25837107
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 30, 1995
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 18xx, 1996, the aggregate market value of Common Stock held
by nonaffiliates of the Registrant was $31xx,045xxx,092xxx and the number
of shares of Common Stock, $.10 par value, of the Registrant outstanding
was 5x,663xxx,042xxx.
Documents Incorporated By Reference
Portions of the 1995 Annual Report to Shareholders are incorporated by
reference in Parts I and II. Portions of the Registrant's Proxy Statement
for the 1996 Annual Meeting of Shareholders are incorporated by reference
in Part III.
The Exhibit Index is on pages 240 and 251.
DYNAMICS RESEARCH CORPORATION
Form 10-K
For the Fiscal Year Ended December 30, 1995
Part I Page
Item 1. Business 4
2. Properties 111
3. Legal Proceedings 122
4. Submission of Matters to a Vote of Security Holders
122
4A. Executive Officers of the Registrant 122
Part II
5. Market for Registrant's Common Equity and
Related Stockholder Matters 133
6. Selected Financial Data 133
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 133
8. Financial Statements and Supplementary Data 133
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 144
Part III
10. Directors and Executive Officers of the Registrant
155
11. Executive Compensation 155
12. Security Ownership of Certain Beneficial Owners
and Management 155
13. Certain Relationships and Related Transactions
155
Part IV
14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 166
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
technical services including informationcomputer-based systems development
and operation, 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 and sells digital instruments and precision
componentsproducts and measurement devices,that are 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 provides 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 has 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 a 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 provides 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 thatwhich evaluate
the quality of software programs and determine how well they adhere to
predetermined standards. One of these tools, AdaMAT, is licensed to both
government and 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. by AdaMAT allowings 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 customersclients
define, develop, and initiate new programs. The Company also helps
customersclients obtainreceive 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
o Theater Battle Management Core Systems (TBMCS)
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. In addition, in January 1996, the Company acquired the
Massachusetts-based operations of Support Systems Associates, Inc. The
acquired assets included a prime contract to provide support services under
the TEMS program.As a result, DRC has retained substantially all the tasks
it had previously performed as a prime contractor, although. 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.. To favorably position itself for future TEMS programs
as a prime contractor with the Air Force Electronic Systems Center (ESC),
the Company acquired a Massachusetts based business of Support Systems
Associates, Incorporated (SSAI) in January 1996. "The acquisition of the
Massachusetts based operations of Support Systems Associates, Inc. (SSAI)
in January, 1996 is a major accomplishment in our effort to strengthen the
Air Force management support services portion of our Systems Division. The
combination of our existing business base and resources with the SSAI
contrctual vehicles enhances our competitiveness in this important business
area."
In February 1995, the U.S. Air Force awarded to the Company a 5-year
contract (one year plus four option years), valued depending on customer
task ordering at up to $23.7 million. Under the contract, DRC will provide
technical and engineering services to the U.S. Air Force Air Logistics
Center at Tinker AFB, Oklahoma. Initial tasking under the new contract
included orders to provide independent test and evaluation services of
certain avionics and software under the Air Force B-1B aircraft program.
DRC has been supporting the B-1B programthis program office since 1990.
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.
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 helpassist 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 1995, the Company received a five-year contract (one
year plus four option years) to provide logistics modeling and analysis for
the U.S. Air Force Air Staff, with a potential value depending upon tasking
of up to $6.9 million. The Company also received a $400,000 contract from
the Federal Aviation Administration for a radar performance monitoring and
analysis system and a $600,000 contract for logistics modeling support for
the DoD's Joint Advanced Strike Technology program. From 1987 to present
the Company has provided acquisition logistics services to the Ballistic
Missile Defense Organization (BMDO). 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 provideding 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. In 1995, DRC
won a $22.5 million 5-year contract from the U.S. Army Research Laboratory
to providewhich builds on the Company's capabilities providing analysis,
system development and support in several functional areas, including
assessment of manpower, personnel and training issues, analysis of soldier
systems performance, and integration of methods and databases for use by
system designers. Under the Company's previouscurrent 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. from the U.S. Army
Research Laboratory which singA 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.
, insert proven technology into the design of new and existing Air
Force systems and processes resulting in improvements to life-cycle cost,
productivity, efficiency, reliability, maintainability, supportability and
survivability provide technical and engineering services 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.
