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EX-21 - HORNE INTERNATIONAL, INC.v178856_ex21.htm
EX-31.1 - HORNE INTERNATIONAL, INC.v178856_ex31-1.htm
EX-23.2 - HORNE INTERNATIONAL, INC.v178856_ex23-2.htm
EX-23.1 - HORNE INTERNATIONAL, INC.v178856_ex23-1.htm
EX-31.2 - HORNE INTERNATIONAL, INC.v178856_ex31-2.htm
EX-32.1 - HORNE INTERNATIONAL, INC.v178856_ex32-1.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 

FORM 10-K

(Mark One)
 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Fiscal-year ended:  December 27, 2009
 
OR
 
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ________________ to ________________
 
Commission File Number:  000-50373
 
Horne International, Inc.
(Exact name of registrant as specified in its charter)
 
Delaware
 
90-0182158
(State or other jurisdiction of
incorporation or organization)
 
3975 University Drive, Suite 100,
Fairfax, Virginia
 
(I.R.S. Employer
Identification No.)
 
22030
(Address of principal executive offices)
 
(Zip Code)
 
Registrant’s telephone number, including area code:  703-641-1100
 
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

None.

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

Common Stock, par value $.0001 per share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  ¨ Yes  x No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  ¨ Yes  x No

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.
x Yes ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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).
 
x Yes ¨ No
 
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. x Yes     o   No
 
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 definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large Accelerated filer ¨ Accelerated Filer ¨
 
Non-Accelerated Filer ¨  Smaller Reporting Company x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ¨    No x
 
The aggregate market value of the common stock held by non-affiliates of the registrant as of the close of business on June 30, 2009, was approximately $4.6 million based on the closing sale price of the registrant’s common stock as reported on the Over the Counter Bulletin Board on that date.
 
As of March 19, 2010, there were 42,687,324 shares of the registrant’s common stock outstanding.
 
DOCUMENTS INCORPORATED BY REFERENCE.  None.

 
 

 
 
HORNE INTERNATIONAL, INC.
Notes To Consolidated Financial Statements
 
TABLE OF CONTENTS
 
Forward-Looking Statements
1
     
PART I
   
Item 1.
Business
1
     
Item 1A.
Risk Factors
3
     
Item 1B.
Unresolved Staff Comments
6
     
Item 2.
Properties
6
     
Item 3.
Legal Proceedings
6
     
Item 4.
(Removed and Reserved)
6
     
PART II
   
Item 5.
Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
6
     
Item 6.
Selected Financial Data
8
     
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
8
     
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
13
     
Item 8.
Financial Statements and Supplementary Data
15
     
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
35
     
Item 9A.
Controls and Procedures
35
     
Item 9B.
Other Information
36
     
PART III
   
Item 10.
Directors, Executive Officers and Corporate Governance
36
     
Item 11.
Executive Compensation
38
     
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
43
     
Item 13.
Certain Relationships and Related Transactions, and Director Independence
44
     
Item 14.
Principal Accounting Fees and Services
44
     
Item 15.
Exhibits, Financial Statements Schedules
45
 
 
i

 
 
FORWARD-LOOKING STATEMENTS

Except for historical information, this report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934.  Such forward-looking statements involve risks and uncertainties, including, among other things, statements regarding our business strategy, future revenues and anticipated costs and expenses. Such forward-looking statements include, among others, those statements including the words “expects,” “anticipates,” “intends,” “believes,” and similar language.  Our actual results may differ significantly from those projected in the forward-looking statements.  Factors that might cause or contribute to such differences include, but are not limited to, those discussed in Part I, Item 1A. “Risk Factors.”  You are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this report.  We undertake no obligation to publicly release any revisions to the forward-looking statements or reflect events or circumstances taking place after the date of this document.

Item 1.       Business.

Horne International, Inc. (the “Company” or “we”, “us”, “our” or similar terms) is a premier technology and technical engineering solutions company focused on two primary target markets — environment, energy, and their inter-relationship to critical infrastructure. The Company’s service areas encompass program engineering, technology, environment, safety & health, acquisition services, public outreach, and business process engineering to both commercial customers and to the United States Government.

The Company was incorporated as Silva Bay International, Inc., a Delaware corporation, in August 1998.  In April 2003, the Company changed its name from Silva Bay to Spectrum Sciences & Software Holdings Corp. in conjunction with the acquisition of Spectrum Sciences & Software, Inc. (“SSSI”), a Florida corporation.  The Company began trading on the Over the Counter (“OTC”) Bulletin Board market in December 2003.  In August 2006, the Company changed its name from Spectrum Sciences & Software Holdings Corp. to Horne International, Inc.

As the result of a series of acquisitions the Company’s business changed significantly.  As of the end of 2005, the Company had three reportable segments.  However, over the course of the past several years and with the closing of Coast Engine and Equipment, Inc. (“CEECO”) and Spectrum Sciences and Software, Inc. (“Spectrum”) during 2008, the Company has once again undergone significant change and currently has only one reportable segment, Services.

Business Segments

The Company has only one reportable segment: Services.  This segment is predominantly focused in the U.S. defense markets, although some commercial work is performed.  Financial information can be found in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.  The Company previously reported the Security Solutions segment that is no longer operating with the closing of Spectrum in 2008, and the Repair and Overhaul segment that is no longer operating with the closing of CEECO in 2008.

Services

The Services segment focuses on providing technology and technical engineering, to include security, energy, and the environment.  Our primary customer in this segment is the U.S. Government, with specific focus within the Departments of Homeland Security, Defense, and Transportation.  This is a services-based segment that relies on its people to maintain the reputation of the Company, to expand operations, and improve marketability.  The Company has been successful in recruiting top-level candidates to staff open client-focused positions.  The applicant pool for the required expertise appears to be sufficiently deep to meet our needs.  This segment is primarily based out of our Fairfax, Virginia, headquarters and employs approximately 40 people.

The market addressed by the Services segment is a very large, competitive market with some of the largest businesses and institutions in the country competing in addition to numerous small and emerging businesses.  Success is dependent on high performance, expert personnel, intimate knowledge of the organizations being served, and strong relationships with the clients and our private sector partners.  This market sector is dependent on the federal budget cycle, federal expenditures, and related priorities.
 
 
- 1 -

 

Discontinued Operations

Discontinued operations include the results of our CEECO and Spectrum subsidiaries that were closed in February 2008 and June 2008, respectively.

Backlog

The Company is reporting two types of backlog: funded and unfunded.  These classifications differ significantly in terms of their expected value to the Company and the expected realization of these amounts.  The funded backlog, as shown in the table below, includes all contracts that have been awarded and funded by the client, in most cases a government entity.  Funded contracts are subject to changes in work scope, delays in project startup, and cancellation by the client.  The backlog figures shown below are as of December 27, 2009.

Funded Backlog    (all dollars in thousands)
   
2009
   
2010
     
2011+
 
Total Funded Backlog
  $ 4,701     $ -     $ -  

The Company previously reported funded backlog of $2,792 at February 20, 2009, for our current operating business.

The amount of unfunded backlog was approximately $21 million at December 27, 2009.  The unfunded backlog comprises contract awards that, at present, have no funding or confirmed orders on which to rely.  An example of this would be GSA schedule awards that are indefinite delivery/indefinite quantity awards.  While these contracts have the potential to generate revenue, the amount, timing, and certainty of those revenues are unknown.  As such, the amount of revenue recognized under these contracts may be significantly less than the amount of unfunded backlog disclosed above.
 
Government Contracts
 
Most of our business is conducted under contracts with or related to U.S. government entities.   We are awarded government contracts either on a sole-source basis or through a competitive bidding process.  Our U.S. government contract types may include fixed-price contracts, cost reimbursable contracts (including cost-plus-fixed fee, cost-plus-award fee, and cost-plus-incentive fee), and time and materials contracts.

Material Government Contract Provisions

The funding of U.S. government programs is subject to Congressional appropriations. Although multi-year contracts may be authorized in connection with major procurements, Congress generally appropriates funds on a fiscal-year basis, even though a program may continue for many years. Consequently, programs are often only partially funded initially, and additional funds are committed only as Congress makes further appropriations.

All contracts with the U.S. government contain provisions, and are subject to laws and regulations, that give the government rights and remedies not typically found in commercial contracts, including rights that allow the government to do any of the following:

 
·
Terminate existing contracts for convenience, which affords the U.S. government the right to terminate the contract in whole or in part anytime it wants for any reason or no reason, as well as for default;

 
·
Reduce or modify contracts or subcontracts, if its requirements or budgetary constraints change;

 
·
Cancel multi-year contracts and related orders, if funds for contract performance for any subsequent year become unavailable;
 
 
- 2 -

 

 
·
Claim rights in products and systems produced by its contractor;

 
·
Adjust contract costs and fees on the basis of audits completed by its agencies;

 
·
Suspend or debar a contractor from doing business with the U.S. government; and

 
·
Control or prohibit the export of products.

Generally, government contracts are subject to oversight audits by government representatives. Provisions in these contracts permit termination, in whole or in part, without prior notice, at the government’s convenience or upon contractor default under the contract. Compensation in the event of a termination, if any, is limited to work completed at the time of termination. In the event of termination for convenience, the contractor may receive a certain allowance for profit on the work performed.
 
Available Information
 
Our headquarters is located at 3975 University Drive, Suite 100, Fairfax, VA 22030.  Our website address is www.Horne.com.  The information contained on our website is not incorporated by reference into this Annual Report.  All reports we filed electronically with the Securities and Exchange Commission (SEC), including our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, and other information and amendments to those reports filed electronically (if applicable), are accessible at no cost on our website as soon as reasonably practicable after such reports have been filed or furnished to the SEC. These filings are also accessible on the SEC’s Web site at www.sec.gov. The public may read and copy any materials we filed with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information from the Public Reference Room by calling the SEC at 1-800-SEC-0330.
 
Item 1A. Risk Factors.

We are subject to several risk factors that could have a direct and material impact on the operations of the Company and the market price of our common stock.  Certain of these risk factors are described below.

Our independent registered public accountants have issued a "going concern" opinion raising substantial doubt about our financial viability.
 
As a result of our losses and negative cash flows, our independent registered public accounting firms issued a “going concern” opinion in connection with their audit of our financial statements for the years ended December 27, 2009 and December 28, 2008. This opinion expressed substantial doubt as to our ability to continue as a going concern. Our ability to continue as a going concern is dependent upon our ability to obtain additional equity or debt financing, attain further operating efficiencies, reduce expenditures, dispose of selective assets, and ultimately, generate additional revenue.  The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.  Accordingly, the value of the Company in liquidation may be different from the amounts set forth in our financial statements.  The going concern opinion may also limit our ability to access certain types of financing, prevent us from obtaining financing on acceptable terms, and limit our ability to obtain new business due to potential customers’ concern about our ability to deliver products or services.

We have liquidity problems and may need to raise capital on terms unfavorable to our stockholders.

At December 27, 2009, we had a negligible cash balance and for the year then ended we had a net loss of approximately $337,000. In 2008 and 2009, our independent registered public accounting firms, expressed substantial doubt about our ability to continue as a going concern.  While we continue to explore growth opportunities for our business, we do not have complete control over the timing and awarding of future contracts because it is subject to economic, political, financial, competitive, regulatory, and other factors affecting the defense and security industries.

 
- 3 -

 
 
We will need additional capital to sustain our operations.  However, our current financial condition, combined with the 2009 and 2008 "going concern" opinions received from our independent registered public accounting firm, makes it more difficult for us to raise capital.  There is no assurance that we will be able to obtain the necessary financing to support our existing business on acceptable terms, or at all; and even if we can, we may do so on terms that are not favorable to our stockholders.

We are considering corporate strategic alternatives the may significantly change the Company as it stands today.

The Company is currently reviewing several strategic options that could have a material and significant impact on the structure, operating activities, businesses, and/or assets of the Company.  These decisions may or may not have to be approved by our shareholders. Decisions that do not require shareholder approval may not be in the best interests of some shareholders.

Corporate overhead structure combined with a reduced operating base may impact our ability to operate at a profit.

We have made a concerted effort to reduce our overhead costs to a minimal level and to be in-line with our operating base.  At the same time, we must maintain certain organizational capabilities to continue to operate the Company.  Given our current revenue base, it is uncertain if that revenue base will be sufficient to cover all of our overhead costs.

