NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of NCI, Inc. and its subsidiaries (collectively NCI or the
Company) have been prepared in accordance with generally accepted accounting principles in the U. S. (GAAP) for interim financial information and pursuant to the rules and regulations of the U. S. Securities and Exchange
Commission (the SEC). As a result, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. In the opinion of management, the accompanying
unaudited interim condensed consolidated financial statements reflect all adjustments necessary to fairly present the Companys financial position as of September 30, 2016, and its results of operations for the three and nine months ended
September 30, 2016 and 2015, and cash flows for the nine months ended September 30, 2016 and 2015, which consists of normal and recurring adjustments. The information disclosed in the notes to the financial statements for these periods is
unaudited. The current periods results of operations are not necessarily indicative of results that may be achieved for any future period. All numbers in tables are presented in thousands except per share numbers. For further information,
refer to the financial statements and footnotes included in NCIs Annual Report on Form
10-K
for the year ended December 31, 2015 and NCIs Annual Report on Form 10-K for the year ended December
31, 2016.
Recently Issued Accounting Pronouncements
On November 20, 2015, the FASB issued ASU
2015-17,
Balance Sheet Classification of Deferred Taxes. To simplify the
presentation of deferred income taxes, the amendments in this ASU require that deferred tax assets and liabilities be classified as
non-current
in a classified balance sheet. As permitted, the Company elected
to early adopt this ASU using the retrospective approach, effective with its Form
10-Q
filing for March 31, 2016. As a result of adopting this ASU, current net deferred taxes of $4.0 million were
reclassified to net
non-current
deferred taxes as of December 31, 2015. The adoption of ASU
2015-17
had no impact on the Companys consolidated statements of
income or cash flows for the year ended December 31, 2015 or the condensed consolidated statements of income or cash flows for the three and nine month periods ended September 30, 2016.
In February 2016, the FASB issued ASU
2016-02,
which requires the recognition of
right-to-use
assets and lease liabilities arising from capital leases and operating leases in the statement of comprehensive income and the statement of financial position, respectively. The Company will
adopt the standard effective January 1, 2019. The Company has not yet completed its evaluation of the impact that the standard may have on its consolidated balance sheet. The actual impact will depend on the Companys lease portfolio at
the time of adoption.
In March 2016, the FASB issued ASU
2016-08,
which clarifies the implementation guidance
with respect to principal versus agent considerations under the new revenue recognition standard, ASU
2014-09,
Revenue from Contracts with Customers. In April 2016, the FASB issued ASU
2016-10,
which clarifies the implementation guidance with respect to identifying promised goods or services from a principal and agent perspective under ASU
2014-09.
The
Company will adopt the standard effective January 1, 2018 and is continuing to evaluate the full effect that ASU
2014-09
and related subsequent updates will have on its consolidated financial statements
and related disclosures.
In March 2016, the FASB issued ASU
2016-09,
which simplifies several aspects of the
accounting for share-based payments, including immediate recognition of all excess tax benefits and deficiencies in the income statement, changing the threshold to qualify for equity classification up to the employees maximum statutory tax
rates, allowing an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures as they occur, and clarifying the classification on the statement of cash flows for the excess tax
benefit and employee taxes paid when an employer withholds shares for
tax-withholding
purposes. The Company is evaluating the full effect that ASU
2016-09
will have on
its consolidated financial statements and will adopt the standard effective January 1, 2017, but at this time believe it will not have a material effect on its consolidated financial statements when it is adopted by the Company in 2017.
In August 2016, the FASB issued ASU
2016-15,
which provides updated guidance on eight specific cash flow issues and
how they should be presented and classified in the statement of cash flows under Topic 230, Statement of Cash Flows, and other Topics. The eight specific cash flow issues addressed are being evaluated by the Company as to the likelihood of those
cash flow transactions occurring and potential corresponding effect on the Companys statement of cash flows. The Company will adopt the standard effective January 1, 2018.
