Dynamics Research DEF 14A 2007
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
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Dynamics Research Corporation
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NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To Be Held May 24, 2007
To the Shareholders:
The Annual Meeting of the shareholders of Dynamics Research Corporation will be held at 2:00 p.m. on May 24, 2007 at the offices of Nixon Peabody LLP, 100 Summer Street, Boston, Massachusetts 02110, for the following purposes:
Only shareholders of record at the close of business on March 30, 2007 will be entitled to receive notice of and to vote at the meeting.
By order of the Board of Directors,
Richard A. Covel
April 27, 2007
TABLE OF CONTENTS
DYNAMICS RESEARCH CORPORATION
60 Frontage Road
Andover, Massachusetts 01810
ANNUAL MEETING OF SHAREHOLDERS
The accompanying proxy is solicited by the Board of Directors of Dynamics Research Corporation (the Company) to be voted at the 2007 Annual Meeting of Shareholders to be held on May 24, 2007.
Shares represented by proxies in the accompanying form, if properly executed and returned and not revoked, will be voted at the Annual Meeting. To be voted, proxies must be filed with the Secretary prior to voting. The authority granted by an executed proxy may be revoked at any time before it is exercised by filing with the Secretary of the Company a written revocation or a duly executed proxy bearing a later date or by voting in person at the Annual Meeting. Proxies will be voted as specified by the shareholders. If no specification is made, the proxy will be voted for the election of three Class II Directors to hold office until the 2010 Annual Meeting of Shareholders.
Shareholders of record at the close of business on March 30, 2007 are entitled to notice of and to vote at the Annual Meeting. There were 9,380,687 shares of common stock, $0.10 par value per share, outstanding as of that date, each entitled to one vote.
This proxy statement and the enclosed proxy are being mailed to shareholders on or about the date of the Notice of Annual Meeting.
The cost of solicitation of proxies will be borne by the Company. Employees of the Company may also solicit proxies by mail, telephone or personal interview.
Consistent with state law and under the Companys by-laws, a majority of the shares entitled to be cast on a particular matter, present in person or represented by proxy, constitutes a quorum as to such matter. Persons appointed by the Company to act as election inspectors for the meeting will count votes cast by proxy or in person at the Annual Meeting.
If a quorum is present, the affirmative vote of the holders of a plurality of the votes properly cast for the election of directors at the Annual Meeting is required to elect the three nominees for election as Class II Directors at the Annual Meeting.
The election inspectors will count shares represented by proxies that withhold authority to vote for either proposal or that reflect abstentions and broker non-votes (i.e., shares held by brokers or nominees as to which
(i) instructions have not been received from the beneficial owners and (ii) the broker or nominee does not have the discretionary authority to vote on a particular matter) only as shares that are present and entitled to vote on the proposal for purposes of determining a quorum. Neither abstentions nor broker non-votes have any effect on the outcome of voting on the election of directors.
ELECTION OF DIRECTORS
The Company maintains a standing Nominating and Governance Committee, comprised solely of independent directors who are responsible for identifying individuals qualified to become Board of Director (Board) members and recommending director nominees to the Board. This Committee periodically reviews the size and composition of the Board and determines whether it is necessary to add or replace directors. Nominees for director are selected based on the criteria set forth in the Nominating and Governance Committee section under Board of Directors and Committees within this section.
The Board is comprised of seven members and is classified into three classes, as nearly equal in number as possible, having staggered terms of three years each with the term of office of one class expiring each year. The enclosed proxy will be voted to elect three Class II Directors for a term of three-years expiring at the 2010 Annual Meeting of Shareholders, or until their respective successors are elected and qualified. If a nominee should become unavailable, proxies will be voted for a substitute nominee designated by the Board, unless instructions are given to the contrary. The Board has no reason to expect that the nominees will become unavailable to serve.
The following table sets forth for each nominee and each director whose term continues after the meeting his age, a brief description of his principal occupation and business experience during the last 5 years, certain other directorships held and how long he has been a director of the Company. Except for Mr. Regan and Mr. Anderegg, none of the nominees or directors is employed by the Company.
The Board recommends a vote FOR the election of all nominees as Class II Directors.
The Board has an Audit Committee, a Compensation Committee and a Nominating and Governance Committee. The Board held five regularly scheduled meetings during 2006. In 2006, each of the directors attended 100% of the total number of meetings of the Board.
Audit Committee. The Audit Committee, comprised solely of independent directors, is responsible for the oversight of our accounting and financial reporting processes and the audits of our financial statements. In discharging its duties, the Audit Committee reviews with the independent registered public accounting firm and management the financial statements and reports issued by the Company, reviews the Companys internal accounting procedures, controls and programs, reviews any transactions that involve a potential conflict of interest, reviews the scope of independent audit coverage and the fees charged by the independent accountants and reviews the independence of such accountants from our management and Company. The Audit Committee also is responsible for selecting and engaging the Companys independent registered public accounting firm. The Audit Committee operates under a written charter, which was initially adopted by the Board on April 25, 2000 and amended by the Board most recently on July 28, 2004. A copy of the Audit Committee Charter, as amended, is publicly available on the Companys website at www.drc.com. The Companys Audit Committee consists of three members: Mr. Kames, Chairman, Lt. General McCausland and Mr. Stavropoulos. The Audit Committee held eight meetings during 2006 in which Mr. Kames and Lt. General McCausland each attended 100% of the meetings and
Mr. Stavropoulos attended 75% of the meetings. The Board has determined that each Audit Committee member has sufficient knowledge in financial and accounting matters to serve on the Committee. The Board has also designated Mr. Kames and Mr. Stavropoulos as the audit committee financial experts, as defined under Item 407(d)(5) of Regulation S-K, adopted in accordance with Section 407 of the Sarbanes-Oxley Act of 2002.