During 1995, DRC was awarded two major prime contracts awards as a
result of a concerted multi-year effort to serve Federal agencies other
than DoD., traditionally our principal customer. successful in
accomplishing its plans to penetrate the non-DoD information technology
business by being awarded two prime contracts: the The first award was
fromwith the U.S. Department of the Treasury to provide information
technology support services to the Internal Revenue Service and other
Treasury departments. The contract is for one year plus four one-year
options with an aggregate ceiling of $200 million. The contract may be
used for a broad range of information system development, acquisition
support, and other management services. The Treasury made multiple awards
and expects the best technical and management performing contractors to
obtain the highest level of tasking over the life of the program. The
secondAlso was with award, from the General Services Administration,,
permits DRC to provide a broad range of information technology services
including software management, communications systems support, satellite
communications systems, acquisition support, and system engineering under
the GSA's Federal Systems Integration and Management program (FEDSIM).
This contract may serve as a vehicle for services to the GSA as well as
other Federal agencies. The amount of revenue that DRC may achieve under
this contract is uncertain. The FEDSIM program is for $840 million over 5
years among eight winning teams.
Digital Instruments and Precision Components
The Company operates two units that produce digital instuments and
precision components manufactured products for commercial markets, the
Encoder Division and the Metrigraphics Division. The 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 became
fullywas fully operational infor 1994 and has continued through 1995,
contributing sales of approximately $5 million in 1995. 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.
The Metrigraphics Division uses photolithographic processes to
manufacture optical discs, scales and reticles thatwhich 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.
Using a process called electroforming, DRC manufactures precision
components used in inkjet cartridges. During 1995, the Metrigraphics
DivisionDRC received a $10 million order to produce these components. The
order is for delivery in 1996. In December 1995, the Company leased 27,000
square feet in Wilmington, Massachusetts to provide space for a second
electroform production facility. Approximately $5 million has been
committed for the purchase of production equipment for the new facility,
$1.9 million of which was incurred in 1995.and is the largest commercial
order ever received by DRC. Uu,. manufactures precision components used in
inkjet cartridges. DRC has been investing capital funds during 1995 to
increase electroform production capacity, and has recently committed to an
additional $3.0 million capital expansion program to meet customer
requirements.committed to a $2.4 million capital expansion program to meet
customer requirements.
The customers for both of these dDivisionsproducts are primarily
manufacturingOEM 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 factorelement of sales. 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 1995, the Company's revenues from contracts with the
DoDDepartment of Defense, either as prime contractor or subcontractor,
accounted for approximately 78% 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, andor (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 1995, approximately
xx56% of the Company's government contracts revenue was under fixed price
or time and material contracts, while approximately xx44% of revenue was
under costs plus fixed fee contracts.
During 1995, the Company's U.S. Government business consisted of
approximately 135 separate contracts on 60xx 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 the 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 30, 1995, the Company's backlog of unfilled orders was
approximately $61,284,000 compared with $43,679,000 at December 31, 1994.
The Company expects that substantially all of its backlog on December 30,
1995 will be filled during itsthe fiscal year ending December 28, 1996.
The bBacklog at December 30, 1995 consisted of funded amounts under
contracts. Backlog at December 30, 1995 included $xx25,528xxx,000xxx 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 becausesince various agencies perform certain types of services
which might otherwise be performed by the Company. The principal
competitive factors for dDefense sServices are price, performance,
technical competence and reliability. In addition, in the our commercial
business, the Company also competes with other manufacturers of encoders,
electroform vendors and photolithographic suppliers of precision
measurement scales. The principal competitive factors effecting the
precision components manufacturing business are price, product quality and
custom engineering to meet customer system requirements.
Research and Development
The Company expended approximately $1,949,000 (inclusive of overhead
and other indirect costs) on new product and service development during the
year ended December 30, 1995, as compared to expenditures of $224,000
during 1994 and $2,007,000 during 1993.
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 30, 1995, the Company had approximately 1,249 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
231,000170,000 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 threetwo leases totaling 11385,000 square
feet, expiring in 20001995, with options to the year 20050. The remaining
leased facilities consist of offices in 242 locations across the United
States. The Company owns aits 135,000 square foot facility in Andover,
Massachusetts. This building was purchased in 1993 and is utilized for its
defense service operations and corporate administrative offices.
The Company's total rental cost for 1995 was $1,636,000.
The Company believes its properties are adequate for its present needs.
See Note 7 to the Consolidated Financial Statements included in the
Company's 1995 Annual Report to Shareholders for a description of the
Company's lease obligations.