If we are unable to grow our business, we may continue to incur operating losses that could impact the Company’s ability to continue operations.  We are actively monitoring our cost structure to ensure that we are prudently incurring expenses while we are actively pursuing growth opportunities for our business.

We may not receive the full amount of our contract awards.

The Company receives many government contract awards that include both funded and unfunded amounts.  While the Company believes that most contracts will become fully funded and executed, there are occasions where the final executed amount of the contract may be substantially less than the contract award.  Congress often appropriates funds for our clients on an annual basis, even though our contracts may call for services over a number of years.  As a result, Congress may elect not to fund a particular contract in future years.  Additionally, the funded amounts on contracts may not be fully recognized as revenue if the priorities of the contract-issuing agencies change and funding is re-appropriated for other uses, the contract is terminated for convenience by the customer, or our inability to find qualified employees or subcontractors to complete the work.

Our tax loss carry-forward may be adversely impacted by factors outside of our control which could severely limit the value and amount of the tax loss carry-forward in future years.

As of December 27, 2009, we had approximately $55 million of net operating loss carry-forward available to offset future taxable income. The United States Internal Revenue Service has certain rules regarding stock ownership changes within a given three year period.  While management is able to manage within these guidelines without triggering the limitations that limit a company’s ability to utilize net operating loss carry-forwards, management may not be able to control or influence outside parties’ activity with regard to our stock.

Our quarterly operating results may fluctuate significantly as a result of factors outside of our control, which could cause the market price of our common stock to decline.

Our revenue and operating results could vary significantly from quarter to quarter. In addition, we cannot predict with certainty our future revenue or results of operations. As a consequence, our operating results may fall below the expectations of securities analysts and investors, which could cause the price of our common stock to decline. Factors that may affect our operating results include, without limitation, the following:

 
·
Fluctuations in revenue earned on contracts;

 
- 4 -

 
 
 
·
Commencement, completion, or termination of contracts during any particular quarter;
 
 
·
Variable purchasing patterns under GSA schedule contracts and agency-specific indefinite delivery/indefinite quantity contracts;
 
 
·
Provision of services under a share-in-savings or performance-based contract;
 
 
·
Additions and departures of key personnel;
 
 
·
Strategic decisions by us or our competitors, such as acquisitions, divestitures, spin-offs, joint ventures, strategic investments, or changes in business strategy;
 
 
·
Contract mix, the extent of use of subcontractors, and the level of third-party hardware and software purchases for customers;
 
 
·
Changes in presidential administrations and senior federal government officials that affect the timing of procurements; and
 
 
·
Changes in policy or budgetary measures that adversely affect government contracts in general.
 
Reductions in revenue in a particular quarter could lead to lower profitability in that quarter because a relatively large amount of our expenses are fixed in the short-term.  We may incur significant unanticipated expenses during the startup and early stages of large contracts and may not receive corresponding payments or revenue in that same quarter.  We may also incur significant or unanticipated expenses when contracts expire, are terminated, or are not renewed.  In addition, payments due to us from government agencies may be delayed due to billing cycles or as a result of failures of governmental budgets to gain Congressional and administration approval in a timely manner.

We depend on contracts with U.S. federal government agencies or with prime contractors of such agencies for substantially all of our revenue, and if our relationships with these agencies were harmed, our business could be threatened.

We receive more than 90% of our revenue in any given year from contracts with U.S. federal government agencies or with prime contractors of such agencies.  We believe that federal government contracts will continue to be the source of substantially all of our revenue for the foreseeable future.  For this reason, any issue that compromises our relationship with agencies of the federal government or their prime contractors could cause serious harm to our business.

Our failure to comply with complex procurement laws and regulations could cause us to lose business and subject us to a variety of penalties.

We must comply with laws and regulations relating to the formation, administration, and performance of federal government contracts, which affect how we do business with our government clients and may impose added costs on our business.  Among the most significant regulations are the following:

 
·
The Federal Acquisition Regulation, and agency regulations analogous or supplemental to the Federal Acquisition Regulation, which comprehensively regulates the formation, administration, and performance of government contracts, including provisions relating to the avoidance of conflicts of interest and intra-organizational conflicts of interest;
 
·
The Truth in Negotiations Act, which requires certification and disclosure of all cost and pricing data in connection with some contract negotiations;
 
·
The Procurement Integrity Act, which requires evaluation of ethical conflicts surrounding procurement activity and establishing certain employment restrictions for individuals who participate in the procurement process;
 
·
The Cost Accounting Standards, which impose accounting requirements that govern our right and method to reimbursement under some cost-based government contracts;
 
·
Laws, regulations, and executive orders restricting the use and dissemination of information classified for national security purposes and the exportation of specified products, technologies, and technical data;
 
·
Laws surrounding lobbying activities a corporation may engage in to support corporate interests; and
 
·
Compliance with anti-trust laws.

 
- 5 -

 

Unfavorable government audit results could force the Company to adjust previously reported operating results and could subject us to a variety of penalties and sanctions.

A significant portion of our revenue comes from payments made by the U.S. government on prime contracts and subcontracts. The costs of these contracts are subject to audit by the Defense Contract Audit Agency (DCAA). Disallowance of these contract costs by the DCAA could adversely affect the Company’s financial statements. Management periodically reviews its estimates of allowable and unallowable costs based on the results of government audits and makes adjustments as necessary.

If the government discovers improper or illegal activities by the Company or its employees, the Company may be subject to civil and criminal penalties and administrative sanctions, including contract termination, forfeiture of profits, suspension of payments, fines, and suspension or disbarment from conducting future business with the government.  In addition, the Company could suffer serious harm to its reputation if allegations of impropriety were made against it, whether or not true.  The Company is not aware of any instances of improper or illegal activities of its employees.

Horne Engineering is the only subsidiary subject to incurred cost audits.  Horne Engineering is current on the DCAA audit through 2006 and has not had any significant audit findings in any recent DCAA audit.

Item 1B. Unresolved Staff Comments.

None.
Item 2.       Properties.

As of March 1, 2010, the Company’s headquarters were located in offices leased by the Company in Fairfax, Virginia.  The facilities for the Services segment include general office space that is provided by our clients.

In 2009, the Company owned two pieces of property in Ft. Walton Beach, Florida that were previously used in operations.  In July, 2009, one of the pieces of property was transferred to lien holders in return for the release of debt secured by the property.  In February, 2010 the remaining property was returned, by Quitclaim Deed, to the mortgagors.

Item 3.       Legal Proceedings.

Information regarding material legal proceedings involving the Company is included in Note 15 to the Company’s consolidated financial statements under the heading “Legal Matters” in Part II, Item 8 of this report, which is incorporated herein by reference.

Item 4.       (Removed and Reserved).

Not applicable.

PART II

Item 5.
Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market Information

The common stock of the Company is listed on the OTC Bulletin Board electronic quotation system and trades under the symbol “HNIN.”  The common stock was first traded on December 5, 2003, under the symbol “SPSC.”  The symbol was changed in conjunction with the corporate name change in August 2006 and began trading under the current symbol on September 12, 2006.  The following table sets forth the high and low bid prices for our common stock for each quarterly period beginning in 2007 as reported on the OTC Bulletin Board.  These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.

 
- 6 -

 

 
High
   
Low
 
2008
               
First Quarter
  $ 0.28     $ 0.16  
Second Quarter
  $ 0.25     $ 0.10  
Third Quarter
  $ 0.12     $ 0.03  
Fourth Quarter
  $ 0.09     $ 0.02  
                 
2009
               
First Quarter
  $ 0.09     $ 0.02  
Second Quarter
  $ 0.15     $ 0.07  
Third Quarter
  $ 0.20     $ 0.10  
Fourth Quarter
  $ 0.14     $ 0.07  

Holders

There were approximately 80 stockholders of record of the common stock of the Company on March 1, 2010.  A significant number of the outstanding shares are beneficially owned by individuals or entities registered in a street name.  The Company is unsure of how many beneficial owners of its common stock there are as of March 1, 2010.

Dividends

The Company has never paid any cash dividends and has no current intention to pay a dividend in the foreseeable future.

Securities Authorized for Issuance Under Equity Compensation Plans.

See the Equity Compensation Plans subsection of Item 12 — Security Ownership of Certain Beneficial Owners and Management on page 41 of this Annual Report on Form 10-K.

2004 Non-Statutory Stock Option Plan

The Company’s 2004 Non-Statutory Stock Option Plan was adopted by the Board of Directors on March 11, 2004 and approved by the shareholders in March 2004.  The plan was intended to advance the interests of the Company by inducing individuals, and eligible entities, and by encouraging and enabling eligible employees, non-employee directors, consultants and advisors to acquire proprietary interests in the Company, and by providing the participating employees, non-employee directors, consultants, and advisors with an additional incentive to promote the success of the Company.  Under this plan, a maximum of 10,000,000 shares of the Company’s common stock, par value $.0001, were authorized for issue.  Options issued under this plan would expire one year from the date of issuance.

Amended and Restated Number 1 2004 Non-Statutory Stock Option Plan

The Amended and Restated Number 1, 2004, Non-Statutory Stock Option Plan was adopted by the Board of Directors on April 16, 2004.  This restated plan took the same form as the 2004 Non-Statutory Stock Option Plan with the exception that the maximum number of options authorized under this plan was increased to 30,000,000.

Amended and Restated Number 2 2004 Non-Statutory Stock Option Plan

The Amended and Restated Number 2, 2004, Non-Statutory Stock Option Plan was adopted by the Board of Directors on November 15, 2004.  This restated plan took the same form as the earlier plans, except that it amended the expiration date on future stock options issued from one year to three years and likewise extended the expiration date of any options issued pursuant to such prior stock option plans.  No additional options were authorized under this amended plan.

The amendments to the Stock Option Plan have not been approved by the shareholders.

 
- 7 -

 

Item 6.       Selected Financial Data (all dollars in $000’s except per share data).

   
2009
   
2008
   
2007
   
2006
   
2005
 
Revenue
  $ 4,680     $ 4,859     $ 13,549     $ 21,183     $ 25,611  
Loss from Continuing Operations
    (183 )     (4,107 )     (15,767 )     (3,005 )     (3,314 )
Per share of Common Stock-basic & diluted
    (0.00 )     (0.10 )     (0.38 )     (0.07 )     (0.08 )
Net Loss
    (337 )     (6,113 )     (19,142 )     (8,595 )     (3,986 )
Per share of Common Stock-basic & diluted
    0.01       (0.14 )     (0.08 )     (0.20 )     (0.09 )
Total Assets
    3,154       5,332       10,332       30,064       49,404  
Long-term Debt
    1,696       1,812       1,969       1,994       2,813  
Shareholder (Deficit) Equity
    (418 )     (338 )     5,620       24,517       35,097  
 
The financial information above is reflective of the operations since 2005.  The income statement data only reflects the operations of Horne Engineering Services and Horne International, Inc.  The operations of Spectrum Sciences and Software, Inc and Coast Engine and Equipment Company have been removed from the operating results and are now included in discontinued operations along with M&M Engineering that was sold in June 2006.  The balance sheet data includes discontinued operations data.  As the Company did not have reportable operations prior to the acquisition of Horne in May 2005, prior years do not provide meaningful trend data and are not being included in this chart.

Selected Quarterly Financial Data

2009
     
Q1
     
Q2
     
Q3
     
Q4
 
Revenue
  $ 950     $ 1,273     $ 1,007     $ 1,450  
Gross Profit
    328       364       293       372  
(Loss) income from continuing operations
    (184 )     (27 )     (69 )     97  
Loss from discontinued operations
    (64 )     (5 )     (55 )     (30 )
Basic & diluted loss per share
    (0.01 )     (0.00 )     (0.00 )     (0.00 )
                                 
2008
     
Q1
     
Q2
     
Q3
     
Q4
 
Revenue
  $ 1,216     $ 1,005     $ 1,093     $ 1,544  
Gross Profit
    72       (214 )     88       980  
(Loss) income from continuing operations
    (835 )     (3,028 )     (641 )     397  
Loss from discontinued operations
    (1,047 )     (353 )     (38 )     (567 )
Basic & diluted loss per share
    (0.04 )     (0.08 )     (0.02 )     (0.00 )

The selected financial data provided in this Item 6 should be read in conjunction with the Notes to Consolidated Financial Statements beginning on page 8 of this Annual Report on Form 10-K.

Item 7.       Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The financial and business analysis below provides information that the Company believes is relevant to an assessment and understanding of the Company’s consolidated financial position, results of operations, and cash flows.  This financial and business analysis should be read in conjunction with the consolidated financial statements and related notes.

