27
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1994
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-7348
DYNAMICS RESEARCH CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Massachusetts 04-2211809
(State or Other Jurisdiction of(I.R.S. Employer Identification No.)
Incorporation or Organization)
60 FRONTAGE ROAD
ANDOVER, MASSACHUSETTS 01810-5498
(Address of Principal Executive Offices)(Zip Code)
Registrant's telephone number, including area code: (508) 475-9090
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
NONE NOT APPLICABLE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.10 Par Value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No .
(Continued)
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [X]
As of March 10, 1995, the aggregate market value of Common Stock held
by nonaffiliates of the Registrant was $23,908,154 and the number of shares
of Common Stock, $.10 par value, of the Registrant outstanding was
5,625,448.
Documents Incorporated By Reference
Portions of the 1994 Annual Report to Shareholders are incorporated by
reference in Parts I and II. Portions of the Registrant's Proxy Statement
for the 1995 Annual Meeting of Shareholders are incorporated by reference
in Part III.
The Exhibit Index is on pages 20 and 21.
DYNAMICS RESEARCH CORPORATION
Form 10-K
For the Fiscal Year Ended December 31, 1994
Part I Page
Item 1. Business 4
2. Properties 11
3. Legal Proceedings 12
4. Submission of Matters to a Vote of Security Holders
12
4A. Executive Officers of the Registrant 12
Part II
5. Market for Registrant's Common Equity and
Related Stockholder Matters 13
6. Selected Financial Data 13
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
8. Financial Statements and Supplementary Data 13
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 14
Part III
10. Directors and Executive Officers of the Registrant
15
11. Executive Compensation 15
12. Security Ownership of Certain Beneficial Owners
and Management 15
13. Certain Relationships and Related Transactions
15
Part IV
14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 16
PART I
Item 1. Business
Dynamics Research Corporation (referred to herein as "DRC" or the
"Company") was organized in 1955 under the laws of the Commonwealth of
Massachusetts.
The Company is principally engaged in providing a broad range of
computer-based systems development, engineering, and management support
services to organizations of the United States Department of Defense (DoD),
other agencies of the U.S. Government and commercial companies. The Company
also designs and manufactures precision products and measurement devices,
often used as components in computer controlled systems.
The Company's products and services fall within the following broad
categories:
Information systems development and operation
Engineering and management support services
Digital instruments and components
The following sections describe each of these business areas and
related major programs and products.
Information Systems Development and Operation
DRC maintains a multi-vendor data processing environment with
professionals who provide systems analysis and programming support
primarily to government customers. The Company designs, develops,
installs, operates, and maintains custom-engineered data systems. Systems
developed by DRC gather information electronically from various sources,
organize the data and store it in large databases. The Company's systems
enable customers to track product location and configuration, and perform
detailed reliability, maintainability, quality assurance, vendor
qualification and cost analyses. The Company has developed systems for
transit vehicles, missiles, submarines, surface ships, land warfare
weapons, and aircraft.
The Company's major DoD information systems programs are sometimes
referred to as logistics information systems. These systems are essentially
product management information systems and involve inventory requirements
and control, maintenance and repair, warranty analysis, supply,
distribution and other functions critical to effective and economical
support of system hardware and software throughout the system's life.
Under contract with the U.S. Air Force, the Company designed,
developed, implemented and operates TICARRS (Tactical Interim CAMS and
REMIS Reporting System) for the F-16 aircraft. The TICARRS databases
accept data entries and requests from numerous Air Force user organizations
worldwide. The TICARRS databases are continuously expanded and provide
upon request by the Air Force user organizations worldwide, a variety of
operational reports. Data include results from worldwide F-16 flight
operations and maintenance activities. While remote computer terminals and
communications interfaces are an integral part of the system, the host
computer facility and its associated F-16 databases are located at a
Company facility where system operations are supported around the clock.
Based on TICARRS, DRC developed Smart Data System (SDS) for the F-117A
Stealth Fighter Program by special request of the U.S. Air Force. It was
used in the Persian Gulf to support Operation Desert Storm. The SDS is an
on-line interactive aircraft maintenance data reporting and analysis system
supporting operational, staff, depot and contractor organizations.
For nearly thirty years, the Company has assisted the U.S. Navy's Fleet
Ballistic Missile program office in the design, development, and operation
of inertial systems. The Company has extensive experience with the
Polaris, Poseidon, and Trident missile guidance systems and submarine
inertial navigation systems. The Company develops and maintains
performance, reliability, and logistics databases for the inertial guidance
instruments housed in those systems. These databases track detailed
information on thousands of component parts comprising the systems. This
information is used by the customer for a wide range of operating
management tasks and decision making.
Also for the U.S. Navy, the Company provides independent analysis and
monitoring of submarine-based inertial guidance systems and electronic
modules. The Company's support capabilities include its Inertial
Instrument Test Laboratory, which is equipped for full-scale performance
testing of navigational quality inertial instruments.
Weapon Systems Management Information System (WSMIS) is a primary Air
Force decision support tool for assessing the impacts of logistics status
on potential wartime capabilities. WSMIS computes inventory requirements
and purchasing needs for high-tech, high-cost aircraft spare parts to meet
aircraft availability requirements. WSMIS also controls repair,
manufacturing and distribution schedules to meet customer demands. WSMIS
assesses the "health" and capability of the Air Force's weapon systems to
meet wartime objectives. DRC served as the overall functional integrator
of WSMIS and the developer of certain WSMIS modules. Currently, the
Company continues to provide operational support for the system as well as
software development modifications and other changes.
During 1994, DRC completed work as subcontractor under the U.S. Air
Force Aircraft Mishap Prevention (AMP) Program. The Company developed a
new system to facilitate aircraft accident analysis. The system helps
analysts systematically identify safeguards, corrective actions, and
countermeasures to reduce the number and impact of human factors that
contribute to aircraft mishaps.
Critical to the development of information systems is the Company's
software development process and related tools. The Company's approach to
mission-critical software stresses principles of continuous software
quality evaluation and increased visibility throughout the software
development life cycle. The Company uses commercially available software
development tools and internally developed tools to meet the needs of
software acquisition managers and developers.
The Company has also developed computer-based tools which evaluate the
quality of software programs and determine how well they adhere to
predetermined standards. One of these tools, AdaMAT, is licensed to
commercial customers as a tool for an Ada software engineering environment.
The Company designed this static code analyzer for use with the Ada
programming language. AdaMAT helps Ada users and managers of Ada
development efforts adhere to specific programming practices and program
development goals during coding, testing, and maintenance of the software.
AdaMAT allows visibility into the quality of the code at any given point in
time. AdaMAT incorporates a hierarchy of software metrics including
management-related concerns such as reliability, portability,
maintainability; and software-related concerns such as code simplicity,
modularity, and self-descriptiveness.
Engineering and Management Support Services
Under various DoD contracts, the Company has performed a variety of
services for its U.S. Government customers to assist them in the planning
and managing of their large system development programs. This business
area utilizes a wide range of technical and management skills of Company
personnel to plan, analyze, design, test, support, train, maintain and
dispose of a variety of complex physical systems. Systems include radar,
C3I, missile, aircraft, information, software, munitions, and soldier
protective gear.
The Company provides support at all stages of a system's life. In
response to emerging requirements, the Company helps clients define,
develop, and initiate new programs. The Company helps clients receive
program approval, conduct strategic planning, and evaluate proposals from
industry. After prime contract awards, the Company helps clients monitor
contractor activities, evaluate progress, and measure performance against
program requirements.
Under the umbrella of the U.S. Air Force Technical and Engineering
Management Support (TEMS) and System Design and Analysis Support (SDAS)
contracts, the Company has supported, among others, the following programs
out of the Air Force Electronic Systems Center at Hanscom Air Force Base in
Massachusetts:
o Milstar
o Airborne Warning and Control System (AWACS)
o Joint Surveillance Target Attack Radar System (JSTARS)
o Mission Planning Systems
o Cheyenne Mountain Upgrade
o U.S. Transportation Command/Air Mobility Command Support
o PEACE SHIELD Air Defense System
o Airborne Battlefield Command and Control Center
o Over-the-Horizon Radar
DRC served as a prime contractor under the TEMS program from 1984 to
1993. During 1993, the Air Force recompeted the TEMS program and awarded
contracts to eight contractors, including several small and "disadvantaged"
businesses. DRC was a subcontractor on one of the winning teams, and has
been subsequently added as a subcontractor to several of the other winning
bidders. As a result, DRC has retained substantially all the tasks it had
previously performed as a prime contractor. As discussed in the Company's
third and fourth quarter reports during 1993, financial results have been
adversely affected by the reduced hourly rates available as a
subcontractor.
In November 1993, the Defense Information Systems Agency (DISA) awarded
its Defense Enterprise Integration Services (DEIS) contract, an estimated
$900 million, five- year program, to six competitors. DRC is a member of
the winning Computer Sciences Corporation team. DEIS is an indefinite
order, indefinite quantity program that may be a vehicle for a wide variety
of tasks which DRC will perform for DISA and related agencies.
In particular, DRC brings its experience in Business Process Re-Engineering
(BPR), as well as systems development, integration and migration, to the
DEIS program.
The Company is also supporting the DoD in the area of acquisition
logistics. DRC technical staff assist the customers to plan and manage the
implementation of program requirements throughout all phases of the
acquisition process. From 1987 to present the Company has provided
services to the Ballistic Missile Defense Organization (BMDO) that include
operating and support considerations during the early conceptual phases of
the BMDO program. In February 1995, the Company received a $0.7 million
contract to provide logistics modeling support for the Joint Advanced
Strike Technology program. Also in February 1995, an indefinite quantity
contract was awarded to the Company to provide logistics support to the Air
Staff.
The Company combines its expertise in the weapon system acquisition
process with expertise in systems analysis, design, training and
simulation, and human factors to perform human-systems integration and
force analysis. DRC has been providing force analysis support to the Army
Research Laboratory since 1987. Force Analysis activities are focused on
developing tools that support analysis of soldier and system effectiveness,
identify and assess force improvement options (doctrine, training, leader
development, organization, and material), and ensure that soldier
considerations are addressed in force improvements. Under the Company's
current contract, begun in 1991, DRC developed a set of automated manpower
and personnel integration analysis tools that are used to analyze system
cost versus performance to help maintain optimal system performance at an
affordable price. DRC also developed methods for analyzing training
requirements to promote standardized training across the military services.
In addition, DRC developed advanced crew coordination training methods for
the Army aviation community designed to help reduce aviation mishaps. A
follow-on to the current contract is presently under evaluation with award
expected during the first half of 1995.
Through its human-systems integration efforts, the Company helps the
military benefit through improved performance and effectiveness, by
matching soldiers to the tasks they must perform; cost and resource
savings, by making soldiers more effective and by automating tasks; and
more effective system design, by documenting relationships of design
options to eventual performance.
HARDMAN III, a suite of microcomputer-based tools developed by DRC,
estimates a weapon system's manpower and training requirements, calculating
manpower requirements by military specialty, skill level, pay grade, and
maintenance level for every unit within a specified force structure. This
suite of tools also allows analysts to locate and distribute system-level
requirements to lower-level tasks with consistency; estimate and set
required parameters for personnel quality constraints that affect job
performance; and evaluate contractor designs on the basis of performance
requirements, available maintenance support, and operator crew sizes. The
training model estimates a weapon system's total course costs, costs per
graduate, instructor requirements, and training man-day requirements. The
HARDMAN software has been used on over fifteen Army weapon systems,
including the APACHE helicopter, and can produce manpower requirements for
the Active Army, Reserves, and National Guard components.
