|
(2)
|
The
percent amounts represent a percentage of GAAP income (loss) before
provision for income taxes, litigation settlement and non-GAAP income
before provision for income taxes,
respectively.
|
Reconciliation
of income (loss) from continuing operations to EBITDA is as
follows:
|
Year
Ended December 31,
|
||||||||||||||||||||
|
(in
thousands)
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
|
Net
income (loss)
|
$ | 10,172 | $ | (1,255 | ) | $ | 7,102 | $ | 4,072 | $ | 11,433 | |||||||||
|
Loss
(income) from discontinued operations
|
141 | 171 | 311 | (410 | ) | (642 | ) | |||||||||||||
|
Cumulative
benefit of accounting change
|
- | - | - | (84 | ) | - | ||||||||||||||
|
Income
(loss) from continuing operations
|
10,313 | (1,084 | ) | 7,413 | 3,578 | 10,791 | ||||||||||||||
|
Interest
expense, net
|
2,024 | 1,423 | 1,541 | 2,042 | 4,367 | |||||||||||||||
|
Provision
(benefit) for income taxes
|
6,262 | (454 | ) | 4,979 | 2,476 | 7,366 | ||||||||||||||
|
Depreciation
expense
|
2,987 | 2,961 | 2,869 | 2,837 | 3,372 | |||||||||||||||
|
Amortization
expense
|
3,305 | 2,620 | 2,602 | 2,809 | 3,039 | |||||||||||||||
|
EBITDA
|
24,891 | 5,466 | 19,404 | 13,742 | 28,935 | |||||||||||||||
|
Litigation
settlement
|
- | 14,819 | 181 | - | - | |||||||||||||||
|
EBITDA,
excluding litigation settlement effect
|
$ | 24,891 | $ | 20,285 | $ | 19,585 | $ | 13,742 | $ | 28,935 | ||||||||||
The
following discussion and analysis of our financial condition and results of
operations should be read together with the consolidated financial statements
and the notes to those statements that appear elsewhere in this Annual Report on
Form 10-K. This discussion contains forward-looking statements that
involve risks, uncertainties, and assumptions, such as statements of our plans,
objectives, expectations, and intentions. Our actual results could differ
materially from those anticipated in the forward-looking statements. Factors
that could cause or contribute to our actual results differing materially from
those anticipated include, but are not limited to, those discussed in Item 1A.
Risk Factors and elsewhere in this Form 10-K.
OVERVIEW
Business
Dynamics
Research Corporation, headquartered in Andover, Massachusetts, is a leading
provider of innovative management consulting, engineering, technical and IT
services and solutions to federal and state governments. We provide
support to our customers in the primary mission areas of IT, logistics and
readiness, cybersecurity and information assurance, homeland security, health
care, and intelligence and space.
As
of December 31, 2009, our only reportable business segment was Systems and
Services. During the fourth quarter of 2009 we entered into a plan to
sell our Metrigraphics division. As of December 31, 2009,
Metrigraphics was classified as held for sale and is presented as a discontinued
operation.
In
the three years ended 2009, we recorded improved operating results absent the
effect of the litigation settlement charges recorded in 2008 and 2007, which,
when included, resulted in a net loss for 2008.
Industry
We
are cognizant of funding challenges and changing priorities of the federal
government. With the solid growth in the 2009 federal IT budgets, the
4% growth in the 2010 IT budget request, and President Obama’s favorable view of
technology, the long-term outlook for the federal professional and IT services
industry is good. TechAmerica, a leading trade association in the
industry, estimates that the total federal IT budget will grow at 3.1% annually
over the next five years, down from the 4.9% in the prior five years, from $77.8
billion to $90.7 billion.
Customers
have moved away from using GSA schedule contracts in favor of agency-wide
multiple-award ID/IQ multi-year contract vehicles. Over the past
several years, we have won or acquired many of these contracts including the DHS
EAGLE and PMSS management and IT services contracts, the military health care
TEAMS contract, the Air Force DESP II engineering services contract, the
DoD-wide LMSS logistics services contract, the Office of Personnel Management
TMA contract, and the Alliant government-wide contract. As a result,
the overall position of our revenue derived from prime contracts rose to 71% in
2009, up from 63% in 2008.
In
recent years, there has been an increase in the portion of contracts issued on a
fixed price basis, compared with time and materials or cost-plus, in an effort
to reduce the risk to the government of cost overruns. We believe our
contract cost management capabilities are strong and view this trend as
favorable to the company. The amount of our revenue derived from
fixed price contracts in 2009 was 40%, up from 33% in 2008.
The
federal government also has set high priority and is initiating programs focused
on strengthening the government workforce with particular emphasis on personnel
responsible for acquisition, such as, acquiring products and services for the
government. The government has set targets for adding to the
government workforce with some of these positions coming from a reduction in the
number of contractor positions supporting the government, known as
in-sourcing. We have experienced a modest reduction in positions and
revenue from in-sourcing on our business and anticipate continuation of this
program. We also are seeing increasing demand for more human capital
and training solutions in support of government initiatives to strengthen the
federal workforce.
Outlook
Our
business is conducted primarily with U.S. Government customers under both
short-term and long-term contracts. We have aligned our service
offerings to current economic conditions and customer needs. The
U.S. Government’s budgetary processes give us good visibility regarding
future spending and the threat areas that they are addressing. Management
believes that our current contracts, and backlog of previously awarded contracts
are well aligned with the direction of our customers’ future needs, and this
provides us with good insight regarding future cash flows. Nonetheless,
management recognizes that the current economic situation and significant
changes in priorities under the new administration likely will result in
significant changes in federal spending with increases in some areas and
decreases in others. While we may benefit from the increases, certain
programs in which we participate may be subject to reductions.
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 accounting areas particularly those that involve
judgments, estimates and assumptions used in the preparation of our consolidated
financial statements.
Revenue
Recognition
We
provide 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. The risk on a fixed-price contract is estimates of costs to
complete the contract may exceed revenues on the contract.
From
time to time, we may proceed with work based on client direction prior to the
completion and signing of formal contract documents. We have a formal review
process for approving any such work. Revenue associated with such work is
recognized only when it can reliably be estimated and realization is probable.
We base our estimates on a variety of factors, including previous experiences
with the client, communications with the client regarding funding status, and
our knowledge of available funding for 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 revenue and cost of revenue.
Unbilled
receivables are the amounts of recoverable revenue that have not been billed at
the balance sheet date. Unbilled receivables relate principally to revenue that
is billed in the month after services are performed. In certain instances,
billing is deferred in compliance with the contract terms, such as milestone
billing arrangements and withholdings, or delayed for other reasons. Costs
related to certain U.S. Government contracts, including applicable indirect
costs, are subject to audit by the government. Revenue from such contracts has
been recorded at amounts we expect to realize upon final
settlement.
Goodwill and Other Intangible
Assets
With
the acquisition of Kadix and other businesses in prior years, we acquired
goodwill and other intangible assets. The identification and valuation of these
intangible assets and the determination of the estimated useful lives at the
time of acquisition, as well as the completion of annual impairment tests,
require significant management judgments and estimates. These estimates are made
based on, among other things, consultations with an accredited independent
valuation consultant and reviews of projected cash flows.
We
estimate fair value by employing different methodologies, including a comparison
to comparable industry companies. discounted cash flows and market value,
applying weighting to these three factors. The determination of relevant
comparable industry companies impacts our assessment of fair value. Should the
operating performance of our reporting unit change in comparison to these
companies or should the valuation of these companies change, this could impact
our assessment of the fair value of the reporting unit. Our discounted cash flow
analysis factors in assumptions on revenue and expense growth rates. These
estimates are based upon our historical experience and projections of future
activity, factoring in customer demand, changes in technology and a cost
structure necessary to achieve the related revenues. Additionally, the
discounted cash flow analysis factors in expected amounts of working capital and
weighted average cost of capital. The market value factor is primarily driven by
the underlying value of our common stock, which can vary significantly depending
upon a number of factors, such as overall market conditions and our estimated
future profitability. Changes in judgments on any of these factors could
materially impact the value of the reporting unit.
The
Company’s annual impairment test is based on several qualitative and
quantitative factors. Principally, a significant and sustained decrease in
expected reporting unit cash flows or changes in market conditions would
increase the risk of impairment of recorded goodwill.
The
Company operates in the government IT consulting marketplace which has
historically been characterized by high visibility of future revenue streams,
profitability, and generally consistent positive cash flows. The Company’s
federal government customer base mitigates against near term volatility in
financial performance experienced by companies operating in other parts of the
economy. Long-term industry trends and other business considerations,
such as those outlined in the Risk Factors section of our Form 10-K can have a
favorable or unfavorable effect on future cash flows. These trends and business
considerations include our concentration of business with the Federal
Government, competitive bidding for contracts, and the mix of contract types in
which we enter. The Company considered its low short-term volatility, favorable
long-term industry trends, high visibility for future revenue and cash flow, and
stock price as context for the determination that disclosure of heightened risk
relative to goodwill impairment was not appropriate at the time of our
filing.
As
a result of the annual impairment test performed as of December 31, 2009,
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, 2009, we had recorded goodwill and other intangible assets of
$101.7 million in the Consolidated Balance Sheets.
Income Taxes and Deferred
Taxes
We
recognize the tax benefit from an uncertain tax position only if it is more
likely than not that the tax position will be sustained on examination by the
taxing authorities, based on the technical merits of the position. The tax
benefits recognized in the financial statements from these positions are
measured based on the largest benefit that has a greater than fifty percent
likelihood of being realized upon ultimate resolution. We review our tax
positions on a quarterly basis and more frequently as facts surrounding tax
positions change. Based on these future events, we
may recognize uncertain tax positions
or reverse current uncertain tax positions which would affect the statement of
operations and/or the balance sheet.
As
part of our process of preparing consolidated financial statements, management
is required to estimate the provision for income taxes, deferred tax assets and
liabilities and future taxable income for purposes of assessing our ability to
realize any future benefits from deferred taxes. This process involves
estimating the current tax liability and assessing temporary and permanent
differences resulting from differing treatment of items for tax and accounting
purposes. These differences result in deferred tax assets and liabilities, which
are included in the Consolidated Balance Sheets. We had a net deferred liability
of $2.8 million at December 31, 2009 compared to a net deferred asset of
$7.7 million at December 31, 2008.
We
must also assess the likelihood that our deferred tax asset will be recovered
from future taxable income and, to the extent a recovery is not likely, a
valuation allowance must be established. At December 31, 2009, we
determined that a valuation allowance was not required.
Pension
Obligations
Accounting
and reporting for our pension plan requires the use of assumptions, including
the discount rate and expected rate of return on assets. These assumptions are
used by independent actuaries to determine the value of our pension obligations
and allocate this cost to the service periods. The actuarial assumptions used to
calculate pension costs are determined and reviewed annually by management after
consulting with outside investment advisors and actuaries.
The
assumed discount rate, which is intended to be the actual rate at which benefits
could effectively be settled, is determined by a spot-rate yield curve method.
The spot-rate yield curve is employed to match the plan assets cash outflows
with the timing and amount of the expected benefit payments. As of December 31,
2009, the pension plan’s measurement date, the weighted average discount rate
used to determine the benefit obligations was 5.75% and the net periodic benefit
costs was 6.25%. A decrease of 50 basis points in the discount rate would
have resulted in an increase in annual pension expense by approximately
$0.1 million.
The
assumed expected rate of return on plan assets, which is the average return
expected on the funds invested or to be invested to provide future benefits to
pension plan participants, is determined by an annual review of historical
long-term asset returns and consultation with outside investment advisors. As of
the pension plan’s measurement date, the weighted average expected rate of
return was 8.5%. A decrease of 50 basis points in the expected rate of
return would have resulted in an increase in annual pension expense by
approximately $0.2 million.
If
assumptions differ materially from actual results in the future, our obligations
under the pension plan could also differ materially, potentially requiring us to
record an additional pension liability and record additional pension costs. An
actuarial valuation of the pension plan is performed each year. The results of
this actuarial valuation are reflected in the accounting for the pension plan
upon determination. At December 31, 2009, we recorded a pension liability
of $21.5 million in the Consolidated Balance Sheet that represented the
underfunded benefit obligation.
Litigation, Commitments, and
Contingencies
We
are subject to a range of claims, lawsuits and administrative proceedings that
arise in the ordinary course of business. Estimating liabilities and costs
associated with these matters requires judgment and assessment based upon
professional knowledge and experience of management and its internal and
external legal counsel. Amounts are recorded as charges to earnings when
management, after taking into consideration the facts and circumstances of each
matter, including any settlement offers, has determined that it is probable that
a liability has been incurred and the amount of the loss can be reasonably
estimated. The ultimate resolution of any such exposure to us may vary from
earlier estimates as further facts and circumstances become known.
Litigation
accruals are recorded as charges to earnings when management, after taking into
consideration the facts and circumstances of each matter, including any
settlement offers, has determined that it is probable that
a
liability
has been incurred and the amount of the loss can be reasonably estimated. The
ultimate resolution of any exposure may vary from earlier estimates as further
facts and circumstances become known.
RESULTS OF
OPERATIONS
Operating
results and results expressed as a percentage of total revenues are as
follows:
|
Year
Ended December 31,
|
|||||||||||||||||||||
|
2009
|
2008
|
2007
|
|||||||||||||||||||
|
(in
millions)
|
$(1) |
%
|
$(1) |
%
|
$(1) |
%
|
|||||||||||||||
|
Revenue
|
$ | 268.7 | $ | 236.8 | $ | 224.7 | |||||||||||||||
|
Gross
profit
|
$ | 45.0 | 16.7 | % | $ | 39.0 | 16.5 | % | $ | 37.2 | 16.5 | % | |||||||||
|
|
|||||||||||||||||||||
|
Selling,
general and administrative
|
23.8 | 8.8 | % | 21.7 | 9.2 | % | 21.3 | 9.5 | % | ||||||||||||
|
Litigation
settlement
|
- | 0.0 | % | 14.8 | 6.3 | % | 0.2 | 0.1 | % | ||||||||||||
|
Amortization
of intangible assets
|
3.3 | 1.2 | % | 2.6 | 1.1 | % | 2.6 | 1.2 | % | ||||||||||||
|
Operating
Income (loss)
|
17.9 | 6.7 | % | (0.1 | ) | (0.1 | )% | 13.1 | 5.8 | % | |||||||||||
|
Interest
expense, net
|
(2.0 | ) | (0.8 | )% | (1.4 | ) | (0.6 | )% | (1.5 | ) | (0.7 | )% | |||||||||
|
Other
income, net
|
0.7 | 0.3 | % | 0.0 | 0.0 | % | 0.8 | 0.4 | % | ||||||||||||
|
Provision
(benefit) for income taxes(2)
|
6.3 | 37.8 | % | (0.5 | ) | 29.5 | % | 5.0 | 40.2 | % | |||||||||||
|
Loss
on discontinued operations
|
(0.1 | ) | (0.1 | )% | (0.2 | ) | (0.1 | )% | (0.3 | ) | (0.1 | )% | |||||||||
|
Net
income (loss)
|
$ | 10.2 | 3.8 | % | $ | (1.3 | ) | (0.5 | )% | $ | 7.1 | 3.2 | % | ||||||||
|
(1)
|
Totals
may not add due to rounding.
|
|
(2)
|
The
percentage for provision (benefit) for income taxes relate to a percentage
of income before provision for income
taxes.
|
Revenue
We
reported revenue of $268.7 million, $236.8 million and $224.7 million
in 2009, 2008 and 2007, respectively. Revenue increased by $31.9 million, or
13.5% in 2009 compared to 2008. In 2008, revenue increased by $12.1
million, or 5.4% compared to 2007. The revenue organic growth rate
for 2009 was 2.7%. Our computation of organic growth adds Kadix’s
first seven months of revenue in 2008 of $24.7 million to our reported revenues
for such period. Also, 2009 included $8.7 million in revenues derived
from 8(a) contracts received with the Kadix acquisition compared with $12.2
million for 2008. Absent the effect of the 8(a) contracts, the
organic growth rate grew to 5.7% in 2009 compared 2008.
Revenues
were earned from the following sectors:
|
Year
Ended December 31,
|
|||||||||||||||||||||
|
2009
|
2008
|
2007
|
|||||||||||||||||||
|
(in
millions)
|
$(1) | %(1) | $(1) | %(1) | $(1) | %(1) | |||||||||||||||
|
National
defense and intelligence agencies
|
$ | 147.0 | 54.7 | % | $ | 156.8 | 66.2 | % | $ | 179.1 | 79.7 | % | |||||||||
|
Homeland
security
|
53.2 | 19.8 | 19.3 | 8.1 | 3.9 | 1.7 | |||||||||||||||
|
Federal
civilian agencies
|
42.4 | 15.8 | 32.9 | 13.9 | 27.5 | 12.2 | |||||||||||||||
|
State
and local government agencies
|
24.0 | 8.9 | 25.8 | 10.9 | 13.6 | 6.1 | |||||||||||||||
|
Other
|
2.1 | 0.8 | 2.0 | 0.8 | 0.7 | 0.3 | |||||||||||||||
|
Total
revenue
|
$ | 268.7 | 100.0 | % | $ | 236.8 | 100.0 | % | $ | 224.7 | 100.0 | % | |||||||||
|
(1)
|
Totals
may not add due to rounding.
|
The
decrease in revenues from national defense and intelligence agencies in 2009
compared to 2008 was due to the roll-off of 8(a) set aside contracts, lower Air
Force small business set aside revenue under the Consolidated Acquisition of
Professional Services contract and lower revenue related to the U.S. Navy
Trident Missile Program. The decrease in 2008 compared to 2007 was
due to decreased revenues derived from the U.S. Air Force ASC small business
set-aside Consolidated Acquisition of Professional Services contract, the
transition from the U.S. Air Force ESC full and open IT Services Program II
contract to the small business set-aside Professional Acquisition Support
Services contract and lower revenue related to the U.S. Navy Trident Missile
program.
Our
revenues derived from the DoD Acquisition Related Advisory and Assistance
Services is currently estimated at $35 million annually. The federal
government has set high priority and is initiating programs focused on
strengthening the government workforce, with particular emphasis on personnel
responsible for acquiring products and services. The government has
set targets for adding to the government workforce with some of the additions
coming from contracted positions, known as in-sourcing. In 2009,
twenty of our positions were in-sourced. However, we are unable to
predict if the level of this activity will change in 2010 and
beyond.
The
increase in revenues from Homeland Security and federal civilian agencies in
2009 compared to 2008 was due to a full year of Kadix revenues, supplemented by
new contract and task orders received in the second half of 2008 and in
2009. The increase in both revenue segments in 2008 compared to 2007
was due to added revenues related to the Kadix acquisition and new task orders
won in 2008.