4
2. Business Overview
NCI is a leading provider of enterprise solutions and services to U.S. defense, intelligence, health care and civilian government agencies. The Company has the
expertise and proven track record to solve its customers most important and complex mission challenges through technology and innovation. NCIs team of highly skilled professionals focuses on delivering cost-effective solutions and
services in the areas of agile software application and systems development/integration; cybersecurity and information assurance; engineering and logistics support; enterprise information management and advanced analytics; cloud computing and IT
infrastructure optimization; health IT and medical support; IT service management; and modeling, simulation and training. Headquartered in Reston, Virginia, NCI has approximately 2,000 employees operating at more than 100 locations worldwide. The
majority of the Companys revenue is derived from contracts with the U.S. Federal Government, directly as a prime contractor or as a subcontractor. The Company primarily conducts business throughout the U.S. The Company reports operating
results and financial data as one reportable segment.
NCIs Program Executive Office Soldier (PEO Soldier) contract is the
Companys largest revenue-generating contract and accounted for approximately 16% and 9% of revenue for the three months ended September 30, 2016 and 2015, respectively. PEO Soldier accounted for approximately 16% and 10% of revenue for
the nine months ended September 30, 2016 and 2015, respectively. The Companys PEO Soldier program is a cost-plus fee contract consisting of a base period and four option periods for a total term of five years, which commenced in October
2015. NCIs Cyber Network Operations and Security Support (CNOSS) program, supporting the U.S. Army Network Enterprise Technology Command accounted for approximately 12% and 7% of revenue for the three months ended
September 30, 2016 and 2015, respectively. CNOSS accounted for approximately 11% and 6% of revenue for the nine months ended September 30, 2016 and 2015, respectively. This
cost-plus-fixed-fee,
single-award indefinite delivery indefinite quantity contract consists of a
12-month
base period with two
one-year
option periods and one
six-month
option period, and commenced in October 2014.
3. Embezzlement and Restatement
In January 2017, the Company identified a misappropriation of Company funds by its former controller. The Audit Committee engaged independent legal counsel and
forensic consultants to investigate the fraud. The internal investigation was completed in March 2017, and revealed that the former controller had embezzled $19.4 million through a circumvention of controls, which included transfers from the payroll
account to his personal account, creating fictitious invoices, and altering bank account statements to conceal the misappropriations. The Company believes that the former controller acted alone and found no evidence that any other NCI employee was
aware of, or colluded in, the embezzlement of Company funds or that there was any unlawful activity apart from that associated with the former controllers embezzlement of Company funds. The amounts embezzled were primarily classified as
expenses and were included as fringe benefits costs in costs of revenue and selling, general and administrative expenses and was originally allocated to contracts as allowable costs. After discovery of the embezzlement these costs were restated as
misappropriation loss, which is an unallowable cost. The Company had sufficient allowable, but previously unbilled costs allocated to its contracts in fiscal years 2010 through 2015 to offset the unallowable costs related to the embezzlement, such
that there was no material change in revenue recognized on its cost reimbursable contracts during such periods. However, during 2016, the Company recorded revenue on certain cost reimbursable contracts in which there was insufficient allowable, but
previously unbilled costs allocated to its contracts to offset the unallowable costs related to the embezzlement, such that there was a change in revenue recognized. In addition, during 2016, a portion of the amounts embezzled were recorded on the
