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| DRCO > SEC Filings for DRCO > Form 8-K/A on 15-Oct-2008 | All Recent SEC Filings |
15-Oct-2008
Completion of Acquisition or Disposition of Assets, Financial Statements
On August 1, 2008, Dynamics Research Corporation (the "Company") completed the acquisition of Kadix Systems, LLC ("Kadix") for approximately $42 million in cash with the potential for additional consideration of up to $5 million, based on achievement of certain conditions. Kadix maintains practice specialties in organizational change, human capital, information technology, public and environmental health and learning and organizational development. Kadix is focused on the U.S. Department of Homeland Security, Marine Corps information technology, military medical health, and federal civilian markets. At August 1, 2008, Kadix had approximately 270 employees and is headquartered in Arlington, VA with additional offices in Greater Washington, DC and Aberdeen, MD. Kadix had annual revenues of $23 million for the year ended December 31, 2007.
The terms of the acquisition of Kadix are set forth in the Membership Interest Purchase Agreement dated July 30, 2008, between the Company, Kadix and Daisy D. Layman, the sole member of Kadix (the "Seller"), filed as Exhibit 2.1 to the Current Report on Form 8-K dated August 5, 2008. This Form 8-K/A amends our Current Report on Form 8-K filed on August 5, 2008 to provide required financial information.
The terms of the transaction and the consideration paid by the Company to Seller were a result of arm's length negotiations between the Company's representatives and representatives of Seller. Prior to the completion of the transaction, neither the Company nor, to the Company's knowledge, any of its directors and officers and their respective associates had any material relationship with the Seller.
(a) Financial Statements of Businesses Acquired
Included with this report on Form 8-K/A are the audited and unaudited
financial statements of
Kadix Systems, LLC, as follows: (*)
As of and for the six months ended June 30, 2008:
Balance Sheet as of June 30, 2008 (unaudited)
Statements of Income and Changes in Accumulated Earnings for the six
months ended June 30, 2008 (unaudited)
Statement of Cash Flows for the six months ended June 30, 2008
(*) Note: No procedures have been performed by Cherry, Bekaert & Holland, L.L.P. with respect to the June 30, 2008 financial statements
(b) Unaudited Pro Forma Financial Information Pro Forma Combined Condensed Balance Sheet as of June 30, 2008 Pro Forma Combined Condensed Statement of Operations for the six months ended June 30, 2008 Pro Forma Combined Condensed Statement of Operations for the year ended December 31, 2007 Notes to Unaudited Pro Forma Combined Financial Statements
(c) Exhibits
Item Number Description
23.1 Consent of Cherry, Bekaert & Holland, L.L.P. (Independent Auditors for Kadix Systems, LLC)
Balance Sheet (unaudited) 1
Statement of Income and Changes in Accumulated Earnings (unaudited) 2
Statement of Cash Flows (unaudited) 3
Notes to Interim Financial Statements 4-5
KADIX SYSTEMS, LLC
BALANCE SHEET (unaudited)
JUNE 30, 2008
ASSETS
Current assets
Cash $ 2,496,044
Restricted cash 113,528
Accounts receivable, net 8,740,309
Prepaid expenses 71,968
Total current assets 11,421,849
Property and equipment, net 315,358
Other assets 6,710
Total assets $ 11,743,917
LIABILITIES AND MEMBER'S EQUITY
Current liabilities
Capital lease obligations, current portion $ 57,685
Accounts payable 1,842,942
Accrued salaries and related expenses 1,637,927
Deferred rent, current portion 6,625
Total current liabilities 3,545,179
Non current liabilities
Capital lease obligations, long term portion 12,094
Deferred rent, long term portion 4,561
Total non current liabilities 16,655
Total liabilities 3,561,834
Commitments and contingencies
Member's equity
Capital 100
Accumulated earnings 8,181,983
Total member's equity 8,182,083
Total liabilities and member's equity $ 11,743,917
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KADIX SYSTEMS, LLC
STATEMENTS OF INCOME AND CHANGES IN ACCUMULATED EARNINGS (unaudited)
SIX MONTHS ENDED JUNE 30, 2008
Revenue $ 20,608,708
Costs and expenses:
Direct expenses 10,501,750
Indirect expenses 5,206,333
Total costs and expenses 15,708,083
Operating income 4,900,625
Interest and other income (expense)
Interest income, net 3,832
Other (70,107 )
Total interest and other income (expense) (66,275 )
Net income 4,834,350
Accumulated earnings, beginning of year 5,399,929
Distributions (2,052,296 )
Accumulated earnings, end of period $ 8,181,983
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KADIX SYSTEMS, LLC
STATEMENT OF CASH FLOWS (unaudited)
SIX MONTHS ENDED JUNE 30, 2008
Cash flows from operating activities:
Net income $ 4,834,350
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 97,755
Loss on disposal of fixed assets 599
Changes in assets and liabilities:
Restricted cash 360,752
Accounts receivable, net (3,803,950 )
Prepaid expenses (14,319 )
Accounts payable 561,424
Accrued salaries and related expenses 1,274,122
Deferred rent 222
Net cash provided by operating activities 3,310,955
Cash flows from investing activities:
Purchases of property and equipment (199,025 )
Net cash used in investing activities (199,025 )
Cash flows from financing activities:
Payments for capital lease obligations (54,843 )
Distributions (2,052,296 )
Net cash used in financing activities (2,107,139 )
Change in cash 1,004,791
Cash, beginning of year 1,491,253
Cash, end of period $ 2,496,044
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Note 1 - Organization and business
Kadix Systems, LLC (the Company) was incorporated in the Commonwealth of Virginia on November 27, 2001 as a limited liability company. The Company will continue until December 31, 2031 unless sooner terminated in accordance with its Operating Agreement. The Company is a professional services firm providing technical support and consulting to the Federal Government and to commercial organizations in the D.C. metropolitan area, Aberdeen and Columbia (Maryland), Quantico (Virginia) and San Antonio (Texas).