The
decrease in revenues from state and local government agencies in 2009 compared
to 2008 was due to lower revenues from the State of Ohio contract, which is now
completed, partially offset by increased revenues from the new child welfare
system development project with the State of Tennessee which began in the second
quarter of 2008. The increase in 2008 compared to 2007 was primarily
due to additional change orders under the State of Ohio contract during 2007 and
2008. Revenues from the State of Tennessee contract are currently
projected at an estimated $5.0 million for 2010, compared with $14.3 million for
2009 and $7.0 million for 2008. Revenues from the State of Ohio
contract were $0.5 million in 2009 compared with $12.1 million for
2008.
Revenues
by contract type as a percentage of revenues were as follows:
|
Year
Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Time
and materials
|
42 | % | 49 | % | 57 | % | ||||||
|
Fixed
price, including service type contracts
|
40 | 33 | 21 | |||||||||
|
Cost
reimbursable
|
18 | 18 | 22 | |||||||||
| 100 | % | 100 | % | 100 | % | |||||||
|
Prime
contract
|
71 | % | 63 | % | 56 | % | ||||||
|
Sub-contract
|
29 | 37 | 44 | |||||||||
| 100 | % | 100 | % | 100 | % | |||||||
Prime
revenues increased in 2009 compared to 2008 and 2007 as a result of an
increasing portion of contracts awarded under DRC’s agency-wide multiple award
schedule ID/IQ contracts, including contracts received through the Kadix
acquisition.
Backlog
and Booking
Our
backlog position at the end of the three fiscal years was:
|
Year
Ended December 31,
|
||||||||||||
|
(in
millions)
|
2009
|
2008
|
2007
|
|||||||||
|
Backlog:
|
||||||||||||
|
Funded
|
$ | 158.5 | $ | 146.6 | $ | 115.2 | ||||||
|
Unfunded
|
276.0 | 211.0 | 230.3 | |||||||||
|
Total
|
$ | 434.5 | $ | 357.6 | $ | 345.5 | ||||||
|
Funded
Bookings
|
$ | 282.3 | $ | 262.8 | $ | 246.9 | ||||||
For
all years funded bookings generated a book-to-bill ratio of approximately
1.1. The ending funded backlog as of December 31, 2009, 2008 and
2007 covered approximately 7.2, 6.7 and 5.9 months of revenue,
respectively. We expect that substantially all of our funded backlog at
December 31, 2009 will generate revenue during the year ending
December 31, 2010. 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.
Gross
Profit
Our
gross profit on revenue was $45.0 million, $39.0 million and $37.2 million
resulting in a gross margin of 16.7% in 2009 and 16.5% in both 2008 and 2007.
The increase in gross profit in 2009 compared to 2008 was primarily due to a
full year of business activity associated with Kadix revenues. The
improvement in gross margin was due to the addition of higher margin services
provided by the acquired Kadix operations, improved labor utilization and a
shift from subcontract work to prime contract work, partially offset by an
increase in pension expense due to the decline in plan asset performance in
2008. The increase in gross profit in 2008 compared to 2007 was
attributable to higher revenues primarily related to the Kadix acquisition and
lower indirect costs, partially offset by costs associated with workforce
reductions. We recorded severance costs of $1.0 million, $1.7 million
and $0.6 million in cost of revenue in 2009, 2008 and 2007,
respectively.
Selling, General and Administrative
Expenses
Selling,
general and administrative expenses were $23.8 million in 2009,
$21.7 million in 2008 and $21.3 million in 2007. Selling,
general and administrative expenses as a percent of total revenue was 8.8%, 9.2%
and 9.5% for 2009, 2008 and 2007, respectively. The increase in
selling, general and administrative expenses in 2009 compared to 2008 was
primarily due to a full year of Kadix selling general and administrative costs
and an increase in deferred compensation costs. The increase in
selling, general and administrative expenses in 2008 compared to 2007 was
primarily due to the addition of Kadix’s selling, general and administrative
expenses partially offset by continuing cost reduction efforts and lower
deferred compensation and stock compensation costs.
Litigation
Settlement
During
2008 and 2007 we recorded a litigation settlement of $14.8 million and $0.2
million, respectively. In August 2009, DRC, the Department of Justice
and the United States Attorney Office, Boston, MA, executed a settlement
agreement involving DRC's admission of liability solely for breach of contract,
payment of $15 million to the government and dismissal with prejudice of all
other claims against DRC.
Amortization of Intangible
Assets
Amortization
expense, which relates to the amortization of acquired intangible assets, was
$3.3 million in 2009 and $2.6 million in both 2008 and 2007. The
increase relates to a full year of amortization expense recorded for the 2008
acquisition of Kadix. We anticipate 2010 amortization expense of $1.5
million as the 2004 Impact Innovations acquisition related intangible assets
became fully amortized in 2009.
Interest Expense,
net
We
incurred interest expense totaling $2.0 million in 2009, $1.5 million in
2008 and $1.6 million in 2007. The increase in interest expense
in 2009 compared to 2008 was due to a full year of interest expense associated
with our term loan used to finance the Kadix acquisition in 2008. The
decrease in interest expense in 2008 compared to 2007 was due to lower daily
average borrowings and lower average interest rates on our revolver in 2008,
partially offset by interest expense associated with the addition of the $40
million term loan. We recorded approximately $0.1 million of interest
income in each of the three years ended 2009.
Other
Income, net
Other
income (expense) consists of our portion of earnings and losses in HMRTech,
gains and losses realized from our deferred compensation plan and results from
other non-operating transactions, all of which were immaterial to our
results.
Provision
for Income Taxes
We
recorded income tax provisions of $6.3 in 2009 and $5.0 million in 2007 and
recorded an income tax benefit of $0.5 million in 2008. The effective income tax
rate was 37.8% in 2009 compared to 39.9% and 40.2% in 2008 and 2007,
respectively, excluding the tax effect of $5.8 million in 2008 and $0.1 million
in 2007 related to the
litigation
provision. The 2009 effective rate was favorably affected by an adjustment to
our unrecognized tax benefits and a reduction in state tax expense associates
with the filing of prior year tax returns.
Loss
on Discontinued Operations
During
the fourth quarter of 2009 we entered into a plan to sell the Metrigraphics
division. As of December 31, 2009, Metrigraphics was classified as
held for sale as a discontinued operation. We recorded a loss from
discontinued operations, net of taxes of $0.1 million, $0.2 million and $0.3
million, in 2009, 2008 and 2007, respectively. The net book value of
the business at December 31, 2009 was $1.9 million. We expect the
sale of Metrigraphics to occur in 2010 and currently anticipate a sales price in
excess of book value.
Shares Used in Computing Earnings
(Loss) Per Share
Weighted
average common shares outstanding and common equivalent shares totaled 9.8
million, 9.5 million and 9.6 million for the years ended
December 31, 2009, 2008 and 2007, respectively. The increase in shares in
2009 compared to 2008 and the decrease in shares in 2008 compared to 2007 is due
to the net loss recorded in 2008, which did not include the dilutive effect of
stock options or unvested restricted stock.
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, 2009, the
borrowing capacity available under our revolver was $22.7
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
have evaluated our future liquidity needs, both from a short-term and long-term
basis. We believe we have sufficient funds to meet our working
capital and capital expenditure needs for the short term. Cash on hand plus cash
generated from operations along with cash available under credit lines are
expected to be sufficient in 2010 to service debt, finance capital expenditures,
pay federal and state income taxes and fund the pension plan, if necessary. To
provide for long-term liquidity, we believe we can generate substantial positive
cash flow, as well as obtain additional capital, if necessary, from the use of
subordinated debt or equity. In the event that our current capital resources are
not sufficient to fund requirements, we believe our access to additional capital
resources would be sufficient to meet our needs.
We
believe that selective acquisitions are an important component of our growth
strategy. We may acquire, from time to time, firms or properties that are
aligned with our core capabilities and which complement our customer base. We
will continue to consider acquisition opportunities that align with our
strategic objectives, along with the possibility of utilizing the credit
facility as a source of financing.
At
December 31, 2009 and 2008, we had cash and cash equivalents aggregating
$0.1 million and $7.1 million, respectively. Our operating practice is
to apply cash received against any outstanding revolving credit facility
balances. When a revolver balance exists, cash balances at the end of
the year generally reflect the timing and size of cash receipts at the end of
the year.
Operating
Activities
Net
cash provided by operating activities from continuing operations of $8.2 million
during 2009 was primarily attributable to net earnings realized. Net
cash provided by operating activities from continuing operations totaled $18.6
million and $3.5 million in 2008 and 2007, respectively.
Contract
receivables were $72.6 million and $70.6 million at December 31, 2009 and
December 31, 2008, respectively. Billed receivables decreased $6.1 million and
increased $3.7 million in 2009 and 2008, respectively, while unbilled
receivables increased $8.0 million in 2009 and $4.4 million in 2008. Contract
receivables days sales outstanding (“DSO”), were 99 days at December 31, 2009
and 96 days at December 31, 2008. Federal business DSO, which
excludes the effect of state contracts, was 73 days at December 31, 2009 and 86
days at December 31, 2008. The states of Ohio and Tennessee had a
combined contract receivable balance outstanding of $19.9 million and $12.7
million at December 31, 2009 and December 31, 2008, respectively.
Our
net deferred tax liability was $2.8 million at December 31, 2009 compared to a
net deferred tax asset of $7.7 million at December 31, 2008 for a net change of
$10.5 million. The decrease from the prior year net asset position was primarily
due to the current benefit associated with the payment of the litigation reserve
and increase in unbilled receivables related to our contract with the State of
Tennessee. We paid $0.5 million in income taxes in 2009 compared to $2.4 million
in 2008. The decline in the amount paid is due to the benefit to be
received for the payment of the litigation reserve in 2009.
The
IRS had challenged the deferral of income for tax reporting purposes related to
unbilled receivables including the applicability of a Letter Ruling issued by
the IRS to DRC in January 1976 which granted us deferred tax treatment of the
unbilled receivables. This issue was elevated to the IRS National
Office for determination. On October 23, 2008, we received a
notification of ruling from the IRS National Office. This ruling
provided clarification regarding the IRS position relating to revenue
recognition for tax purposes regarding our unbilled
receivables. During September 2009, the IRS completed its examination
of our tax returns for 2004 through 2007 and issued a Revenue Agent Report,
which reduced the deferral of income for tax reporting purposes. As a
result we reclassified approximately $1.0 million from deferred to current taxes
payable. The IRS report also included an assessment of interest of
$0.5 million. We have filed a protest with the IRS to appeal the
assessment. We believe the appeal will be successful and have
therefore made no provision for the interest associated with the
assessment.
Share-based
compensation decreased to $0.7 million in 2009 from $1.1 million in 2008 and
$1.6 million in 2007. The decrease in 2009 compared to 2008 and 2008 compared to
2007 was primarily due to the vesting of Executive Long Term Incentive Program
shares in the second quarter of 2008. As of December 31, 2009 the
total unrecognized compensation related to restricted stock awards was $1.1
million to be recognized over two years.
Non-cash
amortization expense of our acquired intangible assets was $3.3 million in 2009
and $2.6 million in both 2008 and 2007. We anticipate that non-cash
expense for the amortization of intangible assets will decrease to approximately
$1.5 million in 2010 primarily due to intangible assets that were acquired in
prior years being fully amortized in 2009.
Our
defined benefit pension plan was underfunded by $21.5 million and $22.6 million
at December 31, 2009 and 2008, respectively. The increase in the
plan’s funded status in 2009 was primarily attributable to the improvement in
the plan asset performance during the year, partially offset by the change in
the discount rate used to determine benefit obligations to 5.75% from 6.25% in
2008. During 2009 we recorded pension expense of $1.6 million
compared to pension income of $1.3 million and $0.8 million in 2008 and 2007,
respectively. The increase in pension expense was primarily due to
unfavorable asset performance in 2008. We expect to contribute $0.8
million to fund the pension plan and anticipate pension expense to be
approximately $0.9 million in 2010.
Investing
Activities
Net
cash used in investing activities from continuing operations of $9.0 million
during 2009 was primarily attributable to additional consideration paid in
connection with the Kadix acquisition and purchases of capital
expenditures. Net cash used in investing activities from continuing
operations was $44.3 million in 2008 and $2.6 million in 2007.
Capital
expenditures for the purchase of property and equipment were $5.2 million,
$2.0 million and $1.7 million in 2009, 2008 and 2007, respectively. We
expect discretionary capital expenditures in 2010 to be approximately $6.0
million, of which approximately $4.0 million will be for expenditures related to
the new headquarters facility in the first quarter of 2010.
On
August 1, 2008, we completed the acquisition of Kadix. The total
purchase price of $47.3 million included additional contingent consideration
related to achievement of earnout objectives of $4.3 million that was accrued at
December 31, 2008 and paid in 2009.
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.
Financing
Activities
During
2009, net cash used in financing activities of $5.9 million represented
repayments under the term loan of $8.0 million, partially offset by net
borrowings of $2.0 million under our revolver and proceeds of $0.3 million from
the issuance of common stock through the exercises of stock options and employee
stock purchase plan transactions.
At
December 31, 2009, the Company was in compliance with its loan
covenants. The Company’s most stringent financial covenant is the
fixed charge coverage ratio. This covenant requires the Company to
maintain a ratio of adjusted consolidated EBITDA to adjusted consolidated
interest expense of not less than 1.25 to 1.00. This fixed charge
coverage ratio is tested on a quarterly basis and is measured on a trailing four
fiscal quarter basis.
The
Company believes it has access to additional capital resources, from the use of
subordinated debt or equity, as alternate sources of funding. We are
confident that our current resources are sufficient and we believe the
possibility of needing additional financing resources is remote.
The
average daily borrowing on our revolver for 2009 was $6.7 million at a weighted
average interest rate of 3.25% compared to $3.2 million at a weighted average
interest rate of 5.41% in 2008 and $16.7 million at a weighted average interest
rate of 7.30% in 2007 under our then existing revolver. During 2009,
the average outstanding balance of our term loan was $34.0 million at a weighted
average interest rate of 4.27% compared to the $40.0 million outstanding for the
last five months of 2008 at a weighted average interest rate of
5.14%.
During
2008, net cash provided by financing activities of $30.7 million represented net
borrowings under the term loan of $38.0 million and proceeds of $0.9 million
from the issuance of common stock through the exercises of stock options and
employee stock purchase plan transactions, partially offset by net repayments of
$7.7 million under our revolver.
During
the third quarter of 2008, we entered into a new unsecured credit facility and
an interest rate swap agreement. The new facility restructured and
increased our credit facility to $65.0 million and provided for a
$40.0 million, five-year term loan and a $25.0 million, five-year
revolving credit agreement for working capital. The term loan
requires quarterly repayments of $2.0 million and we expect operating cash flows
to be sufficient to fund these repayments. The swap agreement
effectively fixes our interest rate on an initial notional amount of $20.0
million of the term loan principal at 5.60% (3.60% swap fixed rate plus 2.00%
margin) throughout the term of the facility. The facility and swap
agreements are more fully described in Note 8 and Note 10, respectively, of our
“Notes to Consolidated Financial Statements” in Part II, Item 8 on
this Form 10-K.
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.
Off-Balance Sheet
Arrangements
We
did not utilize or employ any off-balance sheet arrangements during the three
years ended December 31, 2009, 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.
Contractual
Obligations
Our
contractual obligations as of December 31, 2009 consist of the
following:
|
Payments
Due By Period
|
||||||||||||||||||||
|
Less
|
|
|
||||||||||||||||||
| than | Two to | Four to | ||||||||||||||||||
| one | three | five | ||||||||||||||||||
|
(in
millions)
|
Total(1)
|
year
|
years
|
years
|
Thereafter
|
|||||||||||||||
|
Long-term
debt payments
|
$ | 32.0 | $ | 8.0 | $ | 16.0 | $ | 8.0 | $ | - | ||||||||||
|
Interest
payments
|
1.6 | 0.7 | 0.8 | 0.1 | - | |||||||||||||||
|
Operating
lease payments
|
34.7 | 8.5 | 10.8 | 9.1 | 6.2 | |||||||||||||||
|
Total
contractual obligation payments
|
$ | 68.3 | $ | 17.2 | $ | 27.6 | $ | 17.2 | $ | 6.2 | ||||||||||
|
Contractually
obligated operating lease receipts
|
$ | 12.4 | $ | 3.1 | $ | 4.0 | $ | 3.5 | $ | 1.7 | ||||||||||
|
(1)
|
Totals
may not add due to rounding.
|
The
contractual amounts above related to interest payments does not include the
portion of interest contractually due on our term loan principal balance that is
not tied to the interest rate swap because those interest rates are not
fixed. During 2008 we entered into an interest rate swap agreement
which effectively fixed half of the term loan’s principal balance at an interest
rate of 5.60%. The repayment of borrowings under our revolver of $2.0
million are contractually due on August 1, 2013.
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, 2009 have been excluded from
the contractual obligations table above. For further information on
unrecognized tax benefits, see Note 7 of our “Notes to Consolidated Financial
Statements” in Part II, Item 8 of this Form 10-K.
Contingencies
We
are a party to litigation and other proceedings as referenced in Note 15 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
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 55% of total revenue
in 2009, 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 and term loan,
where interest payments are tied to either the LIBOR or prime
rate. At December 31, 2009, the interest rate on our revolver and
term loan was 3.25% and 2.28%, respectively. We entered into an
interest rate swap agreement to mitigate the floating interest rate
risk
on
half of our outstanding term loan. The swap agreement effectively
fixes the interest rate on half of our outstanding term loan at 3.60% (excluding
the applicable margin of 2.00%). The blended interest rate of our term loan and
swap agreement was 3.94% at December 31, 2009. At any time, a sharp
rise in interest rates could have an adverse effect on net interest expense as
reported in our Consolidated Statements of Operations. Our potential loss over
one year that would result in a hypothetical and instantaneous increase of one
full percentage point in the interest rate on half of our term loan would
increase annual interest expense by approximately
$0.4 million.
In
addition, historically our investment positions have been relatively small and
short-term in nature. We typically invest excess cash in money market
accounts with original maturities of three months or less with no exposure to
market interest rates. We have no significant exposure to foreign currency
fluctuations. Foreign sales, which are nominal, are primarily denominated in
U.S. dollars.