DRC is a subcontractor to Loral Federal Systems for the Close Combat
Tactical Trainer program (CCTT). CCTT will simulate Army tank and
mechanized infantry units from vehicle crews to the battalion level. CCTT
will use distributed, interactive simulation technology to provide a
"virtual" training environment. DRC will conduct all manpower and
personnel integration activities such as training, human factors
engineering, system safety, health hazards, and survivability, and will
develop modules of software for CCTT that generate tactical exercises and
that assess unit performance.
DRC has been supporting the B-1B Program Office since 1990. We provide
independent, third party test and evaluation services to ensure the proper
installation and implementation of avionics and software modifications. In
1994, the Company received an award to continue these services through the
Government's 1995 fiscal year. DRC staff in offices in Oklahoma City,
Oklahoma and Andover, Massachusetts support this program.
The Company's Test Equipment Division provides a variety of research,
engineering, and manufacturing services in support of the U.S. Navy,
including test equipment services for the Trident submarine's inertial
gyroscopes, accelerometers, and other components. Also for the Navy, the
Company has developed an automated system used for the design, simulation,
synthesis, analysis, and verification of integrated circuits, printed
circuit boards, and entire electronic systems.
During 1994, the Company's Systems and Test Divisions competitively bid
and won an Air Force contract to produce a test system for secure tactical
communications devices. Company systems engineers are responsible for the
integration of commercially available components with sophisticated
software supplied by a subcontractor. The system operates with a DEC Alpha
workstation. Future system sales depend on system performance capabilities
as well as cost and customer budget factors.
Digital Instruments and Components
The Company operates two units that produce precision manufactured
products for commercial markets, the Encoder Division and the Metrigraphics
Division. Encoder Division designs, manufactures and markets a line of
digital encoders used to sense position in a wide range of equipment. These
products use optical techniques to convert motion to digital signals that
can then be used to control the speed and position of devices such as
machine tools, computer peripherals, robotics arms and medical equipment.
Beginning in late 1992 and continuing through 1993, the Company
invested in a specialized production line and produced a line of encoders
for an automotive industry manufacturing customer. This line of encoders
is designed into a fuel pump and is used to control fuel flow and reduce
emissions. Manufacturing on the line commenced in 1993 and was fully
operational for 1994. The continuation of this business throughout 1995
and beyond depends on follow-on orders on mutually satisfactory terms and
conditions, end user demand for the vehicles equipped with the system and
other factors.
Metrigraphics Division uses photolithographic processes to manufacture
optical discs, scales and reticles which are used for precision
measurement. Metrigraphics also uses various metals deposition processes,
including electroplating and electroforming, to produce a variety of
precision components. Products include printheads and oriface plates used
in electronic printers.
The customers for these products are primarily OEM companies which
integrate the Company's components into their equipment. Encoder and
Metrigraphics engineers work closely with customer engineers to design and
develop prototypes to meet customer product requirements. Repeat orders
for these customer-designed components are a significant factor. High
quality standards and competitive unit costs are critical aspects of this
business.
United States Government Contracts
Contracts for the Company's defense services are obtained by marketing
and technical personnel employed by the Company. The Company's other
products are sold by sales personnel employed by the Company and sales
representatives.
During 1994, the Company's revenues from contracts with the Department
of Defense, either as prime contractor or subcontractor, accounted for
approximately 82% of the Company's total revenues. The Company's
government contracts can fall into one of three categories: (1) fixed
price, (2) time and materials or (3) cost plus fixed fee. Under a fixed
price contract, the customer pays an agreed upon price for the Company's
services or products and the Company bears the risk that increased or
unexpected costs may reduce its profits or cause it to incur a loss.
Conversely, to the extent the Company incurs actual costs below anticipated
costs on these contracts, the Company could realize greater profits. Under
a time and materials contract, the government pays the Company a fixed
hourly rate intended to cover salary costs and related indirect expenses
plus a certain profit margin. Under a cost plus fixed fee contract, the
government reimburses the Company for its allowable expenses and allowable
costs and pays a negotiated fee. In 1994, approximately 60% of the
Company's government contracts revenue was under fixed price or time and
material contracts, while approximately 40% of revenue was under costs plus
fixed fee contracts.
During 1994 the Company's U.S. Government business consisted of
approximately 125 separate contracts on 50 different programs. The
Company's contracts with the government are generally subject to
termination at the convenience of the government; however, the Company
would be reimbursed for its allowable costs to the time of termination and
would be paid a proportionate amount of the stipulated profit attributable
to work actually performed. Although government contracts may extend for
several years, they are generally funded on an annual basis and are subject
to reduction or cancellation in the event of changes in government
requirements or budgetary concerns. If the U.S. Government significantly
curtails expenditures for research, development and consulting activities,
such curtailment might have an adverse impact on the Company's sales and
earnings.
Backlog
At December 31, 1994, the Company's backlog of unfilled orders was
approximately $43,679,000 compared with $51,257,000 at December 25, 1993.
The Company expects that substantially all of its backlog on December 31,
1994 will be filled during the fiscal year ending December 30, 1995.
Backlog at December 31, 1994 consisted of funded amounts under contracts.
Backlog at December 25, 1993 included $21,534,000 of unfunded amounts under
ongoing programs which were contractually committed by the procuring
Government agency. The Company has a number of multi-year contracts with
agencies of the U.S. Government on which actual funding generally occurs on
an annual basis. The Company's business does not have seasonal
characteristics but a portion of its funded backlog is based on annual
purchase contracts, and the amount of funded backlog as of any date can be
affected by the timing of order receipts and deliveries thereunder.
Competition
The Company competes with both domestic and foreign firms, including
larger diversified companies and smaller specialized firms. The U.S.
Government's own in-house capabilities are also, in effect, competitors of
the Company since various agencies perform certain types of services which
might otherwise be performed by the Company. The principal competitive
factors for Defense Services are price, performance, technical competence
and reliability. In addition, in our commercial business, the Company also
competes with other manufacturers of encoders, electroform vendors and
photolithographic suppliers.
Research and Development
The Company expended approximately $224,000 (inclusive of overhead and
other indirect costs) on new product and service development during the
year ended December 31, 1994, as compared to expenditures of $2,007,000
during 1993 and $1,463,000 during 1992.
Raw Materials
Raw materials and components are purchased from a large number of
independent sources and are generally available in sufficient quantities to
meet current requirements.
Environmental Matters
Compliance with federal, state and local provisions relating to the
protection of the environment has not had and is not expected to have a
material effect upon the capital expenditures, earnings or competitive
position of the Company.
Employees
At December 31, 1994, the Company had approximately 1,130 employees.
Proprietary Information
Patents, trademarks and copyrights are not materially important to the
business of the Company. The United States Government has certain
proprietary rights in processes and data developed by the Company in its
performance of government contracts.
Item 2. Properties
The Company leases offices and other facilities, totaling approximately
170,000 square feet, which are utilized for its defense services,
manufacturing and warehousing operations as well as its marketing and
engineering offices. The Company has manufacturing and office space in
Wilmington, Massachusetts under two leases totaling 85,000 square feet,
expiring in 1995, with options to the year 2000. The remaining leased
facilities consist of offices in 22 locations across the United States.
The Company owns its 135,000 square foot facility in Andover,
Massachusetts. This building was purchased in 1993 and is utilized for
defense service operations and corporate administrative offices.
The Company's total rental cost for 1994 was $1,800,000.
The Company believes its properties are adequate for its present needs.
See Note 7 to the Consolidated Financial Statements included in the
Company's 1994 Annual Report to Shareholders for a description of the
Company's lease obligations.
Item 3. Legal Proceedings
The information set forth in the last paragraph of Note 7 to the
Consolidated Financial Statements included in the Company's Annual Report
to Shareholders for 1994 is incorporated herein by reference. The
complaint described therein, filed in the United States District Court for
Massachusetts by the United States Government, was dismissed in connection
with a settlement agreement entered into by the Company in April 1994.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.
Item 4A. Executive Officers of the Registrant
The following is a list of the names and ages of the executive officers
of the Company indicating all positions and offices held by each person and
each person's principal occupations or employment during the past five
years. The executive officers were elected by the Board of Directors and
will hold office until the next annual election of officers and their
successors are elected and qualified, or until their earlier resignation or
removal by the Board of Directors. There are no family relationships
between any executive officers and directors.
Years of
Age Service Position
John S. Anderegg, Jr. 71 40 Chairman
Albert Rand 68 35President and Chief Executive Officer
John L. Wilkinson 55 13 Vice President, Human Resources
Douglas R. Potter 44 1 Vice President of Finance,
Chief Financial Officer
Each of the persons named above has served in the position indicated
for more than five years, with the exception of Douglas R. Potter. Mr.
Potter was appointed Vice President of Finance and Chief Financial Officer
in November 1993. Previously he was Vice President, Treasurer, and Chief
Financial Officer of SofTech, Inc. of Waltham, Massachusetts since 1990 and
Corporate Controller from 1985 to 1990.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
The common stock of Dynamics Research Corporation is traded on the
National Market System of the National Association of Securities Dealers,
Inc., Automated Quotation System (NASDAQ - NMS) under the symbol DRCO.
The high and low bid prices for the quarters in 1993 and 1994 and
number of holders of record the Company's common stock are described in the
Company's Annual Report to Shareholders for 1994 under the caption "Stock
Prices" and "Number of Shareholders," and such information is incorporated
herein by reference.
In September 1984, the Board of Directors indicated its intention not
to declare cash dividends to preserve cash for the future growth and
development of the Company. The Company did not declare any cash dividends
between 1984 and 1994 and does not anticipate doing so for the forseeable
future.
Item 6. Selected Financial Data
The section entitled, "Five Year Summary of Selected Financial Data" in
the Company's Annual Report to Shareholders for 1994 is incorporated herein
by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The section entitled, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the Company's Annual
Report to Shareholders for 1994 is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The following financial statements are filed as part of this Annual
Report:
Report of Independent Public Accountants
Consolidated Balance Sheets at December 31, 1994, December 25, 1993
and December 26, 1992
Consolidated Statements of Operations for the three years ended
December 31, 1994
Consolidated Statements of Shareholders' Investment for the three
years ended December 31, 1994
Consolidated Statements of Cash Flows for the three years ended
December 31, 1994
Notes to Consolidated Financial Statements
(The consolidated financial statements and related notes listed above
are incorporated by reference to the Company's Annual Report to
Shareholders for the year 1994.)
Report of Independent Public Accountants on Schedules to Consolidated
Financial Statements
Schedule VIII - Valuation and Qualifying Accounts for the three
years ended December 31, 1994
The foregoing schedule is included as part of Item 14 of this Annual
Report on Form 10-K
All other financial statements and schedules have been omitted because
the information required to be submitted has been included in the financial
statements and related notes or they are either not applicable or not
required under the rules of Regulation S-X.