Item 3. Legal Proceedings
None.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 1995 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. 72 41 Chairman
Albert Rand 69 36President and Chief Executive Officer
John L. Wilkinson 56 14 Vice President, Human Resources
Douglas R. Potter 45 2 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 hHe was Vice President, Treasurer, and Chief
Financial Officer of SofTech, Inc. of Waltham, Massachusetts fromsince 1990
to 1993. 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 1994 and 1995 and the
number of holders of record of the Company's common stock are described in
the Company's Annual Report to Shareholders for 1995 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
betweenduringbetween 1984 and 19954 and does not anticipate doing so for
the foreseeableforseeable 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 1995 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 1995 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 30, 1995, December 31, 1994
and December 25, 1993
Consolidated Statements of Operations for the three years ended
December 30, 1995
Consolidated Statements of Shareholders' Investment for the three
years ended December 30, 1995
Consolidated Statements of Cash Flows for the three years ended
December 30, 1995
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 1995.)
Report of Independent Public Accountants on Schedules to Consolidated
Financial Statements
Schedule VIII - Valuation and Qualifying Accounts for the three
years ended December 30, 1995
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 1995, 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 30, 1995, 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 30, 1995.
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 1996
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 30, 1995.
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 thatwhich are filed with this Form 10-
K or thatwhich are incorporated herein by reference are set forth in
the Exhibit Index, which appears in Part IV of this report on pages
240 and 251.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the last
quarter of fiscal 19954.
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 16, 19965. 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 126, 19965
IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS
The following factors, among others, could cause the Company's actual
results and performance to differ materially from those contained in
forward-looking statements made in this report and presented elsewhere by
or on behalf of the Company from time to time.
Uncertainties as to Department of Defense and Other Federal Agency Budgets
The Company has historically derived a substantial portion of its
revenue from contracts and subcontracts with the Government, and currently
more than 78% of the Company's revenue is derived from the Department of
Defense business. Over the past several years, the Company's defense
business has been adversely affected by significant changes in defense
spending. Overall U.S. defense budgets have been declining, and the
effects of this general decline and attendant increased competition within
the consolidating defense industry is expected to continue over the next
several years. Funding limitations could result in a reduction, delay, or
cancellation of existing or emerging programs. These factors, among
others, have reduced the Company's revenue and operating margins on its
defense contracts in recent fiscal periods. The Company anticipates that
competition in all defense-related areas will continue to be intense and
that, accordingly, there will be continued significant competition when the
Company's defense contracts are rebid and continued significant competitive
pressure to lower prices, which may reduce profitability in this area of
the Company's business. Any reduction in the level or profitability of the
Company's defense business, if not offset by new commercial business or
other business with the federal government, will adversely affect the
Company's business, financial condition and results of operations.
A significant portion of the Company's Government contracts are
renewable on an annual basis, or are subject to the exercise of contractual
options. Also, multi-year contracts often require funding actions by the
Government on an annual or more frequent basis. As a result, the Company's
business could experience material adverse consequences should the
Government budget not include funds required to sustain the programs under
which DRC operates.
Government Contracting Risks
A significant portion of the Company's Government contracts are of a
time and materials nature, with fixed hourly rates that are intended to
cover salaries, benefits, other indirect costs of operating the business
and profit. The pricing of such contracts is based upon estimates of
future costs and assumptions as to the aggregate volume of business that
the Company will perform in a certain business division or other relevant
unit. For long term contracts, the Company must estimate the costs
necessary to complete the defined statement of work and recognize revenues
or losses in accordance with such estimates. However, actual costs may
vary materially from the estimates made from time to time, necessitating
adjustments to reported revenue and net income. Underestimates of the
costs associated with a project would adversely affect the Company's
overall profitability and could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Government's awards of contracts are subject to regulations and
procedures that permit formal protests by losing bidders. Such protests
may result in significant delays in the commencement of expected
contractual effort, or the reversal of a previous award decision, which
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Because of the complexity and scheduling of contracting with the
Government, from time to time costs are incurred in advance of contractual
funding by the Government. In some circumstances, such costs may not be
recovered in whole or in part under subsequent Government contractual
actions. Failure to collect such amounts may have material adverse
consequences on the Company's business, financial condition and results of
operations.
Costs incurred in connection with Government contracts are generally
subject to after-the-fact audits. Such audits may result in material
disallowances, which could have an adverse effect on the Company's
business, financial condition and results of operations.
A substantial portion of the Company's Government contracting business
is as a subcontractor. In such circumstances, the Company generally bears
the risk that the prime contractor will meet its performance obligations to
the Government under the prime contract and that the prime contractor will
have the financial capability to pay the Company amounts due under the
subcontract. The inability of a prime contractor to perform or make
required payments could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Government has the right to terminate contracts for convenience.