Compensation Committee. The Compensation Committee is responsible for determining the compensation for the Chief Executive Officer (CEO) and the Companys other executive officers and for administering the Companys various stock option and other incentive plans and determining distributions and granting awards under such plans at the executive level. The CEO determines distributions and grants awards under such plans at the non-executive level. The Compensation Committee operates under a written charter, which was initially adopted by the Board on December 10, 2002 and amended on December 10, 2003. A copy of the Compensation Committee Charter, as amended, is publicly available on the Companys website at www.drc.com. The current members of the Compensation Committee are Dr. Aguilar, Chairman, General Babbitt and Mr. Stavropoulos, all of whom satisfy the independence requirements of the current listing standards of the Nasdaq Global Market. The Compensation Committee held three meetings during 2006 in which all committee members attended 100% of the meetings.
Nominating and Governance Committee. The Nominating and Governance Committee recommends to the Board nominees for the Board as well as for the Board committees, reports annually to the Board on succession planning, leads the Board in its annual review of the Boards performance and recommends to the Board on an ongoing basis the corporate governance guidelines applicable to the Company. The Nominating and Governance Committee was appointed by the Board and held one meeting in 2006 which all committee members attended. The Board discussed governance matters at each of its five meetings in 2006. The Nominating and Governance Committee operates under a written charter, which was initially adopted by the Board on December 10, 2002 and amended on December 10, 2003. A copy of the Nominating and Governance Committee Charter, as amended, is publicly available on the Companys website at www.drc.com. The current members of the Nominating and Governance Committee are Dr. Aguilar, Chairman, Lt. General McCausland and General Babbitt, all of whom satisfy the independence requirements of the current listing standards of the Nasdaq Global Market.
The Nominating and Governance Committee considers and evaluates equally candidates proposed by shareholders, non-management directors, the CEO, other executive officers, third-party search firms or other sources and conducts appropriate inquiries into the backgrounds and qualifications of such candidates. Although the Nominating and Governance Committee currently identifies candidates primarily through networking, third-party search firms would be used if considered necessary. Shareholders may recommend individuals to the Nominating and Governance Committee for consideration as potential director candidates by submitting the names and backgrounds of the proposed candidates to Dr. Aguilar, Chairman of the Nominating and Governance Committee, in care of Richard A. Covel, Dynamics Research Corporation, 60 Frontage Road, Andover, Massachusetts 01810-5498. The Nominating and Governance Committee shall consider such recommendations only if appropriate biographical information and background material is provided.
To be recommended by the Nominating and Governance Committee for a position on the Companys Board, a candidate must, at a minimum, have high standards of personal and professional ethics, integrity and values; substantial experience at the policy making level in business, government, or education; expertise that is complementary to the experience of other Board members; a willingness and ability to devote the required amount of time to fulfill diligently the duties and responsibilities of Board membership; and a desire to represent the balanced best interests of the shareholders as a whole. In addition, the Nominating and Governance Committee believes that one or more of the Companys directors should have expertise or experience as a military officer or a senior civil service executive; as a senior corporate manager or operating officer; and as a public company financial or accounting officer.
The Board has determined that a majority of the Companys directors are independent. In determining director independence, the Board broadly considers all relevant facts and circumstances, including the rules of the Nasdaq Global Market. The Board considers the issue not merely from the standpoint of a director, but also from that of persons or organizations with which the director has an affiliation. An independent director is free of any relationship with the Company or its management that may impair the directors ability to make independent judgments. Particular attention is paid to whether a director is independent from management and to any financial relationships that may exist with a director or a related interest.
The following directors have been determined by the Board to be independent after applying the guidelines set forth above: Dr. Aguilar, General Babbitt, Mr. Kames, Lt. General McCausland, and Mr. Stavropoulos. Each member of the Compensation Committee, the Governance and Nominating Committee, and the Audit Committee is independent. There are no family relationships between any director, executive officer, or person nominated or chosen by the Company to become a director or executive officer.
Shareholders of the Company may communicate in writing directly with the Board by submitting to Richard A. Covel, Dynamics Research Corporation, 60 Frontage Road, Andover, Massachusetts 01810, any such communications. Mr. Covel is primarily responsible for monitoring the communications and providing summaries or copies of such communications to the full Board as he deems appropriate. In general, communications relating to corporate governance and long-term corporate strategy will be submitted to the full Board, and communications relating to ordinary business affairs, personal grievances and the like may be dealt with by Mr. Covel.
The table below provides information concerning the compensation of the directors for our most recently completed fiscal year. Except as noted below, all of our directors are paid at the same rate. The differences among directors in the table below are a function of additional compensation for chairing a committee. In accordance with Securities and Exchange Commission (SEC) regulations, grants of restricted stock are valued at the grant date fair value computed in accordance with Statement of Financial Accounting Standards No. 123 (Revised), Share-Based Payment (SFAS 123(R)). We disclose such expense ratably over the vesting period but without reduction for assumed forfeitures (as we do for financial reporting purposes). We include in the table below the ratable portion of grants made both in 2006 and in prior years to the extent the vesting period for those grants fell in such year.