In the opinion of management, all material adjustments that are of a normal and recurring nature necessary for a fair presentation of the results for the periods presented have been reflected. The results for the six months ended June 30, 2008 may not be indicative of the results that may be expected for the year ending December 31, 2008. The accompanying financial information should be read in conjunction with the audited financial statements and notes for the year ended December 31, 2007 (contained in this filing). The Company has reclassified certain prior period amounts to conform with the current period presentation.
Note 2 - Critical accounting policies
Revenue recognition - The Company performs work under time and materials, cost plus, and fixed price contracts. The Company must receive approval to incur costs in excess of funding. Revenues on time and materials contracts are recognized on the basis of direct labor hours delivered and reimbursable costs incurred. Revenues on fixed price contracts are calculated based on the percentage of completion method. Under this method, individual contract revenue earned is measured by the percentage relationship that contract costs incurred bear to management's estimate of total contract costs. Revenue from cost-type contracts is recognized as costs are incurred on the basis of direct costs plus allowable indirect costs and an allocable portion of the fee.
Losses are recorded in full when they become determinable. Revenue recognized on contracts in excess of related billings is reflected as unbilled receivables. Progress billings in excess of earned revenue are reflected as billings in excess of costs and accrued profit.
Note 3 - Accounts receivable
Accounts receivable at June 30, 2008 consists of:
Billed - trade $ 8,380,615
Unbilled 359,694
$ 8,740,309
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Note 4 - Property and equipment
A summary of property and equipment at June 30, 2008 is as follows:
Leasehold improvements $ 107,565
Furniture and fixtures 112,774
Computer equipment 130,300
Capitalized leases 427,043
Software 149,768
927,450
Less accumulated depreciation and amortization (612,092 )
$ 315,358
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Depreciation and amortization expense was $97,755 for the six months ended June 30, 2008.
Note 5 - Bank line-of-credit
The Company has a line-of-credit agreement with a bank, which provides for borrowings up to $3,000,000, subject to an annual reaffirmation by the bank. As of June 30, 2008 no amounts were outstanding. The maximum borrowing amount is equal to the lesser of $3,000,000 or the sum of 90% of eligible government receivables, as defined in the agreement. The interest floor is 5.0% and borrowings are secured by all of the Company's assets. The agreement contains a covenant related to net worth. As of June 30, 2008 the Company was in compliance with this covenant.
Note 6 - Concentrations
Substantially all of the Company's revenue and accounts receivable are derived from prime contracts and subcontracts with the U.S. Government or with commercial prime contractors. Since a majority of the Company's revenue is derived from contracts with the U.S. government, any cancellations or modifications of significant contracts or subcontracts, or failure by the U.S. government to exercise an option period relating to those contracts or subcontracts, could adversely affect our financial condition and results of operations in the short and long term. Additionally, U.S. government contracts can be terminated at any time by U.S. government without cause, for the convenience of the U.S. government. If such termination occurs, the Company would be entitled to receive compensation for services provided and costs incurred through termination, plus, in certain circumstances, a negotiated amount of profit.
Note 7 - Contingencies
The Company is subject to legal proceedings and claims which arise in the ordinary course of business. In the opinion of management, there is no pending or threatened litigation or administrative proceeding that is expected to have a material adverse impact on the Company's financial position or results of operations.
Note 8 - Subsequent Events
On August 1, 2008, the Company sold 100% of its outstanding membership interests in the Company to Dynamics Research Corporation (Dynamics Research) for $42 million in cash, subject to certain adjustments typical for a transaction of this type, with the potential for additional consideration of up to $5 million, based on achievement of certain conditions, as more fully described in the Member Interest Purchase Agreement, dated July 30, 2008. The terms of the transaction and the consideration paid by Dynamics Research to the Company were a result of arm's length negotiations between the representatives of both parties. Prior to the completion of the transaction, the Company did not have a material relationship with Dynamics Research.
In conjunction with the sale and pursuant to the terms of the Company's Phantom Unit Plan and Ownership Appreciation Rights Plan, as amended, to allow the acceleration of all unvested outstanding rights, all of the units outstanding vested on the sale date. The total amount due to the holders of these units was $7.5 million and was paid from the proceeds of the membership interest sale. In addition $375,000 of transaction and discretionary bonuses along with $1.7 million of professional fees were paid from the proceeds of the membership interest sale.