Quarterly financial data presented on page 13, and Management's
Discussion and Analysis of Financial Condition and Results of Operations
presented on pages 26-28 of the Company's Annual Report to Shareholders for
the year 1994, are also incorporated herein by reference. With the
exception of the portions listed in the above index, the Annual Report
referred to above is not to be deemed filed as part of the financial
statements.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
Information with respect to Directors of the Registrant in the section
entitled "Election of Directors" in the Company's definitive proxy
Statement for the 1995 Annual Meeting of Stockholders, which will be filed
with the Securities and Exchange Commission within 120 days after the close
of the fiscal year ended December 31, 1994, is incorporated herein by
reference.
Information relating to the Executive Officers of the Company is
included in Item 4A of Part I of this Form 10K.
Item 11. Executive Compensation
Information called for by this item is incorporated by reference from
the section entitled "Compensation and Related Matters" in the Company's
definitive Proxy Statement for the 1995 Annual Meeting of Stockholders
which will be filed with the Securities and Exchange Commission within 120
days after the close of the fiscal year ended December 31, 1994.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information called for by this item is incorporated by reference from
the sections entitled "Common Stock Ownership of Certain Beneficial Owners
and Management" in the Company's definitive Proxy Statement for the 1995
Annual Meeting of Stockholders which will be filed with the Securities and
Exchange Commission within 120 days after the close of the fiscal year
ended December 31, 1994.
Item 13. Certain Relationships and Related Transactions
Not applicable.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) and (2) Financial Statements and Schedules -See Item 8.
(a) (3) Exhibits. The exhibits which are filed with this Form 10-K
or which are incorporated herein by reference are set forth in the
Exhibit Index which appears in Part IV of this report on pages 20
and 21.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the last
quarter of fiscal 1994.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES
TO CONSOLIDATED FINANCIAL STATEMENTS
To Dynamics Research Corporation:
We have audited in accordance with generally accepted auditing
standards, the consolidated financial statements included in Dynamics
Research Corporation's annual report to shareholders incorporated by
reference in this Form 10-K, and have issued our report thereon dated
February 10, 1995. Our audit was made for the purpose of forming an
opinion on those statements taken as a whole. The schedule listed in the
accompanying index is the responsibility of the company's management and is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Boston, Massachusetts,
February 10, 1995
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 27, 1995
DYNAMICS RESEARCH CORPORATION
by: /s/ Albert Rand
Albert Rand, President
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on the 27th of March, 1995.
/s/ Albert Rand
Albert Rand Director, President, Chief Executive Officer
/s/ Douglas R. Potter
Douglas R. Potter Vice President of Finance, Chief Financial
Officer (Principal Financial and Accounting Officer)
/s/ John S. Anderegg, Jr.
John S. Anderegg, Jr. Director, Chairman
/s/ Francis J. Aguilar
Dr. Francis J. Aguilar Director
/s/ Thomas J. Troup
Thomas J. Troup Director
/s/ James P. Mullins
Gen. James P.Mullins Director
SCHEDULE VIII
DYNAMICS RESEARCH CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1994
(in thousands of dollars)
ALLOWANCE FOR DOUBTFUL ACCOUNTS AND SALES RETURNS
Balance, December 28, 1991 $320
Additions charged to expense 65
Write-off of uncollectible accounts, net (29)
Balance, December 26, 1992 $356
Additions charged to expense 63
Write-off of uncollectible accounts, net (1)
Balance, December 25, 1993 $418
Additions charged to expense 222
Write-off of uncollectible accounts, net (54)
Balance, December 31, 1994 $586
EXHIBIT INDEX
3.0 Certificate of Incorporation and By-Laws.
3.1 Restated Articles of Organization dated May 22, 1987.
(Incorporated by reference to the Registrant's Form 10-Q for the
quarter ended 6/13/87)
3.2 By-Laws dated May 22, 1987. (Incorporated by reference to the
Registrant's Form 10-Q for the quarter ended 6/13/87)
4.0 Instruments defining the rights of security holders, including
indentures.
4.1 Common stock included in Exhibit 3.1 through 3.2.
4.2 Preferred stock included in Exhibit 3.1 through 3.2.
4.3 Rights Agreement dated as of July 14, 1988 ("Rights Agreement")
between the Company and American Stock Transfer & Trust Company,
as Rights Agent.* (Incorporated by reference to the Registrant's
Form 8-K on July 14, 1988)
4.4 Rights Agreement Amendment No. 1 dated as of September 6, 1989.*
(Incorporated by reference to the Registrant's Form 8-K on
September 12, 1989)
10.0 Material Contracts
10.1 Amended 1983 Stock Option Plan dated January 14, 1987
(Incorporated by reference to the Registrant's Form 10-K for the
year ended 12/27/87) Plan terminated during 1993.*
10.2 Form of Dynamics Research Corporation Indemnification Agreement
for Directors as of July, 1988. (Incorporated by reference to the
Registrant's Form 10-K for the year ended 12/28/91)*
10.3 Form of Dynamics Research Corporation Severance Agreement for
Messrs. Anderegg and Rand as of July, 1988. (Incorporated by
reference to the Registrant's Form 10-K for the year ended
12/28/91)*
10.4 Dynamics Research Corporation Deferred Compensation Plan for Non-
Employee Directors as of October 22, 1991. (Incorporated by
reference to the Registrant's Form 10-K for the year ended
12/28/91)*
10.5 Mortgage agreement dated February 5, 1993 on the Andover
office building as referred above between Dynamics Research
Corporation and ABN AMRO Bank, N.V., Boston branch of a
Connecticut corporation. (Incorporated by reference to the
Registrants Form 8-K on May 5, 1993)
10.6 1993 Equity Incentive Plan dated April 27, 1993.
(Incorporated by reference to the Registrant's Form 10-Q for the
quarter ended 6/12/93)*
10.7 1995 Stock Option Plan for non-employee directors filed
herewith.*
13.0 Annual Report to security holders, Form 10-Q or quarterly reports to
security holders.
The Company's Annual Report to Shareholders for the year ended
December 31, 1994 filed herewith with the exception of the
information incorporated by reference in parts I, II and IV of this
Form 10-K is not deemed to be filed as part of this report.
23.0 Consents of experts and councel
23.1 Consent of Independent Accountants (Arthur Andersen LLP) dated
March 24, 1995 filed herewith.
* Management contract or compensatory plan or arrangement.
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our reports included in and incorporated by reference in this Form 10-K
into the Company's previously filed Registration Statement on Form S-8 File
No. 33-68548.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
March 23, 1995
EXHIBIT A
DYNAMICS RESEARCH CORPORATION
1995 STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS
1. PURPOSE
The purpose of this 1995 Stock Option Plan for Non-Employee Directors
(the "Plan") is to advance the interests of Dynamics Research Corporation
(the "Company") by enhancing the ability of the Company to attract and
retain non-employee directors who are in a position to make significant
contributions to the success of the Company and to align the interest of
those directors more closely with the stockholders.
2. ADMINISTRATION
The Plan shall be administered by a committee (the "Committee") of the
Board of Directors (the "Board") of the Company designated by the Board for
that purpose. Unless and until a Committee is appointed the Plan shall be
administered by the entire Board, the references in the Plan to the
"Committee " shall be deemed references to the Board. The Committee shall
have authority, not inconsistent with the express provisions of the Plan,
(a) to grant options in accordance with the Plan to such directors as are
eligible to receive options; (b) to prescribe the form or forms of
instruments evidencing options and any other instruments required under the
Plan and to change such forms from time to time; (c) to adopt, amend and
rescind rules and regulations for the administration of the Plan; and (d)
to interpret the Plan and to decide any questions and settle all
controversies and disputes that may arise in connection with the Plan.
Such determinations of the Committee shall be conclusive and shall bind all
parties.
3. EFFECTIVE DATE AND TERM OF PLAN
Plan shall become effective on the date on which the Plan is approved
by the Board of Directors of the Company, subject to approval by the
shareholders of the Company. No option shall be granted under the Plan
after the completion of ten years from the date on which the Plan was
adopted by the Board, but options previously granted may extend beyond that
date.
4. SHARES SUBJECT TO THE PLAN
(a) Number of Shares. Subject to adjustment as provided in Section
4(c), the aggregate number of shares of the Company's common stock (the
"Stock") that may be delivered upon the exercise of options granted under
the Plan shall be 100,000. If any option granted under the Plan terminates
without having been exercised in full, the number of shares of Stock as to
which such option was not exercised shall be available for future grants
within the limits set forth in this Section 4(a).
(b) Shares to be Delivered. Shares delivered under the Plan shall be
authorized but unissued Stock or, if the Board so decides in its sole
discretion, previously issued Stock acquired by the Company and held in
treasury. No fractional shares of Stock shall be delivered under the Plan.
(c) Changes in Stock. In the event of a stock dividend, stock split
or combination of shares, recapitalization or other change in the Company's
capital stock, after the effective date of the Plan, the number and kind of
shares of stock or securities of the Company subject to options then
outstanding or subsequently granted under the Plan, the maximum number of
shares or securities that may be delivered under the Plan, the exercise
price, and other relevant provisions shall be appropriately adjusted by the
Committee, whose determination shall be binding on all persons.
5. ELIGIBILITY FOR OPTIONS
Directors eligible to receive options under the Plan ("Eligible
Directors") shall be those directors who are not employees of the Company
or of any subsidiary of the Company.
6. TERMS AND CONDITIONS OF OPTIONS
(a) Number of Options. On the date of the first annual meeting of
stockholders following the adoption of this Plan each Eligible Director who
is elected, re-elected or continuing as a director on such date shall be
awarded on such date an option covering 5,000 shares of Stock; thereafter,
at each annual meeting or meeting of the board of directors at which a new
Eligible Director is elected to the Board or following the election by the
Board of a new Eligible Director to the Board, he or she shall be awarded
an option covering 5,000 shares of Stock; and at each annual meeting
subsequent to the annual meeting at which the initial grant was made to an
Eligible Director and at which he or she is reelected or is continuing as a
director, he or she shall be awarded an additional option covering 1,000
shares of Stock.
(b) Exercise Price. The exercise price of each option shall be 100%
of the fair market value per share of the Stock on the date the option is
granted. In no event, however, shall the option price be less, in the case
of an original issue of authorized stock, than par value per share. For
purposes of this paragraph, (A) the fair market value of a share of Stock
on any date shall be the Closing Price on such day or, if there was no
Closing Price on such day, the latest day prior thereto on which there was
a Closing Price; and (B) the "Closing Price" of the Stock on any business
day will be the last sale price as reported on the principal market on
which the Stock is traded or, if no last sale is reported, then the mean
between the highest bid and lowest asked prices on that day.
(c) Duration of Options. The latest date on which an option may be
exercised (the "Final Exercise Date") shall be the date which is ten years
from the date the option was granted.
(d) Exercise of Options.
(1) Each option shall become exercisable to the extent of one-third
of the shares covered thereby on each of the first, second and third
anniversaries of the date of grant.
(2) Any exercise of an option shall be in writing, signed by the
proper person and delivered or mailed to the Company, accompanied by (i)
any documentation required by the Committee and (ii) payment in full for
the number of shares for which the option is exercised.
(3) The Committee shall have the right to require that the individual
exercising the option remit to the Company an amount sufficient to
satisfy any federal, state, or local withholding tax requirements (or make
other arrangements satisfactory to the employer with regard to such taxes)
prior to the delivery or any Stock pursuant to the exercise of the option.