Each non-employee director received an annual retainer of $27,500 in 2006. The Chairman of each of the Audit Committee, Compensation Committee and Nominating and Governance Committee also received an additional retainer of $10,000, $5,000 and $2,500, respectively. In addition, directors are paid a fee of $1,500 for each day the full Board meets in excess of each years five regularly scheduled meetings. Non-employee directors serving on the Board in May 2006 also received a grant of 2,400 restricted stock awards, which vest in equal installments over a three-year period from the grant anniversary date. Our non-employee directors do not participate in our non-equity incentive compensation plans or retirement plans.
Non-employee directors may elect to defer all or a portion of their fees payable to them under the Companys Deferred Compensation Plan for Non-Employee Directors. Participants may also elect to receive their deferred balance in the form of cash or restricted stock after they cease to be a director. Amounts deferred are maintained in a separate account and for participants who elect a cash payment, interest is credited to such account quarterly at the lowest rate at which the Company borrowed money during each quarter or, if there was no such borrowing, at the
prime rate. The balance in a participants account is payable in a lump sum or in installments when the participant ceases to be a director.
Dr. Aguilar and General Babbitt have each elected to defer all of their compensation for 2006, and both of them have elected to receive their deferred compensation in the form of stock. General Babbitt elected to have the deferred amounts distributed in five annual installments after he ceases to be a director of the Company. Dr. Aguilar elected to have the deferred amounts distributed in a single payment after he ceases to be a director of the Company.
Unless the context requires otherwise, in this Executive Compensation section, including the Compensation Discussion and Analysis and the tables which follow it, references to we, us, our or similar terms are to Dynamics Research Corporation and our subsidiaries.
Executive officers are elected by the Board and will hold office until the next annual election of officers and their successors are elected and qualified, or until their earlier resignation or removal by the Board. Executive officers and their principal positions currently held with us are provided in the Summary Compensation Table. Please refer to our Annual Report on Form 10-K (Form 10-K) under Item 4, Submission of Matters to a Vote of Security Holders for a listing of all positions and offices held by each executive officer during the past five years.
COMPENSATION DISCUSSION AND ANALYSIS
We provide a total compensation package that supports the accomplishment of our objectives and of our customers by supporting the following goals:
The underlying foundation of our compensation system is to pay for performance, at all levels, i.e., individual, business segment, and corporate-wide. Our programs are designed to align incentives with the most appropriate segments of the business that the executives performance can impact. In addition, the compensation system encourages and supports the professional and technological skills development and career growth of employees while balancing the individuals goals and our goals.
1. Our total compensation systems and programs reinforce and support our values and culture related to dedication, respect and continuous improvement.
2. Consistent with a pay-for-performance orientation, we ensure effective differentiation of pay, rewards, and recognition based on demonstrated performance and overall contribution to the success of our business.
3. All elements of our direct compensation system (i.e., base salary, short-term variable, and long-term variable and the policies and practices supporting the programs) are targeted at median competitive market levels for appropriate industry competitor groups for which we compete for our workforce.
4. We offer a diversified array of benefits, covering health and welfare and retirement savings programs, which matches competitive practice for our industry.
5. We provide ongoing training of supervisors in the best practices and techniques for measuring and evaluating performance. Managers will be held accountable for effective performance management, employee development, and the creation of a rewarding work environment.
6. We use a job evaluation system that appropriately balances internal ranking and external competitiveness, is simple to administer, and is easy to understand.
7. We continuously define, acknowledge and reward an individuals acquisition of the professional and technical skills that are important to our success.
8. We are committed to openly communicating with all employees about our total compensation strategy, systems, and programs, and make a wide array of information available through our intranet site, ongoing training programs, and focused training used each year to deliver programs.
It is a strong cultural norm of ours that the same compensation philosophy, policies, and practices are applied to all. While there are differences in programs for different employee groups, the differences are only created where competitive differences exist externally, and are required to be sure that the competitiveness of programs are maintained at all levels.
The following table provides a summary of the primary purpose and strategic fit of each of the programs available to our executives. These purposes are key considerations for any changes being proposed to programs or in the consideration of adding additional programs.
We provide an ongoing base salary with consideration for annual salary increases based on performance of the executive over the past year. A competitive analysis of base salaries and total cash compensation payouts is developed using published cross-industry surveys for companies comparable in size to the Company.
A performance evaluation is completed for each named executive by the Chairman and CEO, and recommendations are developed based on that review and presented to the Compensation Committee for review and consideration for approval. Final recommendations are then presented to the Board for review and consideration for approval. These recommendations are subject to approval by the Board. The salary increases granted in February 2006 for the named executive officers averaged 4.5%.
This annual award plan design is typical of annual award plans used throughout the industry, and is designed to provide an annual incentive to maximize performance over the current fiscal year. Each year the Board approves a target award percentage for each executive based on competitive analysis as mentioned above. This award target is communicated to the executive along with the agreed upon goals for the year that are used to generate payout. For 2006, the goals used were Revenue Growth (40% of total), Net Performance Income (40% of total) and Days Sales Outstanding (20% of total). For functional executives, an additional goal was used that focused on management of individual financial budget performance for each functional executive.
As part of the same process mentioned above for determining salary increases, the Chairman and CEO makes recommendations to the Compensation Committee each year for payout of individual awards based on our
performance and that of each individual named executive. Upon approval by the Compensation Committee, these recommendations are then presented to the Board for review and consideration for approval. The Compensation Committee and the Board also have the responsibility for reviewing and approving any adjustments to goals or exceptions to the plan that may be recommended by the Chairman and CEO to respond to competitive or key executive retention issues. No awards were paid from this plan in 2006 for 2005 performance. Based on the 2006 performance results, awards granted to the named executive officers for 2006 performance averaged 19% of base salary, less than half of their average original target award percentage for the year. The awards approved by the Compensation Committee and the Board reflect our consideration of performance against goals, unforeseeable adverse marketplace changes and positive performance trends exhibited in the second half of the year.