The following discussion and certain other sections of this report contain statements reflecting the Company’s views about its future performance and constitute “forward-looking statements” under the Private Securities Litigation Reform Act of 1995.  These views involve risks and uncertainties that are difficult to predict, and accordingly, the Company’s actual results may differ materially from the results discussed in such forward-looking statements.  Readers should consider that various factors may affect the Company’s performance.  These factors include changes in general economic conditions and competitive market conditions; price pressures; relationships with key customers; and other factors discussed in Part I, Item 1A, “Risk Factors,” and the sections entitled “Executive-Level Overview” and “Critical Accounting Estimates” below.  The Company undertakes no obligation to publicly update any forward-looking statements as a result of new information, future events, or otherwise.
 
 
- 8 -

 

Executive-Level Overview

The Company provides a variety of services through its wholly owned subsidiary — Horne Engineering Services, LLC.  The provision of such services is largely dependent on the amount of U.S. Government contracting in the areas of homeland security, environmental management, and infrastructure reconstruction.

The Company made the strategic decision to terminate the operations of SSSI and CEECO in the first quarter of 2008 due to continuing losses and to focus on its core services business.
 
Basis of Presentation
 
The fiscal-year for Horne International, Inc. is the 52 or 53 week period ending on the last Sunday in December. Fiscal 2009 and 2008 were 52-week fiscal-years. The Consolidated Financial Statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated.  Investments in unconsolidated joint ventures were adjusted to fair market value upon the acquisition of Horne Engineering in 2005.  During 2008, the Company changed the accounting method for its investment in the WESKEM joint venture due to the scheduled closing of the joint venture in early 2009.  This changed the Company’s accounting for this investment to the equity method of accounting.

Critical Accounting Estimates

Management’s Discussion and Analysis of Financial Condition and Results of Operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and determine whether contingent assets and liabilities, if any, are disclosed in the financial statements.  On an ongoing basis, we evaluate our estimates and assumptions, including those related to long-term contracts, product returns, bad debts, inventories, fixed asset lives, income taxes, environmental matters, litigation, and other contingencies.  We base our estimates and assumptions on historical experience and on various factors that are believed to be reasonable under the circumstances, including current and expected economic conditions, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ materially from our estimates under different assumptions or conditions.

We believe that the following critical accounting estimates, among others, require us to make significant estimates and judgments in the preparation of our financial statements:

Revenue Recognition
 
 
Allowance for Bad Debts
 
We evaluate our accounts receivable through a continuous process of assessing our portfolio on an individual and overall basis.  The majority of our contracts are with United States Government entities and as such we have minimal risk of collectability.  The few contracts we have with non-governmental entities we review on a contract-by-contract basis.  During 2007, we recorded a $200,000 bad debt reserve on a specific contract in our discontinued operations on a contract that we executed as a subcontractor.  We have filed suit related to this contract and the receivable of $118,846 is  reserved at December 27, 2009.
 
 
- 9 -

 
 
Net Operating Loss Carry-Forwards
 
We have not recognized the benefit in our financial statements with respect to the approximately $55 million net operating loss carry-forwards for federal income tax purposes as of December 27, 2009. This benefit was not recognized due to the possibility that the net operating loss carry-forwards would not be utilized, for various reasons; including the potential that we might not have sufficient profits to use the carry-forward or that the carry-forwards may be limited as a result of changes in our equity ownership. We intend to use these carry-forwards to offset our future taxable income. If we were to use any of this net operating loss carry-forwards to reduce our future taxable income and the Internal Revenue Service were to then successfully assert that our carry-forwards are subject to limitation as a result of capital transactions, we may be liable for back taxes, interest, and, possibly, penalties.
 
Recent Accounting Pronouncements
 
In June 2006, the FAASB issued guidance related to accounting for uncertainty in income taxes, which was originally effective for fiscal years beginning after December 15, 2007.  In December 2008, the FASB issued further guidance which deferred the effective date for the Company until January 1, 2009.  In September 2009, the FASB issued new accounting guidance related to income taxes which clarifies that management’s determination of the taxable status of an entity is a tax position subject to the standards required for accounting for uncertainty in income taxes and eliminates certain disclosures related to unrecognized tax benefits for nonpublic companies.

In December 2007, a new accounting standard was issued regarding the accounting treatment for corporate acquisitions. The new standard moves closer to a fair value model by requiring the acquirer to measure all assets acquired and all liabilities assumed at their respective fair values at the date of acquisition, including the measurement of non-controlling interests at fair value. This standard also establishes principles and requirements as to how the acquirer recognizes and measures goodwill acquired in a business combination or a gain from a bargain purchase and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. In addition, the standard significantly changes the accounting for business combinations in a number of areas, including the treatment of contingent consideration, pre-acquisition contingencies, in-process research and development, restructuring costs and requires the expensing of acquisition-related costs as incurred. The effective date was for fiscal years beginning after December 15, 2008. For transactions consummated after the effective date prospective application of the new standard is applied. For business combinations consummated prior to the effective date, the prior guidance is applied. The adoption of this standard did not have a material impact on our consolidated financial statements.

In April 2008, the FASB issued an amendment to its guidance determining the useful life of intangible assets which requires companies estimating the useful life of a recognized intangible asset to consider their historical experience in renewing or extending similar arrangements or, in the absence of historical experience, to consider assumptions that market participants would use about renewal or extension as adjusted for entity-specific factors. This guidance is effective for fiscal years beginning after December 15, 2008. The Company does not believe that the adoption of this guidance will have any material effect on its consolidated financial position, results of operations, or cash flows.

In May 2009, the FASB issued accounting guidance on subsequent events which requires companies to address the accounting and disclosure of events that occur after the balance sheet date but before the financial statements are issued or available to be issued.  The adoption of the accounting guidance that was effective January 1, 2009 did not have a material impact on the Company’s consolidated financial condition or results of operations.

In June 2009, the FASB issued an amendment which requires entities to provide more information about the sale of securitized financial assets and similar transactions in which the entity retains some risk related to the assets. This amendment is effective for fiscal years beginning after November 15, 2009. The Company does not believe the adoption this amendment will have a material impact on its consolidated financial position, results of operations, or cash flows.

In June 2009, the FASB issued The Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (the “Codification”) as the single source of authoritative nongovernmental United States generally accepted accounting principles.  The Codification did not change generally accepted accounting principles but rather enhanced the way accounting principles are organized.  The Codification was effective for the Company January 1, 2009 and its adoption did not have a material impact on the Company’s consolidated financial condition or results of operations.
 
 
- 10 -

 

In June 2009, the FASB issued an amendment, which changes how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. Under this guidance, determining whether a company is required to consolidate an entity will be based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. This amendment is effective for fiscal years beginning after November 15, 2009. The Company does not believe the adoption will have a material impact on its consolidated financial position, results of operations, or cash flows.

In October 2009, the FASB revised the accounting guidance for revenue arrangements with multiple deliverables. The revision: (1) removes the objective-and-reliable-evidence-of-fair-value criterion from the separation criteria used to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting, (2) provides a hierarchy that entities must use to estimate the selling price, (3) eliminates the use of the residual method for allocation, and (4) expands the ongoing disclosure requirements. This guidance is effective for the Company beginning January 1, 2011 and can be applied prospectively or retrospectively. The Company is currently assessing the impact of the revised accounting guidance.

Overall Results of Operations
 
   
For the Year ended December,
 
   
(all dollars in 000's)
 
   
2009
   
2008
 
Revenues
  $ 4,680       100.0 %   $ 4,859       100.0 %
Cost of Revenue
    3,323       71.0 %     3,815       78.5 %
Gross Profit
    1,357       29.0 %     1,044       21.5 %
Operating Loss
    (101 )     -2.2 %     (3,886 )     -80.0 %
 
Revenue remained relatively consistent as compared to 2008.  Gross margin as a percentage of sales improved as a result of the termination of the Staubach contract in late 2008 and the change in revenue mix away from real estate services to infrastructure support.  The Staubach contract accounted for an additional $101,000 of gross profit in 2009 with no 2009 cost associated with that revenue as it was residual payouts.  Our Company operation cost decreased significantly in 2009 as compared with 2008.  As a result, our operating loss decreased by $3.8 million.  See corporate expenses below.

The decreased operating costs are described in detail in the corporate expense section below.

Based on our on-going review of strategic alternatives, we are not able to reasonably forecast our 2010 revenue or profitability.  The strategic alternatives being considered and their very different impacts on our operations severely limits our ability to give a materially accurate financial forecast.

Corporate Expenses
 
   
For the Year ended December,
 
   
(all dollars in 000's)
 
   
2009
   
2008
 
Operating Loss
  $ (1,328 )   $ (4,336 )
 
The decrease in corporate expenses is due to reduced personnel related costs of $1,100 due to staffing reductions, the write-off of acquisition related costs of $1,400, lower legal and consulting expenses of $350, and lower rent and utility charges of $400 including the lease breakage costs incurred in 2008.  Additionally, infrastructure support costs were reduced based on the lower staffing and office space and the outsourcing of our IT functions.
 
 
- 11 -

 

Discontinued Operations

For the Year ended December ,
 
(all numbers in 000's)
 
   
2009
   
2008
 
Loss from discontinued operations
  $ (154 )   $ (2,006 )
 
The discontinued operations include only the results of our Spectrum Sciences and Software, Inc. and Coast Engine and Equipment subsidiaries for both years.  The smaller loss in 2009 is primarily a result of the lack of activity in these dormant units with the exception of the property maintenance costs in Ft. Walton Beach, Florida.  The 2008 activity was primarily the shuttering and subsequent asset sales for both units.

Backlog by Segment

The Company is reporting two types of backlog:  funded and unfunded.  These classifications differ significantly in terms of their expected value to the Company and the expected realization of these amounts.  The funded backlog, as shown in the table below, includes all contracts that have been awarded and funded by the client, in most cases a government entity.  Funded contracts are subject to changes in work scope, delays in project startup, and cancellation by the client.  The backlog figures shown below are as of December 27, 2009.

Funded Backlog    (all dollars in thousands)
   
2009
   
2010
     
2011+
 
Total Funded Backlog
  $ 4,701     $ -     $ -  

The Company previously reported funded backlog of $2,792 at December 28, 2008, for our current operating business.

The amount of unfunded backlog was approximately $21 million December 27, 2009.  The unfunded backlog comprises contract awards that, at present, have no funding or confirmed orders on which to rely.  An example of this would be GSA schedule awards that are indefinite delivery/indefinite quantity awards.  While these contracts have the potential to generate revenue, the amount, timing, and certainty of those revenues are unknown.  As such, the amount of revenue recognized under these contracts may be significantly less than the amount of unfunded backlog disclosed above.

Liquidity and Capital Resources

Cash and cash equivalents totaled approximately $15,000 at December 27, 2009.  During 2009, continuing operations provided approximately $100,00 of cash predominantly due to improvement in working capital and the small net income loss from continuing operations. Discontinuing operations provided $215,000 of additional cash before debt service.  The Company borrowed $2.5 million from related parties during 2008 in order to fund operations.  Of this related party debt, $1.5 million was secured by property in Ft. Walton Beach, Florida which was deeded to the secured parties in satisfaction of this debt in July 2009.

In December 2009, the Company entered into a two-tear receivable noncancellable financing agreement with Wells Fargo Bank National Association under which the Company is able to factor certain eligible accounts receivable.  The agreement calls for a minimum monthly fee of $6,000 for the term of the agreement.  The Company is able to receive 85% of any invoices factored to the lender.

During 2009, operations generated $315,000 of cash predominantly due to profit incurred during the last quarter of the year.  Our receivables improved during the year as we have been able to reduce our unbilled accounts receivable balances and bring our receivables aging more current.
 
 
- 12 -

 

As a result of our continuing losses and negative cash flows, our independent registered public accounting firm, issued a “going concern” opinion in connection with its audit of our financial statements for the year ended December 27, 2009. This opinion expressed substantial doubt as to our ability to continue as a going concern. Our ability to continue as a going concern is dependent upon our ability to obtain additional equity or debt financing, attain further operating efficiencies, reduce expenditures, dispose of selective assets, and ultimately generate additional revenue.  The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.  Accordingly, the value of the Company in liquidation may be different from the amounts set forth in our financial statements.  The going concern opinion may also limit our ability to access certain types of financing, prevent us from obtaining financing on acceptable terms, and limit our ability to obtain new business due to potential customers’ concern about our ability to deliver products or services.