If permitted by the committee the individual exercising the option may
elect, at such time and in such manner as the Committee may prescribe, to
have the Company hold back from the transfer Stock having a value
calculated to satisfy such withholding obligation. In the case of an
individual subject to Section 16(b) of the Exchange Act, no such election
shall be effective unless made in compliance with the applicable
requirements of Rule 16b-3 or any successor Rule under the Securities
Exchange Act of 1934, as amended (the "Exchange Act").
(4) If an option is exercised by the executor or administrator of a
deceased director, or by the person or persons to whom the option has been
transferred by the director's will or the applicable laws of descent and
distribution, the Company shall be under no obligation to deliver Stock
pursuant to such exercise until the Company is satisfied as to the
authority of the person or persons exercising the option.
(e) Payment for and Delivery of Stock. Stock purchased under the
Plan shall be paid for as follows: (i) in cash or by check (acceptable to
the Company in accordance with guidelines established for this purpose),
bank draft or money order payable to the order of the Company; (ii) through
the delivery of shares of Stock (which, in the case of shares of Stock
acquired from the Company, have been outstanding for at least six months)
having a fair market value on the last business day preceding the date of
exercise equal to the purchase price; (iii) by having the Company hold back
from the shares transferred upon exercise Stock having a fair market value
on the last business day preceding the date of exercise equal to the
exercise price; (iv) by delivery of an unconditional and irrevocable
undertaking by a broker to deliver promptly to the Company sufficient
funds to pay the purchase price; or (v) by any combination of the
permissible forms of payment; provided, that if the Stock delivered upon
exercise of the option is an original issue of authorized Stock, at least
so much of the exercise price as represents the par value of such Stock
shall be paid other than with a personal check or promissory note of the
option holder.
An option holder shall not have the rights of a shareholder with
regard to awards under the Plan except as to Stock actually received by him
or her under the Plan.
The Company shall not be obligated to deliver any shares of Stock (a)
until, in the opinion of the Company's counsel, all applicable federal and
state laws and regulations have been complied with, and (b) if the
outstanding Stock is at the time listed on any stock exchange, until the
shares to be delivered have been listed or authorized to be listed on such
exchange upon official notice of issuance, and (c) until all other legal
matters in connection with the issuance and delivery of such shares have
been approved by the Company's counsel. If the sale of Stock has not been
registered under the Securities Act of 1933, as amended, the Company may
require, as a condition to exercise of the option, such representations or
agreements as counsel for the Company may consider appropriate to avoid
violation of such Act and may require that the certificates evidencing such
Stock bear an appropriate legend restricting transfer.
(f) Nontransferability of Options. No option may be transferred
other than by will or by the laws of descent and distribution, and during a
director's lifetime an option may be exercised only by him or her.
(g) Death. Upon the death of any Eligible Director granted options
under this Plan, all options not then exercisable shall terminate. All
options held by the director that are exercisable immediately prior to
death may be exercised by his or her executor or administrator, or by the
person or persons to whom the option is transferred by will or the
applicable laws of descent and distribution, at any time within one year
after the director's death (subject, however, to the limitations of Section
6(c) regarding the maximum exercise period for such option). After
completion of that one-year period, such options shall terminate to the
extent not previously exercised.
(h) Other Termination of Status of Director. If a director's service
with the Company terminates for any reason other than death, all options
held by the director that are not then exercisable shall terminate.
Options that are exercisable on the date or termination shall continue to
be exercisable for a period of three months (subject to Section 6(c)).
After completion of that three-month period such options shall terminate to
the extent not previously exercised, expired or terminated.
(i) Mergers, etc. In the event of a consolidation or merger in which
the Company is not the surviving corporation or which results in the
acquisition of substantially all the Company's outstanding Stock by a
single person or entity or by a group of persons and/or entities acting in
concert, or in the event of a sale or transfer of substantially all of the
Company's assets or a dissolution or liquidation of the Company, all
options hereunder will terminate; provided, that 20 days prior to the
scheduled date of the stockholders meeting to vote upon any such merger,
consolidation sale, dissolution, or liquidation as set forth in the related
proxy statement, or if there shall be no such meeting, 20 days prior to the
effective date of any such transaction, all options outstanding hereunder
that are not otherwise exercisable shall become immediately exercisable,
and provided, further that in the event such a transaction is to be
accounted for as a pooling of interests, the Company shall provide for the
surviving or acquiring corporation or an affiliate thereof to grant each
holder of an option hereunder outstanding at the time of the transaction
replacement options on substantially equivalent terms.
7. EFFECT, DISCONTINUANCE, CANCELLATION, AMENDMENT,
TERMINATION AND EFFECTIVENESS
Neither adoption of the Plan nor the grant of options to a director
shall affect the Company's right to grant to such director options that are
not subject to the Plan, to issue to such directors Stock as a bonus or
otherwise, or to adopt other plans or arrangements under which Stock may be
issued to directors.
The Committee may at any time terminate the Plan as to any further
grants of options. The Committee may at any time or times, but in no event
(except to comply with the provisions of the Internal Revenue Code, the
Employee Retirement Income Security Act or the rules thereunder) more than
once in any six-month period, amend the Plan for any purpose which may at
the time by permitted by law; provided, that except to the extent expressly
required or permitted by the Plan, no such amendment will, without the
approval of the stockholders of the Company, effectuate a change for which
stockholder approval is required in order for the Plan to continue to
qualify under Rule 16b-3 promulgated under Section 16 of the Exchange Act.
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</TABLE>
03/29/95 11:36 AM
51
DYNAMICS RESEARCH CORPORATION
Solutions
Through
Information
Technology
ANNUAL REPORT 1994
FINANCIAL HIGHLIGHTS
( In thousands of dollars, except share data)
1994 1993
Revenue $102,964 $101,102
Net Income $ 224 $1,834
Net income per share*$ .04 $ .33
Backlog $43,679 $51,257
Number of employees 1,130 1,188
Number of shares outstanding* 5,631,448 5,610,878
* Retroactively adjusted for the May 1994 stock dividend.
CORPORATE PROFILE
Dynamics Research Corporation applies information system and manufacturing
technologies to create innovative solutions for its customers. Our
solutions enhance the performance, reliability, and cost-effectiveness of
complex systems.
Our mission is to help our customers compete and win in their markets
through the continuous improvement of their products and processes. We
believe that our innovative people, equipped with the best technology the
market has to offer, can create new ways to help our customers deliver
better products more cost effectively.
The majority of our work is for various branches of the U.S. military and
other federal agencies. We develop and operate complex computer and
communications-intensive information systems, as well as provide a broad
array of engineering and management support services. Our growing
commercial divisions, Encoder and Metrigraphics, produce high-precision
manufactured components, often used for digital measurement and computer-
based control systems.
DRC has been committed to the delivery of quality and value for our
customers since its incorporation in 1955.
Color photograph of Al Rand, President and Chief Executive Officer, and
Jack Anderegg, Chairman.
TO OUR SHAREHOLDERS
For the year ended December 31, 1994, Dynamics Research Corporation
achieved record revenue of $103.0 million, up 2% from $101.1 million in
1993. Net income for the year was $224,000, or $.04 per share, compared
with $1.8 million, or $.33 per share a year ago. In the third quarter, we
incurred non-recurring, pre-tax charges totaling $2.25 million. These
charges are related to staff reductions in the Company's Systems Division
and adjustments to revenue and fees on certain Air Force contracts.
In 1994, DRC's defense services business received continuing significant
contract awards for two of the Company's largest programs: The Air
Force's TICARRS maintenance data system and the Navy's Trident inertial
guidance and navigation systems. Both of these projects are considered to
be high-priority efforts that position DRC for follow-on work in the
future. In addition, we are pleased that DRC has been successful in
sustaining its significant business base providing program management
services to the Air Force at its Electronic Systems Center at Hanscom Air
Force Base in Massachusetts through subcontracts. We are encouraged by the
recent news that Hanscom has been excluded from the Secretary of Defense's
recommended base closings. However, our St. Louis operation will be
affected if the recommendation to close the U.S. Army Aviation-Troop
Command is carried out.
DRC was awarded an important new Air Force program in 1994, the Test Device
for the Joint Tactical Information Distribution System, competitively won
through the outstanding teamwork of our Systems and Test Divisions. This
device tests the performance and security of tactical communications
radios. Under this program, initially valued at $4.1 million, DRC system
engineers are integrating sophisticated software and commercially-available
components to produce a test device with dramatic improvements in
capability and performance at a much lower cost than the earlier system.
Also of importance are February 1995 awards for DRC to provide logistics
modeling support for the Joint Advanced Strike Technology program and the
Air Staff. These contracts build on DRC's historical expertise in
logistics and sophisticated modeling techniques.
While the U.S. Defense budget has been under constant pressure for several
years, and DRC has certainly felt the consequences, the information
technology sector in which we participate has a more favorable outlook.
As many realize, the information systems industry is in a dynamic state of
change. To remain competitive, DRC must continue to improve its technology
and knowledge base. We have been fortunate that many of our contracts are
at the leading edge of technology; and in executing these contracts, we
continue to expand our employees' skills and capabilities. In addition to
our technology development under contract, we fund internal development
programs such as image storage, software simulation development, object-
oriented tool development and open system architecture design. Highly
skilled and knowledgeable employees, company proprietary software tools,
and almost forty years of technical experience place us in a favorable
competitive position to participate in major new programs.
Our commercial business, manufacturing motion and position sensors and
precision electroformed products grew 39% in 1994. Over the last two
years, we invested in product and customer development programs that began
to pay off with growing sales and improving profitability in 1994. The
Encoder Division's sales were up sharply as its high-speed automated
production line completed its first full year of producing automotive
components.
The Metrigraphics Division also grew, driven in part by rising sales of
nozzle plates used in ink cartridges for home and business computer
printers.
As we look ahead, we will endeavor to be even more responsive to the needs
and demands of our customers - both commercial and government.
As always, we are grateful to the employees of DRC. Their loyalty,
creativity, and dedication to customer needs are the greatest assets in our
continuing efforts to build a growing company with appreciating value for
our shareholders.
Albert Rand
President and Chief Executive Officer
John S. Anderegg, Jr.
Chairman
MANAGING COMPLEXITY FOR THE U.S. NAVY
Since its founding in 1955, DRC has provided a wide range of sophisticated
analytical and systems services in connection with the U.S. Navy's
strategic programs. The Company's early work involved engineering analysis
of inertial guidance and navigational systems, including methods for
improving systems effectiveness. DRC developed a computer-based database
for managing information about inertial guidance systems. Our role
expanded over the years as we built, operated, and enhanced the database
system to respond to evolving needs with emerging technology. DRC
continues to provide services for this important on-going project in 1995.
Today, the automated database tracks more than 800 guidance systems
containing nearly 12,000 parts from hundreds of suppliers across the
country. The DRC system maintains a complete record of every part - who
made it, where it is, and its performance history.
DRC re-engineered the system two years ago using commercial off-the-shelf
components to accomplish an open-system architecture. More recently, we
have added technology that increases efficiency by allowing users to access
the 15 gigabyte system through Windows-based PCs, workstations, the
Internet, and object-oriented languages. We have also implemented a
paperless system in which on-line documentation in the form of text,
drawings, video, and audio, replaces paper manuals. We are adding CD ROM
capabilities to lower costs of off-line data storage.
We are currently defining a knowledge-based system that will provide on-
line information for decision support. Much system expertise resides in
the experience of people who have worked with the system for many years.
The knowledge-based system will help ensure that this complex database will
continue to fulfill its mission even as the Navy reduces its personnel
requirements.