balance sheet. Accordingly, the Company has restated the Condensed Consolidated Statements of Income for the three- and nine-month periods ended September 30, 2016 and 2015, Condensed Consolidated Statements of Cash Flows for the nine-month period
ended September 30, 2016 and the Condensed Consolidated Balance Sheet as of September 30, 2016, as follows:
|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended,
|
|
|
Three Months Ended,
|
|
|
Nine Months Ended,
|
|
|
Nine Months Ended,
|
|
|
|
September 30, 2016
|
|
|
September 30, 2015
|
|
|
September 30, 2016
|
|
|
September 30, 2015
|
|
|
|
As Reported
|
|
|
As Restated
|
|
|
As Reported
|
|
|
As Restated
|
|
|
As Reported
|
|
|
As Restated
|
|
|
As Reported
|
|
|
As Restated
|
|
Statements of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
79,753
|
|
|
$
|
79,394
|
|
|
|
|
|
|
|
|
|
|
$
|
245,308
|
|
|
$
|
244,949
|
|
|
|
|
|
|
|
|
|
Costs of revenue
|
|
|
66,305
|
|
|
|
65,280
|
|
|
$
|
68,677
|
|
|
$
|
68,005
|
|
|
|
204,213
|
|
|
|
202,655
|
|
|
$
|
207,832
|
|
|
$
|
205,894
|
|
General and administrative expenses
|
|
|
6,434
|
|
|
|
6,356
|
|
|
|
6,445
|
|
|
|
6,390
|
|
|
|
19,375
|
|
|
|
19,257
|
|
|
|
19,941
|
|
|
|
19,772
|
|
Misappropriation loss
|
|
|
-
|
|
|
|
931
|
|
|
|
-
|
|
|
|
727
|
|
|
|
-
|
|
|
|
3,840
|
|
|
|
-
|
|
|
|
2,107
|
|
Provision for income taxes
|
|
|
1,882
|
|
|
|
1,717
|
|
|
|
|
|
|
|
|
|
|
|
6,206
|
|
|
|
5,126
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,261
|
|
|
$
|
3,239
|
|
|
|
|
|
|
|
|
|
|
$
|
9,824
|
|
|
$
|
8,381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS
|
|
$
|
0.25
|
|
|
$
|
0.25
|
|
|
|
|
|
|
|
|
|
|
$
|
0.75
|
|
|
$
|
0.64
|
|
|
|
|
|
|
|
|
|
Diluted EPS
|
|
$
|
0.24
|
|
|
$
|
0.23
|
|
|
|
|
|
|
|
|
|
|
$
|
0.71
|
|
|
$
|
0.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,824
|
|
|
$
|
8,381
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(509
|
)
|
|
|
1,562
|
|
|
|
|
|
|
|
|
|
Accrued expenses and other liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(504
|
)
|
|
|
(1,132
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Reported
|
|
|
As Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
$
|
3,979
|
|
|
$
|
1,908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued salaries and benefits
|
|
|
17,613
|
|
|
|
17,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Revenue
|
|
|
2,312
|
|
|
|
2,670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other accrued expenses
|
|
|
4,563
|
|
|
|
3,483
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained Earnings
|
|
|
45,853
|
|
|
|
44,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4. Earnings Per Share
Basic earnings per share excludes dilution and are computed by dividing net income by the weighted average number of common shares outstanding for the period.
Diluted earnings per share reflects potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Diluted earnings per share include the incremental effect of stock options
calculated using the treasury stock method. Shares that are anti-dilutive are not included in the computation of diluted earnings per share. For the three months ended September 30, 2016 and 2015, approximately 25,000 and 30,000 shares,
respectively, were not included in the computation of diluted earnings per share, because to do so would have been anti-dilutive. For the nine months ended September 30, 2016 and 2015, approximately 11,000 and 63,000 shares, respectively, were
not included in the computation of diluted earnings per share, because to do so would have been anti-dilutive. The following table details the computation of basic and diluted earnings per common share (Class A and Class B) for the three and
nine months ended September 30, 2016 and 2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
2016
(Restated)
|
|
|
2015
|
|
|
2016
(Restated)
|
|
|
2015
|
|
Net income
|
|
$
|
3,239
|
|
|
$
|
3,171
|
|
|
$
|
8,381
|
|
|
$
|
8,622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of basic shares outstanding during the period
|
|
|
13,201
|
|
|
|
13,029
|
|
|
|
13,180
|
|
|
|
13,004
|
|
Dilutive effect of stock options and restricted stock after application of treasury stock
method
|
|
|
656
|
|
|
|
668
|
|