In such a termination, the Company would generally recover costs incurred
to termination, costs required to be incurred in connection with the
termination, and a portion of the fee earned commensurate with the work
performed to termination. However, significant adverse effects on the
Company's indirect cost pools may not be recoverable in connection with a
termination for convenience.
Dependence or Key Personnel
The Company is dependent on its key technical personnel. In addition,
certain technical contributors may have specific knowledge and experience
related to various Government customer operations that would be difficult
to replace in a timely fashion. The loss of the services of key personnel
could have a material adverse effect on the Company's ability to perform
required services under certain contracts, or to retain such business after
the expiration of the current contract, or to win new business where
certain personnel have been identified as key personnel in the proposal,
any of which could have a material adverse effect on the Company's
business, financial condition and results of operations.
Competition
The Government contracting business is subject to intense competition,
both technical and pricing, from numerous companies, many of which have
significantly greater financial, technical and marketing resources than the
Company.
Competition in the market for the Company's commercial products is
also intense. There is a significant lead time for developing such
business, and it involves significant capital investment including
development of prototypes and investment in manufacturing equipment. The
Company's precision products business has a number of competitors, many of
which have significantly greater financial, technical and marketing
resources than the Company.
Risks Associates with New Markets and New Products
In its efforts to enter new markets, including Government agencies
other than the Department of Defense and commercial markets, the Company
faces significant competition from other companies that have prior
experience with such potential customers as well as significantly greater
financial, technical and marketing resources than the Company. As a
result, the Company's efforts to enter such new markets may be unsuccessful
or may not achieve the level of success sought by the Company.
The Company has announced software products for commercial markets.
There is no assurance that the Company's software products will meet with
market acceptance or that the Company will be able to compete in the
development and distribution of such products with competitors that have
significantly greater resources and experience.
Concentration of Customers
Within the Department of Defense, individual services and program
offices account for a significant portion of the Company's Government
business. Two customers account for a significant portion of the revenue
of the Company's commercial manufacturing divisions. No assurance can be
provided that any of these customers will continue as such or will continue
at current levels. A decrease in orders from these customers would have an
adverse effect on the Company's profitability, and the loss of any large
customer could have a material adverse effect on the Company's business,
financial condition and results of operations.
Risk of Product Claims
The Company's precision manufactured products are generally designed
to operate as important components of complex systems or products, and
defects in DRC products could cause the customer's product or systems to
fail or perform below expectations. Like other manufacturing companies,
the Company may be subject to claims for alleged performance issues
relating to its products. There can be no assurance any such claims, if
made, will not have a material adverse effect on the Company's business,
financial conditions or results of operations.
Risk of Economic Events Effecting the Company's Business Segments
Certain of the Company's precision products are components of
commercial products. Factors that affect the production and demand for such
products, including economic events, competition, technological change and
productions stoppages, could adversely affect demand for the Company's
products. Certain of the Company's products are incorporated into capital
equipment, such as machine tools and other automated production equipment,
used in the manufacture of other products. As a result, this portion of
the Company's business may be subject to fluctuations in the manufacturing
sector of the overall economy. An economic recession could have a material
adverse effect on the rate of orders received by the commercial divisions.
Significantly lower production volumes resulting in under-utilization of
the Company's manufacturing would adversely impact the Company's
profitability.
Technological Change
The Company's knowledge base and skills in the Government contracting
area are sophisticated and involve areas in which there have been and are
expected to be significant technological change. There is no assurance
that the Company will continue to be able to offer services that satisfy
its customers' requirements at a competitive price. Many of the Company's
products are incorporated into sophisticated machinery, equipment or
electronic systems. Technological changes may be incorporated into
competitor's products that may adversely affect the market for the
Company's products. Further, there can be no assurance that the Company's
research and product development efforts will be successful and result in
new or improved products that may be required to sustain the Company's
market position.
Uncertainty of Future Financing
Although the Company has no immediate plans to raise additional
capital, it may in the future need to raise additional funds through public
or private debt or equity financings. There can be no assurance that any
such funding will be available or of the terms or timing of any such
funding.
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 25, 1996
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 25th of March, 1996.