The Company anticipates that funds from operations will not be sufficient to provide for our 2010 operations and purchases of plant and equipment.  While we continue to seek financing alternatives to fund our 2010 operations, there is no assurance that we will be able to obtain financing on terms acceptable to the Company, or at all, and terms of any financing we do undertake may not be favorable to our shareholders.

The Company’s working capital position at December 27, 2009, was a deficit of $0.6 million, compared with a deficit of $2.2 million at December 28, 2008. The negative working capital has resulted from our continuing operating losses.  The improvement from year ended 2008 is due to the retirement of the debt related to the 91 Hill Avenue property as a result of the title transfer in July 2009.

Contractual Obligations

The Company has certain obligations and commitments to make future payments under contracts.  At December 27, 2009, the aggregate contractual obligations and commitments from continuing and discontinued operations are:

   
2010
   
2011
   
2012
   
2013
   
2014
     
2015+
 
Operating Leases
  $ 146     $ 102     $ 7     $ -     $ -          
Capital Leases
    50       19       -       -       -          
Mortgage Payable
    66       71       75       81       87       1,363  
Total Lease Commitments
  $ 262     $ 192     $ 82     $ 81     $ 87     $ 1,363  
 
The debt service figures shown above reflect the principal amount of our commitments including those commitments in our discontinued operations.  The above schedule does not include the $0.5 million in related party financing that is callable but has no set payment dates.

In February 2010, the mortgage holders on the Ft. Walton Beach, Florida property accepted a Quitclaim on the property, thereby taking the property back and releasing the Company from its obligation under the mortgage note.  With this release, the mortgage payable commitment is terminated in its entirety.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures, or capital resources.

Item 7A.  Quantitative and Qualitative Disclosures about Market Risk.
 
Interest Rate Risk
 
At December 27, 2009, the Company had no amounts outstanding under a revolving credit facility.  We have not historically mitigated our exposure to fluctuations in interest rates by entering into interest rate hedge agreements, nor do we have any plans to do so in the immediate future.
 
Cash and cash equivalents, as of December 27, 2009, were $15,000 and are primarily invested in money market interest-bearing accounts.  A hypothetical 10% change in the average interest rate on our money market cash investments would have had no material effect on net loss for the twelve months ended December 27, 2009.
 
 
- 13 -

 
 
Foreign Exchange Risk
 
We currently do not have any foreign currency risk and accordingly, estimate that an immediate 10% change in foreign exchange rates would have no impact on our reported net loss.  We do not currently utilize any derivative financial instruments to hedge foreign currency risks.
 
 
- 14 -

 

Item 8.       Financial Statements and Supplementary Data.

The following documents are filed as part of this Annual Report on Form 10-K:

 
Financial Statements
 
Reports of Independent Registered Public Accounting Firms
 
[16]
     
Consolidated Balance Sheets: December 27, 2009, and December 28, 2008
 
[18]
     
Consolidated Statements of Operations and Comprehensive Loss: Years ended December 27, 2009, and December 28, 2008
 
[19]
     
Consolidated Statements of Stockholders’ Deficit: Years ended December 27, 2009, and December 28, 2008
 
[20]
     
Consolidated Statements of Cash Flows: Years ended December 27, 2009, and December 28, 2008
 
[21]
     
Notes to Consolidated Financial Statements
 
[22]
 
 
- 15 -

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Audit Committee of the
 
Board of Directors and Stockholders of Horne International, Inc. and Subsidiaries
 
We have audited the accompanying consolidated balance sheet of Horne International and Subsidiaries (the “Company”) as of December 27, 2009, and the related consolidated statements of operations and comprehensive loss, changes in stockholders’ deficit, and cash flows for the year then ended.  The Company’s management is responsible for these consolidated financial statements.  Our responsibility is to express an opinion on these consolidated financial statements 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 the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audit provides a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Horne International and Subsidiaries as of December 27, 2009, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
 
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern.  As discussed in Note 1 to the consolidated financial statements, the Company has experienced continuing net losses for each of the last three years and as of December 27, 2009 current liabilities exceeded current assets by $601,000.  These conditions raise substantial doubt as to the Company’s ability to continue as a going concern.  Management’s plan in regard to these matters is also described in Note 1.  The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
/s/ Stegman & Company
 
Baltimore, Maryland
 
March 25, 2010

 
- 16 -

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders

Horne International, Inc.

We have audited the accompanying consolidated balance sheet of Horne International, Inc. (a Delaware corporation) and subsidiaries as of December 28, 2008, and the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements 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 the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Horne International, Inc. and subsidiaries as of December 28, 2008, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1, the Company incurred a net loss of $6,113,000 during the year ended December 28, 2008, and, as of that date, the Company’s current liabilities exceeded its current assets by $2,256,000 and its total liabilities exceeded its total assets by $338,000. The Company has cash on hand and cash available totaling $22,000 at December 28, 2008 which management does not believe is sufficient to meets its operating needs during the coming year. These factors, among others, as discussed in Note 1 to the financial statements, raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ GRANT THORNTON LLP

Baltimore, Maryland
March 4, 2009

- 17 -


HORNE INTERNATIONAL, INC.
Consolidated Balance Sheets
(Dollars in thousands except share amounts)
 
   
December
27, 2009
   
December
28, 2008
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 15     $ 22  
Receivables, net
    1,228       1,384  
Prepaid expenses & other current assets
    30       98  
Current assets of discontinued operations
    2       98  
Total current assets
    1,275       1,602  
                 
Property and equipment, net
    77       132  
Investments in joint ventures
    -       61  
Other assets
    57       57  
Other assets of discontinued operations
    1,745       3,480  
TOTAL ASSETS
  $ 3,154     $ 5,332  
                 
LIABILITIES AND STOCKHOLDERS' DEFICIT
               
Current liabilities:
               
Accounts payable
  $ 419     $ 454  
Accrued expenses
    601       490  
Deferred revenues
    57       97  
Current portion of debt
    495       1,046  
Current liabilities of discontinued operations
    304       1,771  
Total current liabilities
    1,876       3,858  
Long-term liabilities:
               
Non-current liabilities of discontinued operations
    1,696       1,812  
TOTAL LIABILITIES
    3,572       5,670  
                 
Commitments and contingencies (Note 15)
               
                 
Stockholders' deficit
               
Preferred stock, $0.0001 par value; 20,000,000 shares authorized, none issued
    -       -  
Common stock, $0.0001 par value; 80,000,000 shares authorized, 42,687,324 and 42,687,324 issued and outstanding
    4       4  
Additional paid-in capital
    79,029       78,772  
Accumulated deficit
    (79,451 )     (79,114 )
Total stockholders' deficit
    (418 )     (338 )
                 
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT
  $ 3,154     $ 5,332  
                 
                 
 
See accompanying notes to consolidated financial statements.

- 18 -

 
HORNE INTERNATIONAL, INC.
Consolidated Statements of Operations and Comprehensive Loss
(Dollars in thousands except share amounts)
   
Twelve months ended
 
   
December
27, 2009
   
December
28, 2008
 
                 
Revenue
  $ 4,680     $ 4,859  
                 
Cost of Revenue
    3,323       3,815  
                 
Gross Profit
    1,357       1,044  
                 
Operating Expense
    1,458       4,930  
                 
Net Operating Loss
    (101 )     (3,886 )
                 
Non-operating expense, net
    (78 )     (220 )
                 
Loss before income taxes
    (179 )     (4,106 )
                 
Income tax expense
    (4 )     (1 )
                 
Loss from continuing operations
    (183 )     (4,107 )
                 
Loss from discontinued operations
    (154 )     (2,006 )
                 
Net and total comprehensive loss
  $ (337 )   $ (6,113 )
                 
Weighted average common shares outstanding:
               
Basic and diluted
    42,687,324       42,477,153  
                 
Loss per share:
               
Basic and diluted from continuing operations
  $ (0.01 )   $ (0.10 )
Basic and diluted from discontinued operations
  $ 0.00     $ (0.05 )
Total basic and diluted loss per share
  $ (0.01 )   $ (0.14 )
 
See accompanying notes to consolidated financial statements.

 
- 19 -

 

HORNE INTERNATIONAL, INC.
Consolidated Statements of Stockholders’ Deficit
(Dollars in thousands except share amounts)

   
Common Stock
         
Accumulated
       
   
Shares
   
Amount
   
APIC
   
Deficit
   
Total
 
                               
Balance as of December 31, 2007
    41,774,082     $ 4     $ 78,617     $ (73,001 )   $ 5,620  
                                         
Net loss
                            (6,113 )     (6,113 )
Stock issuances
    913,242       -       200               200  
Share price guarantee settlement
                    (90 )             (90 )
Option issuances
                    45               45  
                                         
Balance as of December 28, 2008
    42,687,324     $ 4     $ 78,772     $ (79,114 )   $ (338 )
                                         
Net loss
                            (337 )     (336 )
Share price guarantee settlement
                    (131 )             (131 )
Equity activities related to 91 Hill property transfer
              371               371  
Option issuances
                    17               17  
                                         
Balance as of December 27, 2009
    42,687,324     $ 4     $ 79,029     $ (79,451 )   $ (418 )
 
See accompanying notes to the consolidated financial statements.
 
 
- 20 -

 
 
HORNE INTERNATIONAL, INC.
Consolidated Statements of Cash Flows
(Dollars in thousands)
 
   
December 27,
   
December 28,
 
   
2009
   
2008
 
Cash flows from in operating activities:
           
Continuing Operations
           
Net loss from continuing operations
  $ (183 )   $ (4,107 )
Adjustments to reconcile net loss  to net cash flows
               
Stock based compensation
    16       45  
Depreciation and Amortization
    55       161  
Write-down of Weskem investment to fair value
    (10 )     169  
Gain on disposal of equipment
            7  
Non-cash impact of early lease termination
            (5 )
Decrease (increase) in balance sheet items
               
Receivables
    155       (299 )
Prepaid expenses
    69       1,255  
Accounts payable
    (73 )     207  
Accrued expenses
    112       (335 )
Deferred revenue
    (41 )     11  
Other balance sheet changes
    -       111  
Net cash provided by(used in) continuing operations
    100       (2,780 )
                 
Discontinued Operations
               
Loss from discontinued operations
    (154 )     (2,006 )
Cash provided by discontinued operations
    369       2,311  
Net cash provided by discontinued operations
    215       305  
Net cash provided by(used in) operating activities
    315       (2,475 )
                 
Cash flows from investing activities
               
Cash settlement of share price guarantee
    (93 )     (90 )
Proceeds from joint ventures under the equity method
    71       71  
Cash invested in potential acquisition
    -       (521 )
Purchase of property and equipment
    -       (109 )
Proceeds from the sale of equipment
    -       23  
Net cash used in investing activities
    (22 )     (626 )
                 
Cash flows from financing activities:
               
Net cash (repayments)borrowings
    (300 )     2,546  
Net cash (used in)provided by financing activities
    (300 )     2,546  
                 
                 
Net decrease in cash and cash equivalents
    (7 )     (555 )
Cash and cash equivalents at beginning of period
    22       577  
Cash and cash equivalents at end of period
  $ 15     $ 22  
 
See accompanying notes to the consolidated financial statements.
 
- 21 -


HORNE INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
 
1.           ORGANIZATION AND NATURE OF BUSINESS AND UNCERTAINTY
 
Horne International, Inc. (the “Company” or “Horne”), headquartered in Fairfax, Virginia, provides program engineering in the areas of environment, energy and infrastructure.
 
The Company decided to cease operations in the Spectrum Sciences & Software, Inc., and Coast Engine and Equipment Co. subsidiaries during the first quarter of 2008.  These companies represented the entire operations of the Security Solutions and Repair and Overhaul segments, respectively.
 
The Company’s independent accountants stated in their report on the consolidated financial statements of the Company for the year ended December 27, 2009, that the Company has had recurring operating losses that raise substantial doubt about its ability to continue as a going concern. For the year ended December 27, 2009, the Company incurred a loss from continuing operations of approximately $183,000 and had a stockholder deficit of approximately $0.4 million as of that date. The consolidated financial statements do not include any adjustments related to the recovery and classification of recorded assets, or the amounts and classification of liabilities that might be necessary in the event the Company cannot continue as a going concern.
 