The success of the project has become a strategic model for DRC's growth.
We start with a detailed understanding of customer needs, creatively apply
the best available technology to meet the needs, and build long-term
relationships based on performance, integrity, and service. This model
continues to serve us well as we look to the future.
Color photograph of U.S. Navy submarine, missile, and guidance system.
Caption:
SOPHISTICATED INERTIAL DEVICES (LEFT) ARE AT THE CORE OF COMPLEX GUIDANCE
AND NAVIGATIONAL SYSTEMS. UNDERSTANDING THE SYSTEM ENVIRONMENT ENABLES DRC
TO DESIGN, INSTALL, AND OPERATE INFORMATION SYSTEMS THAT PROVIDE SUPERIOR
PERFORMANCE FOR SYSTEM MANAGERS AND ENGINEERS.
INERTIAL GUIDANCE AND NAVIGATIONAL SYSTEMS
DRC services are crucial to the management of the Navy's Trident inertial
guidance and navigation systems. Our engineering and management services
help to achieve:
* Extremely high levels of reliability
* Continuous system improvements
* Re-engineering to use state-of-the-art technology, including:
Commercial off-the-shelf components
Open architecture
On-line documentation
CD ROM storage
Knowledge-based systems
CUTTING-EDGE TECHNOLOGY FOR TEST AND EVALUATION
DRC's Test Equipment Division provides specialized skills in hardware,
software, and product engineering. This division provides a strong
capability for developing and custom-producing a variety of high-
performance devices as well as integrating cutting edge technology into
customer hardware and software based systems.
Under a Navy contract, DRC has developed an Integrated Engineering
Environment that uses software to simulate the characteristics of
electronic components. Software simulation allows users to design and
evaluate system improvements without the expense and time-consuming process
of building physical mockups of the device. Also for the Navy, we are
creating new technology that allows electronic chips to be built in layers,
thus reducing the space between components. These "multi-chip modules" are
expected to provide a higher system speed and performance.
Teamed with a U.K. partner, we are building a system for the Air Force to
test secure communications devices known as Joint Tactical Information
Distribution System (JTIDS). These devices provide highly secure and
reliable digital communications over a radio network of airborne, shipborne
and land-based nodes.
The test device being built is basically a simulator designed to stress
JTIDS performance in simulated combat conditions. We believe that the
simulation capabilities of the device will allow it to be used for training
as well as testing.
DRC is providing systems integration expertise for JTIDS as well as
hardware and manufacturing experience. Software is provided by our team
partner, Wellic Ltd. DRC won this contract in an open, competitive
procurement bid, based in part on our ability to assemble an integrated
team that crosses organizational and functional boundaries.
Color photograph of Universal Interface Board and geographic display of
tactical environment.
Caption: DRC IS DEVELOPING A "UNIVERSAL INTERFACE BOARD" (LEFT) TO PERMIT
INCREASED INTEROPERABILITY OF SYSTEMS.
THE JTIDS TEST DEVICE (ABOVE) PROVIDES A GEOGRAPHIC DISPLAY AND SIMULATION
OF THE TACTICAL ENVIRONMENT.
HARDWARE, SOFTWARE, AND SYSTEMS CAPABILITIES
Drawing upon engineering and technical talents that span the Company's
divisions, DRC provides coordinated services to meet customer needs over a
wide range of advanced and high-performance systems:
* Integrated hardware capabilities
Re-engineering
Simulation
Prototyping
Electronic design
Automation
* Integrated software capabilities
Re-use
Code conversion
Migration
* Proprietary products and tools
AdaMAT:software code metrics, process improvement, and code
quality improvement
Harness: Distributed heterogenous processing
* Business process re-engineering
Architectural analysis
Requirements analysis
Data standards and modeling
Functional economic analysis
Training
A WORLDWIDE INFORMATION SYSTEM FOR THE AIR FORCE
Under contract with the Air Force, DRC developed and operates a maintenance
information system called TICARRS which has contributed substantially to
the success of the F-16 program over the last 15 years.
TICARRS is an integrated worldwide information system. It provides around-
the-clock, real-time maintenance information for all U.S. Air Force F-16
aircraft. The success of this system has resulted in its expansion over
the years to handle additional information demands for a growing user
community.
Today, TICARRS serves more than 14,000 terminals at 72 user sites
worldwide, linked by satellite and land-based communications to a central
computer at DRC headquarters. During 1995, we will provide additional
enhancements to the system. Also during 1995, we are closely following
customer planning for a new generation Air Force program expected to
consolidate air-craft maintenance information. The mission of this high-
priority effort is to improve efficiency by integrating all maintenance-
related information and decision support systems into a unified system that
will be operational by the year 2005.
DRC is strategically positioned to participate in the Air Force's
procurement of this integrated maintenance data system for the 21st
century. We created a base of expert knowledge in the domain of aircraft
maintenance; then we applied our capabilities in existing and emerging
technologies to capture and manage the data required to most effectively
and cost-efficiently support the Air Force mission. TICARRS is another
example of a strategy that has been highly successful for DRC over the
years.
Color photograph of TICARRS Communication Network and F-16 aircraft.
Caption:
DRC's F-16 AIRCRAFT MAINTENANCE INFORMATION SYSTEM SUPPORTS OPERATIONS
WORLDWIDE. DRC HAS THE FULL RANGE OF CREATIVE TECHNICAL SKILLS AND
EXPERIENCE NEEDED TO PROVIDE INNOVATIVE, COST-EFFECTIVE SOLUTIONS TO
CHANGING CUSTOMER REQUIREMENTS.
INFORMATION FOR MANAGING AIRCRAFT MAINTENANCE DATA
Building upon years of experience in logistics, data systems, and aircraft
maintenance information, DRC offers a unique capability in the development
and management of complex, large scale systems that meet demanding
requirements for decision making:
* Comprehensive skills
Management
Engineering
Maintenance
* Integrated development team
Systems designers
Hardware designers
Users/customers
* Domain expertise
* Use of commercially available software and tools
* Integrated testing
* Independent verification and validation
* Configuration management and control
Identification and tracking
Information for problem solving
Failure analysis and diagnosis
HIGH-PRECISION PRODUCTS FOR DEMANDING COMMERCIAL MARKETS
DRC designs, custom-engineers, and produces high-precision products for
demanding applications in commercial markets. We target niche markets
where our creative engineering capabilities and our commitment to service
and our quality combine to meet extremely demanding requirements.
The Encoder Division manufactures products used in automotive applications.
An expanding market for these products is met through our high-speed,
automated production facility, which successfully completed its first full
year of operation in 1994. Other encoder products are used in a wide range
of applications, including medical equipment, semiconductor processing, and
factory automation equipment.
The Metrigraphics Division uses advanced electroforming capabilities in the
production and prototyping of precision components. Advantages of
electroforming include superior edge definition and the ability to hold
critical tolerances on parts with as many as two million holes per square
inch. Sales of electroformed products improved in 1994, partly due to
strong sales of printers that use our electroformed nozzle plates.
Metrigraphics also produces code discs, linear scales, high density circuit
and optical targets.
A number of different market forces are creating opportunities for our
commercial products. The trend toward higher levels of automation, the
demand for speed and precision, and the spread of computer technology to
many manufactured products provide future opportunities for our Commercial
Divisions. Encoders covert analog information to digital form and thus
become integral to the computer control feedback system. Electroforming is
a superior manufacturing process for a growing array of micro-miniature
parts. By providing exceptional service and customer satisfaction, DRC
seeks to build long-term relationships that result in new product
opportunities - for DRC and for our customers.
Color photograph of quality control device and electronic circuit boards.
Caption: MINIATURE COMPONENT PARTS MANUFACTURED BY AN ELECTROFORMING
PROCESS ARE SUBJECT TO RIGOROUS QUALITY CONTROL AND TESTING (LEFT).
ELECTRONIC CIRCUITRY IN ENCODERS IS MANUFACTURED IN HIGH VOLUMES WITH HIGH-
SPEED AUTOMATED PRODUCTION EQUIPMENT.
PRECISE MOTION AND POSITION SENSORS.
ELECTROFORMED COMPONENTS.
DRC applies it's experience and technical expertise to the development of
specialized products and capabilities, including:
* High-precision measurement devices and components
Optical encoders
Linear and rotary measurement devices
Scales and reticles
* Electroformed parts
Nozzle plates
Printheads
* Custom-engineering
* Manufacturing skills and techniques
Materials deposition
Chemical processes
Photo lithography
* Specialized production lines
Automation
High speed
High accuracy
DIVERSITY AND STRENGTH
As the examples in this report illustrate, our ability to understand and
meet customer requirements is critical to success in our traditional
markets. In addition, our emphasis on quality assurance, customer service,
and total customer satisfaction has positioned DRC to continue to compete
successfully.
In recent years, we have augmented our traditional strengths with new areas
of expertise: the use of commercial, off-the-shelf technology, open system
architectures, standards-based systems, and object-oriented technology.
These and other initiatives align DRC with the Department of Defense
emphasis on greater efficiency, better use of resources, and maintaining
mission readiness with fewer personnel. As a result, we continue to be
successful in attracting contract support in forward-looking, high-priority
projects.
Space does not permit a full presentation of all our engineering and
management support services for Air Force, Navy and Army customers, but
other work includes:
* Technical and engineering management support for a wide range of
high-profile Air Force electronics systems programs. Our people
support all stages of an acquisition from program definition and
initiation, strategic planning, proposal evaluation, contract or
monitoring, progress evaluation and measurement.
* Logistics analysis and support, throughout all phases of the
acquisition process and system life.
* Human-systems integration for improved performance and effectiveness
of personnel and systems: training methods, task
automation, performance analysis and personnel requirements.
In non-DoD markets, we continue to develop opportunities where our proven
capabilities can produce significant and measurable results for our
customers. In addition, we are growing the commercial segment of our
business through innovative product engineering and aggressive, focused
marketing.
Information technology is the core of DRC's strength. With customer
service and satisfaction as a driving force, we provide solutions that
result in engineering, manufacturing, and business opportunities - for us
and for our customers.
<TABLE>
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
<CAPTION>
(in thousands of dollars, except per share data)1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C>
Revenue $102,964$101,102$102,581$97,701$90,548
Operating income 632 3,242 6,377 5,684 5,557
Net income 224 1,834 4,014 3,630 3,260
Net income per common share* .04 .33 .70 .61 .51
Total assets 53,977 59,494 48,877 45,397 43,137
Long-term debt (excl. curr. port.) 2,717 3,900 - - -
Shareholders' investment 32,713 32,437 30,805 27,550 24,718
Shareholders' investment per share* 5.81 5.78 5.47 4.74 4.08
Return on shareholders' investment (%) .7 5.7 13.0 13.2 13.2
Backlog 43,679 51,257 54,547 52,609 50,605
Cash flow from operations 5,721 1,397 9,468 3,416 4,462
Research and development expense224 2,007 1,463 698 667
Capital expenditures 2,444 12,144 4,732 3,710 2,151
Number of shares outstanding
at end of year* 5,631,4485,610,8785,632,2645,815,5986,061,072
Number of employees 1,130 1,188 1,189 1,195 1,174
</TABLE>
QUARTERLY DATA**
(in thousands of dollars, except per share data) unaudited
1994 1st Qtr2nd Qtr 3rd Qtr4th Qtr
Revenue $22,692$23,656 $21,573$35,043
Operating income 696 580 (2,699) 2,055
Net income 390 302 (1,734) 1,266
Net income per common share .07 .05 (.31).22
1993
Revenue $23,026$24,382 $21,892$31,802
Operating income 1,118 1,034 368 722
Net income 651 594 189 400
Net income per common share* .12 .11 .03 .07
1992
Revenue $21,194$24,222 $23,731$33,434
Operating income 810 1,174 1,481 2,912
Net income 518 761 950 1,785
Net income per common share* .09 .13 .16 .32
* Retroactively adjusted for the May 1994, February 1993, and February
1992 stock dividends.