The 2001 Executive Long-Term Incentive Plan (ELTIP) is a one-time long-term incentive plan approved by the Compensation Committee and Board in 2001. The purpose of the plan is both long term performance incentive and retention. Messrs. Regan, Keleher, Covel, and OBrien are participants in the plan. The plan awards include both restricted share awards and incentive stock options. Performance goals were established over the term of the plan. The plan provides for 100% vesting after seven years with the opportunity for acceleration of vesting if performance targets are achieved prior to the end of the term.
Long-term incentive cash awards are being offered for the first time beginning in April 2007. A peer group competitive sizing was completed and will be done annually to determine competitive total long-term incentive opportunity. The companies used in this years peer group comparison were: CACI International, Inc., ManTech International Corp., Maximus, Inc., MTC Technologies, Inc., NCI, Inc., SI International, Inc., SRA International, Inc., TechTeam Global, Inc. and Tyler Technologies, Inc. Restricted stock awards are used to fill a portion of that competitive sizing, as mentioned above, to address retention as well as incentive performance objectives. The remaining portions (currently estimated to be approximately 75% of the total award opportunity) will be provided through long-term cash incentives. This opportunity will generally have a three-year vesting restriction and performance will be based on achievement of specified corporate performance goals over the three-year period. For the 2007 grant, for one time only, the grant will vest 50% after the first two years and 50% at the end of the third year. This adjustment is being done to assure a smooth transition from the previous one-time long-term incentive plan scheduled to vest in 2008.
Performance goals will be reviewed annually and reset annually. For the 2007 grant, organic revenue growth and return on invested capital were selected as the measures of performance. Recommendations for future awards will be submitted annually by the Chairman and CEO for consideration for approval by the Compensation Committee and the Board. When the performance period is completed, the Compensation Committee and the Board will certify the level of performance against the goals and will approve appropriate payments to executives. The Compensation Committee and the Board will also have approval responsibilities of any plan changes due to administrative or non-recurring business transactions that may change performance goals based on recommendations by the Chairman and CEO.
This program is designed to reward long-term performance at all levels and to provide retention value to the executive. Each year grants are made to executives to fill a portion of the competitive target for total long-term incentive compensation as determined in a peer competitive analysis.
In 2005, Stock Ownership Guidelines were approved by the Board for the senior executive group. As a result, Mr. Regan is required to maintain a level of equity ownership with us equal to at least three times the midpoint of his base salary range. Mr. Keleher is required to maintain a level of equity ownership with us equal to at least one and one-half times the midpoint of his base salary range. The other named executive officers have an additional one-year holding restriction after vesting prior to being able to exercise vested shares. These awards generally vest ratably over three years. Recommendations for these grants are proposed by the Chairman and CEO to the Compensation Committee for review and consideration for approval. The grants are then presented to the Board for consideration for approval. The remaining portion of long-term incentives is provided in a long-term cash incentive opportunity as described below.
We currently maintain a defined benefit pension plan that has undergone significant changes in recent years. In February 2002, the Board approved specific retirement program changes that limited future increases in benefits and froze the plan to new participants. These changes became effective July 1, 2002. Then in October 2006, the Board approved a total freeze in benefits effective as of January 1, 2007. Currently Messrs. Regan, Keleher, OBrien and Covel are participants in this plan.
This is a voluntary, deferred compensation plan in which executives may elect to defer a portion of their base salary and all or a portion of their annual cash bonus until a specified event or date. We do not make contributions to this plan. Therefore all gains are purely a function of funds that have been deferred and the investment performance on these funds. Election periods are established according to statutory deadlines governing these plans.
We have an employment agreement with Mr. Regan providing for his full-time employment as president, CEO and a director. Mr. Regan is eligible for an annual incentive award of up to 75% of his base salary. The agreement precludes Mr. Regan from competing with us for one year after the cessation of his employment. The agreement may be terminated by either party on six months notice. If Mr. Regans employment is terminated by us other than for cause or by Mr. Regan with good reason (unless he is covered by the change of control agreement described below), we will continue to pay Mr. Regans base salary and to provide his health and life insurance for twelve months. Mr. Regan would be entitled to receive the portion of his earned prorated annual incentive award and all of his unvested stock grants and options would vest and remain exercisable for one year.
Our change of control agreement with Mr. Regan provides him with benefits if his employment with us is terminated, other than for cause or his disability or death, or if he resigns for good reason within two years of any change of control agreement we enter into. Upon such a termination, (i) we will pay Mr. Regan an amount equal to two times his annual base salary at the rate in effect immediately prior to the date of termination or immediately prior to the change of control, whichever is higher, plus his target bonus compensation for the fiscal year during which the termination of employment occurs or in effect immediately prior to the change of control, whichever is higher; (ii) any unvested restricted stock grants, stock options or other awards will immediately vest and remain exercisable for the lesser of four years or their original term; and (iii) we will continue to insure Mr. Regan and his dependents in our life and medical insurance plans for up to two years after termination or the date Mr. Regan is eligible to receive substantially equivalent life and medical benefits under another employer-provided plan. If any payment or benefit we provide under the agreement is subject to an excise tax under Section 4999 of the Internal Revenue Code of 1986, as amended (the Code), we will provide Mr. Regan with a payment to cover such tax.