The Company is dependent upon available cash and operating cash flow to meet its capital needs. The Company is considering all strategic options to improve its liquidity and provide it with working capital to fund its continuing business operations which include equity offerings, assets sales or debt financing as alternatives to improve its cash needs.
 
In December 2009, the Company entered into a two-year receivable noncancellable financing agreement with Wells Fargo Bank National Association under which the Company is able to factor certain eligible accounts receivable to a facility maximum of $1,000,000.  The agreement calls for a minimum monthly fee of $6,000 for the term of the agreement.  The Company is able to receive 85% of any invoices factored to the lender.
 
During 2008, the Company entered into a loan agreement with Darryl K. Horne, the Company’s President and Chief Executive Officer.  The loan permitted the Company to borrow up to $525,000 at 8%.  As of December 27, 2009, the outstanding balance is $275,000. On August 6, 2008, the Company entered into a receivables financing agreement with Mr.  Horne.  Under the terms of the agreement, Mr. Horne agreed to finance specific accounts receivable under a line of credit for up to $790,000 at an interest rate of 8.5%.  The Company has taken draws of $220,000 as of December 27, 2009. The loan is not convertible into any Company securities.
 
On March 22, 2010, the Company entered into a strategic partnership with Intelligent Decisions, Inc. (“Intelligent”).  Intelligent  is an information technology services company headquartered in Ashburn, Virginia servicing both commercial and government customers.  The agreement between the parties will allow the Company to have a cash line of credit in the amount of $250,000 for business/projects jointly developed by Intelligent and the Company.  This line of credit will be secured by the Company’s eligible Accounts Receivable  on such projects or the Company’s full-time equivalent employees arising after the inception of this Agreement that are billing against projects as decided by Intelligent in its sole discretion.  No cash will be advanced by Intelligent until Intelligent receives a perfected security interest (i.e., first lien on the orders to be advanced under this cash line of credit).
 
2.           SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Basis of Presentation
 
The fiscal year for Horne International, Inc. is the 52-or 53-week period ending on the last Sunday in December. Fiscal 2009 and 2008 were 52-week fiscal-years. The Consolidated Financial Statements include the accounts of Horne International, Inc., and its subsidiaries. All significant intercompany accounts and transactions have been eliminated.  Investments in unconsolidated joint ventures were adjusted to fair market value upon the acquisition of Horne Engineering in 2005.  Beginning in 2008, the Company began accounting for its Weskem joint venture investment under the equity method.  The joint venture ceased operations in 2009.
 
Revenue Recognition
 
The Company’s two principal methods of revenue recognition are monthly fixed price contracts where revenue is recognized ratably over the contract period and time and materials contracts where revenue is recognized as costs are incurred.
 
 
- 22 -

 
 
Use of Estimates
 
The preparation of financial statements, in conformity with accounting principles generally accepted in the United States of America, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Accordingly, results could differ from those estimates and assumptions.
 
Cash Equivalents
 
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
 
Fair Value of Financial Instruments
 
The carrying amount of cash and cash equivalents, receivables, accounts payable and accrued expenses approximates fair value because of the short-term nature of those instruments.  The carrying amount and fair market value of the Company’s short-term investments are the same since short-term investments are recorded at fair value.  Debt is recorded at the cash settlement value of the underlying notes and is not revalued.
 
Significant Customers and Credit Risks
 
Revenues from individual customers greater than 10% of consolidated revenues, in the respective periods, were as follows:

   
Fiscal Year
 
   
2009
   
2008
 
Customer A
   
 
* 
    26.9 %
Customer B
    32.6 %      
Customer C
    16.7 %     23.3 %
Customer D
    37.6 %     35.3 %
 

*Less than 10% of consolidated revenue as of the end of each period.

Due to the nature of the Company’s business and the relative size of certain contracts, it is not unusual for a significant customer in one year to be insignificant in the next.  However, it is possible that the loss of any single significant customer could have a material adverse effect on the Company’s results from operations.  The Company’s primary customers are government entities.  If revenue from a single government entity exceeds 10% of our total revenue, it is disclosed above.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to credit risk consist of cash and cash equivalents, accounts receivable, and unbilled services.  As of December 27, 2009, all of the Company’s cash and cash equivalents were held in or invested with domestic banks.  Accounts receivable from individual customers that are equal to or greater than 10% of consolidated accounts receivable in the respective periods were as follows:
 
   
Fiscal Year
 
   
2009
   
2008
 
Customer A
          57.0 %
Customer B
    65.15 %       
Customer C
    10.53 %     4.82 %
Customer D
    21.68 %     25.5 %
 

*Less than 10% of consolidated accounts receivable and unbilled services as of the end of each period.
 
 
- 23 -

 

In determining the allowance for doubtful accounts, the Company analyzes the aging of the accounts receivable, historical bad debts, customer creditworthiness, and specific situations involving our customers.  As the majority of our work is government related, the risk of uncollectiblity is greatly reduced.  We do take specific bad debt reserves when we consider our ability to collect an amount to be in doubt.

Property & Equipment

Property and equipment acquired as part of the acquisitions were adjusted to their approximate fair value at the time of acquisition.  All other property and equipment are recorded at cost less accumulated depreciation.  Depreciation is computed on both an accelerated basis and straight-line methods over the estimated useful lives of the underlying assets.  The lives range from 3 to 40 years depending on asset type.  Routine maintenance and repairs are expensed as incurred.  Major replacements and improvements are capitalized.  Leasehold improvements are amortized over the shorter of the useful life or the lease term.

Impairment of Long-Lived Assets

The Company reviews the recoverability of its long-lived asset groups, including buildings, furniture and equipment, computer hardware and software, leasehold improvements, and other finite-lived intangibles, when events or changes in circumstances occur that indicate the carrying value of the asset may not be recoverable.  The assessment of possible impairment is based on the Company’s ability to recover the carrying value of the asset from the expected future pre-tax cash flows (undiscounted and without interest charges) of the related operations.  If these cash flows are less than the carrying value of such asset, an impairment loss is recognized for the difference between estimated fair value and carrying value.  The Company’s primary measure of fair value is based on discounted cash flows.  The measurement of impairment requires the Company to make estimates of these cash flows related to long-lived assets, as well as other fair value determinations.
 
Income Taxes
 
The Company accounts for income taxes utilizing the asset and liability method.  This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enacted date. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
 
Loss Per Share
 
Basic loss per share is calculated by dividing net loss by the weighted-average number of common shares outstanding during the reporting period.  Diluted loss per share is computed in a manner consistent with that of basic loss per share while giving effect to the impact of common stock equivalents.  The Company’s common stock equivalents consist of employee, director, and consultant stock options to purchase common stock.  Common stock equivalents of 2,211,000 and 445,000 were not included in the computation of diluted loss per share for the twelve months ended December 27, 2009 and December 28, 2008, respectively, as the inclusion of these common stock equivalents would be anti-dilutive as the Company is in a net loss position and including such shares would reduce the net loss per share.
 
Foreign Currency Translation
 
The Company’s functional currency is the U.S. dollar.
 
 
- 24 -

 
HORNE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Stock Based Compensation
 
The fair values of stock option awards are determined using the Black-Sholes model.  The compensation expense is recognized on a straight-line basis over the vesting period.  The Company, beginning in 2006, has included a vesting period for most options granted.  See Note 11 for a detailed discussion of the Company’s stock-based compensation plans.
 
Recent Accounting Pronouncements
 
In June 2006, the FASB issued guidance related to accounting for uncertainty in income taxes, which was originally effective for fiscal years beginning after December 15, 2007.  In December 2008, the FASB issued further guidance which deferred the effective date for the Company until January 1, 2009.  In September 2009, the FASB issued new accounting guidance related to income taxes which clarifies that management’s determination of the taxable status of an entity is a tax position subject to the standards required for accounting for uncertainty in income taxes and eliminates certain disclosures related to unrecognized tax benefits for nonpublic companies.

In December 2007, the FASB issued guidance regarding the accounting treatment for corporate acquisitions. The new standard moves closer to a fair value model by requiring the acquirer to measure all assets acquired and all liabilities assumed at their respective fair values at the date of acquisition, including the measurement of non-controlling interests at fair value. This standard also establishes principles and requirements as to how the acquirer recognizes and measures goodwill acquired in a business combination or a gain from a bargain purchase and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. In addition, the standard significantly changes the accounting for business combinations in a number of areas, including the treatment of contingent consideration, pre-acquisition contingencies, in-process research and development, restructuring costs and requires the expensing of acquisition-related costs as incurred. The effective date was for fiscal years beginning after December 15, 2008. For transactions consummated after the effective date prospective application of the new standard is applied. For business combinations consummated prior to the effective date, the prior guidance is applied. The adoption of this standard did not have a material impact on our consolidated financial statements.

In April 2008, the FASB issued an amendment to its guidance determining the useful life of intangible assets which requires companies estimating the useful life of a recognized intangible asset to consider their historical experience in renewing or extending similar arrangements or, in the absence of historical experience, to consider assumptions that market participants would use about renewal or extension as adjusted for entity-specific factors. This guidance is effective for fiscal years beginning after December 15, 2008. The Company does not believe that the adoption of this guidance will have any material effect on its consolidated financial position, results of operations, or cash flows.

In May 2009, the FASB issued accounting guidance on subsequent events which requires companies to address the accounting and disclosure of events that occur after the balance sheet date but before the financial statements are issued or available to be issued.  The adoption of the accounting guidance that was effective January 1, 2009 did not have a material impact on the Company’s consolidated financial condition or results of operations.

In June 2009, the FASB issued an amendment which requires entities to provide more information about the sale of securitized financial assets and similar transactions in which the entity retains some risk related to the assets. This amendment is effective for fiscal years beginning after November 15, 2009. The Company does not believe the adoption this amendment will have a material impact on its consolidated financial position, results of operations, or cash flows.

In June 2009, the FASB issued The Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (the “Codification”) as the single source of authoritative nongovernmental United States generally accepted accounting principles.  The Codification did not change generally accepted accounting principles but rather enhanced the way accounting principles are organized.  The Codification was effective for the Company January 1, 2009 and its adoption did not have a material impact on the Company’s consolidated financial condition or results of operations.
 
In June 2009, the FASB issued an amendment, which changes how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. Under this guidance, determining whether a company is required to consolidate an entity will be based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. This amendment is effective for fiscal years beginning after November 15, 2009. The Company does not believe the adoption will have a material impact on its consolidated financial position, results of operations, or cash flows.

 
- 25 -

 

HORNE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In October 2009, the FASB revised the accounting guidance for revenue arrangements with multiple deliverables. The revision: (1) removes the objective-and-reliable-evidence-of-fair-value criterion from the separation criteria used to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting, (2) provides a hierarchy that entities must use to estimate the selling price, (3) eliminates the use of the residual method for allocation, and (4) expands the ongoing disclosure requirements. This guidance is effective for the Company beginning January 1, 2011 and can be applied prospectively or retrospectively. The Company is currently assessing the impact of the revised accounting guidance.
 
3.           DISCONTINUED OPERATIONS
 
The Company made the strategic decision to close the operations of its Spectrum Sciences and Software, Inc. subsidiary and Coast Engine & Equipment subsidiary in early 2008.  Accordingly, the operating results of these two entities are included in discontinued operations for all years presented.

During 2009, the Company deeded one of the two real property sites to creditors who are affiliated parties in return for the release of $1.75 million of debt owed to the creditors by the Company, In February, 2010, the Company, by Quitclaim Deed returned the second of the two real property sites to the mortgagors in return for a release of all obligations and claims under the Contract for Deed.

The assets of discontinued operations during 2009 were primarily the land and buildings located in Ft. Walton Beach, Florida.  During 2008, the Company conducted a review of its asset values and determined that two of its assets had book values in excess of the fair market value.  Accordingly, the Company wrote down the value of these assets to their market value.  The amount of the write-down was $455,000.

The liabilities of discontinued operations at December 27, 2009, primarily consist of mortgages and a capital lease obligation.  The mortgages include a $1.7 million note that is adjustable at the U.S. federal funds rate plus 4.6% subject to certain interest rate floors and caps as specified in the agreement. The adjustable mortgage rates in effect at December 27, 2009 and December 28, 2008, were both 7.0%.  The interest rate on the capital lease is 7.1%.  The fixed rate mortgage notes are detailed in Note 9 Related Party Transactions.
 