** The Company uses a 13-period accounting year, each with four weeks.
The first three quarters contain 12 weeks,
and the fourth fiscal quarter contains 16 weeks. The 1994 fiscal year
covered a 53-week period with 17 weeks
in the fourth fiscal quarter.
CONSOLIDATED BALANCE SHEETS
At December 31, l994, December 25, 1993 and December 26, 1992
(in thousands of dollars, except per share data) 1994 1993 1992
Assets
Current assets:
Cash and cash equivalents $ 206 $ 140 $2,908
Receivables, less allowances of $586, $418 and $356 14,939 20,016
15,810
Unbilled expenditures and fees on contracts in process 18,194 17,053
16,214
Inventories 2,353 2,630 2,007
Refundable income taxes 885 553 1,550
Prepaid expenses and other current assets 1,330 1,315 873
Total current assets 37,907 41,707 39,362
Property, plant and equipment, at cost:
Land 1,126 1,126 -
Building 7,774 7,774 -
Machinery and equipment 28,857 27,637 25,258
Leasehold improvements 1,377 1,835 1,826
Total property, plant and equipment, at cost 39,134 38,372 27,084
Less-accumulated depreciation and amortization 23,064 20,585 17,569
Net property, plant and equipment 16,070 17,787 9,515
Total assets $53,977 $59,494 $48,877
Liabilities and Shareholders' Investment
Current liabilities:
Notes payable $1,200 $3,301 $220
Accounts and drafts payable 3,442 4,327 4,877
Accrued payroll and employee benefits 4,649 4,736 4,678
Deferred contract and other revenue 894 3,073 2,880
Other accrued expenses 1,535 944 579
Current deferred income taxes 4,741 4,531 3,761
Current portion of long-term debt 1,221 1,200 -
Total current liabilities 17,682 22,11216,995
Long-term debt, less current portion 2,717 3,900 -
Deferred income taxes 865 1,045 1,077
Commitments and contingencies
Shareholders' Investment
Preferred stock, par value, $.10 per share,
5,000,000 shares authorized, none issued
Common stock, par value, $.10 per share
Authorized - 15,000,000 shares
Issued - 6,571,495 shares in 1994, 6,028,155 shares in 1993 and
5,960,940 shares in 1992 657 603 596
Less: Treasury stock - 940,047 shares in 1994, 927,357 shares in 1993
and 840,700 shares in 1992, at par value (94) (93) (84)
Capital in excess of par value 9,284 6,977 7,199
Retained earnings 22,866 24,950 23,094
Total shareholders' investment 32,713 32,437 30,805
Total liabilities and shareholders' investment$53,977 $59,494 $ 48,877
The accompanying notes are an integral part of these consolidated financial
statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three years ended December 31, 1994
(in thousands of dollars, except per share data) 1994 1993 1992
Revenue:
Contract revenue $84,891 $88,085 $92,015
Product sales 18,073 13,017 10,566
Total revenue 102,964 101,102 102,581
Costs and expenses:
Cost of contract revenue 77,398 74,523 76,241
Cost of goods 14,571 10,768 8,170
Selling, engineering and administrative expenses 10,363 12,569
11,793
Total operating costs and expenses 102,332 97,860 96,204
Operating income 632 3,242 6,377
Interest expense (income), net 431 250 (167)
Income before provision for income taxes 201 2,992 6,544
Provision (benefit) for income taxes (23) 1,158 2,530
Net income $ 224 $1,834 $4,014
Net income per common share* $ .04 $ .33 $ .70
Weighted average number of common shares outstanding* 5,638,700
5,633,354 5,745,302
* Retroactively adjusted for the May 1994 and February 1993 stock
dividends.
The accompanying notes are an integral part of these consolidated financial
statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT
For the three years ended December 31, 1994
(in thousands)
Common Stock Capital in
Issued Treasury StockExcess ofRetained
SharesPar ValueSharesPar ValuePar ValueEarnings
Balance at December 28, 1991 5,480 $548(674) $ (67) $5,958
$21,111
Year 1992
10% stock dividend 470 47 - - 1,981(2,031)
Stock options exercised 11 1 - - 35 -
Treasury stock purchased - - (167) (17) (775) -
Net income - - - - - 4,014
Balance at December 26, 1992 5,961 $596(841) $ (84) $7,199
$23,094
Year 1993
Stock dividend adjustment(5) - - - (22) 22
Stock options exercised 72 7 - - 206 -
Treasury stock purchased - - (86) (9) (406) -
Net income - - - - - 1,834
Balance at December 25, 1993 6,028 $603(927) $ (93) $6,977
$24,950
Year 1994
10% stock dividend 509 51 - - 2,255(2,308)
Stock options exercised 34 3 - - 94 -
Treasury stock purchased - - (13) (1) (42) -
Net income - - - - - 224
Balance at December 31, 1994 6,571 $657(940) $ (94) $9,284
$22,866
The accompanying notes are an integral part of these consolidated financial
statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three years ended December 31, 1994
(in thousands of dollars) 1994 1993 1992
Cash provided by operations:
Net income $ 224 $1,834 $4,014
Depreciation and amortization 4,161 3,872 2,834
Increase (decrease) in deferred income taxes(180) (32) 115
Provision for receivable reserves 222 63 65
4,427 5,737 7,028
Cash provided by (used for) working capital:
Receivables 4,855 (4,269) 7,046
Unbilled expenditures and fees on contracts in process(1,141) (839)
(5,727)
Inventories 277 (623) (274)
Refundable income taxes (332) 997(1,508)
Prepaid expenses and other current assets(15) (442) (321)
Accounts and drafts payable (885) (550) 1,325
Accrued payroll and employee benefits (87) 58 461
Deferred contract and other revenue (2,179) 193 110
Other accrued expenses 591 365 153
Accrued and current deferred income taxes 210 770 1,175
1,294 (4,340) 2,440
Net cash generated in operations 5,721 1,397 9,468
Cash used for investing activities:
Additions to property and equipment, net(2,444)(12,144)(4,732)
Cash provided by (used for) financing activities:
Net borrowings (repayments) under line-of-credit agreements(2,065) 3,081
(3,117)
Proceeds from issuance of the mortgage loan - 6,000 -
Principal payment under mortgage agreement(1,200)(900) -
Proceeds from exercise of stock options 97 213 36
Purchase of treasury shares (43) (415) (792)
Net cash generated (used) in financing activities(3,211)7,979 (3,873)
Net increase (decrease) in cash and cash equivalents 66(2,768) 863
Cash and cash equivalents at the beginning of the year140 2,908 2,045
Cash and cash equivalents at the end of the year $ 206 $ 140 $ 2,908
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 583 $ 276 $ 32
Income taxes $ 265 $ 905 $2,761
The accompanying notes are an integral part of these consolidated financial
statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation. The accompanying consolidated financial
statements include the accounts of Dynamics Research Corporation and its
wholly-owned subsidiaries (the Company). All material intercompany
transactions and balances have been eliminated in consolidation.
Revenue recognition. Revenues under cost-reimbursement and fixed-price
contracts are recognized as costs are incurred and include applicable fees
in the proportion that costs incurred bear to total estimated costs. When
a loss is indicated on any contract in process, provision for the total
estimated loss is made at that time. Unbilled expenditures and fees on
contracts in process represent the revenue recognized on certain contracts
in excess of the billings to date. Deferred contract revenue represents the
amounts billed on certain contracts in excess of costs and fees incurred to
date. Overhead and general and administrative costs charged to U.S.
government contracts are subject to audit for years after 1992.
Income taxes. Effective December 27, 1992, the Company adopted the
liability method of accounting for income taxes as set forth in Statement
of Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for
Income Taxes." Under the liability method, deferred taxes are determined
based upon the difference between the financial statement and tax bases of
assets and liabilities using enacted tax rates in effect in the years in
which the differences are expected to reverse. Deferred tax expense
represents the change in the deferred tax asset/liability balance. The
adoption of SFAS 109 in 1993 did not have a material effect on the
Company's consolidated financial statements. Prior to fiscal 1993, the
Company recorded income taxes on timing differences between financial
statement and tax treatment of income and expenses under Accounting
Principle Board Opinion No. 11.
Inventories. Inventories are stated at the lower of cost (first-in, first-
out) or market, and consist of materials, labor and overhead. There are no
amounts in inventories relating to contracts having production cycles
longer than one year.
(in thousands of dollars) 1994 1993 1992
Work in process $ 603 $ 632 $ 418
Raw materials and subassemblies 1,750 1,998 1,589
Total $2,353 $2,630 $2,007
Property, plant & equipment. Property, plant and equipment are recorded at
cost. Depreciation and amortization are provided in amounts sufficient to
amortize the cost of such assets over their estimated useful lives using
principally the straight-line method for plant and equipment. Leasehold
improvements are amortized over the remaining term of the lease or the life
of the related asset, whichever is shorter.
Cash and cash equivalents. The Company considers all cash investments with
original maturities of three months or less to be cash equivalents.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
2. INCOME TAXES
The components of the provisions (benefit) for federal and state income
taxes are as follows:
(in thousands of dollars) 1994 1993 1992
Currently payable (refundable)
Federal $(354) $517 $ 320
State (24) 172 85
Total $(378) $689 $ 405
Deferred
Federal $ 297 $366 $1,641
State 58 103 484
Total $ 355 $469 $2,125
Total provision (benefit) $(23) $1,158 $2,530
The differences between the statutory U.S. federal income tax rate and the
Company's effective tax rates are as follows:
(in thousands of dollars) 1994 1993 1992
Provision at statutory rate $ 68 $1,017 $2,225
State income tax, net of federal tax benefit 23 182 375
R&D tax credit (100) - -
Other, net (14) (41) (70)
Provision (benefit) for income taxes $(23) $1,158 $2,530
Significant items comprising deferred tax assets and liabilities are as
follows:
(in thousands of dollars) 1994 1993
Unbilled costs and fees and deferred contract revenue, net $
(6,768) $(5,634)
Accrued expenses 1,338 733
Receivable reserves 230 170
Inventory reserves 155 168
Other 304 32
Current deferred tax liabilities, net $(4,741)$(4,531)
Accelerated tax depreciation $(581) $(820)
Other (284) (225)
Non-current deferred tax liabilities $(865) $(1,045)
Total deferred tax liabilities, net $(5,606)$(5,576)
During 1992, deferred income taxes were provided primarily for timing
differences in
the recognition of contract revenue.
Total deferred tax assets and total deferred tax liabilities were
$7,633,000 and $2,027,000,
respectively at December 31, 1994 compared with $6,679,000 and $1,103,000,
respectively
at December 25, 1993.