PART II
|
Page
|
|
|
46
|
|
|
47
|
|
|
48
|
|
|
49
|
|
|
50
|
|
|
51
|
|
|
79
|
To
the Board of Directors and
Shareholders
of Dynamics Research Corporation:
We
have audited the accompanying consolidated balance sheets of Dynamics Research
Corporation (a Massachusetts corporation) and subsidiaries (collectively the
“Company”) as of December 31, 2009 and 2008, and the related consolidated
statements of operations, changes in stockholders’ equity and comprehensive
income (loss), and cash flows for each of the three years in the period ended
December 31, 2009. Our audits of the basic financial statements
included the financial statement schedule listed in the index appearing under
Item 15 (a)(2). These consolidated financial statements and financial statement
schedule are the responsibility of the Company’s management. Our responsibility
is to express an opinion on these consolidated financial statements and
financial statement schedule based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Dynamics Research Corporation and
subsidiaries as of December 31, 2009 and 2008, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2009, in conformity with accounting principles generally
accepted in the United States of America. Also in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
We
also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Company’s
internal control over financial reporting as of December 31, 2009, 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 16, 2010 expressed an
unqualified opinion thereon.
/s/
Grant Thornton LLP
Boston,
Massachusetts
March 16,
2010
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Assets
|
||||||||
|
Current
assets
|
||||||||
|
Cash
and cash equivalents
|
$ | 55 | $ | 7,111 | ||||
|
Contract
receivables, net
|
72,569 | 70,632 | ||||||
|
Prepaid
expenses and other current assets
|
5,702 | 1,706 | ||||||
|
Discontinued
operations
|
2,058 | 1,591 | ||||||
|
Total
current assets
|
80,384 | 81,040 | ||||||
|
Noncurrent
assets
|
||||||||
|
Property
and equipment, net
|
13,915 | 8,999 | ||||||
|
Goodwill
|
97,641 | 97,641 | ||||||
|
Intangible
assets, net
|
4,074 | 7,379 | ||||||
|
Deferred
tax asset
|
4,252 | 10,396 | ||||||
|
Other
noncurrent assets
|
3,335 | 3,125 | ||||||
|
Discontinued
operations
|
- | 350 | ||||||
|
Total
noncurrent assets
|
123,217 | 127,890 | ||||||
|
Total
assets
|
$ | 203,601 | $ | 208,930 | ||||
|
Liabilities
and stockholders' equity
|
||||||||
|
Current
liabilities
|
||||||||
|
Current
portion of long-term debt
|
$ | 8,000 | $ | 8,000 | ||||
|
Accounts
payable
|
18,299 | 17,874 | ||||||
|
Accrued
compensation and employee benefits
|
16,357 | 13,644 | ||||||
|
Deferred
tax liability
|
7,046 | 2,670 | ||||||
|
Other
accrued expenses
|
3,708 | 24,702 | ||||||
|
Discontinued
operations
|
186 | 279 | ||||||
|
Total
current liabilities
|
53,596 | 67,169 | ||||||
|
Long-term
liabilities
|
||||||||
|
Long-term
debt
|
23,973 | 30,000 | ||||||
|
Other
long-term liabilities
|
31,936 | 30,286 | ||||||
|
Total
long-term liabilities
|
55,909 | 60,286 | ||||||
|
Total
liabilities
|
109,505 | 127,455 | ||||||
|
Commitments
and contingencies (Note 15)
|
||||||||
|
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; 9,923,357 and
9,674,512 shares issued and outstanding at December 31, 2009 and 2008,
respectively
|
992 | 967 | ||||||
|
Capital
in excess of par value
|
52,580 | 51,919 | ||||||
|
Accumulated
other comprehensive loss, net of tax
|
(20,505 | ) | (22,268 | ) | ||||
|
Retained
earnings
|
61,029 | 50,857 | ||||||
|
Total
stockholders' equity
|
94,096 | 81,475 | ||||||
|
Total
liabilities and stockholders' equity
|
$ | 203,601 | $ | 208,930 | ||||
The
accompanying notes are an integral part of these consolidated financial
statements.
(In thousands, except share and per
share data)
|
Year
Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Revenue
|
$ | 268,661 | $ | 236,796 | $ | 224,676 | ||||||
|
Cost
of revenue
|
223,694 | 197,802 | 187,516 | |||||||||
|
Gross
profit
|
44,967 | 38,994 | 37,160 | |||||||||
|
Selling,
general and administrative expenses
|
23,754 | 21,705 | 21,273 | |||||||||
|
Litigation
settlement
|
- | 14,819 | 181 | |||||||||
|
Amortization
of intangible assets
|
3,305 | 2,620 | 2,602 | |||||||||
|
Operating
income (loss)
|
17,908 | (150 | ) | 13,104 | ||||||||
|
Interest
expense, net
|
(2,024 | ) | (1,423 | ) | (1,541 | ) | ||||||
|
Other
income, net
|
691 | 35 | 829 | |||||||||
|
Income
(loss) from continuing operations before provision for income
taxes
|
16,575 | (1,538 | ) | 12,392 | ||||||||
|
Provision
(benefit) for income taxes
|
6,262 | (454 | ) | 4,979 | ||||||||
|
Income
(loss) from continuing operations
|
10,313 | (1,084 | ) | 7,413 | ||||||||
|
Loss
from discontinued operations, net of tax benefit of $173, $250 and $297 in
2009, 2008 and 2007, respectively
|
(141 | ) | (171 | ) | (311 | ) | ||||||
|
Net
income (loss)
|
$ | 10,172 | $ | (1,255 | ) | $ | 7,102 | |||||
|
Earnings
(loss) per common share
|
||||||||||||
|
Basic
|
||||||||||||
|
Income
(loss) from continuing operations
|
$ | 1.08 | $ | (0.11 | ) | $ | 0.79 | |||||
|
Loss
from discontinued operations
|
(0.02 | ) | (0.02 | ) | (0.03 | ) | ||||||
|
Net
income (loss)
|
$ | 1.06 | $ | (0.13 | ) | $ | 0.76 | |||||
|
Diluted
|
||||||||||||
|
Income
(loss) from continuing operations
|
$ | 1.06 | $ | (0.11 | ) | $ | 0.77 | |||||
|
Loss
from discontinued operations
|
(0.02 | ) | (0.02 | ) | (0.03 | ) | ||||||
|
Net
income (loss)
|
$ | 1.04 | $ | (0.13 | ) | $ | 0.74 | |||||
|
Weighted
average shares outstanding
|
||||||||||||
|
Basic
|
9,551,614 | 9,493,495 | 9,326,907 | |||||||||
|
Diluted
|
9,772,722 | 9,493,495 | 9,649,897 | |||||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
(in
thousands)
|
Capital
|
Accumulated
|
|||||||||||||||||||||||
|
In
Excess
|
Other
|
|||||||||||||||||||||||
|
Common
Stock Issued
|
of
Par
|
Comprehensive
|
Retained
|
|||||||||||||||||||||
|
Shares
|
Par
Value
|
Value
|
Loss
|
Earnings
|
Total
|
|||||||||||||||||||
|
Balance
at December 31, 2006
|
9,315 | $ | 931 | $ | 47,644 | $ | (9,206 | ) | $ | 44,945 | $ | 84,314 | ||||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||||
|
Net
income
|
- | - | - | - | 7,102 | 7,102 | ||||||||||||||||||
|
Other
comprehensive income, net of tax:
|
||||||||||||||||||||||||
|
Pension
liability adjustment
|
- | - | - | 2,353 | - | 2,353 | ||||||||||||||||||
|
Unrealized
gains on investments, net of reclassification adjustment
|
- | - | - | 108 | - | 108 | ||||||||||||||||||
|
Other
comprehensive income
|
2,461 | |||||||||||||||||||||||
|
Comprehensive
income
|
9,563 | |||||||||||||||||||||||
|
Issuance
of common stock through stock 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 plan transactions
|
- | - | 77 | - | - | 77 | ||||||||||||||||||
|
Tax
deficiency on equity awards
|
- | - | (68 | ) | - | - | (68 | ) | ||||||||||||||||
|
Balance
at December 31, 2007, as previously presented
|
9,510 | 951 | 50,251 | (6,745 | ) | 52,047 | 96,504 | |||||||||||||||||
|
Impact
of change in defined benefit plan measurement date
|
- | - | - | - | 65 | 65 | ||||||||||||||||||
|
Balance
at December 31, 2007, adjusted
|
9,510 | 951 | 50,251 | (6,745 | ) | 52,112 | 96,569 | |||||||||||||||||
|
Comprehensive
loss:
|
||||||||||||||||||||||||
|
Net
loss
|
- | - | - | - | (1,255 | ) | (1,255 | ) | ||||||||||||||||
|
Other
comprehensive loss, net of tax:
|
||||||||||||||||||||||||
|
Pension
liability adjustment, net of reclassification adjustment
|
- | - | - | (14,896 | ) | - | (14,896 | ) | ||||||||||||||||
|
Reclassification
adjustment for gains realized in net loss
|
- | - | - | (108 | ) | - | (108 | ) | ||||||||||||||||
|
Unrealized
loss on derivative instruments
|
- | - | - | (519 | ) | - | (519 | ) | ||||||||||||||||
|
Other
comprehensive loss
|
(15,523 | ) | ||||||||||||||||||||||
|
Comprehensive
loss
|
(16,778 | ) | ||||||||||||||||||||||
|
Issuance
of common stock through stock plan transactions
|
128 | 12 | 843 | - | - | 855 | ||||||||||||||||||
|
Issuance
of restricted stock
|
92 | 9 | (9 | ) | - | - | - | |||||||||||||||||
|
Forfeiture
of restricted stock
|
(13 | ) | (1 | ) | 1 | - | - | - | ||||||||||||||||
|
Release
of restricted stock
|
(42 | ) | (4 | ) | (418 | ) | - | - | (422 | ) | ||||||||||||||
|
Share-based
compensation
|
- | - | 1,148 | - | - | 1,148 | ||||||||||||||||||
|
Tax
benefit from stock plan transactions
|
- | - | 103 | - | - | 103 | ||||||||||||||||||
|
Balance
at December 31, 2008
|
9,675 | 967 | 51,919 | (22,268 | ) | 50,857 | 81,475 | |||||||||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||||
|
Net
income
|
- | - | - | - | 10,172 | 10,172 | ||||||||||||||||||
|
Other
comprehensive income, net of tax:
|
||||||||||||||||||||||||
|
Pension
liability adjustment, net of reclassification adjustment
|
- | - | - | 1,587 | - | 1,587 | ||||||||||||||||||
|
Changes
in unrealized loss on derivative instruments, net of reclassification
adjustment
|
- | - | - | 176 | - | 176 | ||||||||||||||||||
|
Other
comprehensive income
|
1,763 | |||||||||||||||||||||||
|
Comprehensive
income
|
11,935 | |||||||||||||||||||||||
|
Issuance
of common stock through stock plan transactions, net
|
190 | 19 | 231 | - | - | 250 | ||||||||||||||||||
|
Issuance
of restricted stock
|
101 | 10 | (10 | ) | - | - | - | |||||||||||||||||
|
Forfeiture
of restricted stock
|
(24 | ) | (2 | ) | 2 | - | - | - | ||||||||||||||||
|
Release
of restricted stock
|
(19 | ) | (2 | ) | (171 | ) | - | - | (173 | ) | ||||||||||||||
|
Share-based
compensation
|
- | - | 736 | - | - | 736 | ||||||||||||||||||
|
Tax
deficiency from stock plan transactions
|
- | - | (127 | ) | - | - | (127 | ) | ||||||||||||||||
|
Balance
at December 31, 2009
|
9,923 | $ | 992 | $ | 52,580 | $ | (20,505 | ) | $ | 61,029 | $ | 94,096 | ||||||||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
|
Year
Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Cash
flows from operating activities:
|
||||||||||||
|
Net
income (loss)
|
$ | 10,172 | $ | (1,255 | ) | $ | 7,102 | |||||
|
Loss
from discontinued operations
|
(141 | ) | (171 | ) | (311 | ) | ||||||
|
Income
(loss) from continuing operations
|
10,313 | (1,084 | ) | 7,413 | ||||||||
|
Adjustments
to reconcile net cash provided by operating activities:
|
||||||||||||
|
Depreciation
|
2,987 | 2,961 | 2,869 | |||||||||
|
Amortization
of intangible assets
|
3,305 | 2,620 | 2,602 | |||||||||
|
Share-based
compensation
|
736 | 1,148 | 1,640 | |||||||||
|
Investment
income from equity interest
|
(355 | ) | (483 | ) | (516 | ) | ||||||
|
Tax
benefit from stock plan transactions, net of tax deficiencies from equity
awards
|
127 | (103 | ) | (9 | ) | |||||||
|
Litigation
settlement (payment)
|
(15,000 | ) | 14,819 | 181 | ||||||||
|
Deferred
income taxes
|
9,362 | (4,572 | ) | (2,972 | ) | |||||||
|
Other
|
(637 | ) | (620 | ) | (497 | ) | ||||||
|
Change
in operating assets and liabilities:
|
||||||||||||
|
Contract
receivables, net
|
(1,937 | ) | 1,310 | 640 | ||||||||
|
Prepaid
expenses and other current assets
|
(3,996 | ) | 4 | 1,251 | ||||||||
|
Accounts
payable
|
(2,342 | ) | 3,558 | (6,223 | ) | |||||||
|
Accrued
compensation and employee benefits
|
2,713 | (1,519 | ) | (745 | ) | |||||||
|
Other
accrued expenses
|
(2,043 | ) | 2,239 | (1,286 | ) | |||||||
|
Other
long-term liabilities
|
4,975 | (1,696 | ) | (861 | ) | |||||||
|
Net
cash provided by continuing operations
|
8,208 | 18,582 | 3,487 | |||||||||
|
Net
cash provided by (used in) discontinued operations
|
(280 | ) | 173 | (542 | ) | |||||||
|
Net
cash provided by operating activities
|
7,928 | 18,755 | 2,945 | |||||||||
|
Cash
flows from investing activities:
|
||||||||||||
|
Purchase
of business, net of cash acquired
|
(4,250 | ) | (43,016 | ) | - | |||||||
|
Additions
to property and equipment
|
(5,185 | ) | (1,973 | ) | (1,676 | ) | ||||||
|
Proceeds
from sale of investments and long-lived assets
|
215 | 291 | 6 | |||||||||
|
Dividends
from equity investment
|
556 | 423 | 180 | |||||||||
|
Payments
related to sale of building
|
- | (35 | ) | (980 | ) | |||||||
|
Change
in other assets
|
(345 | ) | 21 | (170 | ) | |||||||
|
Net
cash used in continuing operations
|
(8,730 | ) | (44,289 | ) | (2,640 | ) | ||||||
|
Net
cash used in discontinued operations
|
(71 | ) | (37 | ) | (112 | ) | ||||||
|
Net
cash used in investing activities
|
(8,801 | ) | (44,326 | ) | (2,752 | ) | ||||||
|
Cash
flow from financing activities:
|
||||||||||||
|
Borrowings
under term loan agreement
|
- | 40,000 | - | |||||||||
|
Repayments
under term loan agreement
|
(8,000 | ) | (2,000 | ) | - | |||||||
|
Borrowings
under revolving credit agreement
|
79,497 | 69,225 | 201,918 | |||||||||
|
Repayments
under revolving credit agreement
|
(77,524 | ) | (76,962 | ) | (209,181 | ) | ||||||
|
Proceeds
from the exercise of stock plan transactions
|
250 | 855 | 1,180 | |||||||||
|
Tax
benefit from stock plan transactions, net of tax deficiencies from equity
awards
|
(127 | ) | 103 | 9 | ||||||||
|
Payments
of deferred financing costs
|
- | (545 | ) | - | ||||||||
|
Net
cash provided by (used in) financing activities
|
(5,904 | ) | 30,676 | (6,074 | ) | |||||||
|
Net
increase (decrease) in cash and cash equivalents
|
(7,056 | ) | 5,105 | (5,881 | ) | |||||||
|
Cash
and cash equivalents, beginning of period
|
7,111 | 2,006 | 7,887 | |||||||||
|
Cash
and cash equivalents, end of period
|
$ | 55 | $ | 7,111 | $ | 2,006 | ||||||
|
Supplemental
disclosure of cash flow information:
|
||||||||||||
|
Cash
paid during the year for interest
|
$ | 2,350 | $ | 973 | $ | 1,494 | ||||||
|
Cash
paid during the year for income taxes, net of refunds
|
$ | 522 | $ | 2,399 | $ | 6,206 | ||||||
|
Supplemental
disclosure of noncash financing and investing activities:
|
||||||||||||
|
Issuance
of restricted stock
|
$ | 903 | $ | 869 | $ | 1,135 | ||||||
|
Increase
(decrease) in pension liability
|
$ | (2,630 | ) | $ | 24,682 | $ | (3,899 | ) | ||||
|
Change
in fair value of derivatives
|
$ | (291 | ) | $ | 860 | $ | - | |||||
|
Accrual
of additions to property and equipment
|
$ | 2,767 | $ | - | $ | - | ||||||
|
Accrual
of earnout on purchase of business
|
$ | - | $ | 4,250 | $ | - | ||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
50
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars
in thousands, except per share amounts)
Dynamics
Research Corporation (the “Company”) is a leading provider of innovative
management consulting, engineering, technical, information technology services
and solutions to federal and state governments. Founded in 1955 and
headquartered in Andover, Massachusetts, the Company has approximately 1,470
employees located throughout the United States. The Company operates
as a parent corporation and through its wholly owned subsidiaries, Kadix
Systems, LLC, H.J. Ford Associates, Inc. and DRC International
Corporation.
The
Company provides support to its customers in the primary mission areas of
information technology, logistics and readiness, cybersecurity and information
assurance, homeland security, health care, and intelligence and
space. Customers include the Department of Defense, the Department of
Homeland Security, federal civilian agencies and state
governments.
NOTE
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis
of Presentation
The
consolidated financial statements include the accounts of the Company and all
wholly owned subsidiaries. All significant intercompany accounts and
transactions are eliminated in consolidation. Unless otherwise indicated, all
dollars presented herein are in thousands and financial information refers to
continuing operations. The Company has reclassified certain prior period amounts
to conform with the current period presentation.
During
the fourth quarter of 2009, the Company entered into a plan to sell the
Metrigraphics business segment. As of December 31, 2009,
Metrigraphics was classified as held for sale as a discontinued operation and
the Company’s consolidated financial statements and notes thereto were restated
to reflect the discontinuation of Metrigraphics for all periods
presented. Refer to Note 3 for additional information regarding
Metrigraphics.
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 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 priorities policies and procedures and
government contracting issues. The U.S. Government has the right to terminate
contracts for convenience in accordance with government regulations. If the
government terminated contracts, the Company would generally recover costs
incurred up to termination, costs required to be incurred in connection with the
termination and a portion of the fee earned commensurate with the work performed
to termination. However, significant adverse effects on the Company’s indirect
cost pools may not be recoverable in connection with a termination for
convenience. Contracts with state and other governmental entities are subject to
the same or similar risks.