|
|
683
|
|
|
|
655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of diluted shares outstanding during the period
|
|
|
13,857
|
|
|
|
13,697
|
|
|
|
13,863
|
|
|
|
13,659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.25
|
|
|
$
|
0.24
|
|
|
$
|
0.64
|
|
|
$
|
0.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
0.23
|
|
|
$
|
0.23
|
|
|
$
|
0.60
|
|
|
$
|
0.63
|
|
5
5. Accounts Receivable
Accounts receivable consists of billed and unbilled amounts. The following table details accounts receivable at the end of each period:
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
Billed receivables
|
|
$
|
22,762
|
|
|
$
|
23,621
|
|
Unbilled receivables:
|
|
|
|
|
|
|
|
|
Amounts billable at end of period
|
|
|
26,295
|
|
|
|
27,185
|
|
Other
|
|
|
5,017
|
|
|
|
9,980
|
|
|
|
|
|
|
|
|
|
|
Total unbilled receivables
|
|
|
31,312
|
|
|
|
37,165
|
|
|
|
|
|
|
|
|
|
|
Total accounts receivable
|
|
|
54,074
|
|
|
|
60,787
|
|
Less: Allowance for doubtful accounts
|
|
|
742
|
|
|
|
742
|
|
|
|
|
|
|
|
|
|
|
Total accounts receivable, net
|
|
$
|
53,332
|
|
|
$
|
60,044
|
|
|
|
|
|
|
|
|
|
|
Other unbilled receivables primarily consist of amounts that will be billed upon milestone completions and other accrued
amounts that cannot be billed as of the end of the period. Substantially all unbilled receivables are expected to be billed and collected within the next 12 months.
6. Property and Equipment
The following table details
property and equipment at the end of each period:
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
Property and equipment
|
|
|
|
|
|
|
|
|
Furniture and equipment
|
|
$
|
20,949
|
|
|
$
|
26,573
|
|
Leasehold improvements
|
|
|
7,411
|
|
|
|
9,323
|
|
Real property
|
|
|
549
|
|
|
|
549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,909
|
|
|
|
36,444
|
|
Less: Accumulated depreciation and amortization
|
|
|
22,571
|
|
|
|
29,746
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
6,338
|
|
|
$
|
6,698
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense for the three months ended September 30, 2016 and 2015 was $0.8 million.
Depreciation expense for the nine months ended September 30, 2016 and 2015 was $2.5 million and $2.6 million, respectively.
7.
Intangible Assets
The following table details intangible assets at the end of each period:
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
Contract and customer relationships
|
|
$
|
39,594
|
|
|
$
|
39,594
|
|
Developed software
|
|
|
1,113
|
|
|
|
1,113
|
|
Less: Accumulated amortization
|
|
|
(24,209
|
)
|
|
|
(21,476
|
)
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
$
|
16,498
|
|
|
$
|
19,231
|
|
|
|
|
|
|
|
|
|
|
6
Amortization expense of intangible assets for the three months ended September 30, 2016 and 2015 was
$0.9 million and $1.0 million, respectively. Amortization expense of intangible assets for the nine months ended September 30, 2016 and 2015 was $2.7 million and $3.2 million, respectively. Intangible assets are primarily
amortized on a straight line basis over periods ranging from three to 11 years. Expected amortization expense for the remainder of the fiscal year ending December 31, 2016, and for each of the fiscal years thereafter, is as follows:
|
|
|
|
|
For the year ending December 31,
|
|
|
|
2016 (remaining three months)
|
|
$
|
911
|
|
2017
|
|
|
3,632
|
|
2018
|
|
|
3,149
|
|
2019
|
|
|
3,049
|
|
2020
|
|
|
3,027
|
|
Thereafter
|
|
|
2,730
|
|
|
|
|
|
|
|
|
$
|
16,498
|
|
|
|
|
|
|
8. Share-Based Payments
During the three months ended September 30, 2016, the Company did not grant any stock options, and during the nine months ended September 30, 2016,
the Company granted 25,000 stock options to purchase shares of Class A common stock with a weighted-average exercise price of $13.29, which represents the fair market value of the Companys Class A common stock at the date of grant.
During the three months ended September 30, 2016, a total of 35,426 stock options were exercised at a weighted-average exercise price of $6.38. During the nine months ended September 30, 2016, a total of 73,758 stock options were exercised
at a weighted-average exercise price of $5.66. As of September 30, 2016, there were 1,499,074 stock options outstanding.