3. EMPLOYEE BENEFIT PROGRAMS
The Company has a noncontributory defined benefit pension plan covering
substantially all of its employees. Pension plan benefits are generally
based on years of service and compensation during final years of
employment. The Company's funding policy is to contribute at least the
minimum amount required by the Employee Retirement Income Security Act of
1974 or additional amounts to assure that plan assets will be adequate to
provide retirement benefits. Contributions are intended to provide not
only for benefits attributed to service to date, but also for those
expected to be earned in the future.
Net pension cost for 1994, 1993 and 1992 included the following components:
(in thousands of dollars) 1994 1993 1992
Service cost - benefits earned during the period $1,309 $1,108 $ 1,081
Interest cost on projected benefit obligation 1,666 1,544 1,343
Actual return on plan assets 685 (1,662) (979)
Net amortization and deferred items (2,198) (116) (676)
Net periodic pension cost $1,462 $ 874 $ 769
The following table sets forth the plan's funded status and amounts
recognized in the Company's consolidated financial statements at December
31, 1994, December 25, 1993 and December 26, 1992:
(in thousands of dollars) 1994 1993 1992
Actuarial present value of benefit obligations:
Vested $18,327 $19,814$13,324
Nonvested 466 569 510
Accumulated benefit obligation 18,793 20,383 13,834
Effect of projected future salary increases 2,644 2,595 3,324
Projected benefit obligation for service rendered to date 21,437
22,978 17,158
Plan assets at fair market value 19,600 19,639 17,565
Projected benefit obligation less than (in excess of) plan assets
(1,837) (3,339) 407
Unrecognized net gain from past experience different
from that assumed and effects of changes in assumptions (2,097)
(430) (4,299)
Prior service cost not yet recognized in net periodic pension cost
2,359 2,579 2,799
Unrecognized net obligation at January 1, 1987 being recognized
over 15 years 246 281 316
Net pension liability recognized in the Consolidated Balance Sheet
at December 31, 1994, December 25, 1993 and December 26, 1992 $
(1,329) $(909) $(777)
The weighted-average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation were 8.5% and 3.5% in 1994, 7.25% and 3% in
1993 and 9% and 5% in 1992. The expected long-term rate of return on assets
was 9% in 1994 and 1993 and 10% in 1992. A substantial portion of the
projected benefit obligation decrease from 1993 to 1994 was attributable to
the increase in the discount rate to match current market conditions, while
the substantial increase from 1992 to 1993 was due to the lowering of the
discount rate.
The Company also maintains a cash or deferred savings plan (401(k) plan),
under which employees may reduce their compensation and have such "elective
deferrals" contributed to the plan on their behalf. The Company
contributes to the plan an amount equal to 25% of the first 6% of
employee's elective deferrals. The Company contributed $581,305 to the plan
for 1994, $534,321 for 1993 and $477,789 for 1992. The elective deferrals
are invested in one or more collective investment funds at the
participant's direction. The Company's contributions are invested in
guaranteed investment contracts and are paid to the employee upon
termination, subject to forfeiture of any non-vested portion if termination
occurs within the first five years of employment.
4. NOTES PAYABLE AND LINES OF CREDIT
At December 31, l994, the Company had unsecured lines of credit with
various banks that provide for maximum borrowings of $21,000,000, of which
$1,200,000 was utilized. Borrowings under these lines of credit are
payable on demand and bear interest at the prevailing prime interest rate
(8.5% at December 31, 1994) or at a lower rate quoted by the respective
banks. The Company's average interest rate on outstanding borrowings at
December 31, 1994, December 25, 1993 and December 26, 1992 were 7.0%, 3.8%
and 6.0% respectively. While the arrangements do not have termination
dates, the terms are reviewed and revised periodically.
5. LONG-TERM DEBT
(in thousands of dollars)
Long-term debt consists of the following: 1994 1993
Mortgage note payable to a bank, bearing interest at LIBOR plus 1%
(6.7% through February 2, 1995, at which time the interest rate is
to be adjusted) due in quarterly payments of $300,000 plus interest
through February 1998,secured by certain land and buildings. $ 3,900
$ 5,100
Other 38 -
Less - current portion (1,221) (1,200)
$2,717 $3,900
Future maturities of long-term debt are as follows:1995 $ 1,221
1996 1,217
1997 1,200
1998 300
$3,938
The Mortgage Agreement contains covenants concerning certain operating
ratios, minimum balances of net worth and specified fixed charge coverage
ratios. The Company, during the third and fourth quarters of 1994 was not
in compliance with the covenants which require specified fixed charge
coverage ratios. The bank has waived these defaults. The Mortgage
Agreement has been amended and the Company is in compliance with the
amended covenants. Based on current operating plans, management believes
the amended covenants can be met on a continuing basis.
6. STOCK OPTION PLANS
The Company has stock option plans which are administered by the
Compensation Committee of the Board of Directors who determine the
employees to receive options and the number and option price of shares
covered by each such option.
On April 27, 1993, the Company's shareholders approved the 1993 Equity
Incentive Plan (1993 Plan) to replace the Company's 1983 Stock Option Plan
(1983 Plan), which terminated in 1993. The 1993 Plan permits the Company to
grant incentive stock options, stock appreciation rights (SAR), awards of
nontransferable shares of restricted common stock and deferred grants of
common stock. Options granted under the 1983 Plan on or before December 31,
1986 are not exercisable, while previously granted options are outstanding.
Options granted under both plans may be either incentive stock options or
non-qualified stock options. The option price shall not be less than the
fair market value at the time the option is granted, and the option period
may not be greater than ten years from the date the option is granted.
Options under the plans have normally been exercisable in three equal
installments commencing one year from the date of the grant. Transactions
involving the plans are summarized as follows:*
1994 1993 1992
Shares under option:
Outstanding at beginning of year 429,129 481,704 434,775
Granted - 38,500 89,843
Exercised (34,120) (79,986) (12,966)
Canceled (34,117) (11,089) (29,948)
Outstanding at end of year 360,892 429,129 481,704
Price range of options outstanding$3.46-$7.42$2.60-$7.42$2.60-$7.42
Exercisable at end of year 315,602 315,205 340,293
* Retroactively adjusted for the May 1994 stock dividend.
At December 31, l994, under the 1993 Plan, 440,000 shares have been
reserved, of which 418,000 shares are available for future grants.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
7. COMMITMENTS AND CONTINGENCIES
The Company conducts certain of its operations in facilities which are
under long-term operating leases expiring at various dates through 1999,
with various options to renew through 2004. Rent expense under these leases
(exclusive of real estate taxes, insurance and other expenses payable under
the terms of the leases) was approximately $1,800,000 in 1994 and
$1,887,000 in 1993 and $3,300,000 in 1992.
The aggregate minimum lease commitment for the Company's facilities on
December 31, 1994 was $2,344,000, payable as follows: $1,332,000 in 1995,
$436,000 in 1996, $359,000 in 1997, $188,000 in 1998 and $29,000 in 1999.
The Company also leases certain equipment. Rent expense under these leases
was approximately $46,000 in 1994, $429,000 in 1993 and $1,390,000 in 1992.
The Company entered into a settlement agreement in April, 1994 with the
Department of Justice whereby the Company paid $1,790,000, to the U.S.
Government and a civil suit against the Company, filed by the Department of
Justice in 1991, was dismissed. The amount of the settlement had been fully
reserved and had no impact on reported results during 1994.
8. PREFERRED STOCK PURCHASE RIGHTS
On July 14, 1988, and as amended on September 6, 1989, the Company declared
a dividend distribution of one preferred stock purchase right (Right) for
every outstanding share of common stock. The Rights have attached to all
outstanding shares of common stock, and no separate Rights certificates
will be issued. The Rights will become exercisable upon the earlier to
occur of (i) the date which is the tenth business day following a public
announcement that a person or group of affiliated or associated persons has
acquired, or obtained the right to acquire, beneficial ownership of 15% or
more of the outstanding shares of common stock or (ii) the tenth business
day following the commencement or announcement of an intention to make a
tender offer or exchange offer that would result in a person or group
owning 30% or more of the outstanding common stock.
When exercisable, each Right entitles the registered holder to purchase
from the Company one tenth of a share of its Series A Participating
Preferred Stock, $.10 par value, at a price of $40.00 per each one tenth
share of preferred stock.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a shareholder of the Company including, without limitation, the
right to vote or to receive dividends. The Rights may be redeemed by the
Company at the discretion of the Board of Directors, at a price of $.01 per
Right, and they expire on July 27, 1998.
9. BUSINESS SEGMENTS
The Company provides computer systems services, other engineering and
management support services and manufactures position and motion sensors
and other precision components. The Systems segment provides specialized
technical services to the Department of Defense and produced approximately
82% of total Company revenues in 1994. These services include the
development and operation of computer-based management information systems
where sophisticated software programs are applied to collect, analyze,
store and retrieve information regarding the location, design,
configuration, maintenance status and performance test history of the
individual component parts of major weapons systems. The Commercial
products segment produces encoders, which are used to measure rotary or
linear movement, and precision-patterned glass and electroformed metal
products.
Identifiable assets by business segment include both assets directly
identified with those operations and an allocable share of jointly used
assets.
General corporate assets consist primarily of cash and the Company's
corporate headquarters.
Summarized financial information by business segment for 1994, 1993 and
1992 are as follows:
(in thousands of dollars) 1994 1993 1992
Revenue:
Defense systems and services $84,891 $88,085$92,015
Commercial products 18,073 13,017 10,566
Total Revenue $102,964$101,102 $102,581
Operating income:
Defense systems and services $(290) $3,457 $6,225
Commercial products 922 (215) 152
Total operating income $ 632 $3,242 $6,377
Total assets:
Defense systems and services $36,573 $41,744$37,767
Commercial products 6,878 7,432 6,060
Corporate 10,526 10,318 5,050
Total Assets $53,977 $59,494$48,877
Depreciation and amortization:
Defense systems and services $2,932 $2,726 $2,114
Commercial products 772 674 545
Corporate 457 472 175
Total depreciation and amortization $4,161 $3,872 $2,834
Capital expenditures:
Defense systems and services $1,971 $2,207 $3,455
Commercial products 347 779 1,191
Corporate 126 9,158 86
Total capital expenditures $2,444 $12,144$4,732
9. BUSINESS SEGMENTS - CONTINUED
Unbilled expenditures and fees on contracts in process consist of costs and
estimated earnings in excess of billings on uncompleted government
contracts and are comprised principally of amounts, including retainage,
for which billings could not be presented under the terms of the contracts
at the balance sheet dates. Unbilled expenditures and fees on
contracts in process with the U.S. Government at December 31, 1994 were
$18,194,000 compared to $17,053,000 at December 25, 1993, and $16,214,000
at December 26, 1992.
The approximate number of U.S. Government contracts has varied between 100
and 150 during the past five years, with 125 contracts open at December 31,
1994. Receivables under U.S. Government contracts at December 31, 1994
were $12,505,000 compared to $17,580,000 at December 25, 1993, and
$14,059,000 at December 26, 1992.
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
The management of Dynamics Research Corporation is responsible for the
accuracy and internal consistency of all information contained in this
annual report, including the consolidated financial statements. Management
has followed those generally accepted accounting principles which it
believes to be most appropriate to the circumstances of the Company, and
has made what it believes to be reasonable and prudent judgments and
estimates where necessary.