Report of Independent Auditors 1
Balance Sheets 2
Statements of Income and Changes in Accumulated Earnings 3
Statements of Cash Flows 4
Notes to Financial Statements 5-10
REPORT OF INDEPENDENT AUDITORS
To the Member of
Kadix Systems, LLC
We have audited the accompanying balance sheets of Kadix Systems, LLC (a Limited Liability Company) as of December 31, 2007 and 2006 and the related statements of income and changes in accumulated earnings and of cash flows for the years then ended. These financial statements are the responsibility of the management of Kadix Systems, LLC. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Kadix Systems, LLC as of December 31, 2007 and 2006, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
/s/ Cherry, Bekaert & Holland, L.L.P.
Vienna, Virginia
March 20, 2008
KADIX SYSTEMS, LLC
BALANCE SHEETS
December 31,
2007 2006
ASSETS
Current assets
Cash $ 1,491,253 $ 333,401
Restricted cash 474,280 306,337
Accounts receivable, net 5,044,512 3,878,681
Prepaid expenses 57,649 58,924
Total current assets 7,067,694 4,577,343
Property and equipment, net 214,687 392,565
Other assets 6,710 6,035
Total assets $ 7,289,091 $ 4,975,943
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LIABILITIES AND MEMBER'S EQUITY
Current liabilities
Bank line-of-credit $ - $ 615,000
Capital lease obligations, current portion 91,616 135,436
Accounts payable 1,281,518 766,096
Accrued salaries and related expenses 363,805 299,646
Billings in excess of cost and profit 108,153 -
Deferred rent, current portion 3,062 10,495
Total current liabilities 1,848,154 1,826,673
Non current liabilities
Capital lease obligations, long term portion 33,006 88,962
Deferred rent, long term portion 7,902 9,077
Total non current liabilities 40,908 98,039
Total liabilities 1,889,062 1,924,712
Member's equity
Capital 100 100
Accumulated earnings 5,399,929 3,051,131
Total member's equity 5,400,029 3,051,231
Commitments and contingencies
Total liabilities and member's equity $ 7,289,091 $ 4,975,943
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KADIX SYSTEMS, LLC
STATEMENTS OF INCOME AND CHANGES IN ACCUMULATED EARNINGS
Year ended December 31,
2007 2006
Revenue $ 22,970,932 $ 17,485,764
Costs and expenses:
Direct expenses 11,136,300 9,731,570
Indirect expenses 8,202,594 6,767,731
Total costs and expenses 19,338,894 16,499,301
Operating income 3,632,038 986,463
Interest and other income (expense)
Interest expense, net (30,893 ) (66,820 )
Other (95,347 ) (111,469 )
Total interest and other income (expense) (126,240 ) (178,289 )
Net income 3,505,798 808,174
Accumulated earnings, beginning of year 3,051,131 2,438,957
Distributions (1,157,000 ) (196,000 )
Accumulated earnings, end of year $ 5,399,929 $ 3,051,131
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KADIX SYSTEMS, LLC
STATEMENTS OF CASH FLOWS
Year ended December 31,
2007 2006
Cash flows from operating activities:
Net income $ 3,505,798 $ 808,174
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 259,508 206,044
Loss on disposal of fixed assets 1,436 -
Changes in assets and liabilities:
Accounts receivable, net (1,165,831 ) 1,990,978
Prepaid expenses 1,275 (7,038 )
Other assets (675 ) (3,101 )
Accounts payable 515,422 (443,099 )
Accrued salaries and related expenses 64,159 (297,988 )
Billings in excess of cost and profit 108,153 -
Deferred rent (8,608 ) (8,334 )
Net cash provided by operating activities 3,280,637 2,245,636
Cash flows from investing activities:
Purchases of property and equipment (43,621 ) (21,341 )
Net cash used in investing activities (43,621 ) (21,341 )
Cash flows from financing activities:
Net payments to bank line-of-credit (615,000 ) (1,353,200 )
Payments for capital lease obligations (139,221 ) (122,948 )
Distributions (1,157,000 ) (196,000 )
Net cash used in financing activities (1,911,221 ) (1,672,148 )
Change in cash 1,325,795 552,147
Cash, beginning of year 639,738 87,591
Cash, end of year $ 1,965,533 $ 639,738
Supplemental disclosure of cash flow information:
Interest paid $ 32,917 $ 68,909
Non-cash investing and financing activities:
Equipment acquired under capital leases $ 39,445 $ 93,110
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Note 1 - Organization and business
Kadix Systems, LLC (the Company) was incorporated in the Commonwealth of Virginia on November 27, 2001 as a limited liability company. The Company will continue until December 31, 2031 unless sooner terminated in accordance with its Operating Agreement. The Company is a professional services firm providing technical support and consulting to the Federal Government and to commercial organizations in the D.C. metropolitan area, Aberdeen and Columbia (Maryland), Quantico (Virginia) and San Antonio (Texas).
Note 2 - Summary of significant accounting policies
Cash - For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with an original maturity of three . . .
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