4.           RECEIVABLES (000’s)
 
Receivables primarily comprise amounts due to the Company for work performed on contracts directly related to commercial and government customers.  The U.S. Department of Defense (including the Army Environmental Command and the Army Corps of Engineers), , Department of Homeland Security, General Services Administration (GSA Schedules), and other government agencies are our major customers.
 
   
December
   
December
 
Accounts Receivable
 
27, 2009
   
28, 2008
 
Billed
  $ 1,119     $ 1,277  
Unbilled
    62       60  
Holdbacks
    48       48  
Bad Debt Reserve
    (1 )     (1 )
Total
  $ 1,228     $ 1,384  

Unbilled receivables represent recoverable costs and estimated earnings consisting principally of contract revenues that have been recognized for accounting purposes but are not yet billable to the customer based upon the respective contract terms.  Substantially all of these amounts will be billed in the following year.

 
- 26 -

 

HORNE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
5.           PROPERTY AND EQUIPMENT (000’s)
 
   
December
   
December
 
Property & Equipment
 
27, 2009
   
28, 2008
 
Buildings and Improvements
  $ 5       5  
Furniture and Fixtures
    11       11  
Office Equipment
    290       292  
Vehicles
    38       38  
Total
  $ 344     $ 346  
Accumulated Depreciation
    (267 )     (214 )
Property and Equipment, net
  $ 77     $ 132  

6.           ACCRUED EXPENSES (000’s)

   
December
   
December
 
Accrued Expenses
 
27, 2009
   
28, 2008
 
Salaries and payroll related items
  $ 165     $ 124  
Accrued leave
    263       206  
Professional fees
    75       133  
Other
    98       27  
Total Accrued Liabilities
  $ 601     $ 490  
 
7.           BORROWINGS AND LINES OF CREDIT
 
The Company’s borrowings, not included in discontinued operations, consist of related party receivable financing and unsecured notes of approximately $495 thousand.    The rates on the related party notes are 8% and 8.5% and approximately half of these notes are secured against company receivables and a company settlement award.  See further detail in Note 9 related to the related party notes.
 
Wells Fargo
 
In December 2009, the Company entered into a two-year receivable noncancellable financing agreement with Wells Fargo Bank National Association under which the Company is able to factor certain eligible accounts receivable.  The agreement calls for a minimum monthly fee of $6 thousand for the term of the agreement.  The Company is able to receive 85% of any invoices factored to the lender. As of December 27, 2009, no receivables were factored.

The schedule below represents future principal payments under existing debt agreements related to discontinued operations (000’s).
 
   
2010
   
2011
   
2012
   
2013
   
2014
     
2015+
 
Capital Leases
    50       19             -       -          
Mortgage Payable
    66       71       75       81       87       1,363  
Total Lease Commitments
  $ 116     $ 90     $ 75     $ 81     $ 87     $ 1,363  
 
In February 2010, the Company, by Quitclaim Deed returned the second of the two real property sites to the mortgagors in return for a release of all mortgage obligations and claims under the Contract for Deed.

8.
STOCKHOLDERS’ EQUITY
 
During 2009, the Company had two equity transactions.  The first was the share price settlement with the former owners of CEECO. Under the terms of the CEECO acquisition agreement from 2005, the 913,242 shares of stock that were issued to Lou and Marilyn Rogers in March 2008 were subject to a share price guarantee.  Those shares were issued at $0.219 per share. The average share price, calculated as the ten-day average closing share price centered on February 28, 2009, was $.0755.  As a result the Company recorded a payable to the Rogers of $131,000 and reduced additional paid in capital by that same amount.  A payable of $38,500 is outstanding at December 27, 2009.

 
- 27 -

 

HORNE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The second 2009 equity transaction was the issuance of 2,000,000 options related to the 91 Hill Avenue transaction described in detail in Note 9 to these financial statements.

Additionally, on March 24, 2008, the Company paid $90,088 to Lou and Marilyn Rogers for the negative change in share price from the March 8, 2007, share issuance.  The share price for the 2007 issuance was $0.3985 and resulted in a share issuance of 501,882.  The current share price, as stipulated in the share agreement and shown above was $0.219.  This share price difference of $0.1795 was multiplied by the 501,882 shares. This transaction reduced the additional paid in capital recorded in the initial stock issuance.

During 2007, the Company had only one equity transaction other than option activity.  On March 8, 2007, the Company issued 501,882 unregistered shares of stock to Louis and Marilyn Rogers in accordance with the Coast Engine and Equipment Co. acquisition agreement.  This agreement contained an earn-out provision of up to $200,000 worth of Company stock at a 10-day average price centered on the two-year anniversary of the acquisition, or $0.3985 per share.  The agreement also included a share price guarantee based on the 10 day average share-price centered on February 28, 2008.

During 2008, the Company had equity transactions related to stock option expense, the final share issuances for the CEECO earn-out, and the related share price guarantee payments for the 2007 CEECO earn-out share issuance.
 
9.           RELATED PARTY TRANSACTIONS

Darryl Horne Notes

On August 6, 2009, Horne International, Inc. entered into an Agreement to Transfer Property with Darryl K. Horne and The Susott Family Limited Partnership and 91 Hill Avenue, LLC.  The Agreement states that Horne International, Inc. will transfer the real property located at 91 Hill Avenue, Fort Walton Beach, Florida to 91 Hill Avenue, LLC.  In addition, the Company will also issue to 91 Hill Avenue, LLC two million stock options with a price of the greater of $0.10 or $0.25 less than the reported stock one day prior to the exercise of the options.  As consideration for the transfer of the real property and the aforementioned stock options, Darryl K. Horne and the Susott Family Limited Partnership will each forgive certain secured and unsecured debt owed to each of them by the Company.  Darryl K. Horne will forgive both secured and unsecured debt owed to him by the Company in the amount of $750,000.  The Susott Family Limited Partnership will forgive secured debt owed to it by the Company in the amount of $1,000,000.

On August 7, 2009, the real property owned by Horne International, Inc. located at 91 Hill Avenue, Fort Walton Beach, FL was transferred to 91 Hill Avenue, LLC pursuant to the terms of the Agreement to Transfer Property dated August 6, 2009.

During 2008, the Company entered into three separate loan transactions with Darryl K. Horne, the Company’s President and Chief Executive Officer.  The first loan permitted the Company to borrow up to $525,000 at 8%.  As of December 28, 2008, the Company has borrowed the full $525,000.  The interest is payable quarterly beginning in July 1, 2008 with principal payable upon demand.  The note is unsecured and is not convertible into any Company securities.  This loan was settled in part of the 91 Hill avenue transaction.  As of December 27, 2009, the outstanding balance is $275,000.

In July 2008, the Company entered into a second loan transaction with Mr. Horne, for a working capital loan to the Company.  The terms of the loan provide that the Company is able to borrow $500,000 at 8% interest, with such interest payable quarterly beginning in October 2008.  The Company has borrowed $500,000 under this agreement as of December 28, 2008.  Principal under the loan is payable in full at the earlier of (a) twelve (12) months from the loan closing date and (b) the sale of the Company's Ft Walton Beach, Florida commercial property formerly utilized for SSSI's operations (the "SSSI Property").  The maturity date of the loan may be extended for an additional six (6) months under certain conditions, including the payment by the Company of a fee equal to one-half percent of the outstanding principal balance.  Mr. Horne's loan is secured by a second deed of trust on the SSSI Property, which will be junior in priority and subordinate to a first deed of trust securing the Company's obligations under the Revolving Line of Credit to Evan Auld-Susott, as agent.  The loan is not convertible into any Company securities.  The terms of the loan were approved by the Company's Board of Directors, including each disinterested director.  The loan documentation contains customary terms and conditions for financing of this type.  This loan was discharged in the 91 Hill Avenue transaction described above.  There were no amounts outstanding under this loan at December 27, 2009.

 
- 28 -

 

HORNE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On August 6, 2008, the Company entered into a receivables financing agreement with Mr.  Horne.  Under the terms of the agreement, Mr. Horne agreed to finance specific accounts receivable under a line of credit for up to $790,000 at an interest rate of 8.5%.  The Company has taken draws of $220,000 as of December 27, 2009. The loan is not convertible into any Company securities.

Evan Auld-Susott Mortgage Note
 
In July 2009, the Company deeded the SSSI property against 91 Hill Avenue, LLC, a limited liability company established by Darryl K. Horne and Evan Auld-Susott to take title to the property.  In return for the property, Evan Auld-Susott released the $1,000,000 debt due under the April 10, 2008 revolving line of credit. As of December 27, 2009, there were no amounts outstanding under the agreement.

On April 10, 2008, the Company entered into a binding term sheet with Evan Auld-Susott as agent for The Susott FLP for the provision to the Company of a revolving line of credit.   Evan Auld-Susott is a member of the Company's Board of Directors.  Under the line of credit, the Company is able to borrow $1,000,000 at 12.5% interest upon the Company's certification to the lenders that the Company has fully exhausted all funds available to the Company pursuant to the $500,000 working capital loan from Darryl K. Horne, described above.  Interest on the line of credit will be payable quarterly beginning in October 2008 with principal payable in full at the earlier of (a) twelve (12) months from the line of credit closing date or (b) the sale of the SSSI Property. The maturity date of the line of credit may be extended for an additional six (6) months under certain conditions, including the payment by the Company of a fee equal to the greater of (i) $2,500 and (ii) one-half percent of the outstanding principal balance.  The lender has a first deed of trust on the SSSI Property, which is senior in priority and superior to the second deed of trust in favor of Darryl K. Horne with respect to this working capital loan described above.  The loan is not convertible into any Company securities.  The terms of the line of credit were approved by the Company's Board of Directors, including each disinterested director.  The Company settled on this line in July 2008.  As of December 28, 2008, the entire $1,000,000 has been advanced under the line.  There was no balance as of December 27, 2009.

On November 12, 2008, the Company entered into a short-term borrowing agreement with Evan Auld-Susott as agent for The Susott FLP.  Under this agreement, the Company borrowed $70,000 at 8.5% interest.  This note is secured by certain receivables of the Company and is not convertible into any Company securities..  This loan was repaid in January 2009.  As of December 27, 2009, there were no amounts outstanding under this agreement.

John Krobath Notes

On June 12, 2008, the Company entered into a short-term borrowing arrangement with John Krobath, the Company’s Chief Financial Officer, under which the Company borrowed $70,000 at 8% interest.  The loan and related interest were repaid on June 17, 2008.

On October 1, 2008, the Company entered into a short-term borrowing arrangement with John Krobath, the Company’s Chief Financial Officer at such time, under which the Company borrowed $43,000 at 8.5% interest.  This loan is not convertible into any Company securities but is secured by some of the Company’s real property in Ft. Walton Beach, Florida.  The loan and related interest were repaid in June 2009.

10.         EMPLOYEE BENEFIT PLAN
 
The Company has a defined contribution 401(k) plan available to all U.S. employees who have completed minimum service requirements and meet minimum age requirements.  Eligible employees may defer a portion of their salary as defined by Internal Revenue Service regulations.  The Company currently matches 50% of an employee’s contribution up to 5%, subject to legal limits.  The total expense for the years ended December 27, 2009 and December 28, 2008 were approximately $27,000 and $61,000, respectively.

 
- 29 -

 

HORNE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
11.         STOCK OPTION PLAN
 
During 2006, the Company issued 15,000 stock options to each of its five advisory board members, 75,000 options in total.  The options vest over a two-year period with 5,000 options vesting immediately and 5,000 options vesting at the one and two year anniversaries of the grants. During 2007, the Company issued an additional 15,000 options to a new advisory board member with the same terms as prior advisory issuances and retired 15,000 options previously issued to a departed advisory member. These options have an exercise price of $0.50 and a ten year life from the grant date. The weighted-average assumptions used in the Black-Scholes model to price the options were as follows: a risk-free rate of 4.5%, no dividend yield, a volatility factor of 0.63 and a life of 10 years. In 2009, the Company stopped using the services of the advisory board; and therefore, recognized no further expense related to these options.  However these options remain outstanding.  Accordingly, the Company has recorded stock-based compensation expense of $0 in 2009 and $8,334 in 2008.  The expense recognized is based on the fair value at each reporting date since the recipients are non-employees.

On July 21, 2006, the Company issued 30,000 options to each of its five external Board of Directors members.  These options vest in 10,000 share increments on July 21, 2007, 2008, and 2009.  The option terms include an exercise price of $0.80, a life of three years and a service obligation to vest.  The Company has recorded $6,665 and $14,240 of stock-based compensation expense in 2009 and 2008, respectively, related to these options.