During the three months
ended September 30, 2016, no restricted stock was granted and 5,000 shares of restricted stock were cancelled. During the nine months ended September 30, 2016, 25,000 shares of restricted stock were granted and 25,000 shares of restricted
stock were cancelled. As of September 30, 2016, there were 315,000 shares of restricted stock outstanding.
The following table summarizes stock
compensation expense allocated to cost of revenue and general and administrative costs for the three and nine months ended September 30, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
|
Nine months ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Cost of revenue
|
|
$
|
47
|
|
|
$
|
76
|
|
|
$
|
162
|
|
|
$
|
199
|
|
General and administrative
|
|
|
179
|
|
|
|
264
|
|
|
|
607
|
|
|
|
837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
226
|
|
|
$
|
340
|
|
|
$
|
769
|
|
|
$
|
1,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2016, there was approximately $3.3 million of total unrecognized compensation cost related to
unvested stock compensation arrangements. This cost is expected to be fully amortized over the next five years, with approximately $0.2 million, $0.9 million, $0.9 million, $0.7 million and $0.6 million amortized during the
remainder of 2016, and the full years of 2017, 2018, 2019, and 2020, respectively. The cost of stock compensation is included in the Companys Condensed Consolidated Statements of Income and expensed over the service period of the options.
9. Debt
NCIs senior credit facility, amended in
December 2014, and referred to herein as the credit facility, consists of a revolving line of credit with a borrowing capacity of up to an $80.0 million principal amount and a $45.0 million accordion feature allowing the
Company to increase its borrowing capacity to up to a $125.0 million principal amount, subject to obtaining commitments for the incremental capacity from existing or new lenders. The outstanding borrowings are collateralized by a security
interest in substantially all of the Companys assets. The lenders also require a direct assignment of all contracts at the lenders discretion. The outstanding balance under the credit facility accrues interest based on the
one-month
London Interbank offered rate or LIBOR, plus an applicable margin, ranging from 210 to 310 basis points, based on the ratio of the Companys outstanding senior funded debt to Earnings before Interest,
Taxes, Depreciation, and Amortization or EBITDA, as defined in the credit facility. The credit facility expires on January 31, 2017. Accordingly all borrowings are classified as current liabilities as they are due and payable within the next 12
months.
7
The credit facility contains various covenants that limit, among other things, the Companys ability to
incur or guarantee additional debt; make certain distributions, investments and other restricted payments, including limits on cash dividends on the Companys outstanding common stock or equivalent equity interests; enter into transactions with
certain affiliates; create or permit certain liens; and consolidate, merge, or sell assets. In addition, the credit facility contains certain financial covenants that require the Company to maintain a minimum fixed charge coverage ratio, maintain a
minimum funded debt to earnings ratio; and limit capital expenditures below certain thresholds. As of September 30, 2016, the Company was in compliance with all of its loan covenants.
The credit facility allows the Company to use borrowings thereunder of up to $17.5 million to repurchase outstanding shares of Class A common stock.
No stock repurchases took place in the three or nine months ended September 30, 2016. At September 30, 2016, $16.7 million was remaining under the Board of Directors authorization for share repurchases.
During the third quarter of 2016, the Company had a weighted average outstanding loan balance of $6.5 million which accrued interest at a weighted
average borrowing rate of 2.5%. During the third quarter of 2015, the Company had a weighted average outstanding loan balance of $18.8 million which accrued interest at a weighted average borrowing rate of 2.3%.
As of September 30, 2016, there was no outstanding balance under the credit facility.
10. Computech Acquisition
On January 1, 2015, the
Company completed its purchase of 100% of the outstanding stock of Computech, Inc. (Computech), a leader in agile and lean application software development and IT operations and maintenance, for approximately $56.7 million, net of
cash acquired. The acquisition has been accounted for under the acquisition method of accounting, which requires the total purchase consideration to be allocated to the assets acquired and liabilities assumed based on estimates of fair
value. The excess of the purchase consideration over the amounts assigned to tangible or intangible assets acquired and liabilities assumed was recognized as goodwill.