A
majority of the Company’s revenue is derived from U.S. Government
contracts. Cancellations, modifications, or failure to win a
re-competition of the Company’s 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. The Company could experience
material adverse consequences should such actions not be taken.
The
financial statements have been prepared in conformity with accounting principles
generally accepted in the United States of America and, accordingly, include
amounts based on informed estimates and judgments of management with
consideration given to materiality. Estimates and judgments also affect the
amount of revenue and expenses during the reported period. Actual results could
differ from those estimates. The Company believes the
51
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
following
accounting policies affect the more significant judgments made and estimates
used in the preparation of its consolidated financial
statements.
The
Company 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. 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
always estimate losses or ranges of losses. Refer to Note 15 for information on
the Company’s litigation and other proceedings.
Revenue
Recognition
The
Company 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 salaries and other 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. The risk on a fixed-price contract is estimates of costs to
complete the contract may exceed revenues on the contract.
From
time to time, we may proceed with work based on client direction prior to the
completion and signing of formal contract documents. We have a formal review
process for approving any such work. Revenue associated with such work is
recognized only when it can reliably be estimated and realization is probable.
We base our estimates on a variety of factors, including previous experiences
with the client, communications with the client regarding funding status, and
our knowledge of available funding for the contract.
For
each type of contract, the Company recognizes anticipated contract losses as
soon as they become known and estimable. Out-of-pocket expenses that are
reimbursable by the customer are included in revenue and cost of
revenue.
Unbilled
receivables are the amounts of recoverable revenue that have not been billed at
the balance sheet date. Generally, the Company’s unbilled receivables relate to
revenue that is billed in the month after services are performed. In certain
instances, billing is deferred in compliance with the contract terms, such as
milestone billing arrangements and withholdings, or delayed for other reasons.
Costs related to certain U.S. Government contracts, including applicable
indirect costs, are subject to audit by the government. Revenue from such
contracts has been recorded at amounts the Company expects to realize upon final
settlement.
52
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
Cash and Cash
Equivalents
Cash
equivalents, which consist primarily of money market accounts, have original
maturities of three months or less.
Contract
Receivables
Contract
receivables, net of the allowance for doubtful accounts, are stated at amounts
expected to be realized in future periods. Unbilled receivables are
amounts that are expected to be billed in accordance with contract terms and
delivery schedules, as well as amounts expected to become billable upon final
execution of contracts, contract completion, milestones or completion of rate
negotiations. Generally, the Company’s unbilled receivables relate to
revenue that is billed in the month after services are performed. Costs related
to certain U.S. Government contracts, including applicable indirect costs, are
subject to audit by the government. Revenue from such contracts has been
recorded at amounts the Company expects to realize upon final
settlement. Contract receivables are classified as current assets in
accordance with industry practice.
The
allowance for doubtful accounts is determined based upon the Company's best
estimate of a customer's ability to pay. The factors that influence management’s
estimate include historical experience, specific identification and an aging
criteria of potential uncollectible accounts. The Company writes off contract
receivables when such amounts are determined to be uncollectible. Losses have
historically been within management’s expectations.
Property and
Equipment
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 fifteen years. Leasehold
improvements are amortized over the shorter of the remaining expected term of
the lease, considering renewal options if reasonably assured, or the life of the
related asset. The Company recorded depreciation expense of $2,987, $2,961 and
$2,869 during 2009, 2008 and 2007, respectively. The Company recorded
disposals of $922, $807 and $3,736, during 2009, 2008 and 2007, respectively, of
substantially fully-depreciated property and equipment no longer in
use.
Internal
Software Development Costs
In
accounting for development costs of software to be used internally both internal
and external costs incurred during the application development stage are
capitalized and subsequently amortized over the estimated economic useful life
of the software. These costs are included with machinery and
equipment, a separate component of property and equipment.
Investments
The
Company 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 2009, 2008 and 2007, the Company recorded net
unrealized holding gains of $324 and $164 in 2009 and 2007, respectively, and
recorded a net unrealized holding loss of $569 in 2008.
Business
Acquisitions
The
Company accounts for business acquisitions using the purchase method of
accounting. The Company determines and records the fair values of assets
acquired and liabilities assumed as of the dates of acquisition.
The
53
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
Company
utilizes an independent valuation specialist to determine the fair values of
identifiable intangible assets acquired in order to assist in the determination
of the portion of the purchase price allocable to these assets.
Goodwill
and Indefinite-lived Intangible Assets
Goodwill
is recorded when the consideration paid for a business acquisition exceeds the
fair value of net tangible and identifiable intangible assets acquired. Goodwill
and other intangible assets with indefinite useful lives are not amortized, but
rather, tested annually for impairment.
The
Company assesses goodwill for impairment annually and when events or
circumstances change that would more likely than not reduce the fair value of a
reporting unit below its carrying value by applying a direct value-based fair
value test. Goodwill could be impaired due to market declines, reduced expected
future cash flows, or other factors or events. Should the fair value of goodwill
at the measurement date fall below its carrying value, a charge for impairment
of goodwill could occur in that period. Impairment is tested using a two-step
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, 2009 and 2008, the Company determined that the
carrying amount of goodwill did not exceed its fair value and, accordingly, did
not record a charge for impairment. There can be no assurance that
goodwill will not become impaired in future periods.
Intangible and Other Long-lived
Assets
The
Company uses assumptions in establishing the carrying value, fair value and
estimated lives of identifiable intangible and other long-lived assets.
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. During 2009, there were no events or changes in
circumstances that required the Company to test for
impairment.
Asset Retirement
Obligations
The
Company records the fair value of obligations to retire and remove long-lived
assets in the period in which the obligation is incurred, typically when the
asset is placed in service. When the liability is initially recorded, the
Company capitalizes this cost by increasing the carrying amount of the related
asset. Over time the liability is increased for the change in its present value,
and the capitalized cost is depreciated over the useful life of the related
asset. During the fourth quarter of 2009, the Company recorded a long term
liability of $100 offset by a similar increase in leasehold improvements due to
a legal obligation to remove certain leasehold improvements at the Company’s new
corporate headquarters.
Income
Taxes
The
Company accounts for income taxes using the asset and liability method 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 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 the Company determined it would not be able to realize all or
part of its net deferred tax asset in the future, an adjustment to the
54
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
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, 2009 and 2008.
The
Company recognizes 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 are classified as net interest
expense and selling, general and administrative costs, respectively, in the
Company’s financial statements. The Company reviews its tax positions
on a quarterly basis and more frequently as facts surrounding tax positions
change. Based on these future events, the Company may recognize uncertain
tax positions or reverse current uncertain tax positions the impact of which
would affect the statement of operations and/or the balance sheet.
Pension
Obligations
The
Company measures plan assets and benefit obligations as of the date of its
fiscal year end which was effective for the Company’s fiscal year ended December
31, 2008 using the alternative transition method. In lieu of re-measuring plan
assets at the beginning of 2008, the alternative transition method allowed the
use of the November 30, 2007 measurement date with net periodic benefit
income for the period from December 1, 2007 to December 31, 2008
allocated proportionately between an adjustment of retained earnings (for the
period from December 1, 2007 to December 31, 2007) and net periodic
benefit income for 2008 (for the period from January 1, 2008 to
December 31, 2008). The impact of using the alternative transition method
resulted in a positive adjustment of $107 to retained earnings and an offset to
accumulated other comprehensive income for $65, net of tax of $42, which
represented one month of net periodic pension income.
Accounting
and reporting for the Company’s pension plan requires the use of assumptions,
including but not limited to, a discount rate and an expected return on assets.
These assumptions are reviewed at least annually based on reviews of current
plan information and consultation with the Company’s independent actuary and the
plan’s investment advisor. If these 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.
Deferred
Financing Costs
Costs
associated with obtaining the Company’s financing arrangements are deferred and
amortized over the term of the financing arrangements using the effective
interest method.
Derivative
Financial Instruments
The
Company recognizes derivatives as either an asset or liability measured at its
fair value. For derivatives that have been formally designated as a
cash flow hedge, the effective portion of changes in the fair value of the
derivatives are recorded in accumulated other comprehensive income
(loss). Amounts in accumulated other comprehensive income (loss) are
reclassified into earnings when interest expense on the underlying borrowings is
recognized.
The
Company entered into an interest rate swap agreement to manage its exposure to
interest rate changes. The swap effectively converts a portion of the
Company’s variable rate debt under the term loan to a fixed rate, without
exchanging the notional principal amounts. If, at any time, the swap
is determined to be ineffective, in whole or in part, due to changes in the
interest rate swap or underlying debt agreements, the fair value of the portion
of the swap determined to be ineffective will be recognized as a gain or loss in
the statement of operations for the applicable period.
55
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share
amounts)
Fair Value
Measurements
The
Company’s financial assets and liabilities are measured at fair value which is
defined as the price that would be received to sell an asset, or paid to
transfer a liability, in an orderly transaction between market
participants. Valuation techniques are based on observable or
unobservable inputs. Observable inputs reflect market data obtained
from independent sources, while unobservable inputs reflect the Company’s market
assumptions. These two types of inputs have created the following fair value
hierarchy:
|
•
|
Level
1 — Quoted prices for identical instruments in active
markets.
|
|
|
•
|
Level
2 — Quoted prices for similar instruments in active markets; quoted prices
for identical or similar instruments in markets that are not active; and
model-derived valuations in which significant value drivers are
observable.
|
|
|
•
|
Level
3 — Valuations derived from valuation techniques in which significant
value drivers are unobservable.
|
The
carrying values of cash and cash equivalents, contract receivables and accounts
payable approximate fair value because of the short-term nature of these
instruments. The carrying value of debt also approximates fair
value because the interest rate is variable.
Operating
Leases
The
Company’s minimum operating lease payments are recognized on a straight-line
basis, beginning on the date that the Company takes possession or control of the
property. When the terms of an operating lease provide for periods of
free rent, rent concessions 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 $5,157 and $849 recorded as of December
31, 2009 and 2008, respectively. The long-term portions of the
deferred rent liability of $4,951 and $698 were recorded in other long-term
liabilities as of December 31, 2009 and 2008, respectively, and the remaining
current portions were recorded in other accrued expenses in the accompanying
balance sheets.
Restructuring
Costs
Obligations
associated with restructuring activities 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 reported in the period in which the plan is approved
by the Company’s senior management and, where material, the Company’s Board of
Directors, and when the liability is incurred.
During
the first half of 2008, the Company learned that its work on the Navy’s Trident
Missile program would be curtailed significantly in the second half of
2008. During 2008, the Company recorded a restructuring cost of $735
consisting principally of employee termination costs which was included in cost
of revenue and paid out in full during the year.
Comprehensive
Income (Loss)
As
it relates to the Company, comprehensive income (loss) is defined as net income
(loss) plus other comprehensive income (loss), which is the sum of changes in
additional pension liabilities and unrealized gains and losses on investments
available for sale and derivative instruments. These amounts are
presented net of tax in the accompanying statements of changes in stockholders’
equity and comprehensive income (loss).
56
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
Earnings
Per Share
Basic
earnings (loss) per share are computed by dividing net income by the weighted
average number of shares of common stock outstanding during the period. Diluted
earnings per share is determined by using the weighted average number of common
and dilutive common equivalent shares outstanding during the
period. In years in which a net loss is reported, the dilutive effect
of stock options and restricted stock grants are not included in the computation
as their effect would be anti-dilutive.
Restricted
shares of common stock that vest based on the satisfaction of certain conditions
are treated as contingently issuable shares until the conditions are satisfied.
These shares are excluded from the basic earnings per share calculation and
included in the diluted earnings per share calculation.
Share-Based
Compensation
The
measurement and recognition of share-based compensation expense is 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 recognizes
compensation expense based on the estimated grant date fair value method using a
straight-line amortization method over the vesting period of the award reduced
for actual forfeitures.
Recent
Accounting Pronouncements
On
July 1, 2009, Financial Accounting Standards Board (“FASB”) Accounting
Standards Codification™ (“ASC”) became the sole source of authoritative
Generally Accepted Accounting Principles (“GAAP”) literature recognized by the
Financial Accounting Standards Board for financial statements issued for interim
and annual periods ending after September 15, 2009. Rules and interpretive
releases of the Security Exchange Commission (“SEC”) under authority of federal
securities laws are also sources of authoritative GAAP for SEC registrants.
Except for applicable SEC rules and regulations and a limited number of
grandfathered standards, all other sources of GAAP for nongovernmental entities
were superseded by the issuance of ASC. ASC did not change GAAP, but rather
combined the sources of GAAP and the framework for selecting among those sources
into a single source. Accordingly, the adoption of ASC had no impact on the
financial results of the Company.
Prior
to the adoption of ASC, the Company adopted various standards which have been
codified into ASC. A discussion of these standards, along with a reference to
the ASC topics into which they have been codified and the effect of adoption on
the Company follows.
Adoption
of New Accounting Standards
In
December 2007, the FASB issued Statement of Financial Accounting Standards
(“SFAS”) No. 141(R), Business Combinations
(codified into ASC Topic 805, Business Combinations). The
standard establishes principles and requirements for how an acquirer recognizes
and measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any noncontrolling interest in the acquiree and
recognizes and measures the goodwill acquired in the business combination or a
gain from a bargain purchase. The standard applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008. The
Company adopted this standard on January 1, 2009 and it will be applied
prospectively on future acquisitions.
In
April 2009, the FASB issued FSP SFAS 141(R)-1, Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise from
Contingencies (codified into ASC Topic 805, Business Combinations).
The standard amends guidance with respect to the initial recognition
and measurement, subsequent measurement and accounting, and disclosure of assets
and liabilities arising from contingencies in a business
combination.
In
March 2008, the FASB issued SFAS No. 161, Disclosure about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No. 133
(codified into ASC Topic 815, Derivatives and Hedging).
SFAS No. 161 establishes, among other things, the disclosure requirements
for derivative instruments and for
57
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
hedging
activities. SFAS No. 161 is effective for financial statements issued for
fiscal years beginning after November 15, 2008. Refer to Note 10 for the
required disclosures made under this standard.
In
April 2008, the FASB issued FSP SFAS 142-3, Determination of the Useful Life of
Intangible Assets (codified into ASC Topic 350, Intangibles—Goodwill and
Other). The standard amends the accounting guidance to permit an entity
to use its own assumptions when developing renewal or extension assumptions used
to determine the useful life of a recognized intangible asset. The standard
removes the requirement for an entity to consider whether an intangible
asset can be renewed without substantial cost or material modification to the
existing terms and conditions and requires an entity to consider its own
experience in renewing similar arrangements. The standard is effective for
fiscal years beginning after December 15, 2008 and interim periods within
those fiscal years. The guidance for determining the useful life of a recognized
intangible asset is applied prospectively to intangible assets acquired after
the effective date.
In
June 2008, the FASB issued FSP EITF 03-6-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities
(codified into ASC Topic 260, Earnings per Share). The
standard clarified that all outstanding share-based payment awards that contain
a right to receive nonforfeitable dividends participate in the undistributed
earnings with common shareholders, and therefore, the issuing entity is required
to apply the two-class method of computing basic and diluted earnings per share.
No. 128, Earnings per
Share (codified into ASC Topic 260, Earnings per Share). The
adoption of the new standard had no impact on the Company’s computation of
earnings per share.
On
December 30, 2008, the FASB issued FSP FAS 132(R)-1, Employers’ Disclosures about
Postretirement Benefit Plan Assets (codified in ASC 715-20, Compensation – Retirement
Benefits), which requires more detailed disclosures about employers’ plan
assets, including employers’ investment strategies, major categories of plan
assets, concentrations of risk within plan assets and fair value measurements
for recording plan assets. The Company adopted the disclosure standards
beginning with these financial statements. Refer to Note 11 for the
required disclosures made under this standard.
In
May 2009, the FASB issued SFAS No. 165, Subsequent Events (codified
into ASC Topic 855, Subsequent
Events), which provides guidance on management’s accounting for and
disclosure of events that occur after the balance sheet date, but before
financial statements are issued or are available to be issued. The standard is
effective for interim or annual financial periods ending after June 15,
2009. The initial application of the standard had no impact on the financial
results of the Company. The Company evaluates subsequent events through the date
and time of the filing of the applicable periodic report with the
SEC. The Company evaluated subsequent events through the date of
issuance of its Annual Report on Form 10-K. The Company is not aware
of any subsequent events which would require recognition or disclosure in the
financial statements.
Accounting
Standards Not Yet Adopted
On
January 21, 2010, the FASB issued ASU 2010-06, Improving Disclosures about Fair
Value Measurements. The standard amends ASC Topic 820, Fair Value Measurements and
Disclosures to require additional disclosures related to transfers
between levels in the hierarchy of fair value measurement. The standard is
effective for interim and annual reporting periods beginning after December 15,
2009. The standard does not change how fair values are measured. Accordingly,
the standard will not have an impact on the Company.
NOTE
3. DISCONTINUED OPERATIONS
During
2009, the Company engaged an investment banker, and in the fourth quarter
entered into a plan to sell Metrigraphics as management determined that
Metrigraphics was not core to the Company’s mission and strategy. As of
December 31, 2009, Metrigraphics was classified as held for sale as a
discontinued operation and the Company’s consolidated financial statements and
notes thereto were restated to reflect the discontinuation of Metrigraphics for
all periods presented.
The
Company anticipates the sale of Metrigraphics will occur in 2010. At
December 31, 2009, the carrying value of Metrigraphics did not exceed its
estimated fair market value.
58
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
The
operating results of Metrigraphics classified as discontinued operations are
summarized below:
|
Year
Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Product
revenue
|
$ | 6,611 | $ | 6,028 | $ | 4,901 | ||||||
|
Loss
before benefit for income taxes
|
$ | (314 | ) | $ | (421 | ) | $ | (608 | ) | |||
|
Benefit
for income taxes
|
173 | 250 | 297 | |||||||||
|
Loss
from operations of discontinued operations, net of tax
|
$ | (141 | ) | $ | (171 | ) | $ | (311 | ) | |||
Details
of balance sheet items for Metrigraphics are summarized below:
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Accounts
receivables
|
$ | 946 | $ | 806 | ||||
|
Prepaid
expenses and other current assets
|
886 | 785 | ||||||
|
Total
current assets at December 31, 2008
|
1,591 | |||||||
|
Property
and equipment, net
|
226 | 350 | ||||||
|
Total
current assets at December 31, 2009
|
2,058 | |||||||
|
Total
assets
|
$ | 2,058 | $ | 1,941 | ||||
|
Accounts
payable
|
$ | 186 | $ | 221 | ||||
|
Other
accrued expenses
|
- | 58 | ||||||
|
Total
current liabilities
|
$ | 186 | $ | 279 | ||||
NOTE
4. BUSINESS ACQUISITION
On
August 1, 2008, the Company completed the acquisition of Kadix for
$42.3 million in cash including acquisition costs of $408, plus additional
consideration of $5 million based on migration to the Company of services
provided by Kadix under 8(a) contracts, which are stipulated for performance by
minority/women owned contracts having an unrestricted status, and the
achievement of anticipated 2009 gross margin targets. During 2008,
additional consideration of $5.0 million was earned and accrued as additional
purchase price. Of the additional purchase price, $750 was paid in
2008 and the remaining $4.3 million was paid in the first quarter of
2009.