Pursuant to the Companys Special Severance Plan, Messrs. Keleher, Wentzell and Covel would each be provided with benefits if their employment with us is terminated, other than for cause or their disability or death, or if they resign for good reason within 24 months of any change of control agreement we enter into. Upon such a termination, (i) we will pay Mr. Keleher eighteen months, and Messrs. Wentzell and Covel twelve months of their current annual base salary at the rate in effect immediately prior to the date of termination or immediately prior to the change of control, whichever is higher, plus their target bonus compensation for the fiscal year during which the termination of employment occurs or in effect immediately prior to the change of control, whichever is higher; and (ii) we will continue to provide our life and medical insurance plans or similar coverage for the same term as their severance pay term after termination or until the date they become eligible to receive substantially equivalent life and medical benefits under another employer-provided plan. The Special Severance Plan agreements terminate on January 1, 2009 or on the second anniversary of a change of control.
In addition to the compensation and benefits programs described above, named executive officers receive certain limited perquisites and other benefits. These include Company paid benefits for an executive medical and dental insurance plans, a supplemental executive medical insurance plan, and 401(k) contributions and, only in the case of Mr. Regan, use of a company vehicle, club membership dues and executive life insurance plan premiums. These perquisites and other benefits are provided to assure competitiveness and provide additional retention incentive for these named executives. The costs associated with providing these additional benefits are reflected in the All Other Compensation column of the Summary Compensation Table.
Section 162(m) of Code imposes limitations on the federal income tax deductibility of compensation paid to our CEO and to each of our other four most highly compensated executive officers. Under these limitations, we may deduct such compensation only to the extent that during any fiscal year the compensation does not exceed $1,000,000 or meets certain specified conditions (such as certain performance-based compensation that has been approved by our shareholders). Based on our current compensation plans and policies and proposed regulations interpreting the Code, we and the Compensation Committee believe that, for the near future, there is not a significant risk that we will lose any significant tax deduction for executive compensation. Our compensation plans and policies will be modified to ensure full deductibility of executive compensation if we and the Compensation Committee determine that such an action is in our best interest.
In summary, we believe this mix of salary, potentially significant variable cash incentives for both short-term and long-term performance, and the potential for equity ownership in the Company motivates our management team to produce strong returns for shareholders. We further believe this program strikes an appropriate balance between the interests and needs of the Company in operating our business and appropriate employee rewards based on shareholder value creation.
The Compensation Committee has reviewed the Compensation Discussion and Analysis and discussed that analysis with management. Based on its review and discussions with management, the committee recommended to the Board that the Compensation Discussion and Analysis be included in our Form 10-K for 2006 and our 2007 proxy statement. This report is provided by the following independent directors, who comprise the committee:
The Compensation Committee of the Board of Directors
Francis J. Aguilar, Chairman
George T. Babbitt
The following sections provide a summary of cash and certain other amounts we paid for the year ended December 31, 2006 to the named executive officers. Except where noted, the information in the Summary Compensation Table generally pertains to compensation to the named executive officers for the year ended December 31, 2006. The compensation we disclose below is presented in accordance with SEC regulations. According to those regulations we are required in some cases to include:
Therefore, we encourage you to read the following tables closely. The narratives preceding the tables and the footnotes accompanying each table are important parts of each table. Also, we encourage you to read this section in conjunction with the Compensation Discussion and Analysis, above.
The following provides information concerning the compensation of the named executive officers for our most recently completed fiscal year for the table illustrated on the following page.
In the column Salary, we disclose the amount of base salary earned by the named executive officer during the fiscal year.
In the columns Stock Awards and Option Awards, SEC regulations require us to disclose the award of stock or options measured in dollars and calculated in accordance with SFAS 123(R). For restricted stock, the SFAS 123(R) fair value per share is equal to the closing price of our stock on the date of grant. For stock options, the SFAS 123(R) fair value per share is based on certain assumptions which we explain in footnote 11 to our financial statements which are included in our Form 10-K. We disclose such expense ratably over the vesting period but without reduction for assumed forfeitures (as we do for financial reporting purposes). The amounts shown in the 2006 Summary Compensation Table also include a ratable portion of each grant we made in prior years to the extent the vesting period fell in 2006. Please also refer to the second table in this Proxy Statement, Grants of Plan-Based Awards.
The Stock Awards column includes expense attributable to restricted stock awards granted in 2006 and in prior years. Restricted stock awards generally vest ratably over three years, with the exception of awards granted under the ELTIP which cliff-vest at seven years. Awards are conditioned on the participants continued employment with the Company.
We made no grants of stock option awards to the named executive officers in 2006. Therefore, the Option Award column discloses only a portion of the expense attributable to stock options granted in prior years. Stock option awards generally vest ratably over three years, with the exception of awards granted under the ELTIP which cliff-vest at seven years. Awards are conditioned on the participants continued employment with the Company.
In the column Non-Equity Incentive Plan Compensation, we disclose the dollar value of all earnings for services performed during the fiscal year pursuant to awards under our Executive Incentive Plan.
In the column Change in Pension Value and Nonqualified Deferred Compensation Earnings, we disclose the sum of the dollar value of the aggregate change in the actuarial present value of the named executive officers accumulated benefit under our defined benefit pension plan in 2006. There were no above-market or preferential earnings, as defined by the SEC, on nonqualified deferred compensation otherwise this amount would be included in this column.