During 2007, the Company granted 180,000 options to external members of its Board of Directors, 15,000 options to a non-employee member of the advisory board and 340,000 options to employees.  On August 1, 2007, the Company issued external members of the Board of Directors options that vest over a three year period, expire three years from the vesting date, and have a strike price of $0.35.  The Company has recorded $6,074 and $10,159 of expense related to these options in 2009 and 2008, respectively.  The employee options were issued at various strike prices some with immediate partial vesting but most with time requirements for vesting.  As of December 27, 2009, 334,000 of the employee options have expired as the employees have left the company prior to vesting.

In 2008, the only options granted during the year were employee options of 100,000 with a strike price of $0.20.  Of these options, 30,000 were vested immediately with the remaining 70,000 vesting over the next two years.  Expense of approximately $3,361 and $10,083, was recognized on these options in 2009 and 2008, respectively.

In 2009, the Company issued two million options with a strike price of the greater of $0.10 or $0.25 less than current market value of the stock at the time of exercise to 91 Hill Avenue, LLC as part of the satisfaction of the debt to Evan Auld-Susott and Darryl K. Horne.  The options vest on December 31, 2009.  There was no option expense recorded on this transaction as it was treated as a capital contribution.

There were no options exercised in 2009 or 2008.  As of December 27, 2009, there was $3,000 of unrecognized compensation cost, net of estimated forfeitures, related to non-vested stock options, which is expected to be recognized over a weighted-average period of approximately one year.
 
The following table summarizes information about the Plan’s stock options at December 27, 2009.
 
   
Number of shares
   
Option Price
   
Weighted Average Price
 
Options Outstanding 12/30/2007
    1,912,514              
Granted
    100,000     $ 0.20     $ 0.20  
Exercised
    -                  
Cancelled
    (1,567,514 )     0.40 - 1.65       1.47  
Options Outstanding 12/30/2008
    445,000                  
Granted
    2,000,000       0.10          
Exercised
    -                  
Cancelled
    (234,000 )     0.20 - 0.80     $ 0.55  
Options Outstanding 12/27/2009
    2,211,000                  

 
- 30 -

 

HORNE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Exercise
   
Shares
   
Shares
   
Weighted Average
 
Price
   
Outstanding
   
Exercisable
   
Remaining Life (yrs)
 
$ 0.10       2,000,000       -       3.0  
$ 0.20       70,000       70,000       0.8  
$ 0.35       60,000       60,000       2.6  
$ 0.40       6,000       6,000       0.8  
$ 0.50       75,000       75,000       5.8  
                             
          2,211,000       211,000          
           
Total options available to issue
      30,000,000  
Total options outstanding or exercised
      22,332,200  
Total options Remaining
      7,667,800  
 
The intrinsic value of the options outstanding at December 27, 2009, is zero as the exercise price for all options is greater than our share price at that date.
 
12.         INCOME TAXES
 
The provision for income taxes consisted of the following (000’s)

   
Year Ended
 
   
December 27,2009
   
December 28, 2008
 
Current
           
Federal
    -       -  
State
  $ 4     $ 1  
Foreign
    -       -  
Total Current
    4       1  
                 
Deferred
               
Federal
    -       -  
Foreign
    -       -  
Total Deferred
    -       -  
Total Tax Provision
  $  4     $ 1  
 
The difference between the tax provision at the statutory federal income tax rate and the tax provision attributable to income before taxes was as follows:

Rate Reconciliation:
           
   
2009
   
2008
 
Statutory Federal Income Tax Rate
    39.00 %     34.00 %
State Taxes (Net of Federal Benefit)
    3.64 %     3.95 %
Permanent Difference
    -0.19 %     -0.05 %
Valuation Allowance
    -42.45 %     -33.61 %
Other
    0.00 %     -4.29 %
Effective Tax Rate
    0.00 %     0.00 %

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial and tax reporting purposes.  Significant components of the Company’s deferred taxes were as follows (numbers in 000’s)

 
- 31 -

 

HORNE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Deferred Tax Asset/Liability:
           
   
2009
   
2008
 
Accrued Expenses
  $ 58     $ 53  
Depreciation
    17       16  
Amortization of Intangibles
    -       -  
Allowance for Doubtful Accounts
    -       -  
Stock Compensation
    313       272  
NOL Carryforwards
    18,857       16,888  
Other, Net
    752       (116 )
Valuation Allowance
    (19,998 )     (17,113 )
Net Deferred Tax Asset/(Liability)
  $ -     $ -  

As of December 27, 2009, the Company has approximately $55 million of net operating loss carry-forwards available to offset future income.  The net operating loss carry-forwards will expire on or before 2027.

In determining the extent to which a valuation allowance for net deferred tax assets is required, the Company evaluates all available evidence including projections of future taxable income, carry-back opportunities, and other tax-planning strategies.  The valuation allowance relates to our U.S. net operating losses.  Due to the continued losses incurred by the Company in 2009 and prior years, the Company believes that it is more likely than not that the deferred tax asset related to these net operating losses will not be realized.  If, in the future, the Company determines that the utilization of these net operating losses becomes more likely than not, the Company will reduce the valuation allowance at that time.

The Company adopted Accounting Standards Codification topic 740, subtopic 10 on January 1, 2007, which requires financial statement benefits to be recognized for positions taken for tax return purposes when it is more-likely-than-not that the position will be sustained.  There has been no change in our financial position and results of operation due to the adoption of this standard.

13.         NON-OPERATING INCOME (EXPENSE) (000’s)

   
2009
   
2008
 
Income
           
Interest
  $ -     $ 4  
Equity Investments
    8       -  
Expense
               
Interest
    (86 )     (134 )
Equity Investments
    -       (90 )
Total net non-operating (expense)income
  $ (78 )   $ (220 )
 
14.         SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (000’S)

Supplemental disclosure of cash flow information:
 
2009
   
2008
 
Cash paid for interest
  $ 1     $ 32  
Cash paid for taxes
  $ 4     $ 18  
                 
Supplemental schedule of non-cash investing and financing activities:
               
Relief of related party notes payable for property and 2,000,000 stock options
  $ 1,750     $ 0.00  

 
- 32 -

 

HORNE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
The CEECO earn-out in 2008 of $200,000 was paid via the issuance of 913,242 shares of Company common stock.  The share price guarantee related to the 2008 share issuance resulted in a $131,000 reclass between additional paid in capital and accrued liabilities in March 2009.  The Company paid $100,000 and $90,087 in 2009 and 2008, respectively.
 
15.          COMMITMENTS AND CONTINGENCIES (000’s)
 
Operating Leases
 
The Company leases office space at various locations in the United States.  Rent expense totaled approximately $128,000 and $482,000 for 2009 and 2008, respectively.  Included in the 2008 expense is $227,000 of cost related to the early termination of our headquarters lease.  The Company also enters into various other non-cancellable leases for office equipment and vehicles as necessary.
 
The table below summarizes our future annual minimum lease payments under non-cancellable agreements with an initial term of greater than one year at inception. (000’s)
 
   
2010
   
2011
   
2012
   
2013
     
2014+
 
Operating Leases
  $ 146     $ 102     $ 7     $ -     $ -  
 
Legal Matters
 
Munitions Assembly Conveyor (MAC) Lawsuit

On or about August 23, 2004, Spectrum Sciences & Software, Inc. (SSSI) filed suit against the United States alleging a breach of express contract, a breach of an implied in fact contract, and misappropriation of trade secrets.  SSSI claims damages in the amount of $3,500,000.  The complaint arose out of the government’s actions associated with the procurement of the improved Munitions Assembly Conveyor (MAC).  Based upon SSSI’s previous experience in both utilizing and producing the MAC, the Government and SSSI entered into a Cooperative Research and Development Agreement (CRADA) for the purpose of improving munitions support equipment, including the MAC.  As part of the CRADA negotiation, SSSI identified its prior development, unique modifications, and improvements that constituted trade secrets and intellectual property owned by SSSI.  Subsequent to the completion of the CRADA, SSSI alleges that the government deliberately breached its obligations to protect the trade secrets, intellectual property, and proprietary information identified by SSSI in the CRADA by disclosing and widely disseminating to the general public SSSI’s proprietary information.

In response to a Motion for Summary Judgment filed on behalf of the United States, the Court dismissed the claim for misappropriation of trade secrets.  The surviving claims remain pending in the United States Court of Federal Claims in Washington, DC.  On November 13, 2007, a trial on the merits as to liability was heard by the United States Court of Federal Claims.  The Court found in favor of SSSI on the merits of the case.  A trial on damages was held in January 2010.  The Court has not yet ruled on damages in this case.

B-Stand Lawsuit

On April 8, 2009, the Company reached a settlement agreement with the U.S. Air Force regarding the Company’s pending B-Stand litigation through the alternative disputes resolution process.  The U.S. Air Force agreed to pay $122,500 in full settlement of all outstanding claims related to this matter.   The Company received this payment in the third quarter of 2009.
 
16.           INVESTMENTS IN JOINT VENTURES
 
The Company, through its Horne Engineering subsidiary, is a member of Weskem, a limited liability company that specializes in environmental remediation.  During 1999, Horne Engineering invested $77,500 and became a 5.6% partner in this joint venture.  The investment has been accounted for using the cost method of accounting until 2008.  During 2008, the decision was made to cease Weskem’s operations during the first quarter of 2009.  At that time the Company performed an analysis of the liquidation value of the investment.  It was determined during this analysis, that the expected liquidation value of the investment was approximately $169,000 less than our carrying value.  Accordingly, we recorded a write-down of the Weskem investment to its liquidation value.  At the same time, we changed our accounting method to the equity method. The investment was liquidated in 2009.

 
- 33 -

 

HORNE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
17.           SUBSEQUENT EVENTS
 
In February 2010, the mortgage holders on our Ft. Walton Beach, Florida property accepted a Quitclaim on the property, thereby taking the property back and releasing the Company from its obligation under the mortgage note.  With this release, the mortgage payable commitment is terminated in its entirety.
 
On March 22, 2010, the Company entered into a strategic partnership with Intelligent Decisions, Inc. (“Intelligent”)  Intelligent  is an information technology services company headquartered in Ashburn, Virginia servicing both commercial and government customers.  The agreement between the parties provides for Intelligent to provide business support services to the Company.  The business support services will include business development support, bid and proposal support, contracting support, investor relations and marketing support, accounting services support and recruiting services.  In addition, Intelligent will assist the Company in achieving its long term and short term plans for revenue growth by providing near term business opportunities including procurement and other acquisition opportunities.  In return for the described business support services, the Company will award to Intelligent 8,333,333 options to purchase common stock as well as up to 12,500,000 restricted stock units.  4,166,667 of the awarded options will vest immediately and the remaining 4,166,666 options will vest when the share price of Horne reaches $.50 or the company achieves revenue in the amount of $15,000,000.  The restricted stock units will be issued in exchange for the aforementioned business support services.

 
- 34 -

 
 
Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
 
 (a) Former Independent Registered Accounting Firm. On February 15, 2010 the Company’s Audit Committee dismissed Grant Thornton LLP (Grant Thornton) as the Company's independent registered accounting firm. Grant Thornton's reports on the Company's consolidated financial statements as of and for the years ended December 30, 2007 and December 28, 2008 did not contain an adverse opinion or disclaimer of opinion, nor were they qualified or modified as to audit scope or accounting principle. However, with respect to the Company’s financial statements as of and for the year ended December 28, 2008, the accountant’s report was modified to include an explanatory paragraph related to substantial doubt about the Company’s ability to continue as a going concern.
 
In connection with its audits of the Company’s financial statements as of and for the year ended December 28,  2008 and reviews of the Company’s financial statements as of and for the nine-months ended September 30, 2009 and 2008, and through February 15, 2010, there were no disagreements with Grant Thornton on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Grant Thornton would have caused Grant Thornton to make reference to the subject matter of the disagreements in connection with its reports on the financial statements for such years. Additionally, during these periods there were no reportable events, as defined in Regulation S-K 304(a)(1)(v).
 
The Company has provided Grant Thornton a copy of this Current Report prior to filing thereof with the United States Securities and Exchange Commission. The Company has requested Grant Thornton to furnish the Company with a letter addressed to the Securities and Exchange Commission stating whether Grant Thornton agrees with the statements made by the Company in the Current Report, and if not, stating all respects in which it does not agree. A copy of Grant Thornton's letter dated February 18, 2010, is filed as Exhibit 1 to this Current Report.
 