Kadix
maintains practice specialties in organizational change, human capital,
information technology and public and environmental health. Kadix is
focused on the U.S. DHS, Marine Corps information technology, military
healthcare, and federal civilian markets. The acquisition
strengthened and expanded the Company’s growth as a provider of high-end
services and solutions in the DHS and other federal civilian
markets.
The
purchase price associated with the Kadix acquisition is as follows:
|
Cash
consideration at purchase date
|
$ | 44,960 | ||||||
|
Additional
earnout cash consideration
|
5,000 | |||||||
|
Transaction
costs
|
408 | |||||||
|
Purchase
price
|
50,368 | |||||||
|
Cash
acquired
|
(3,102 | ) | ||||||
|
Purchase
price, net of cash acquired
|
$ | 47,266 |
59
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
The
purchase price allocation based on an independent appraisal is as
follows:
|
Current
assets, net of cash acquired
|
$ | 9,638 | ||||||
|
Property
and equipment
|
316 | |||||||
|
Current
liabilities
|
(4,200 | ) | ||||||
|
Long-term
liabilities
|
(4 | ) | ||||||
|
Goodwill
and other intangible assets
|
41,516 | |||||||
|
Total
purchase price allocation
|
$ | 47,266 | ||||||
|
amortization
|
||||||||
|
life
(years)
|
||||||||
|
Customer
contracts
|
$ | 3,500 | 5 | |||||
|
Customer
relationships
|
1,900 | 6 | ||||||
|
Non-compete
agreement
|
1,400 | 3 | ||||||
|
8(a)
contract transition
|
130 | 1 | ||||||
|
Goodwill
|
34,586 | - | ||||||
|
Total
goodwill and other intangible assets
|
$ | 41,516 | ||||||
The
Company believes that the $41,516 of purchase price allocated to goodwill and
other intangible assets will be tax deductible.
The
following unaudited pro forma results of operations have been prepared as though
the acquisition of Kadix had occurred on January 1, 2007. These pro forma
results include adjustments for interest expense and amortization of deferred
financing costs on the acquisition term loan used to finance the transaction,
amortization expense for the identifiable intangible asset determined in the
preliminary independent appraisal and the effect of income taxes. These
unaudited pro forma results do not include certain nonrecurring costs Kadix paid
at the closing of the sale, including the payout for Kadix’ Phantom Unit Plan
and Ownership Appreciations Rights participants, professional fees related to
the acquisition and discretionary bonuses. This unaudited pro forma
information does not purport to be indicative of the results of operations that
would have been attained had the acquisition been made as of January 1,
2007, or of results of operations that may occur in the future.
|
Year
Ended December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
(unaudited)
|
||||||||
|
Revenue
|
$ | 261,540 | $ | 247,647 | ||||
|
Gross
profit
|
$ | 48,118 | $ | 45,982 | ||||
|
Operating
income
|
$ | 4,228 | $ | 14,916 | ||||
|
Net
income
|
$ | 692 | $ | 6,848 | ||||
|
Earnings
per share:
|
||||||||
|
Basic
|
$ | 0.07 | $ | 0.73 | ||||
|
Diluted
|
$ | 0.07 | $ | 0.71 | ||||
60
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
NOTE 5. SUPPLEMENTAL BALANCE SHEET
INFORMATION
The
composition of selected balance sheet accounts is as follows:
|
December
31,
|
||||||||
|
|
2009
|
2008
|
||||||
|
Contract
receivables, net:
|
||||||||
|
Billed
receivables
|
$ | 28,203 | $ | 34,598 | ||||
|
Unbilled
receivables(1):
|
||||||||
|
Revenues
recorded in excess of milestone billings on fixed price contracts with the
State of Tennesse and the State of Ohio in 2008
|
18,004 | 8,907 | ||||||
|
Retainages
and fee withholdings
|
689 | 1,179 | ||||||
|
Other
unbilled receivables
|
26,256 | 26,858 | ||||||
|
Total
unbilled receivables
|
44,949 | 36,944 | ||||||
|
Allowance
for doubtful accounts
|
(583 | ) | (910 | ) | ||||
|
Contract
receivables, net
|
$ | 72,569 | $ | 70,632 | ||||
|
Prepaid
expenses and other current assets:
|
||||||||
|
Refundable
income taxes
|
$ | 1,604 | $ | - | ||||
|
Restricted
cash
|
262 | 150 | ||||||
|
Other
|
3,836 | 1,556 | ||||||
|
Prepaid
expenses and other current assets
|
$ | 5,702 | $ | 1,706 | ||||
|
Property
and equipment, net:
|
||||||||
|
Software
|
$ | 12,107 | $ | 11,602 | ||||
|
Furniture
and other equipment
|
9,679 | 7,405 | ||||||
|
Leasehold
improvements
|
6,445 | 2,193 | ||||||
|
Production
equipment
|
440 | 441 | ||||||
|
Property
and equipment
|
28,671 | 21,641 | ||||||
|
Less
accumulated depreciation
|
(14,756 | ) | (12,642 | ) | ||||
|
Property
and equipment, net
|
$ | 13,915 | $ | 8,999 | ||||
|
Other
noncurrent assets:
|
||||||||
|
Deferred
compensation plan investments
|
$ | 1,378 | $ | 1,107 | ||||
|
Equity
investments
|
978 | 1,180 | ||||||
|
Other
|
979 | 838 | ||||||
|
Other
noncurrent assets
|
$ | 3,335 | $ | 3,125 | ||||
|
Accrued
compensation and employee benefits:
|
||||||||
|
Accrued
compensation and related taxes
|
$ | 9,029 | $ | 7,504 | ||||
|
Accrued
vacation
|
4,724 | 4,391 | ||||||
|
Accrued
pension liability
|
840 | - | ||||||
|
Other
|
1,764 | 1,749 | ||||||
|
Accrued
compensation and employee benefits
|
$ | 16,357 | $ | 13,644 | ||||
|
Other
accrued expenses:
|
||||||||
|
Accrued
litigation settlement
|
$ | - | $ | 15,000 | ||||
|
Accrued
acquisition costs
|
- | 4,265 | ||||||
|
Accrued
income taxes
|
- | 2,042 | ||||||
|
Deferred
gain on sale of building
|
676 | 676 | ||||||
|
Other
|
3,032 | 2,719 | ||||||
|
Other
accrued expenses
|
$ | 3,708 | $ | 24,702 | ||||
61
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
|
December
31,
|
||||||||
|
|
2009
|
2008
|
||||||
|
Other
long-term liabilities:
|
||||||||
|
Accrued
pension liability
|
$ | 20,666 | $ | 22,570 | ||||
|
Deferred
gain on sale of building
|
3,381 | 4,057 | ||||||
|
Deferred
compensation plan liability
|
1,378 | 1,107 | ||||||
|
Other
|
6,511 | 2,552 | ||||||
|
Other
long-term liabilities
|
$ | 31,936 | $ | 30,286 | ||||
|
(1)
|
At
December 31, 2009 and 2008, $503 and $495, respectively, of unbilled
retainages and fee withholdings are not anticipated to be billed within
twelve months. Additionally, at December 31, 2008, $4,557 of
the unbilled balance under the Company’s contract with the State of
Tennessee was not scheduled to be invoiced within one
year.
|
NOTE
6. GOODWILL AND INTANGIBLE ASSETS
Components
of the Company’s identifiable intangible assets are as follows:
|
December
31, 2009
|
December 31,
2008
|
|||||||||||||||||||||||
|
Accumulated
|
Accumulated
|
|||||||||||||||||||||||
|
Cost
|
Amortization
|
Net
|
Cost
|
Amortization
|
Net
|
|||||||||||||||||||
|
Customer
relationships
|
$ | 13,400 | $ | (11,643 | ) | $ | 1,757 | $ | 14,700 | $ | (11,769 | ) | $ | 2,931 | ||||||||||
|
Customer
contracts
|
3,500 | (2,234 | ) | 1,266 | 3,500 | (522 | ) | 2,978 | ||||||||||||||||
|
Non-competition
agreements
|
1,400 | (349 | ) | 1,051 | 1,400 | - | 1,400 | |||||||||||||||||
|
8(a)
contract transition
|
130 | (130 | ) | - | 130 | (60 | ) | 70 | ||||||||||||||||
|
Total
|
$ | 18,430 | $ | (14,356 | ) | $ | 4,074 | $ | 19,730 | $ | (12,351 | ) | $ | 7,379 | ||||||||||
During
the fourth quarter of 2009, the Company wrote-off $1,300 of fully amortized
intangible assets. The Company recorded amortization expense for its
identifiable intangible assets of $3,305, $2,620 and $2,602 in the years ended
December 31, 2009, 2008 and 2007, respectively. At December 31, 2009,
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:
|
||||
|
2010
|
$ | 1,542 | ||
|
2011
|
$ | 1,188 | ||
|
2012
|
$ | 492 | ||
|
2013
|
$ | 349 | ||
|
2014
|
$ | 299 | ||
|
2015
and thereafter
|
$ | 204 | ||
The
carrying amount of goodwill of $97,641 at December 31, 2009 and
December 31, 2008 was included in the Systems and Services
segment.
NOTE
7. INCOME TAXES
Total
income tax expense was allocated as follows:
|
Year
Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Income
(loss) from operations
|
$ | 6,262 | $ | (454 | ) | $ | 4,979 | |||||
|
Loss
from discontinued operations
|
(173 | ) | (250 | ) | (297 | ) | ||||||
|
Deficiency
(benefit) from stock plan transactions
|
127 | (103 | ) | (9 | ) | |||||||
|
Other
comprehensive income (loss)
|
1,158 | (10,198 | ) | 1,617 | ||||||||
| $ | 7,374 | $ | (11,005 | ) | $ | 6,290 | ||||||
62
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
The
components of the provision (benefit) for federal and state income taxes from
operations were as follows:
|
Year
Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Currently
payable (receivable)
|
||||||||||||
|
Federal
|
$ | (2,997 | ) | $ | 3,429 | $ | 6,772 | |||||
|
State
|
(103 | ) | 689 | 1,179 | ||||||||
|
Total
currently payable (receivable)
|
(3,100 | ) | 4,118 | 7,951 | ||||||||
|
Deferred
payable (prepaid)
|
||||||||||||
|
Federal
|
8,367 | (3,692 | ) | (2,486 | ) | |||||||
|
State
|
995 | (880 | ) | (486 | ) | |||||||
|
Total
deferred payable (prepaid)
|
9,362 | (4,572 | ) | (2,972 | ) | |||||||
|
Provision
(benefit) for income taxes
|
$ | 6,262 | $ | (454 | ) | $ | 4,979 | |||||
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,
|
|||||||||||||||||||||
|
2009
|
2008
|
2007
|
|||||||||||||||||||
|
Provision
(benefit) at statutory rate
|
$ | 5,801 | 35.0 | % | $ | (538 | ) | 35.0 | % | $ | 4,337 | 35.0 | % | ||||||||
|
State
income taxes, net of federal tax benefit
|
752 | 4.5 | (127 | ) | 8.3 | 536 | 4.3 | ||||||||||||||
|
Permanent
differences, net
|
(35 | ) | (0.2 | ) | 126 | (8.2 | ) | 157 | 1.3 | ||||||||||||
|
Stock
based compensation
|
- | - | 71 | (4.7 | ) | 73 | 0.6 | ||||||||||||||
|
Other,
net
|
(256 | ) | (1.5 | ) | 14 | (0.9 | ) | (124 | ) | (1.0 | ) | ||||||||||
|
Provision
(benefit) for income taxes
|
$ | 6,262 | 37.8 | % | $ | (454 | ) | 29.5 | % | $ | 4,979 | 40.2 | % | ||||||||
The
tax effects of significant temporary differences that comprise deferred tax
assets and liabilities are as follows:
|
December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Pension
liability
|
$ | 13,208 | $ | 14,250 | ||||
|
Deferred
gain on sale of building
|
1,854 | 2,163 | ||||||
|
Accrued
expenses
|
3,684 | 7,648 | ||||||
|
Accrued
vacation
|
1,386 | 1,050 | ||||||
|
Employee
share-based compensation
|
630 | 700 | ||||||
|
Net
operating loss carry forward, net of federal tax benefit
|
621 | - | ||||||
|
Receivables
reserves
|
244 | 392 | ||||||
|
Other
|
257 | 341 | ||||||
|
Deferred
tax assets
|
21,884 | 26,544 | ||||||
|
Unbilled
receivables
|
(9,863 | ) | (6,911 | ) | ||||
|
Fixed
assets and intangibles
|
(7,083 | ) | (3,814 | ) | ||||
|
Pension
funding
|
(4,882 | ) | (5,302 | ) | ||||
|
Domestic
International Sales Corporation
|
(2,183 | ) | (2,119 | ) | ||||
|
Other
|
(667 | ) | (672 | ) | ||||
|
Deferred
tax liability
|
(24,678 | ) | (18,818 | ) | ||||
|
Deferred
tax asset (liability), net
|
$ | (2,794 | ) | $ | 7,726 | |||
Management
believes that it is more likely than not that these deferred tax assets will be
realized.
The
Internal Revenue Service (“IRS”) had challenged the deferral of income for tax
reporting purposes related to unbilled receivables including the applicability
of a Letter Ruling issued by the IRS to the Company in January 1976 which
granted to the Company deferred tax treatment of the unbilled
receivables. This issue was elevated to the IRS National Office for
determination. On October 23, 2008, the Company received a
notification of ruling from the IRS National Office. This ruling
provided clarification regarding the IRS position relating to
revenue
63
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
recognition
for tax purposes regarding its unbilled receivables. During September
2009, the IRS completed its examination of the Company’s tax returns for 2004
through 2007 and issued a Revenue Agent Report (“RAR”), which reduced
the deferral of income for tax reporting purposes. As a result the
Company reclassified approximately $1 million from deferred to current taxes
payable. The RAR also included an assessment of interest of $500. The
Company has filed a protest letter with the IRS to appeal the
assessment. The Company believes the appeal will be successful and
has made no provision for the interest associated with the
assessment.
As
of December 31, 2009 the Company had a state net operating loss carry-forward of
approximately $11 million which will be carried forward and is expected to be
fully utilized prior to their statutory expiration which ranges from 5 to 20
years.
The
change in the unrecognized tax benefits was as follows:
|
Balance
at December 31, 2007
|
$ | 517 | ||
|
Reductions
for current year tax positions
|
(87 | ) | ||
|
Balance
at December 31, 2008
|
430 | |||
|
Additions
for current year tax positions
|
132 | |||
|
Lapses
of applicable statute of limitations
|
(153 | ) | ||
|
Balance
at December 31, 2009
|
$ | 409 |
At
December 31, 2009, the Company’s unrecognized tax benefits, which if recognized
in future periods, could favorably impact the effective tax rate by
approximately $150. The total amount of accrued interest and
penalties resulting from such unrecognized tax benefits was $158 and $164 at
December 31, 2009 and 2008, respectively.
The
Company files income tax returns in the U.S. federal jurisdiction and numerous
state jurisdictions. State tax returns for all years after 2005 are
subject to future examination. Although the IRS has completed its
examination of tax years 2004 through 2007 the statutes are still open for those
years until the appeals process is finalized.
NOTE
8. FINANCING ARRANGEMENTS
The
Company’s credit facility provides for a $40.0 million, five-year term loan
(the “term loan”) and a $25.0 million, five-year revolving credit agreement
for working capital (the “revolver”). The bank group, led by Brown Brothers
Harriman & Co. as a lender and as administrative agent, also includes TD
Bank, N.A. and Bank of America, N.A.
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 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 within three calendar days of the
date when such payment is due;
|
||
|
•
|
Any
breach by the Company or any of its subsidiaries of certain covenants,
representations and warranties;
|
||
|
•
|
Any
default and acceleration of any indebtedness owed by the Company or any of
its subsidiaries to any person (other than the bank group) which is in
excess of $1.0 million;
|
||
|
•
|
Any
final judgment against the Company or any of its subsidiaries in excess of
$1.0 million which has not been insured to the reasonable satisfaction of
Brown Brothers as administrative agent;
|
||
|
•
|
Any
bankruptcy (voluntary or involuntary) of the Company or any of its
subsidiaries;
|
||
|
•
|
Any
material adverse change in the business or financial condition of the
Company and its subsidiaries; or
|
||
|
•
|
Any
change in control of the Company.
|
64
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
At
December 31, 2009, the Company was in compliance with its loan
covenants.
The
Company used the $40 million term loan proceeds to fund the acquisition
of Kadix. The credit facility requires quarterly principal payments on the
term loan of $2 million, which commenced December 31, 2008. The Company
has the option of selecting an interest rate for the term loan equal to either:
(a) the then applicable LIBOR rate plus 1.50% per annum to 2.50% per annum,
depending on the Company’s most recently reported leverage ratio (currently
2.00%); or (b) the base rate as announced from time to time by the
administrative agent plus 0.00% per annum to 0.25% per annum, depending on the
Company’s most recently reported leverage ratio (currently 0.00%). For those
portions of the term loan accruing at the LIBOR rate, the Company has the option
of selecting interest periods of 30, 60, 90 or 180 days. The credit
facility also required the Company, within thirty days of the closing date, to
secure interest rate protection in an amount not less than fifty percent of the
outstanding principal balance of the term loan, as more fully described in Note
10.
The
revolver has a five-year term and is available to the Company for general
corporate purposes, including strategic acquisitions. The interest rate terms on
the revolver are similar to those of the term
loan.
Outstanding
Debt
The
Company’s outstanding debt at December 31, 2009 was $32.0 million which
consisted of an outstanding balance of $30.0 million under the term loan and
$2.0 million of net borrowings under the revolver. The interest rate
on the term loan at December 31, 2009 was 2.28% based on the 90-day LIBOR rate
option that was in effect on December 31, 2009. The interest rate on
the revolver at December 31, 2009 was 3.25% based on the base rate that was in
effect on December 31, 2009. The Company’s outstanding debt at
December 31, 2008 was $38.0 million which consisted of borrowings under the term
loan. The interest rate on the term loan at December 31, 2008 was
4.21% based on the 90-day LIBOR rate option that was in effect on December 4,
2008. The repayment of borrowings under the revolver is contractually
due on August 1, 2013 and therefore the amounts outstanding are classified as
long-term, however, the Company may repay at any time prior to that
date. At December 31, 2009, the remaining available balance to borrow
against the revolver was $22.7 million.