Allocation of Purchase Price
The Company has completed
the valuation of the assets acquired and liabilities assumed of Computech. The fair values assigned to the intangible assets acquired were based on estimates, assumptions, and other information compiled by management, including independent
valuations that utilized established valuation techniques. Based on the Companys valuation, the total consideration of approximately $56.7 million, net of $3.3 million of cash acquired, has been allocated to assets acquired
(including identifiable intangible assets and goodwill) and liabilities assumed, as follows:
|
|
|
|
|
Accounts receivable and other assets
|
|
|
8,407
|
|
Goodwill
|
|
|
33,878
|
|
Definite-life intangible assets
|
|
|
19,720
|
|
Accrued salary and benefits
|
|
|
(4,112
|
)
|
Other accrued expenses
|
|
|
(1,236
|
)
|
|
|
|
|
|
|
|
$
|
56,657
|
|
|
|
|
|
|
The definite life intangibles recognized in the allocation of the Computech purchase price consists of $18.6 million in
contracts and customer relationships and $1.1 million in developed software. The fair value of the definite-lived intangible asset for contracts and customer relationships is based on existing customer contracts and anticipated
follow-on
contracts with existing customers and will be amortized on a straight-line basis over its expected life of seven years. The fair value of the definite-lived intangible asset for developed software will be
amortized on a straight-line basis over its expected useful life of three years.
All goodwill and intangible asset amortization related to the
acquisition of Computech is expected to be deductible for income tax purposes.
11. Dividends
Our Board of Directors declared and the Company paid the following dividends during the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Declaration Date
|
|
Dividend
Per Share
|
|
|
Record Date
|
|
|
Total Amount
|
|
|
Payment Date
|
|
February 10, 2015
|
|
$
|
0.12
|
|
|
|
February 25, 2015
|
|
|
$
|
1,561
|
|
|
|
March 13, 2015
|
|
February 8, 2016
|
|
$
|
0.15
|
|
|
|
February 26, 2016
|
|
|
$
|
2,020
|
|
|
|
March 18, 2016
|
|
8
12. Related Party Transactions
The Company purchases services under a subcontract from Renegade Technology Systems, Inc., which is a government contractor wholly-owned by Rajiv Narang, the
son of Charles K. Narang, Chairman of the Board of Directors. For the three months ended September 30, 2016 and 2015, the expense incurred under this agreement was approximately $298,000 and $177,000, respectively. For the nine months ended
September 30, 2016 and 2015, the expense incurred under this agreement was approximately $656,000 and $525,000, respectively. As of September 30, 2016, and 2015, outstanding amounts due to Renegade Technology Systems, Inc. under this
agreement were $103,150 and $51,137, respectively.
13. Contingencies
Government Audits
Payments to the Company
on U.S. Federal Government contracts are subject to adjustment upon audit by various agencies of the U.S. Federal Government. Audits of costs and the related payments have been performed by the various agencies through 2007 for NCI Information
Systems, Inc., our primary corporate vehicle for Government contracting. In the opinion of management, the final determination of costs and related payments for unaudited years will not have a material effect on the Companys financial
position, results of operations, or liquidity.
Litigation
Civil Suit Against Former Controller
As previously
disclosed on January 23, 2017, the Company commenced an internal investigation upon discovering that its former controller, Jon Frank, had been embezzling money from the Company. Upon completion of the internal investigation, the Company
determined that the actual amount of the embezzlement by Mr. Frank during the period from January 2010 through 2017 was approximately $19.4 million. The Company believes that Mr. Frank acted alone and found no evidence that any other
NCI employee was aware of or colluded in the embezzlement of Company funds and found no evidence of any unlawful activity apart from that associated with Mr. Franks embezzlement of Company funds.
On January 23, 2017, we filed a lawsuit against Mr. Frank in the Circuit Court of Fairfax County in the State of Virginia to recover the embezzled
funds.
On February 2, 2017, the Honorable Chief Judge White entered an Order for Preliminary Injunction and Asset Freeze (the Preliminary
Injunction) against Mr. Frank. Among other things, the Preliminary Injunction placed an immediate freeze on all monies and assets of Mr. Frank and ordered Mr. Frank to prepare and deliver to the Company an accounting of his
personal assets. In addition, pursuant to the Preliminary Injunction, Mr. Frank agreed to cooperate with the Company to identify, recover and return to the Company all assets that he obtained wrongfully or acquired with wrongfully-obtained
funds.