(b) New Independent Registered Accounting Firm. On February 15, 2010, the Audit Committee of the Company engaged Stegman and Company as the Company's independent registered public accounting firm to audit the Company's consolidated financial statements for the year ended December 27, 2009.
 
During the two most recent years, neither the Company nor any one acting on its behalf consulted with Stegman and Company regarding (1) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company's financial statements; or (2) any matter that was wither the subject of a disagreement as defined in Item 304(a)(1)(iv) of Regulation S-K.
 
Item 9A.  Controls and Procedures.

Evaluation of Disclosure Controls and Procedures
Based on management’s evaluation (with the participation of our CEO and Interim Chief Financial Officer (CFO)), as of the end of the period covered by this report, our CEO and CFO have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)), are effective to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
 
Attestation Report of the Registered Public Accounting Firm 
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting.  Management’s report was not subject to attestation by its registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

 
- 35 -

 
 
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
 
Management assessed our internal control over financial reporting as of December 27, 2009, the end of our fiscal-year. Management based its assessment on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management’s assessment included evaluation of elements such as the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies, and our overall control environment.
 
Based on our assessment, management has concluded that our internal control over financial reporting was effective as of the end of the fiscal-year to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles. We reviewed the results of management’s assessment with the Audit Committee of our Board of Directors.
 
Inherent Limitations on Effectiveness of Controls 
Our management, including the CEO and CFO, does not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting.  Management’s report was not subject to attestation by its registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
 
Changes in Internal Control over Financial Reporting 
There were no changes to our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the Company's fourth fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
9B. Other Information

 
There is no information that was required to be disclosed on a Form 8-K during the fourth quarter but was not reported.

 
PART III

 
Item 10.  Directors, Executive Officers and Corporate Governance.

 
The names of our executive officers and directors, their ages as of March 1, 2010, and the positions currently held by each are as follows:

 
- 36 -

 

Name
 
Age
 
Position
Darryl K. Horne
 
49
 
President, Chief Executive Officer and Chairman, Director
Paige E. Shannon
 
43
 
Interim Chief Financial Officer
Evan Auld-Susott
 
30
 
Director
John A. Moore
 
57
 
Director

BIOGRAPHIES OF EXECUTIVE OFFICERS AND DIRECTORS

Darryl K. Horne.  In June 2005, Darryl K. Horne was appointed President and Chief Executive Officer (CEO) of Horne International, Inc.  Mr. Horne also serves as Chairman of the Board of Directors of Horne International, Inc.  Mr. Horne founded Horne Engineering Services, Inc., a Virginia corporation, in 1990 and led the organization as the President and CEO until May 2005, when Horne Engineering Services, Inc., dissolved and was superseded by Horne Engineering Services, LLC.  Horne Engineering Services, Inc., was a professional engineering firm providing engineering solutions to issues primarily in the areas of national security, energy and the environment, and transportation for customers in the U.S. federal government, state and local governments, and the private sector.  As the President and CEO of Horne Engineering Services, Inc., Mr. Horne was responsible for personnel, budgeting, performance contracts, subcontract administration, proposals, business development, and the general oversight of corporate operations.  In 1999, Mr. Horne was appointed by then Virginia Governor James Gilmore to the Virginia Military Institute (VMI) Board of Visitors.  Mr. Horne was re-appointed to the VMI Board of Visitors by Governor Mark Warner in 2003.  Mr. Horne was honored by Ernst & Young in 1999 as a Greater Washington Entrepreneur of the Year, and in 2002 he was a finalist for a National Capital Business Ethics Award.  In March 2004, he was invited to become a Trustee on the Federal City Council, a non-profit, non-partisan organization dedicated to the improvement of the Nation’s Capital and composed of and financed by the region’s top business, professional, educational, and civic leaders.  Mr. Horne received a bachelor’s degree in civil engineering from VMI in 1982.  He is a member of the National Society of Professional Engineers and the Society of American Military Engineers, and he completed service in the U.S. Army Reserve with the rank of Captain.

Paige E. Shannon.  In June, 2009, Paige E. Shannon was appointed Interim Chief Financial Officer (CFO).  Ms. Shannon has and continues to serve as the General Counsel prior to being appointed Interim CFO.  She has extensive experience in the government contracting industry.   Ms. Shannon received a juris doctorate from The Catholic University of America, Columbus School of Law and a Master’s in Business Administration from George Mason University in 2002.

John A. Moore, Jr.    John A. Moore, Jr. was elected to the Horne International, Inc., Board of Directors on April 27, 2006.  Mr. Moore currently serves as the Chairman of both the audit and compensation committees.  Mr. Moore has served as the Executive Vice President and Chief Financial Officer of ManTech International Corporation.  Mr. Moore has extensive experience in strategic planning, acquisitions, corporate compliance, proposal preparation and pricing in the Federal Solutions marketplace.  Mr. Moore has served on the Board of Directors for ManTech International Corporation and Global Secure Corporation and currently serves on the Board of Directors of Paradigm Holdings, Inc.  Mr. Moore is also a former member of the Board of Visitors for the University of Maryland, Robert H. Smith School of Business.

Evan Auld-Susott Evan Auld-Susott was elected to the Horne International, Inc., Board of Directors in June 2007. Mr. Auld-Susott is an independent investment advisor based in Los Angeles, California, and serves as General Partner for the Susott FLP.  Previously, he worked as an investment advisor at Morgan Stanley on a private wealth management team with responsibility for $6 billion in assets.  Mr. Auld-Susott has a B.A. in economics and a B.A. in international relations from the University of Southern California in Los Angeles.

None of the events set forth in Item 401(f) of Regulation S-K occurred during the past ten years.

CODE OF ETHICS

The Company has adopted a Code of Ethics applicable to its Principal Executive Officer, Principal Financial         Officer, Principal Accounting Officer or Controller, and/or other persons performing similar functions.  A copy of the written Code of Ethics is incorporated by reference as an exhibit to this Annual Report.  The Code of Ethics can also be found in the Corporate Governance section of the Company’s website located on the web at http://www.horne.com.

 
- 37 -

 

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934 requires officers and directors of the Company and persons who own more than ten percent (10%) of a registered class of Horne International, Inc., equity securities to file reports of ownership and changes in their ownership on Forms 3, 4, and 5 with the Securities and Exchange Commission and forward copies of such filings to the Company.  Based on the copies of filings received by the Company during the most recent fiscal-year, the directors, officers, and beneficial owners of more than ten percent (10%) of the equity securities of the Company registered pursuant to Section 12 of the Exchange Act have timely filed all required Forms 3, 4, and 5 and any amendments thereto.

AUDIT COMMITTEE

The Company formed an audit committee on October 4, 2005, and adopted the Charter of the Audit Committee on April 27, 2006.  Francis X. Ryan was appointed as Chairman upon the Committee’s formation.  On July 20, 2006, John A. Moore, Jr., was appointed by the Board of Directors to serve as a member of the Audit Committee.   Upon Mr. Ryan’s resignation form the Board of Directors in July, 2008, Mr. Moore was appointed Chairman of the Audit Committee.  The Company’s Board has determined that Mr. Moore qualifies as an audit committee financial expert as defined in Item 401(h) of Regulation S-K of the Securities Act of 1933, as amended and is independent as defined in NASDAQ marketplace Rule 5605(a)(2).

Item 11.  Executive Compensation.


Although our executive compensation program is generally applicable to each of our senior management, this Compensation Discussion and Analysis focuses primarily on the program as applied to our CEO, CFO, and each of our other “named executive officers” as defined under applicable SEC rules.  Our “named executive officers” for 2009 were our CEO, Darryl K. Horne, our interim CFO, Paige Shannon, and our former CFO John E. Krobath.

Executive Compensation Policy and General Philosophy

We recognize that our long term success depends on our ability to provide innovative, comprehensive and quality services and products to the marketplace.  Attracting and retaining highly talented individuals at all levels of the organization that are committed to the Company’s core values of excellence and integrity requires us to maintain competitive compensation programs.  Our Executive Compensation Program is based upon the same objectives that guide us in establishing all of our Compensation Programs.  The Company compensates its senior management with a blend of base salary, bonus and equity compensation designed to be competitive with comparable employers and to align management’s incentives with our long term goals and the best interests of our stockholders.

Compensation of our Chief Executive Officer and former Chief Financial Officer (Michael Megless) are substantially affected by the employment agreements each of these individuals entered into in connection with our acquisition of Horne Engineering in May 2005.  As described herein under the section titled “Employment Contracts and Termination of Employment and Change of Control Agreements” these employment agreements establish minimum base salaries for these executives, subject to annual review and increase by the Board of Directors, discretionary annual cash bonuses, certain payments and benefits upon termination of employment, including accelerated vesting of options and participation in any executive bonus and stock based incentive programs established by us from time to time.  The employment agreements were a condition to the closing of the Horne Engineering acquisition, and reflected our view of the value of obtaining the experience and leadership skills of each of Mr. Horne and Mr. Megless.  In addition, Mr. Horne received a substantial equity interest in our Company in consideration for his Horne Engineering shares.  We believe that for compensatory purposes, Mr. Horne’s equity interest aligns his interests with those of the stockholders generally, and our Board takes this factor into account in compensation determinations with respect to Mr. Horne.

 
- 38 -

 

A Compensation Committee was established by the Board of Directors on January 1, 2007.  In 2009, the Compensation Committee set the performance goals and objectives and recommended to the Board of Directors the overall compensation of the Chief Executive Officer.  In addition, the Compensation Committee will further review the compensation of each of the five (5) most highly compensated employees.  The Compensation Committee will recommend performance objectives and guidelines for the award of bonuses to senior level management.  The executive management of Horne International, Inc. with the advice of the members of the Board of Directors determines the compensation for senior level management.  Executives and members of the Board of Directors participated in deliberations concerning executive officer compensation and senior level management compensation. Darryl Horne and John Krobath did not participate in any deliberations concerning the compensation of the Chief Executive Officer and Chief Financial Officer, respectively.

Components of Executive Compensation for 2009

For 2009, the compensation of the named executive officers consisted of the same three components as were provided to other levels of management—base salary, cash bonus award, and equity compensation.

Base Salaries

Base salary is the fixed element of employees’ annual compensation.  The value of base salary reflects the employee’s long term performance, skill set and the market value of that skill set.  For both the Chief Executive Officer and the former Chief Financial Officer (Mr. Megless), minimum base salaries are established by employment contracts which were entered into on May 11, 2005, in connections with the Company’s acquisition of Horne Engineering as amended in February 2007.  For a period of five (5) years beginning on May 11, 2005, Darryl K. Horne, Chief Executive Officer is entitled to receive an annual base salary of $375,000. The base salaries of the Chief Executive Officer and the Chief Financial Officer were determined to be appropriate based upon their skill sets, knowledge of the marketplace, and historical knowledge of Horne Engineering Services, LLC.  For former our Chief Financial Officer, John Krobath, minimum base salary of $158,625 was established by an employment agreement signed in October 2008.  Paige Shannon receives an annual salary of $160,000 while serving as Interim CFO. Each of the base salaries paid to our “named executive officers” who include our CEO and CFO are comparable to other government contractors of similar size and revenue.  The Compensation Committee of the Board will review the base salaries of Mr, Horne and Ms. Shannon periodically in the future.

In January 2008, our Board at the request of the CEO decreased his salary to $237,000. Mr. Horne has not waived the base salary provisions of his employment contracts.

For 2009 the Company determined that a range of $140,000 to $190,000 for base annual salaries for senior level management was appropriate.  In determining the base salaries of senior level management, we considered the individual employee’s skill set and the market value of that skill set and for employees who have served the Company for at least twelve (12) months, that employee’s overall performance.

Performance and Incentive Cash Bonuses

The Company’s practice is to award annual cash bonuses with the purpose of aligning employees’ goals with the Company’s overall performance objectives.  Cash bonuses are awarded to senior level management based upon the Company’s overall performance and the individual employee’s overall performance.  In 2009, we did not award any cash bonuses to the Chief Executive Officer, Chief Financial Officer or any other named executive.  In 2010 the Compensation Committee of the Board of Directors will set the performance goals and objectives as well as recommend to the Board of Directors the overall compensation of the Chief Executive Officer and Chief Financial Officer.  In addition, the Compensation Committee will further review the compensation of each of the five (5) most highly compensated employees.  The Compensation Committee will recommend performance objectives and guidelines for th