As
noted above, the credit facility requires quarterly principal payments on the
term loan of $2 million, which commenced December 31, 2008. The
Company’s contractual obligations for principal payments on the term loan is $8
million in each year ending December 31, 2010 through 2012 and $6 million in the
year ending December 31, 2013. However, the Company has the option to
prepay principal at anytime during the term of the credit facility without
penalty.
NOTE
9. FAIR VALUE MEASUREMENTS
The
following tables present our assets and liabilities that are measured at fair
value on a recurring basis:
|
Fair
Value Measurements
|
|||||||||||||||||
|
At
December 31, 2009 Using
|
|||||||||||||||||
|
Balance
Sheet Classification
|
Level
1
|
Level
2
|
Level
3
|
Total
|
|||||||||||||
|
Assets:
|
|||||||||||||||||
|
Investments
held in Rabbi Trusts
|
Other
noncurrent assets
|
$ | 1,378 | $ | - | $ | - | $ | 1,378 | ||||||||
|
Liabilities:
|
|||||||||||||||||
|
Interest
rate swap
|
Other
long-term liabilities
|
$ | - | $ | 569 | $ | - | $ | 569 | ||||||||
65
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
|
Fair
Value Measurements
|
|||||||||||||||||
|
At
December 31, 2008 Using
|
|||||||||||||||||
|
Balance
Sheet Classification
|
Level
1
|
Level
2
|
Level
3
|
Total
|
|||||||||||||
|
Assets:
|
|||||||||||||||||
|
Investments
held in Rabbi Trusts
|
Other
noncurrent assets
|
$ | 1,107 | $ | - | $ | - | $ | 1,107 | ||||||||
|
Liabilities:
|
|||||||||||||||||
|
Interest
rate swap
|
Other
long-term liabilities
|
$ | - | $ | 860 | $ | - | $ | 860 | ||||||||
The
following is a description of the valuation methodologies used for these items,
as well as the general classification of such items:
Investments held in Rabbi Trusts —
The investments include exchange-traded equity securities and mutual
funds. Fair values for these investments were based on quoted prices in active
markets and were therefore classified within Level 1 of the fair value
hierarchy.
Interest rate swap — The
derivative is a receive-variable, pay-fixed interest rate swap based on the
LIBOR rate and is designated as a fair value hedge. Fair value was based on a
model-driven valuation using the LIBOR rate, which was observable at commonly
quoted intervals for the full term of the swap. Therefore, our interest rate
swap was classified within Level 2 of the fair value hierarchy.
NOTE
10. DERIVATIVE FINANCIAL INSTRUMENTS
In
September 2008, the Company entered into an interest rate swap agreement with an
initial notional amount of $20.0 million of the term loan principal and matures
on August 1, 2013. Under this agreement, the Company receives a
floating rate based on the 90-day LIBOR rate and pays a fixed rate of 3.60%
(both excluding the applicable margin of 2.00%) on the outstanding notional
amount. The swap fixed rate was based on a 90-day LIBOR rate and is structured
to mirror the payment terms of the term loan. The fair value of the
swap at inception was zero. It is not expected that any gains or
losses will be reported in the statement of operations during the term of the
agreement as the swap is assumed to be highly effective through its maturity
based on the matching terms of the swap and credit facility
agreements.
As
of December 31, 2009 and 2008, the total notional amount committed to the swap
agreement was $15.0 million and $19.0 million, respectively. The Company
recorded a liability to recognize the fair value of the swap which has been
accounted for as a component of the accumulated other comprehensive
loss.
The
fair value effect on the financial statements from the interest rate swap
designated as a cash flow hedge is as follows:
|
December
31,
|
Year
Ended December 31,
|
|||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||
|
Other
long-term liabilities
|
$ | 569 | $ | 860 | ||||||||||||
|
Loss
recognized in other comprehensive income, net of tax
|
$ | 343 | $ | 519 | ||||||||||||
NOTE
11. EMPLOYEE BENEFIT PROGRAMS
Defined
Benefit Pension Plan
The
Company’s Defined Benefit Pension Plan (the “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 and participants’ calculated pension benefit
was frozen effective December 31, 2006.
66
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
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 required payments of $840 will be needed to fund
the Pension Plan in 2010.
The
Company’s Pension Plan measurement date was changed to December 31 from November
30 in 2008.
Net
Periodic Pension Cost
|
Year
Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Interest
cost
|
$ | 4,269 | $ | 4,103 | $ | 3,955 | ||||||
|
Expected
return on plan assets
|
(3,857 | ) | (5,975 | ) | (5,811 | ) | ||||||
|
Recognized
actuarial loss
|
1,209 | 586 | 1,104 | |||||||||
|
Net
periodic pension cost (income)
|
$ | 1,621 | $ | (1,286 | ) | $ | (752 | ) | ||||
Obligations
and Funded Status
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Change
in benefit obligation
|
||||||||
|
Benefit
obligation at beginning of year
|
$ | 69,691 | $ | 67,342 | ||||
|
Interest
cost
|
4,269 | 4,444 | ||||||
|
Benefits
paid
|
(3,450 | ) | (3,516 | ) | ||||
|
Actuarial
(gain) loss
|
4,723 | 1,421 | ||||||
|
Benefit
obligation at end of year
|
75,233 | 69,691 | ||||||
|
Change
in plan assets
|
||||||||
|
Fair
value of plan assets at beginning of year
|
47,121 | 68,060 | ||||||
|
Actual
return on plan assets
|
10,001 | (17,423 | ) | |||||
|
Employer
contributions
|
55 | - | ||||||
|
Benefits
paid
|
(3,450 | ) | (3,516 | ) | ||||
|
Fair
value of plan assets at end of year
|
53,727 | 47,121 | ||||||
|
Funded
status
|
$ | (21,506 | ) | $ | (22,570 | ) | ||
Amounts
recognized in the consolidated balance sheets consist of:
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Accrued
compensation and employee benefits
|
$ | 840 | $ | - | ||||
|
Other
long-term liabilities
|
20,666 | 22,570 | ||||||
|
Net
amount recognized
|
$ | 21,506 | $ | 22,570 | ||||
Additional
Information
At
December, 31, 2009, the Company decreased its additional liability by $2,630 to
reflect the required pension liability of $33,312. In 2008, the
Company increased its additional liability by $24,682 to reflect the required
pension liability of $35,942. These amounts are reflected, net of related tax
effects, as a component of accumulated other comprehensive loss as part of
stockholders’ equity in the accompanying balance sheets.
67
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
The
reconciliation of the unrecognized net actuarial loss was as
follows:
|
Beginning
|
Experience
|
Ending
|
||||||||||||||
|
Balance
|
Amortization
|
Loss/(Gain)
|
Balance
|
|||||||||||||
|
2009
|
$ | 35,942 | $ | (1,209 | ) | $ | (1,421 | ) | $ | 33,312 | ||||||
|
2008
|
$ | 11,260 | $ | (635 | ) | $ | 25,317 | $ | 35,942 | |||||||
|
2007
|
$ | 15,159 | $ | (1,104 | ) | $ | (2,795 | ) | $ | 11,260 | ||||||
The
Company expects to recognize amortization expense related to the net actuarial
loss of approximately $1,093 in 2010.
Assumptions
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 long-term 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 consultation with outside investment advisors. In
selecting the expected long-term rate of return on assets, the Company
considered its investment return goals stated in the Pension Plan’s investment
policy. The Company, with input from the Pension Plan’s professional investment
managers, also considered the average rate of earnings expected on the funds
invested or to be invested to provide Pension Plan benefits. This process
included determining expected returns for the various asset classes that
comprise the Pension Plan’s target asset allocation.
The
following assumptions were used to determine the benefit obligations and net
periodic benefit costs:
|
December
31,
|
||||||||||||
|
2009
|
2008
|
|||||||||||
|
Used
to determine benefit obligations
|
||||||||||||
|
Discount
rate
|
5.75 | % | 6.25 | % | ||||||||
|
Rate
of compensation increase
|
N/A | N/A | ||||||||||
|
|
||||||||||||
|
Year
Ended December 31,
|
||||||||||||
|
2009
|
2008 | 2007 | ||||||||||
|
Used
to determine net periodic benefit costs
|
||||||||||||
|
Discount
rate
|
6.25 | % | 6.25 | % | 5.75 | % | ||||||
|
Expected
rate of return on assets
|
8.50 | % | 9.00 | % | 9.00 | % | ||||||
|
Rate
of compensation increase
|
N/A | N/A | N/A | |||||||||
Plan
Assets
The
Company’s overall investment strategy for plan assets is to achieve a long-term
rate of return of 8.5%, with a wide diversification of asset types, fund
strategies and fund managers. The target allocation for the plan
assets are 55% in equity securities, 38% in fixed income securities, 5% in other
types of investments and 2% in cash and cash equivalents. The risk
management practices include regular evaluations of fund managers to ensure the
risk assumed is commensurate with the given investment style and
objectives. Prohibited investments include, but are not limited to
private placements, limited partnerships, venture-capital investments, real
estate properties and collateralized mortgage obligation.
68
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
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:
|
Fair
Value Measurement at December 31, 2009
|
||||||||||||||||
|
Quoted
Prices
|
||||||||||||||||
|
in
Active
|
Significant
|
|||||||||||||||
|
Markets
for
|
Other
|
Significant
|
||||||||||||||
|
Identical
|
Observable
|
Unobservable
|
||||||||||||||
|
Assets
|
Inputs
|
Inputs
|
||||||||||||||
|
Asset
Category
|
Total
|
(Level
1)
|
(Level
2)
|
(Level
3)
|
||||||||||||
|
Cash
and cash equivalents
|
$ | 200 | $ | 200 | $ | - | $ | - | ||||||||
|
Equity
securities:
|
||||||||||||||||
|
International
equity
|
7,940 | 7,940 | - | - | ||||||||||||
|
U.S.
large-cap growth
|
6,578 | 6,578 | - | - | ||||||||||||
|
U.S.
large-cap value
|
6,017 | 6,017 | - | - | ||||||||||||
|
Small
value equity
|
3,321 | 3,321 | - | - | ||||||||||||
|
Mid-cap
value
|
2,525 | 2,525 | - | - | ||||||||||||
|
Emerging
markets growth
|
2,332 | 2,332 | - | - | ||||||||||||
|
Real
estate investment trusts
|
1,968 | 1,968 | - | - | ||||||||||||
|
Fixed
income securities:
|
||||||||||||||||
|
Corporate
and government bonds
|
19,846 | - | 19,846 | - | ||||||||||||
|
Other
type of investments:
|
||||||||||||||||
|
Managed
futures
|
2,000 | - | - | 2,000 | ||||||||||||
|
Hedge
fund
|
1,000 | - | - | 1,000 | ||||||||||||
|
Total
|
$ | 53,727 | $ | 30,881 | $ | 19,846 | $ | 3,000 | ||||||||
The
Pension Plan’s assets did not include any of the Company’s common stock at
December 31, 2009 and 2008.
A
reconciliation of the beginning and ending balances of Level 3 assets is as
follows:
|
Fair
Value Measurement Using Significant Unobservable Inputs (Level
3)
|
||||||||||||
|
Managed
Futures
|
Hedge
Fund
|
Total
|
||||||||||
|
Beginning
balance at December 31, 2008
|
$ | - | $ | - | $ | - | ||||||
|
Actual
returns on plan assets:
|
- | |||||||||||
|
Relating
to assets still held at the reporting date
|
- | - | - | |||||||||
|
Relating
to assets sold during the period
|
- | - | - | |||||||||
|
Purchases
|
2,000 | 1,000 | 3,000 | |||||||||
|
Transfers
in and/or out of Level 3
|
- | - | - | |||||||||
|
Ending
balance at December 31, 2009
|
$ | 2,000 | $ | 1,000 | $ | 3,000 | ||||||
The
managed futures consist of units of limited partnership interests through the
allocation of assets of multiple commodity trading advisors. These
commodity trading advisors engage in speculative trading in U.S. and
international markets for currencies, interest rates, stock indices,
agricultural and energy products, and precious base metals. The fair
value of managed futures is estimated based on the investments net asset value
at the reporting period.
The
hedge fund is a fund of funds that combines diversified multi-strategy methods
to achieve investment objectives during a three to five year investment
cycle. Strategy methods may consist of conventional long-term equity
and fixed income investments or derivative investments, including, total return
swaps, options and forwards. The fair value of the hedge fund is
estimated based on the investments net asset value at the reporting
period.
The
estimated fair value of the managed futures and the hedge fund at December 31,
2009 was determined to approximate cost due to the close proximity of the
purchase of these investments and the reporting period.
69
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
Estimated
Future Benefit Payments
The
following table sets forth the expected timing of benefit
payments:
|
Year
ending December 31:
|
||||
|
2010
|
$ | 3,682 | ||
|
2011
|
$ | 3,879 | ||
|
2012
|
$ | 4,185 | ||
|
2013
|
$ | 4,449 | ||
|
2014
|
$ | 4,595 | ||
|
Five
subsequent fiscal years ending December 31, 2019
|
$ | 25,620 | ||
401(k)
Plan
The
Company maintains a cash or deferred savings plan, the 401(k) Plan. All
employees are eligible to elect to defer a portion of their salary and
contribute the deferred portion to the 401(k) Plan.
The
401(k) Plan is structured with two components: (i) a Company matching
contribution for 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 for all eligible
employees.
Employee
contributions and the Company’s contributions are invested in one or more
collective investment funds at the participant’s direction. The Company’s
contributions are subject to forfeitures of any non-vested portion if
termination occurs. The vesting of the Company’s matching
contribution is 25% after one year and 100% after the second
year. The vesting of profit sharing contributions is 100% cliff
vesting after three years. The Company’s contributions, net of
forfeitures, charged to expense aggregated $3,513, $3,062 and $3,188 in 2009,
2008 and 2007, 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. Expenses
related to this plan were $60, $56, and $36 in 2009, 2008 and 2007,
respectively. The liability related to the SERP, which is unfunded, was $371 and
$381 at December 31, 2009 and 2008, 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 to defer up to 100% of cash incentive payments and
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, 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, 2009 and 2008, $1,378 and $1,107, 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 is credited 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.
70
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
NOTE
12. 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 10,000, 12,000 and 30,000 stock
options were outstanding and exercisable under the 1993 Plan at December 31,
2009, 2008 and 2007, respectively.
The
Company’s 1995 Stock Option Plan for Non-employee Directors (the “1995 Plan”)
expired in April 2006. The 1995 Plan provided for each outside
director to receive options to purchase 5,000 shares of common stock at the
first annual meeting at which the director was elected. As long as he or she
remained an eligible director, the director received options to purchase
1,000 shares of common stock at each annual meeting. Eligible directors
could not be an employee of the Company or one of its subsidiaries or a holder
of five percent or more of the Company’s common stock. The exercise price of
these options was the fair market value of the common stock on the date of
grant. Each option was non-transferable except upon death and expires
10 years after the date of grant. The options became exercisable in three
equal installments on the first, second and third anniversaries of the date of
grant. A total of 132,000 shares were reserved for issuance. A total of
11,000, 12,214 and 14,614 stock options were outstanding and exercisable under
the 1995 Plan at December 31, 2009, 2008 and 2007, respectively.
The
Company’s 2000 Incentive Plan (the “2000 Plan”) expired in November
2009. The 2000 Plan allowed 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 was not less than the fair market value of the stock
at the date of grant. The option period did not exceed 10 years from the
date of grant. The terms of the 2000 Plan were substantially similar to those of
the 1993 Plan. A total of 585,843 and 664,894 stock options were outstanding and
exercisable under the 2000 Plan at December 31, 2009 and 2008, respectively, and
717,464 stock options were outstanding of which 222,464 stock options were
exercisable at December 31, 2007.
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 directors or key employees of the Company. A total of
400,000 shares were reserved for issuance which 372,024 shares
remained available at December 31, 2009. The terms of the 2003
Plan are substantially similar to those of the 2000 Plan. The 2003
Plan expires in December 2012.
Restricted
stock awards granted by the Company were issued under the 2000 Plan and 2003
Plan. Shares of restricted stock of the Company may be granted at no cost to
employees. Restrictions limit the sale or transfer of these shares
until they vest, which is typically over three years. The Company
granted a total of 100,748 restricted stock awards during the year ended
December 31, 2009 of which 66,750 and 33,998 restricted stock awards were
granted from the 2000 Plan and the 2003 Plan, respectively. The Company granted
92,000 and 99,300 restricted stock awards from the 2000 Plan during the years
ended December 31, 2008 and 2007, respectively. Restricted stock awards of
137,725, 158,476 and 223,330 were unvested and outstanding under the 2000 Plan
as of December 31, 2009, 2008 and 2007, respectively, and 27,976 awards were
unvested and outstanding under the 2003 Plan as of December 31,
2009.
71
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
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. During 2001, the Company granted stock
options under the ELTIP totaling 750,000 shares of common stock at fair
market value and awarded 121,000 shares of restricted common stock which
vested in May 2008. Included in the 2000 Plan amounts stated above, a
total of 425,000 and 475,000 stock options were outstanding and exercisable at
December 31, 2009 and 2008, respectively, and 495,000 stock options and 77,000
restricted stock awards were outstanding and not yet vested under the ELTIP at
December 31, 2007.
During
1999, the Company granted a key executive officer 250,000 non-qualified stock
options that were not part of an approved shareholder plan. The option price for
these grants, which became fully vested in November 2003, was the fair market
value at the time of the grant. At December 31, 2008, there were 200,000 stock
options outstanding and exercisable. During 2009, the remaining stock
options were exercised.
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 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. The ESPP allows stock to be purchased at a discount
of 5% and does not include a “look-back” option, therefore the accounting for
shares purchased is not considered compensatory. A total of 1,300,000
shares are available for issuance under the ESPP, of which 398,603shares were
remaining at December 31, 2009. In 2009, 2008 and 2007, a total
of 38,953, 46,880 and 59,662 shares were issued, respectively, under the
ESPP.