In the column All other compensation, we disclose the sum of the dollar value of:
In this table, we provide information concerning each grant of an award made to a named executive officer in the most recently completed fiscal year. This includes non-equity incentive plan awards granted under the Executive Incentive Plan and restricted stock awards made under the 2000 Incentive Plan. The threshold, target and maximum columns reflect the range of estimated payouts under the Executive Incentive Plan. Restricted stock awards granted to the named executive officer in 2006 were fixed, so the number of awards granted is disclosed in the target column under the equity incentive plan awards section. During 2006, we did not issue any stock option awards and therefore any related columns related to stock option information have been eliminated.
The following table provides information, for the named executives, on the number of shares acquired upon the vesting of restricted stock awards and the value realized before payment of any applicable withholding tax and broker commissions. During 2006, none of the named executives exercised vested stock options and therefore columns related to stock option information have been eliminated.
The following table provides information concerning unexercised options, stock that has not vested, and equity incentive plan awards for each named executive officer outstanding as of the end of our most recently completed fiscal year. Each outstanding award is represented by a separate row which indicates the number of securities underlying the award.
For option awards, the table discloses the exercise price and the expiration date. For stock awards, the table provides the total number of shares of stock that have not vested and the aggregate market value of shares of stock that have not vested.
We computed the market value of stock awards by multiplying the closing market price of our stock at the end of the most recently completed fiscal year by the number of shares or units of stock or the amount of equity incentive plan awards, respectively.
Outstanding Equity Awards at Fiscal Year-End 2006
on 10/12/2007 Mr. Wentzell, 8,334 options; and
each on 5/31/2008 Messrs. Regan, 225,000 options; Keleher, 60,000 options; OBrien, 45,000 options; and Covel, 50,000 options.
each on 3/1/2007 Messrs. Regan, 7,000 shares; Keleher, 3,333 shares; OBrien, 1,000 shares; and Covel, 933 shares;
each on 3/2/2007 Messrs. Regan, 3,000 shares; Keleher, 1,000 shares; OBrien, 500 shares; and Wentzell, 833 shares;
on 4/20/2007 Mr. Covel, 500 shares;
on 10/12/2007 Mr. Wentzell, 1,500 shares;
each on 3/1/2008 Messrs. Regan, 3,000 shares; Keleher, 1,334 shares; OBrien, 200 shares; and Covel, 334 shares;
each on 3/2/2008 Messrs. Regan, 3,000 shares; Keleher, 1,000 shares; OBrien, 500 shares; and Wentzell, 833 shares;
on 4/20/2008 Mr. Covel, 500 shares;
each on 5/31/2008 Messrs. Regan, 25,000 shares; Keleher, 15,000 shares; OBrien, 7,000 shares; and Covel, 10,000 shares;
each on 3/2/2009 Messrs. Regan, 3,000 shares; Keleher, 1,000 shares; OBrien, 500 shares; and Wentzell, 834 shares; and
on 4/20/2009 Mr. Covel, 500 shares.
Our Defined Benefit Pension Plan (Pension Plan) is tax-qualified and non-contributory, covering substantially all employees, including the named executives, who completed one year of service prior to July 1, 2002. On October 25, 2006, our Board approved amendments to the Pension Plan which removed the 3% annual benefit inflator for active participants in the Pension Plan and froze each participants calculated pension benefit as of December 31, 2006.
Effective July 1, 2002, the Board approved specific retirement program changes that limit future increases in benefits and froze membership in the Pension Plan. On July 1, 2002, we calculated the accrued pension benefit for all eligible participants. This benefit was calculated using an employees final average pay and years of service. The amount of annual retirement benefit as of June 30, 2002, was determined by a formula which multiplied years of service by the product of 0.683% of the average of the participants five highest consecutive years of compensation in the last ten years worked (or actual number of years, if less than 5 years) plus 0.65% of such average annual earnings which exceed Social Security covered compensation, but not less than (a) $60 multiplied by his or her years of service or (b) the benefit which had accrued as of December 31, 1987 under our prior retirement program. This accrued benefit increased by 3% each year through December 31, 2006, while the participant was employed with us. Terminated vested employees who worked at least 1,000 hours in the year of termination were eligible for the 3% increase. The 3% increase was applied on the last business day of each year beginning in 2003 and ending on
December 31, 2006. A participant who has 10 or more years of service may elect early retirement at any time between age 55 and normal retirement age of 65, subject to reduction of the retirement benefit to reflect the early commencement of the benefit. The only executive that qualifies for early retirement is Mr. OBrien.
The following table provides information with respect to the Pension Plan for payments or other benefits at, following, or in connection with retirement. This does not include defined contribution plans (whether tax qualified or not). Values reflect the actuarial present value of each named executive officers accumulated benefit under the plan, computed as of December 31, 2006. In making such calculation, we assumed that the retirement age will be the normal retirement age as defined in the plan, or if not so defined, the earliest time at which a participant may retire under the plan without any benefit reduction due to age.
Our Senior Management Deferred Compensation Plan allows certain employees the ability to annually elect to defer up to 100% of any cash incentive payments and any salary in excess of the FICA earnings ceiling. Employee contributions are invested in selected mutual funds held within a Rabbi Trust. A hypothetical account is established for each participant who elects to defer and the participant selects investment funds from a broad range of options. Earnings and losses on each account are determined based on the performance of the investment funds selected by the participant. We do not contribute to this plan.
The following table provides information with respect to the nonqualified deferred compensation plan. The amounts shown include compensation earned and deferred in prior years, and earnings on such amounts.