Government Agency Investigations
In
connection with the discovery of Mr. Franks embezzlement of money from the Company, we self-reported such matter to the U.S. Securities and Exchange Commission (SEC) and the civil and criminal divisions of the U.S. Department
of Justice (DOJ).
By letter to the Company dated February 1, 2017, the DOJ has identified the Company as a possible victim of
Mr. Franks conduct. On February 8, 2017, the SEC commenced a formal investigation and has served the Company with a subpoena requesting certain documents and information relevant to the embezzlement of Company funds by
Mr. Frank. The Company is cooperating fully with the DOJ and the SEC in connection with their respective investigations, which are ongoing.
The
United States Attorneys Office for the Eastern District of Virginia (USAO EDVA) has opened a civil fraud investigation into the impact of Mr. Franks conduct on the Companys government contracts. The Company is
cooperating fully with the USAO EDVA and the Inspectors General of relevant government agencies in connection with this investigation, which is ongoing. At this time, we do not have an estimate of the financial impact on the Company, if any, of the
investigation being conducted by the USAO EDVA.
Other Legal Proceedings
From time to time, we are involved in legal proceedings arising in the ordinary course of business. At this time, the probability is remote that the outcome of
any such ordinary course litigation matters currently pending will have a material adverse effect on our financial condition and results of operations.
Misappropriation lossCosts and Recovery
As discussed above, the Company initiated civil legal proceedings against our former controller seeking to recover assets acquired by him with
funds wrongfully obtained by him through his embezzlement of Company funds and that litigation is ongoing. The court has frozen all of our former controllers assets. The Company carries insurance that could cover up to $5 million of the
misappropriation loss. The timing and amount of final recoveries, net of expenses of recovery, is uncertain. The Company has not yet recognized an estimated value of the potential recovery due to the limited amount of information available to it at
this time. The Company estimates that it incurred approximately $5 million in costs during the first quarter of 2017 related to the embezzlement, including legal, auditing and forensic accounting fees.
14. Subsequent Events
Change in
Management
On October 31, 2016, the Company announced that Brian J. Clark, the Companys President and Chief Executive Officer
(CEO), has resigned from his employment with the Company and as a member of the Board of Directors of the Company, effective as of October 31, 2016. In connection with his resignation, the Company and Mr. Clark entered into a
Separation and Transition Agreement which provides for the payment of certain severance benefits to Mr. Clark including the following: (a) the Company will pay Mr. Clark a total fee of $250,000 for consulting services to be provided
through April 30, 2017; (b) the Company will pay Mr. Clark a lump sum cash payment equal to twenty-four months of his annual base salary in the amount of $1,000,000; (c) the Company will pay Mr. Clark a lump sum cash payment equal to
his prorated annual bonus for 2016 at the target level of performance in the amount of $420,000; (d) the Company will continue to provide Mr. Clark with health and welfare coverage and executive long-term disability coverage at no additional
cost to him for one year; and (e) the Company will repurchase 390,000 stock options held by Mr. Clark that are vested and exercisable as of October 31, 2016 at a purchase price per option equal to the closing sale price of a share of
NCI common stock on The Nasdaq Stock Market on October 28, 2016 less the applicable per share exercise price of the options.
The Board has appointed
Paul A. Dillahay as the Companys President and CEO and a member of the Board effective as of October 31, 2016. Mr. Dillahay will initially receive a
one-time
signing bonus in the amount of
$325,000 and will be eligible for an annual cash bonus for the fourth quarter of 2016 equal to $125,000. He will receive an option award of 250,000 shares and a grant of 100,000 shares of restricted stock. The options vest in five equal annual
installments beginning on the first anniversary of the grant date. The restricted stock awards vest in accordance with the following schedule: 33 1/3% vest on January 31, 2017; 33 1/3% vest one year from the grant date and 33 1/3% vest two
years from the grant date.
9