Share-Based
Compensation Costs
Total
share-based compensation cost reported in the consolidated statements of
operations was as follows:
|
Year
Ended December 31,
|
||||||||||||
|
|
2009
|
2008
|
2007
|
|||||||||
|
Cost
of products and services
|
$ | 319 | $ | 483 | $ | 605 | ||||||
|
Selling,
general and administrative
|
417 | 665 | 1,035 | |||||||||
|
Total
share-based compensation expense
|
$ | 736 | $ | 1,148 | $ | 1,640 | ||||||
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
and exercisable at December 31, 2008
|
889,108 | $ | 8.42 | 2.1 | $ | 729 | ||||||||||
|
Granted
|
- | $ | - | |||||||||||||
|
Exercised
|
(273,581 | ) | $ | 5.55 | ||||||||||||
|
Cancelled
|
(8,684 | ) | $ | 14.53 | ||||||||||||
|
Outstanding
and exercisable at December 31, 2009
|
606,843 | $ | 9.62 | 1.5 | $ | 981 | ||||||||||
72
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
Cash
proceeds received, the intrinsic value and the total tax benefits realized
resulting from stock option exercises were as follows:
|
Year
Ended December 31,
|
||||||||||||
|
|
2009
|
2008
|
2007
|
|||||||||
|
Amounts
realized or received from stock option exercises:
|
||||||||||||
|
Cash
proceeds received
|
$ | 631 | $ | 449 | $ | 558 | ||||||
|
Intrinsic
value realized
|
$ | 1,972 | $ | 267 | $ | 279 | ||||||
|
Income
tax benefit realized
|
$ | 84 | $ | 101 | $ | 70 | ||||||
The
total income tax benefit realized from exercised stock options and ESPP
transactions for 2009, 2008 and 2007 was $86, $103 and $77,
respectively. During 2007, the Company also recorded tax deficiencies
on its equity awards of $68 against its pool of excess tax
benefits.
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, 2008
|
158,476 | $ | 10.61 | |||||
|
Granted
|
100,748 | $ | 8.96 | |||||
|
Vested
|
(69,534 | ) | $ | 11.36 | ||||
|
Cancelled
|
(23,989 | ) | $ | 9.94 | ||||
|
Nonvested
at December 31, 2009
|
165,701 | $ | 9.39 | |||||
The
total fair value of restricted shares vested during 2009, 2008 and 2007 was
$790, $1,586 and $1,059, respectively. As of December 31, 2008, the total
unrecognized compensation cost related to restricted stock awards was $1,061
which is expected to be amortized over a weighted-average period of
approximately two years.
NOTE
13. SHAREHOLDERS’ EQUITY
Preferred
Stock Purchase Rights
On
June 5, 2008, the Board of Directors of the Company approved a shareholder
Rights Agreement, subject to finalization of price, which was approved by the
Board on July 23, 2008 at $59.09 per one one-hundredth of a Preferred
Share. The Rights replaced preferred share purchase rights which were
attached to common shares (the “Old Rights”), that expired on July 27,
2008.
On
July 23, 2008, the Board of Directors of the Company authorized and declared a
dividend distribution of one right (a “Right”) for each outstanding share of the
Company’s common stock, par value $0.10 per share to stockholders of record at
the close of business on such date. Each Right entitles the registered holder to
purchase from the Company one one-hundredth of a share of Series B Preferred
Stock, par value $0.10 per share, of the Company (the “Preferred Stock”), at a
price of $59.09 per one one-hundredth of a Preferred Share, subject to
adjustment. The definitive terms of the Rights are set forth in a
Rights Agreement, dated as of July 23, 2008, between the Company and American
Stock Transfer & Trust Company, LLC, as Rights Agent.
The
Rights become exercisable upon the earlier of the following events: (i) 10 days
following a public announcement that a person or group of affiliated or
associated persons have acquired beneficial ownership of 15% or more of the
outstanding Common Stock or (ii) 10 business days (or such later date as may be
determined by action of the Board of Directors prior to such time as any person
or group of affiliated or associated persons becomes an acquiring person)
following the commencement of, or announcement of an intention to make, a tender
offer or exchange offer the consummation of which would result in the beneficial
ownership by a person or group of
73
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
15%
or more of the outstanding Common Stock (the earlier of such dates being the
distribution date). The Rights will expire on July 27, 2018.
Accumulated Other Comprehensive
Loss
Accumulated
other comprehensive loss as of December 31, 2009 of $20,505 consisted of
aggregate additional pension liability adjustments of $20,162, net of a $13,150
tax benefit and an unrealized holding loss on a derivative instrument of $343,
net of a tax benefit of $226. Accumulated other comprehensive loss as
of December 31, 2008 of $22,268 consisted of aggregate additional pension
liability adjustments of $21,749, net of a $14,193 tax benefit and an unrealized
holding loss on a derivative instrument of $519, net of a tax benefit of
$341.
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, 2007
|
||||||||||||
|
Minimum
pension liability adjustment
|
$ | 3,899 | $ | (1,546 | ) | $ | 2,353 | |||||
|
Unrealized
holding gains on investments
|
179 | (71 | ) | 108 | ||||||||
|
Other
comprehensive income
|
$ | 4,078 | $ | (1,617 | ) | $ | 2,461 | |||||
|
Year
ended December 31, 2008
|
||||||||||||
|
Pension
liability adjustment
|
$ | (25,268 | ) | $ | 10,018 | $ | (15,250 | ) | ||||
|
Less:
reclassification adjustment for costs realized in net loss
|
586 | (232 | ) | 354 | ||||||||
|
Net
pension liability adjustment
|
(24,682 | ) | 9,786 | (14,896 | ) | |||||||
|
Unrealized
holding losses on derivative instruments
|
(860 | ) | 341 | (519 | ) | |||||||
|
Reclassification
adjustment for gains on investments realized in net loss
|
(179 | ) | 71 | (108 | ) | |||||||
|
Other
comprehensive loss
|
$ | (25,721 | ) | $ | 10,198 | $ | (15,523 | ) | ||||
|
Year
ended December 31, 2009
|
||||||||||||
|
Pension
liability adjustment
|
$ | 1,421 | $ | (564 | ) | $ | 857 | |||||
|
Less:
reclassification adjustment for costs realized in net
income
|
1,209 | (479 | ) | 730 | ||||||||
|
Net
pension liability adjustment
|
2,630 | (1,043 | ) | 1,587 | ||||||||
|
Unrealized
holding losses on derivative instruments
|
(175 | ) | 69 | (106 | ) | |||||||
|
Less:
reclassification adjustment for costs realized in net
income
|
466 | (184 | ) | 282 | ||||||||
|
Net
unrealized holding gain on derivative instruments
|
291 | (115 | ) | 176 | ||||||||
|
Other
comprehensive income
|
$ | 2,921 | $ | (1,158 | ) | $ | 1,763 | |||||
Earnings Per
Share
Due
to their antidilutive effect, approximately 63,000, 279,200 and 80,500 options
to purchase common stock were excluded from the calculation of diluted earnings
per share for the years ended December 31, 2009, 2008 and 2007,
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,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Weighted
average shares outstanding - Basic
|
9,551,614 | 9,493,495 | 9,326,907 | |||||||||
|
Dilutive
effect of stock options and restricted stock grants
|
221,108 | - | 322,990 | |||||||||
|
Weighted
average shares outstanding - Diluted
|
9,772,722 | 9,493,495 | 9,649,897 | |||||||||
74
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
NOTE
14. BUSINESS SEGMENT, GEOGRAPHIC, MAJOR CUSTOMER AND RELATED PARTY
INFORMATION
Business
Segment
With
the decision to discontinue the operations of the Metrigraphics segment in the
fourth quarter of 2009, the Company now operates in one business
segment. The Company provides support to its customers in the primary
mission areas of information technology, logistics and readiness, information
assurance and cybersecurity, homeland security, health care, and intelligence
and space. The Company offers several business solutions to its
customers, often combining two or more solutions to achieve customer goals,
including business transformation, information technology infrastructure,
training and performance support, business intelligence, automated case
management, program management, engineering, human capital management,
information assurance and cybersecurity, and healthcare.
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 100% of revenues in each of the three years ended
December 31, 2009. The Company’s long-lived assets of $118,965 and
$117,144, at December 31, 2009 and 2008, 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 U.S. Government agency customers in aggregate accounted for approximately
88%, 86% and 92% of total revenues in 2009, 2008 and 2007,
respectively. Revenues earned from the U.S. Air Force Aeronautical
Systems Center in 2007 were $24,565, or 11% of total revenue. No
other customers accounted for more than 10% of revenue in each of the three
years ended December 31, 2009.
In
February 2008, the Company was awarded a $25.5 million fixed price contract from
the State of Tennessee, which began in the second quarter of 2008 with
deployment scheduled to occur in the third quarter of 2010. The
outstanding contract receivable balance of the State of Tennessee contract at
December 31, 2009 was $18.8 million. At December 31, 2009 and 2008,
no other customers accounted for more than 10% of the outstanding contract
receivable balance.
Related
Party
Through
its wholly owned subsidiary, HJ Ford, the Company has a 40% interest in HMRTech
which is accounted for using the equity method. Revenues from HMRTech
included in revenues for 2009, 2008 and 2007 were $3,186, $4,753, and $21,581,
respectively. The amounts due from HMRTech
included in contract receivables at December 31, 2009 and 2008 were $21 and
$779, respectively. In addition, HMRTech
charged the Company $1,347, $1,430 and $126 in 2009, 2008 and 2007,
respectively, relating to contract work. At December 31, 2009 and
2008, the Company had a related payable of $151 and 238,
respectively.
NOTE
15. COMMITMENTS AND CONTINGENCIES
Commitments
The
Company conducts its operations in facilities that are under long-term operating
leases. These leases expire at various dates through 2017, with options to renew
as negotiated between the Company and its landlords. With the exception of the
Company’s current corporate headquarters facility, 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 former
corporate
75
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
headquarters
facility. Rent expense under these leases (inclusive of real estate taxes and
insurance) was $5,874 in 2009, $5,751 in 2008 and $6,326 in
2007.
Minimum
lease commitments, primarily for facilities under non-cancelable operating
leases and related sublease receipts in effect at December 31, 2009 were as
follows:
|
Lease
|
Sublease
|
|||||||
|
Commitment
|
Receipts
|
|||||||
|
Year
ending December 31:
|
||||||||
|
2010
|
$ | 8,530 | $ | 3,147 | ||||
|
2011
|
6,086 | 2,314 | ||||||
|
2012
|
4,760 | 1,732 | ||||||
|
2013
|
4,617 | 1,732 | ||||||
|
2014
|
4,508 | 1,732 | ||||||
|
2015
and thereafter
|
6,185 | 1,732 | ||||||
| $ | 34,686 | $ | 12,389 | |||||
On
August 14, 2009, the Company entered into a lease agreement for 69,000 square
feet of space in a building located at 2 Tech Drive in Andover,
MA. In November 2009, the Company commenced the use of the building
as its new corporate headquarters. The term of the lease is
approximately seven years and four months beginning on December 1, 2009 and
terminating on April 28, 2017.
The
Company has the option to extend the term of the lease for two consecutive
periods of five years each on the same terms and conditions set forth in the
original lease and at current fair market rental values of comparable space at
that time. The Company currently anticipates exercising the first
five-year option extension, however the minimum lease payments cannot be
determined as the payments are not fixed.
The
Company’s annual rent is based on $19.49 per square foot, adjusted to include
final leasehold improvements, for eight months beginning four months after the
commencement date. The annual rent escalates $1.00 per square foot in
each of the next full twelve month periods to the termination of the
lease. The fixed rental cost over the term of the lease is
approximately $11 million. The agreement also requires the Company to pay $7 per
month for the cost of electricity.
As
part of the lease agreement, the landlord committed to make and pay for $2.7
million in building improvements. As of December 31, 2009, $1.7
million was reimbursed by the landlord and approximately $900 was recorded as a
receivable. Additionally, the Company elected to increase the tenant
improvement allowance by approximately $700, which will be paid back to the
landlord over the life of the lease in the form of increased
rent. The Company also entered into a letter of credit with its bank
group for $353 to satisfy the required security deposit.
On
August 17, 2009, the Company entered into an assignment and assumption agreement
to assign all of the Company’s right, title, and interest in, to and under its
former corporate headquarters facility. The effective date of the agreement was
December 1, 2009, the date the Company vacated the building. The terms of the
agreement assign the sublessee all of the rights and obligations of the original
lease signed by the Company in 2005. The original lease includes two
consecutive five year renewal options. If these options are exercised
by the sublessee, the Company will be released for the option periods by the
landlord. The Company is continuing to amortize the deferred gain
over the original ten year lease period. The agreement also provides
the sublessee the use of certain Company owned furniture in connection with
their occupancy of the building.
Contingencies
As
a defense contractor, the Company is subject to many levels of audit and review
from various government agencies, including the Defense Contract Audit Agency,
various inspectors general, the Defense Criminal Investigation Service, the
Government Accountability Office, the Department of Justice and Congressional
Committees. Both related to and unrelated to its defense industry involvement,
the Company is, from time to time, involved in audits, lawsuits, claims,
administrative proceedings and investigations. The Company accrues
for
76
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
liabilities
associated with these activities when it becomes probable that future
expenditures will be made and such expenditures can be reasonably estimated.
Except as noted below, the Company does not presently believe it is reasonably
likely that any of these matters would have a material adverse effect on the
Company’s business, financial position, results of operations or cash flows. The
Company’s evaluation of the likelihood of expenditures related to these matters
is subject to change in future periods, depending on then current events and
circumstances, which could have material adverse effects on the Company’s
business, financial position, results of operations and cash flows.
On
June 28, 2005, a class action employee suit was filed in the U.S. District Court
for the District of Massachusetts alleging violations of the Fair Labor
Standards Act and certain provisions of Massachusetts General Laws. The
plaintiff’s claim was for $8 million. On April 10, 2006, the U.S.
District Court for the District of Massachusetts entered an order granting in
part the Company’s motion to dismiss the suit and to compel compliance
with the Company’s mandatory dispute resolution program, directing that the
parties arbitrate the claims, and striking the class action waiver which was
part of the dispute resolution program. In the arbitration, the Company filed a
Motion to Dismiss and/or for Summary Disposition. The motion was
denied and the parties exchanged discovery documents. The Company is
unable to estimate the likely outcome of this matter, and believes the range of
loss to be between zero and the plaintiffs claim, estimated at $8 million,
although an amount higher than $8 million is possible. The wide range
of possible outcomes results from several factors, which currently are pending
the arbitrator’s decisions. These factors include class determination, the
period of non-compliance, and determination if such non-compliance was
willful. The range of outcomes is likely to narrow in coming months
as the arbitrator rules on these matters. The Company has analyzed
all available information, believes it has substantive legal and factual
defenses to this matter, and intends to vigorously defend against the
action. Nevertheless, the outcome remains uncertain and an adverse
outcome could have a material effect, substantially in the amount of the
plaintiff’s claim, on the Company’s results of operations, financial position
and cash flows.
In
August 2009, the Company, the Department of Justice and the United States
Attorney Office, Boston, MA, executed a settlement agreement involving the
Company's admission of liability solely for breach of contract, payment of $15
million to the government and dismissal with prejudice of all other claims
against the Company.
77
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
NOTE
16. QUARTERLY RESULTS (UNAUDITED)
During
the fourth quarter of 2009, the Company entered into a plan to sell the
Metrigraphics business segment. The results listed below were
restated to reflect Metrigraphics as a discontinued operation for all periods
presented. Refer to Note 3 for additional information regarding
Metrigraphics.
|
First
|
Second
|
Third
|
Fourth
|
Fiscal
|
||||||||||||||||
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
Year
|
||||||||||||||||
|
2009
|
||||||||||||||||||||
|
Revenue
|
$ | 67,203 | $ | 68,128 | $ | 67,504 | $ | 65,826 | $ | 268,661 | ||||||||||
|
Gross
profit
|
$ | 11,260 | $ | 11,113 | $ | 10,622 | $ | 11,972 | $ | 44,967 | ||||||||||
|
Operating
income
|
$ | 3,976 | $ | 3,930 | $ | 4,058 | $ | 5,944 | $ | 17,908 | ||||||||||
|
Income
from continuing operations
|
$ | 1,957 | $ | 2,174 | $ | 2,896 | $ | 3,286 | $ | 10,313 | ||||||||||
|
Income
(loss) from discontinued operations
|
(186 | ) | (124 | ) | 59 | 110 | (141 | ) | ||||||||||||
|
Net
income
|
$ | 1,771 | $ | 2,050 | $ | 2,955 | $ | 3,396 | $ | 10,172 | ||||||||||
|
Earnings
per share:
|
||||||||||||||||||||
|
Basic
|
||||||||||||||||||||
|
Income
from continuing operations
|
$ | 0.20 | $ | 0.23 | $ | 0.30 | $ | 0.34 | $ | 1.08 | ||||||||||
|
Income
(loss) from discontinued operations
|
(0.02 | ) | (0.01 | ) | 0.01 | 0.01 | (0.02 | ) | ||||||||||||
|
Net
income
|
$ | 0.18 | $ | 0.21 | $ | 0.31 | $ | 0.35 | $ | 1.06 | ||||||||||
|
Diluted
|
||||||||||||||||||||
|
Income
from continuing operations
|
$ | 0.20 | $ | 0.22 | $ | 0.29 | $ | 0.33 | $ | 1.06 | ||||||||||
|
Income
(loss) from discontinued operations
|
(0.02 | ) | (0.01 | ) | 0.01 | 0.01 | (0.02 | ) | ||||||||||||
|
Net
income
|
$ | 0.18 | $ | 0.21 | $ | 0.30 | $ | 0.34 | $ | 1.04 | ||||||||||
|
2008
|
||||||||||||||||||||
|
Revenue
|
$ | 54,773 | $ | 53,708 | $ | 62,300 | $ | 66,015 | $ | 236,796 | ||||||||||
|
Gross
profit
|
$ | 8,561 | $ | 8,109 | $ | 10,044 | $ | 12,280 | $ | 38,994 | ||||||||||
|
Operating
income (loss)
|
$ | (6,011 | ) | $ | 2,601 | $ | (2,068 | ) | $ | 5,328 | $ | (150 | ) | |||||||
|
Income
(loss) from continuing operations
|
$ | (5,230 | ) | $ | 1,578 | $ | (127 | ) | $ | 2,695 | $ | (1,084 | ) | |||||||
|
Income
(loss) from discontinued operations
|
(26 | ) | 51 | (105 | ) | (91 | ) | (171 | ) | |||||||||||
|
Net
income (loss)
|
$ | (5,256 | ) | $ | 1,629 | $ | (232 | ) | $ | 2,604 | $ | (1,255 | ) | |||||||
|
Earnings
(loss) per share:
|
||||||||||||||||||||
|
Basic
|
||||||||||||||||||||
|
Income
(loss) from continuing operations
|
$ | (0.55 | ) | $ | 0.17 | $ | (0.01 | ) | $ | 0.28 | $ | (0.11 | ) | |||||||
|
Income
(loss) from discontinued operations
|
(0.01 | ) | 0.00 | (0.01 | ) | (0.01 | ) | (0.02 | ) | |||||||||||
|
Net
income (loss)
|
$ | (0.56 | ) | $ | 0.17 | $ | (0.02 | ) | $ | 0.27 | $ | (0.13 | ) | |||||||
|
Diluted
|
||||||||||||||||||||
|
Income
(loss) from continuing operations
|
$ | (0.55 | ) | $ | 0.16 | $ | (0.01 | ) | $ | 0.28 | $ | (0.11 | ) | |||||||
|
Income
(loss) from discontinued operations
|
(0.01 | ) | 0.01 | (0.01 | ) | (0.01 | ) | (0.02 | ) | |||||||||||
|
Net
income (loss)
|
$ | (0.56 | ) | $ | 0.17 | $ | (0.02 | ) | $ | 0.27 | $ | (0.13 | ) | |||||||
|
(1)
|
Operating
income includes a litigation settlement of $8,819 and $6,000 in the first
quarter and third quarter of 2008, respectively.
|
|
(2)
|
Basic
and diluted earnings per share is computed independently for each of the
quarters presented; accordingly, the sum of the quarterly earnings per
share may not equal the total computed for the
year.
|
|
Additions
|
||||||||||||||||||||
|
Balance
at
|
Charged
to
|
Charged
to
|
Deductions
|
Balance
at
|
||||||||||||||||
|
Beginning
|
Costs
and
|
Other
|
and
|
End
of
|
||||||||||||||||
|
of
Period
|
Expenses
|
Accounts
|
Write-Offs
|
Period
|
||||||||||||||||
|
Allowance
for doubtful accounts
|
||||||||||||||||||||
|
Year
ended December 31,
|
||||||||||||||||||||
|
2009
|
$ | 910 | $ | 124 | $ | - | $ | (451 | ) | $ | 583 | |||||||||
|
2008
|
$ | 873 | $ | 249 | $ | - | $ | (212 | ) | $ | 910 | |||||||||
|
2007
|
$ | 724 | $ | 204 | $ | - | $ | (55 | ) | $ | 873 | |||||||||
None.