Potential Payments Upon Termination or Change In Control
The following table summarizes the estimated payments to be made under each contract, plan or agreement (collectively referred to as contracts) which provides for payments to a named executive officer at, following, or in connection with any termination of employment including by resignation, retirement or a constructive termination of a named executive officer, or a change of control. No contracts provide for any additional compensation or benefits for the named executive officers in the event of termination by disability or death. In the event Mr. Regan becomes disabled during employment, the Company would continue to pay his base salary, less the amount of any benefits provided through a Company-provided disability plan, and would continue to provide health and life insurance benefits for up to six months of disability. If Mr. Regan is unable to return to work after six months of disability, the Company may terminate his employment. The following table does not repeat information disclosed above under the pension benefits table, the deferred compensation table, or the outstanding equity awards at fiscal year-end table, except to the extent that the amount payable would be enhanced by the termination event. For the purpose of the quantitative disclosure in the following table, and in accordance with SEC regulations, we have assumed that the termination took place on the last business day of our most recently completed fiscal year.
INDEPENDENT PUBLIC ACCOUNTANTS
On May 23, 2006 the Audit Committee voted to engage Grant Thornton as the Companys independent registered public accounting firm. A representative of Grant Thornton is expected to be present at the Annual Meeting with the opportunity to make a statement if desired and to respond to appropriate questions.
The following table presents fees for professional audit services rendered by Grant Thornton for the audit of the Companys annual financial statements for the years ended December 31, 2006 and December 31, 2005, and fees billed for other services rendered by Grant Thornton during those periods. The Audit Committee approved 100% of the 2006 and 2005 audit and non-audit fees.
In the above table, in accordance with the SECs definitions and rules, audit fees are fees the Company paid to Grant Thornton for the audit of the Companys annual financial statements included in the Form 10-K and review of financial statements included in the Form 10-Qs; for the audit of the Companys internal control over financial reporting with the objective of obtaining reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects; for the attestation of managements report on the effectiveness of internal control over financial reporting; and for services that are normally provided by the auditor in connection with statutory and regulatory filings or engagements. Tax fees are fees for tax compliance, tax advice and tax planning.
The Audit Committee of the Board is required to pre-approve all audit and non-audit services provided by the Companys independent accountants in order to assure that the provision of such services does not impair the accountants independence. The Audit Committee has established a policy regarding pre-approval of permissible audit, audit-related, tax and other services provided by the independent accountants, which services are periodically reviewed and revised by the Committee. Unless a type of service has received general pre-approval under the policy, the service will require specific approval by the Audit Committee. The policy also includes pre-approved fee levels for specified services, and any proposed service exceeding the established fee level must be specifically approved by the Committee.
The Audit Committee of the Board of Directors reviews the Companys auditing, accounting, financial reporting and internal control functions and selects and engages the Companys independent auditors. In discharging its duties, the Audit Committee reviews and approves the scope of the annual audit, non-audit services to be performed by the independent auditors and the independent auditors audit and non-audit fees; reviews the audited financial statements to be included in the Form 10-K for filing with the Securities and Exchange Commission (SEC); meets independently with the Companys director of internal audit, independent auditors and senior management; and reviews the general scope of the Companys accounting, financial reporting, annual audit and internal audit programs and matters relating to internal control systems, as well as the results of the annual audit and interim financial statements, and auditor independence issues. The Audit Committee of the Board of Directors is composed of three directors, each of them qualifying as independent under the current listing standards of the Nasdaq Global Market and applicable SEC rules and regulations. The Audit Committee operates under a written charter adopted and amended by the Board of Directors. A copy of the Audit Committee Charter is publicly available on the Companys website at www.drc.com.
Prior to commencing the 2006 integrated audit of financial statements and internal controls, the Committee discussed with the Companys independent accountants Grant Thornton LLP (Grant Thornton) the overall scope and plans for their audit. Upon completion of the audit, the Committee met with Grant Thornton, with and without management present, to discuss the results of their examination, their evaluation of the Companys internal controls, and the overall quality of the Companys financial reporting.
The Committee reviewed with management and with Grant Thornton the audited financial statements for the year ended December 31, 2006, including footnotes as well as managements discussion and analysis of results of operations included in the Form 10-K. The Committee also discussed with Grant Thornton matters required to be discussed by Statement on Auditing Standards No. 61, as amended, as adopted by the Public Company Accounting Oversight Board (PCAOB) in Rule 3200T. The Committee has received the written disclosures and the letter from Grant Thornton as to that firms independence from management and the Company, as required by the Independence Standards Board Standard No. 1, Independence Discussion with Audit Committees, as adopted by the PCAOB in Rule 3600T, and has discussed with Grant Thornton their independence.
Based upon these reviews and discussions, the Committee recommended to the Board of Directors that the audited financial statements be included in the Form 10-K for the year ended December 31, 2006 for filing with the Securities and Exchange Commission.
The Audit Committee of the Board of Directors
Kenneth F. Kames, Chairman
Charles P. McCausland
STOCK OWNERSHIP OF CERTAIN PERSONS
The following table sets forth the number and the percentage of shares of the Companys common stock that were beneficially owned by the executive officers named in the Summary Compensation Table, by the directors and by all current directors and executive officers as a group as of March 30, 2007. There were no shares of the Companys preferred stock that was issued and outstanding as of March 30, 2007. Except as otherwise indicated, each director or executive officer listed below possessed sole voting and investment power with respect to their shares.