Dynamics Research Corporation operates under a system of internal
accounting controls designed to provide reasonable assurance that its
financial records are accurate, that the assets of the Company are
protected, and that the financial statements present fairly the financial
position and results of operations of the Company. The internal accounting
control system is tested, monitored and revised as necessary.
Three directors of the Company, not members of management, serve as the
Audit Committee of the Board of Directors and are the principal means
through which the Board supervises the performance of the financial
reporting duties of management. The Audit Committee meets with management
and the Company's independent auditors several times a year to review the
results of external audits of the Company and to discuss plans for future
audits. At these meetings the Audit Committee also meets privately with
the independent auditors to assure its free access to them.
The Company's independent auditors, Arthur Andersen LLP, audited the
financial statements prepared by the management of Dynamics Research
Corporation. Their report on these statements is presented below.
Albert Rand Douglas R. Potter
President, Chief Executive OfficerVice President of Finance, Chief
Financial Officer
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Dynamics Research Corporation:
We have audited the accompanying consolidated balance sheets of DYNAMICS
RESEARCH CORPORATION (a Massachusetts corporation) and subsidiaries as of
December 31, 1994, December 25, 1993 and December 26, 1992, and the related
consolidated statements of operations, shareholders' investment and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of DYNAMICS RESEARCH
CORPORATION and subsidiaries as of December 31, 1994, December 25, 1993 and
December 26, 1992, and the results of their operations and their cash flows
for the years then ended in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts,
February 10, 1995
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND OPERATING RESULTS
RESULTS OF OPERATIONS
This discussion and analysis should be read in conjunction with and is
intended to supplement the information set forth in the Company's
consolidated financial statements and related notes.
The following table sets forth, for the periods indicated, the percentage
which certain items in the Consolidated Statements of Operations bear to
revenue:
1994 1993 1992
Revenue
Contract revenue 82.4% 87.1% 89.7%
Product sales 17.6 12.9 10.3
Total revenue 100.0 100.0 100.0
Cost of contract revenue* 91.2 84.6 82.9
Cost of product sales* 80.6 82.7 77.3
Total cost of sales 89.3 84.4 82.3
Selling, engineering and administrative expenses 10.1 12.411.5
Total operating costs 99.4 96.8 93.8
Operating income 0.6 3.2 6.2
Interest expense (income), net 0.4 0.2 (0.2)
Income before income taxes 0.2 3.0 6.4
Provision for income taxes 0.0 1.2 2.5
Net income 0.2% 1.8% 3.9%
*These amounts represent a percentage of contract revenue and product
sales, respectively.
The following comments should be read in conjunction with the foregoing
table:
Contract revenue decreased 3.6% or $3,194,000 in 1994 over 1993 as compared
to a 4.3% or $3,930,000 decrease in 1993 over 1992. During 1994, the
Company experienced reductions in several areas including the Air Force
Technical, Engineering and Management Support (TEMS) program at Hanscom Air
Force Base. Also, reflected in 1994 revenue was a $1.0 million third
quarter adjustment in connection with a contract with the United States Air
Force to reflect the uncertainty of recovery of certain costs incurred to
date. Defense budget pressures and priorities may alter the future scope
of defense programs, and the potential impact of these changes on the
Company's future contract revenue is difficult to predict. However, much
of the Company's revenue relates to the development and operation of
computer based management information and logistics support systems which
continue to receive budgetary suppport. The Company is continuing to
pursue additional programs both within the Department of Defense (DoD) and
with other government agencies. The 1993 decrease in revenue primarily
resulted from the Company continuing TEMS work as a subcontractor, rather
than as prime contractor.
Product sales in 1994 increased 38.8% or $5,056,000 as compared with 1993.
This was principally the result of full production of a new line of custom
encoder devices for a customer in the automotive industry and of
electroformed components for commercial printers and increased business
across a wide customer base. Product sales in 1993 increased 23.2% or
$2,451,000 as compared with 1992. This principally resulted from
commencement of sales of the new product lines.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND OPERATING RESULTS - CONTINUED
Cost of contract revenue as a percentage of contract revenue increased
from 84.6% in 1993 to 91.2% in 1994. This increase was due principally to
$500,000 in charges for reserves related to certain Air Force programs and
to the continuing adverse effect on profit margins resulting from the
Company's shift from a prime contractor role to a subcontractor role for
the engineering services program performed for the Air Force at Hanscom Air
Force Base. A nonrecurring charge of $750,000 was taken in the third
quarter of 1994 relating to staff reductions, consisting primarily of
seperation costs. Cost reduction actions were taken in the fourth quarter
of 1993, consisting primarily of indirect labor staff reductions and
consolidation of office space. Facility costs were significantly reduced
in 1994 and 1993 compared to 1992 due to the January 1993 purchase of the
Andover, Massachusetts building occupied by its Corporate offices and
Systems Division.
The cost of contract revenue, measured as a percentage of contract revenue,
increased from 82.9% in 1992 to 84.6% in 1993. This was attributable to
lower profit margins on specific contracts in 1993.
Cost of goods as a percentage of product sales decreased from 82.7% in 1993
to 80.6% in 1994. This decrease was primarily the result of full
production levels of the new custom encoder product line and increased
production of electroformed components for commercial printers. Start-up
costs for these product lines were incurred in 1993 and targeted unit
production levels for these products were achieved in 1994.
Cost of goods as a percentage of product sales increased from 77.3% in 1992
to 82.7% in 1993. This increase was the result of start-up costs for the
new custom encoder product line.
Selling, engineering and administrative expenses decreased $2,206,000 or
17.6% in 1994 from 1993. The decrease was principally due to the
completion of research and development efforts by the Company related to
the Company's maintenance data system for the Air Force. These internal
research and development efforts were completed late in 1993. There was
also a decrease in general and administrative expenses due to staff
reductions in late 1993.
Selling, engineering and administrative expenses increased $776,000 or 6.6%
in 1993 over 1992. The increase was principally due to an increase of
$544,000 in research and development expense as discussed above.
Interest expense (income), net increased to $431,000 in 1994 from $250,000
in 1993 due to an increase in the average level of the Company's borrowings
in 1994 combined with higher average interest rates in 1994. The sum of
receivables and unbilled expenditures and fees on contracts in process
increased from the end of 1992 to 1993 and then decreased at the end of
1994. Early in 1993, the Company acquired its headquarters building with a
combination of cash and mortgage financing.
Provision (benefit) for income taxes was (11.4%) for 1994, and 38.7% for
1993 and 1992. Effective December 27, 1992, the Company adopted Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes."
This statement requires the use of the liability method for computing the
current and deferred provisions for income taxes. The adoption of this
method did not have a material impact on the Company's tax provision. The
1994 tax rate was favorably affected by research and development
expenditure credits as well as somewhat lower net state income taxes.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND OPERATING RESULTS - CONTINUED
The Company's backlog of unfilled orders at the end of 1994 was
$43,679,000, a decrease of 14.8% from $51,257,000 in 1993. A portion of
the Company's backlog is based on annual purchase contracts, and the amount
of the backlog as of any date can be affected by the timing of such order
receipts and deliveries thereunder.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity have been cash flow from
operations and bank credit lines. The ratio of current assets to current
liabilities was 2.1 to 1 at December 31, 1994 compared to 1.9 to 1 at the
end of 1993. The change in this ratio is attributable to the paydown of
notes payable from $3.3 million at year-end 1993 to $1.2 million at year-
end 1994 as well as other reductions in payables. During 1994, noncash
expenses for depreciation and amortization and favorable receivables
collections enabled the Company to generate $5.7 million from operations
despite net income of only $.2 million. Further receivable reductions are
expected in 1995. The Company had no large capital spending commitments as
of December 31, 1994.
At December 31, 1994, $19,800,000 was available under the Company's current
lines of credit. The Company believes that its liquid assets, cash flows
from operations and available bank lines of credit will support its
operating and capital requirements for 1995.
IMPACT OF INFLACTION AND CHANGING PRICES
Overall, inflation has not had a material impact on the Company's
operations. Increased costs and expenses have been offset by price
increases, cost reduction programs and improved productivity. In addition,
the terms of Defense contracts, which account for approximately 82% of the
Company's revenues in 1994 are generally for one year, thus reducing the
potential impact of inflation on the Company.
CORPORATE HEADQUARTERS
60 Frontage Road
Andover, Massachusetts 01810-5498
Telephone: (508) 475-9090
Fax: (508) 475-8205
AUDITORS
Arthur Andersen LLP
One International Place, Boston, Massachusetts 02110
LEGAL COUNSEL
Ropes & Gray
One International Place, Boston, Massachusetts 02110
TRANSFER AGENT
American Stock Transfer & Trust Company
99 Wall Street, New York, New York 10005
Telephone: (800) 937-5449
STOCK PRICES
Bid price by quarter 1994 1993*
High LowHigh Low
First quarter $4.77 $3.86$5.80 $3.62
Second quarter 4.55 3.645.45 4.21
Third quarter 4.00 3.385.00 4.32
Fourth quarter 3.75 2.754.66 3.41
* Retroactively adjusted for the May 1994 stock dividend.
The bid and asked prices of the Company's common stock on February 16, 1995
were $4.00 and $4.75, respectively. Prices shown reflect inter-dealer
prices, without retail mark-up, mark-down, or commission
and may not necessarily represent actual transactions. Source: Monthly
Statistical Report of the National Association of Securities Dealers, Inc.
- NASDAQ.
COMMON STOCK
The Company's stock is traded on the NASDAQ National Market System, Symbol:
DRCO; and listed in newspapers as DynamR., DynRsh. or DynRsearch.
NUMBER OF SHAREHOLDERS
The approximate number of shareholders of record at February 16, 1995 was
1,085. As of February 16,
1995 there were 5,630,448 common shares outstanding.
FORM 10-K
A copy of DRC's Form 10-K, which is filed annually with the Securities and
Exchange Commission, will be sent without charge to any shareholder
requesting it in writing to the Treasurer's office, Dynamics Research
Corporation, 60 Frontage Road, Andover, Massachusetts 01810-5498.
ANNUAL MEETING
The 1995 Annual Meeting of Shareholders will be held on Tuesday, April 25,
1995 at the State Street Bank and Trust Building, 33rd floor, 225 Franklin
Street, Boston, Massachusetts 02110.
DIRECTORS
Dr. Francis J. Aguilar**
Professor of Business Administration,
Harvard University, Graduate School of Business Administration
John S. Anderegg, Jr.
Chairman, Dynamics Research Corporation
General James P. Mullins**
USAF retired
Albert Rand
President and Chief Executive Officer, Dynamics Research Corporation
Thomas J. Troup*
Vice Chairman, Burr-Brown Corporation
* Member of the Audit Committee.
** Member of the Audit and Compensation Committees
OFFICERS
John S. Anderegg, Jr.
Chairman
Albert Rand
President, Chief Executive Officer
Arthur Brown
Vice President, Contracts, Systems Division
Dr. Joseph W. Griffin, Jr.
Vice President, Systems Development, Systems Division
Chester Ju
Vice President, Encoder Division and Metrigraphics Division
Douglas R. Potter
Vice President of Finance and Chief Financial Officer
Richard P. Rappaport
Vice President, Test Equipment Division
Vernon F. Vutech
Vice President, Systems Programs, Systems Division
John L. Wilkinson
Vice President, Human Resources
David C. Proctor
Treasurer and Assistant Clerk
Frederick Eromin
Controller, Systems Division
John R.D. McClintock
Clerk