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, 2009; and, based
on this review, the Company’s CEO and CFO concluded that, as of December 31,
2009, 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, 2009. Based on this assessment, management
concluded that, as of December 31, 2009, 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, 2009
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, 2009 that has materially effected, or is
reasonably likely to materially effect, the Company’s internal control over
financial reporting.
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To
the Board of Directors and
Shareholders
of Dynamics Research Corporation:
We
have audited Dynamics Research Corporation’s internal control over financial
reporting as of December 31, 2009, 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 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, 2009,
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, 2009 and 2008, and the
related consolidated statements of operations, changes in stockholders’ equity
and comprehensive income (loss), and cash flows for each of the three years in
the period ended December 31, 2009 and our report dated March 16, 2010
expressed an unqualified opinion.
/s/
Grant Thornton LLP
Boston,
Massachusetts
March
16, 2010
None.
Information
required by this item is hereby incorporated by reference to the Company’s
definitive proxy statement under the captions “Election of Directors,” “Report
of the Audit Committee of the Board of Directors,” “Other Directors and Officer
Information” and “Executive Compensation” to be filed by the Company within
120 days after the close of its fiscal year.
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
|
Executive
Office Held
|
Age
|
|||
|
James
P. Regan
|
President,
Chairman and Chief Executive Officer
|
69 | |||
|
Richard
A. Covel
|
Vice
President, General Counsel and Secretary
|
63 | |||
|
David
Keleher
|
Senior
Vice President and Chief Financial Officer
|
60 | |||
|
Steven
P. Wentzell
|
Senior
Vice President and General Manager,
Human
Resources
|
63 | |||
|
Lawrence
H. O’Brien, Jr.
|
Senior
Vice President and General Manager,
Business
Solutions and Business Development
|
58 |
Mr. Regan
joined us in 1999 as President, Chief Executive Officer and Director and was
elected Chairman in April 2001. Prior to joining us, he was President and Chief
Executive Officer of CVSI, Inc. from 1997 to October 1999. Prior to
that, he served as Senior Vice President of Litton PRC from 1992 to
1996.
Mr. Covel
joined us as Vice President and General Counsel in December 2000. Prior to
joining us, he was General Counsel, Patent Counsel and Secretary at
Foster-Miller, Inc. from 1985 to 2000.
Mr. Keleher
joined us as Vice President and Chief Financial Officer in January 2000. Prior
to joining us, he was employed by Raytheon Company as Group Controller for the
Commercial Electronics Division in 1999 and Assistant Corporate Controller in
1998. Prior to that, he served in several senior management positions in
corporate finance and operations at Digital Equipment Corporation from 1981 to
1997.
Mr. Wentzell
joined us as Senior Vice President and General Manager, Human Resources, in
October 2004. Prior to joining us, Mr. Wentzell was Senior Vice President
of Human Resources for Brooks Automation, Inc. from 2002 to 2004, following its
acquisition of PRI Automation, Inc., where Mr. Wentzell served as Corporate
Vice President for Human Resources from 1997 through the acquisition. Prior to
that, Mr. Wentzell served as the Corporate Vice President of Human
Resources for Dialogic Corporation from 1993 to 1997.
Mr.
O’Brien joined us in 1978 and has held various senior management positions
during this time. In 2007, Mr. O’Brien became Senior Vice President
and General Manager, Business Solutions and Business Development. From 2004 to
2007, Mr. O’Brien was Vice President for Business Solutions. Prior to
that, Mr. O’Brien was Vice President of Systems Engineering Group from 2001 to
2004.
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 the “Investors”
link.
If
any substantive amendments are made to the Company’s code of ethics or any
waiver is granted, the Company intends to satisfy the disclosure requirement
under Item 5.05 of Form 8-K regarding such amendment to, or waiver from, a
provision of the Company’s code of ethics by posting such information on its
website, at the address and location specified above.
The
information required by this Item 11 is hereby incorporated by reference to
the Company’s definitive proxy statement under the caption “Executive
Compensation” 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 under the caption “Stock Ownership of
Certain Persons” 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 under the caption “Other Director and
Executive Officer Information” 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 under the caption “Independent Public
Accountants” to be filed by the Company within 120 days after the close of
its fiscal year.
|
(a)
|
Documents
filed as part of the report:
|
|
|
(1)
|
Financial
Statements
|
|
|
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.
|
||
|
(3)
|
Exhibits
|
|
|
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.
|
SIGNATURES
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
|
||
|
Date:
March 16, 2010
|
/s/
James P. Regan
|
|
|
James
P. Regan
|
||
|
President,
Chairman and Chief Executive Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
|
/s/
James P. Regan
|
President,
Chairman and Chief Executive Officer (Principal Executive
Officer)
|
March 16,
2010
|
||
|
James
P. Regan
|
||||
|
/s/
David Keleher
|
Senior
Vice President and Chief Financial Officer (Principal Financial
Officer)
|
March 16,
2010
|
||
|
David
Keleher
|
||||
|
/s/
Shaun McCarthy
|
Vice
President, Corporate Controller and Chief Accounting Officer (Principal
Accounting Officer)
|
March 16,
2010
|
||
|
Shaun
McCarthy
|
||||
|
/s/
John S. Anderegg, Jr.
|
Director
|
March 16,
2010
|
||
|
John
S. Anderegg, Jr.
|
||||
|
/s/
Francis J. Aguilar
|
Director
|
March 16,
2010
|
||
|
Francis
J. Aguilar
|
||||
|
/s/
Gen. George T. Babbitt, Jr.
|
Director
|
March 16,
2010
|
||
|
Gen.
George T. Babbitt, Jr.
|
||||
|
/s/
Kenneth F. Kames
|
Director
|
March 16,
2010
|
||
|
Kenneth
F. Kames
|
||||
|
/s/
Lt. Gen. Charles P. McCausland
|
Director
|
March 16,
2010
|
||
|
Lt.
Gen. Charles P. McCausland
|
||||
|
/s/
Nickolas Stavropoulos
|
Director
|
March 16,
2010
|
||
|
Nickolas
Stavropoulos
|
EXHIBIT
INDEX
|
Filed
|
Incorporated
by Reference**
|
|||||||
|
Exhibit
No.
|
Description
|
Herewith
|
Form
|
Date
|
||||
|
2.1
|
Equity
Purchase Agreement among Dynamics Research Corporation and Impact
Innovations Group LLC and J3 Technology Services Corp., dated
August 2, 2004.
|
8-K
|
September
8, 2004
|
|||||
|
|
||||||||
|
2.2
|
Membership
Interest Purchase Agreement among Dynamics Research Corporation
and Kadix Systems, LLC and Daisy D. Layman, The Sole Member of Kadix
Systems, LLC, dated July 30, 2008.
|
8-K
|
August
5, 2008
|
|||||
|
3.1
|
Restated
Articles of Organization of the Company, dated May 22,
1987.
|
10-Q
|
June
17, 1987
|
|||||
|
|
||||||||
|
3.2
|
By-Laws
of the Company, dated May 22, 1987.
|
10-Q
|
June
17, 1987
|
|||||
|
|
||||||||
|
3.3
|
Certificate
of Vote of Directors Establishing Series B Preferred Stock, dated
February 17, 1998.
|
8-A12G
|
June
25, 1998
|
|||||
|
|
||||||||
|
3.4
|
Amendment,
dated September 10, 1998, to the Certificate of Vote of Directors
Establishing Series B Preferred Stock.
|
8-A12G/A
|
September
30, 1998
|
|||||
|
|
||||||||
|
3.5
|
Certificate
of Vote of Directors Establishing Series A Preferred Stock, dated
July 14, 1988.
|
10-K
|
December
31, 2002
|
|||||
|
3.6
|
Amendment,
dated April 28, 1998, to the restated Articles of Organization of the
Company.
|
10-K
|
December
31, 2002
|
|||||
|
|
||||||||
|
3.7
|
Amendment,
dated April 25, 2000, to the restated Articles of Organization of the
Company.
|
10-K
|
December
31, 2002
|
|||||
|
|
||||||||
|
3.8
|
Certificate
of Designation with respect to the Series B Preferred Stock, par value
$.10 per share, of the Company (attached as Exhibit A to the Rights
Agreement).
|
8-K
|
July
25, 2008
|
|||||
|
4.1
|
Specimen
certificate for shares of the Company’s common stock.
|
S-8
|
April
27, 2001
|
|||||
|
|
||||||||
|
4.2
|
Rights
Agreement dated as of July 23, 2008 ("Rights Agreement") between the
Company and American Stock Transfer & Trust Company, as Rights
Agent.
|
8-K
|
July
25, 2008
|
|||||
|
10.1
|
Form
of indemnification agreement for directors of the Company.
|
10-K
|
December
31, 1991
|
|||||
|
|
||||||||
|
Filed
|
Incorporated
by Reference**
|
|||||||
|
Exhibit
No.
|
Description
|
Herewith
|
Form
|
Date
|
||||
|
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
1995 Stock Option Plan for Non-Employee Directors.
|
10-Q
|
March
31, 1997
|
|||||
|
10.6*
|
Amended
1993 Equity Incentive Plan.
|
10-K
|
December
31, 1998
|
|||||
|
|
||||||||
|
10.7*
|
2000
Incentive Plan.
|
DEFS14A
|
December
6, 1999
|
|||||
|
|
||||||||
|
10.8*
|
Employment
Agreement between the Company and James P. Regan.
|
10-K
|
December
31, 1999
|
|||||
|
10.9*
|
Change
of Control Agreement between the Company and James P.
Regan.
|
10-K
|
December
31, 1999
|
|||||
|
|
||||||||
|
10.10*
|
Non-qualified
Stock Option Agreement between the Company and James P.
Regan.
|
S-8
|
October
12, 2000
|
|||||
|
|
||||||||
|
10.11*
|
2000
Employee Stock Purchase Plan.
|
S-8
|
April
27, 2001
|
|||||
|
|
||||||||
|
10.12*
|
Special
Severance Plan.
|
10-K
|
December
31, 2001
|
|||||
|
|
||||||||
|
10.13*
|
Senior
Management Deferred Compensation Plan.
|
10-Q
|
March
31, 2002
|
|||||
|
|
||||||||
|
10.14*
|
Dynamics
Research Corporation Special Severance Plan, as amended on May 14,
2003.
|
10-K
|
December
31, 2003
|
|||||
|
|
||||||||
|
10.15*
|
2003
Incentive Plan.
|
10-K
|
December
31, 2003
|
|||||
|
|
||||||||
|
10.16*
|
Form
of grant of stock options under the 2003 Incentive Plan.
|
10-Q
|
September
30, 2004
|
|||||
|
|
||||||||
|
10.17*
|
Form
of grant of restricted stock under the 2003 Incentive
Plan.
|
10-Q
|
September
30, 2004
|
|||||
|
10.18*
|
Form
of grant of stock options under the 2000 Incentive Plan.
|
10-Q
|
September
30, 2004
|
|||||
|
|
||||||||
|
10.19*
|
Deferred
Stock Compensation Plan for Non-Employee Directors, as amended for
deferrals on or after January 1, 2005.
|
10-K
|
December
31, 2004
|
|||||
|
|
||||||||
|
Filed
|
Incorporated
by Reference**
|
|||||||
|
Exhibit
No.
|
Description
|
Herewith
|
Form
|
Date
|
||||
|
10.20*
|
Amendment
to Deferred Stock Compensation Plan for Non-Employee
Directors.
|
10-K
|
December
31, 2004
|
|||||
|
|
||||||||
|
10.21*
|
Beneficiary
Designation Form for the Deferred Compensation Plan for Non-Employee
Directors.
|
10-K
|
December
31, 2004
|
|||||
|
10.22*
|
Forms
of grant of restricted stock under the 2000 Incentive
Plan.
|
10-K
|
December
31, 2005
|
|||||
|
10.23
|
Purchase
and Sale Agreement, dated November 18, 2005, by and between Dynamics
Research Corporation and Direct Invest Property Acquisition,
LLC.
|
8-K
|
January
4, 2006
|
|||||
|
10.24
|
Amendment
to Purchase and Sale Agreement, dated December 28, 2005, by and
between Dynamics Research Corporation and Direct Invest Property
Acquisition, LLC.
|
8-K
|
January
4, 2006
|
|||||
|
|
||||||||
|
10.25
|
Lease,
dated December 28, 2005, by and between Dynamics Research Corporation
and Direct Invest-60 Frontage, LLC.
|
8-K
|
January
4, 2006
|
|||||
|
10.26
|
Consent,
Waiver and Amendment Agreement, dated December 28, 2005, by and among
Dynamics Research Corporation, Brown Brothers Harriman & Co.,
KeyBank National Association, TD Banknorth, N.A., and Bank of America,
N.A.
|
8-K
|
January
4, 2006
|
|||||
|
|
||||||||
|
10.27
|
Third
Amended and Restated Loan Agreement, as of September 29, 2006, by and
among Dynamics Research Corporation, DRC International Corporation and
H.J. Ford Associates, Inc. and Brown Brothers Harriman & Co., TD
Banknorth, N.A., Bank of America, N.A.
|
8-K
|
October
4, 2006
|
|||||
|
|
||||||||
|
10.28
|
Master
Unlimited Guaranty, dated as of September 29, 2006, by each of Dynamics
Research Corporation, DRC International Corporation, and H.J. Ford
Associates Inc., in favor of Brown Brothers Harriman & Co., for itself
and as Administrative Agent for each of the Lenders which are and which
may become parties to the Loan Agreement.
|
8-K
|
October
4, 2006
|
|||||
88
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in thousands, except per share amounts)
|
Filed
|
Incorporated
by Reference**
|
|||||||
|
Exhibit
No.
|
Description
|
Herewith
|
Form
|
Date
|
||||
|
10.29
|
First
Amendment to Third Amended and Restated Loan Agreement by and among
Dynamics Research Corporation, DRC International Corporation, and H.J.
Ford Associates, Inc. and Brown Brothers Harriman & Co., TD Banknorth,
N.A. and Bank of America, N.A.
|
8-K
|
May
14, 2008
|
|||||
|
10.30
|
Fourth
Amended and Restated Loan Agreement by and among Dynamics Research
Corporation, DRC International Corporation, H.J. Ford Associates,
Inc., Kadix Systems, LLC as the Borrowers, and The Lenders Party
hereto and Brown Brothers Harriman & Co., as Administrative Agent and
TD Bank, N.A. as Documentation Agent and Bank of America, N.A. as
Syndication Agent, as of August 1, 2008.
|
8-K
|
August
5, 2008
|
|||||
|
10.31
|
Pledge
Agreement by and between Dynamics Research Corporation and Brown Brothers
Harriman & Co., for itself and as Administrative Agent for each of the
Lenders which are and which may become parties to the Loan Agreement, as
of August 1, 2008.
|
8-K
|
August
5, 2008
|
|||||
|
10.32
|
First
Amendment to Fourth Amended and Restated Loan Agreement by and among
Dynamics Research Corporation, DRC International Corporation, H.J. Ford
Associates, Inc., Kadix Systems, LLC as the Borrowers, and The
Lenders Party hereto and Brown Brothers Harriman & Co., as
Administrative Agent and TD Bank, N.A. as Documentation Agent and Bank of
America, N.A. as Syndication Agent, as of December 31,
2008.
|
10-K
|
December
31, 2008
|
|||||
|
21.1
|
Subsidiaries
of the registrant.
|
X
|
||||||
|
|
||||||||
|
23.1
|
Consent
of Independent Registered Public Accounting Firm (Grant Thornton
LLP).
|
X
|
||||||
|
|
||||||||
|
31.1
|
Certification
of the Chief Executive Officer pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934, as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
|
X
|
||||||
|
|
||||||||
|
Filed
|
Incorporated
by Reference**
|
|||||||
|
Exhibit
No.
|
Description
|
Herewith
|
Form
|
Date
|
||||
|
31.2
|
Certification
of the Chief Financial Officer pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934, as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
|
X
|
||||||
|
|
||||||||
|
32.1
|
Certification
of the Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
X
|
||||||
|
|
||||||||
|
32.2
|
Certification
of the Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
X
|
||||||
|
*
|
Management
contract or compensatory plan or arrangement.
|
|
|
|
||
|
**
|
In
accordance with Rule 12b-32 under the Securities Exchange Act of
1934, as amended, reference is made to the documents previously filed with
the Securities and Exchange Commission, which documents are hereby
incorporated by reference. The dates listed for Forms 8-A12G,
Forms 8-K, Forms DEFS14A and Forms S-8 are dates the respective forms were
filed on, and dates listed for Forms 10-Q and Forms 10-K are for the
quarterly or annual period ended
dates.
|
90