The following sets forth certain information concerning the principal shareholders known to us who may be considered beneficial owners of more than 5% of the outstanding shares of the Company common stock as of December 31, 2006.
The Company has four shareholder approved equity incentive plans, which are administered by the Compensation Committee of the Board. These plans, which include the 1993 Equity Incentive Plan, the 1995 Stock Option Plan for Non-Employee Directors, the 2000 Incentive Plan and the 2003 Incentive Plan, are more fully described in footnote 11 to our financial statements which are included in our Form 10-K.
The Company also maintains a shareholder approved 2000 Employee Stock Purchase Plan (the ESPP) which is designed to give eligible employees an opportunity to purchase common stock of the Company through accumulated payroll deductions. All employees of the Company or designated subsidiaries who customarily work at least 20 hours per week and do not own five percent or more of the Companys common stock are eligible to participate in the ESPP. On October 25, 2006, the Companys Board of Directors approved an amendment to eliminate the look-back option and to reduce the stock purchase discount from 15% to 5% under the ESPP effective November 1, 2006. Under SFAS 123(R), this amendment results in the Company accounting for shares purchased in connection with the ESPP as non-compensatory as of the effective date. Please refer to footnote 11 to our financial statements for additional information regarding the ESPP.
The following table summarizes, as of December 31, 2006, the number of shares of the Companys common stock to be issued upon exercise of options issued under our equity compensation plans and the number of shares of common stock remaining available for future issuance under these plans.
The following graph illustrates the return that would have been realized (assuming reinvestment of dividends) by an investor who invested $100 on December 29, 2001 in each of (i) the Companys common stock, (ii) the NASDAQ Stock Market Composite U.S. Index and (iii) a peer group of companies as listed below:
Comparison of Five Year Cumulative Total Returns
Performance Graph for
Dynamics Research Corporation
OTHER DIRECTOR AND EXECUTIVE OFFICER INFORMATION
The Company recognizes that related party transactions can present potential or actual conflicts of interest and create the appearance that Company decisions are based on considerations other than our best interests and our shareholders. Therefore, all related party transactions are reviewed and approved by the Audit Committee in accordance with the Audit Committee Charter. During 2006, there were no related party transactions that were reviewed by the Audit Committee.
Section 16(a) of the Securities Exchange Act of 1934 requires the Companys directors, executive officers and any persons who own more than 10% of the Companys common stock to file reports of ownership and changes in ownership with the Securities and Exchange Commission. To the Companys knowledge, based solely on a review of the copies of such reports furnished to the Company and written representations that no other reports were required, all filing requirements under Section 16(a) were complied with during 2006, except for one Form 4 filed late by an executive officer, Mr. Wentzell. The report of Mr. Wentzell was filed on December 12, 2006 to report a single disposal of 477 shares that was transacted on October 12, 2006 and was filed late due to an administrative oversight on the part of the Company.
Proposals of shareholders submitted pursuant to Rule 14a-8 of the Securities Exchange Act of 1934 for consideration at the 2008 Annual Meeting of Shareholders must be received by the Company no later than November 28, 2007 in order to be considered for inclusion in the Companys proxy materials for that meeting.
For proposals that shareholders intend to present at the 2008 Annual Meeting of Shareholders that will not be included in the Companys proxy materials, if the shareholder fails to notify the Company of such intent on or before February 13, 2008, then the proxies that management solicits for the 2008 Annual Meeting will include discretionary authority to vote on the shareholders proposal, if it is properly presented at the meeting.
For shareholders that are beneficial owners, but not record holders, of the Companys common stock, your broker, bank or other nominee may only deliver one copy of this proxy statement and our 2006 Annual Report to multiple shareholders who share an address unless that nominee has received contrary instructions from one or more of the shareholders. We will deliver promptly, upon written or oral request, a separate copy of this proxy statement and our 2006 Annual Report to a shareholder at a shared address to which a single copy of the documents was delivered. A shareholder who wishes to receive a separate copy of the proxy statement and annual report, now or in the future, should submit this request by writing to Treasurers Office, Dynamics Research Corporation, 60 Frontage Road, Andover, MA 01810-5498, or calling (800) 522-4321. Beneficial owners sharing an address who are receiving multiple copies of proxy materials and annual reports and who wish to receive a single copy of such materials in the future will need to contact their broker, bank or other nominee to request that only a single copy of each document be mailed to all shareowners at the shared address in the future.
The Board does not know of any business that will be presented to the Annual Meeting other than that referred to in the accompanying notice. If other business properly comes before the Annual Meeting, it is intended that the proxies will be voted in the discretion of the persons voting the proxies unless specific instructions to the contrary are given.
DYNAMICS RESEARCH CORPORATION
Annual Meeting of Stockholders - May 24, 2007
The undersigned hereby appoints Katherine Bettencourt and Richard A. Covel and each of them as proxies, with full power of substitution and re-substitution to each and hereby authorizes them to represent and to vote as designated on the reverse side, at the Annual Meeting of Stockholders of Dynamics Research Corporation (the Company) on May 24, 2007 at 2:00 P.M., Boston time, and at any adjournments thereof, all of the shares of the Company held of record by the undersigned on March 30, 2007 which the undersigned would be entitled to vote if personally present.
(Continued and to be signed on the reverse side)
ANNUAL MEETING OF STOCKHOLDERS OF
DYNAMICS RESEARCH CORPORATION
May 24, 2007
Please date, sign and mail
your proxy card in the
envelope provided as soon
¯ Please detach along perforated line and mail in the envelope provided.¯