/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 30, 1995
(in thousands of dollars)
ALLOWANCE FOR DOUBTFUL ACCOUNTS AND SALES RETURNS
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
NetAdditions recoveries charged to expense (2)
Write-off of uncollectible accounts, net (182)
Balance, December 30, 1995 $402
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 1993 Equity Incentive Plan. (Incorporated by reference to
the Registrant's Form
10-Q for the quarter ended 6/12/93)
10.3 1995 Stock Option Plan for non-employee directors.
(Incorporated by reference to the Registrant's Form 10-K for the
year ended 12/31/94)
10.42 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)*
10.53 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)*
10.64 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)*
10.75 Mortgage Aagreement 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
Registrant's 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.
13.1 The Company's Annual Report to Shareholders for the year
ended December 30, 1995 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 counscel
23.1 Consent of Independent Accountants (Arthur Andersen LLP) dated
March 26XX, 1996 filed herewith.
99.0 Important Factors Regarding Forward-Looking Statements.
* Management contract or compensatory plan or arrangement.
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Dynamics Research Corporation
ANNUAL REPORT 1995
Solutions Through Information Technology
About The Cover
Building upon wide-ranging capabilities in information
technology, systems integration and engineering, Dynamics
Research Corporation serves a diverse customer base whose
systems and products must meet demanding performance and
cost requirements. As the cover suggests, broad technical,
management and manufacturing capabilities form the basis
of DRC+s continuing success and strength.
Financial Highlights
1995 1994
Revenue $ 103,941 $ 102,964
Net income $ 559 $ 224
Net income per share $ .10 $ .04
Backlog $ 61,284 $ 43,679
Number of employees 1,249 1,130
Number of shares outstanding 5,622,772 5,631,448
Corporate Profile
Dynamics Research Corporation applies information system
and manufacturing technologies to create innovative
solutions for its customers. Our solutions are designed
to 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.
To Our Shareholders
To Our Shareholders
For the year ended December 30, 1995, Dynamics Research
Corporation had revenue of $104 million, up from $103
million in 1994. Net income for the year was $559,000,
or $.10 per share, an improvement over $224,000, or
.04 per share, earned in 1994.Over the past five years,
DRC+s sales have been generally flat, in the range of
$98 million to $104 million, with declining profits
until a modest recovery in 1995. Overall sales have
been sustained by an increase of our commercial
manufactured products business from $10.9 million
in 1991 to $23 million in 1995. Meanwhile defense
services peaked at $92 million in 1992 and declined
to $81 million in 1995. This situation was
unsatisfactory and we adjusted our strategies in each
of our business units.
Our new strategies were in essence a commitment of
resources to developing business in markets with greater
potential for growth. The significant contract awards
and other events in 1995 are an outgrowth of this
sustained strategic effort and make us optimistic for
1996 and beyond.
In our Government services business, we recharged our
new business development efforts, both with the DoD
and with other government agencies. This commitment
of resources hurt our profitability, particularly in
a period when sales were declining. However, we had
significant wins in 1995, including major awards from
the Department of the Treasury and the General Services
Administration, as described in the following paragraphs.
In February 1995, the U.S. Air Force Air Logistics Center
at Oklahoma+s Tinker Air Force Base awarded DRC a prime
contract to provide technical and engineering services
.Valued at up to $23.7 million, this contract initiated
a working relationship with an important new customer.
This award enables DRC to build its presence at
Tinker AFB and to compete more effectively for new
business at other Air Logistic Centers in Utah, Georgia,
and Texas.
Another win of note in 1995 was a $22.5 million, five-year
contract from the U.S. Army Research Laboratory. This
contract builds on our long experience in manpower
planning, training, force analysis and human/system
performance factors. This award in these technical
specialties provides a vehicle to increase our
business in 1996 and beyond.
Our long-term Navy customer renewed its contracts with DRC supporting
Trident inertial guidance and navigation systems for the government+s 1996
fiscal year at an increased level over 1995. We also continue to provide
operation and maintenance system support for all of the Air Force+s F-15
and F-16 aircraft.
In June 1995, DRC was awarded a prime contract by the
U.S. Department of the Treasury to provide information
processing support services to the Internal Revenue
Service and other Treasury organizations. The contract
is for one year plus four one-year options. Each year
under the contract carries a $40 million ceiling.
Our goal is to provide the hi
ghest quality services, thereby improving our chances
of capturing increasing levels of tasking. With a
strong team of subcontractors, we believe we are now
positioned to compete for tasking in a number of key
areas. At the end of December, DRC was awarded a prime
contract by the General Services Administration (GSA).
The five-year award is a vehicle for providing services
to all Federal agencies under the GSA+s Federal Systems
Integration and Management program (FEDSIM). Awards
were made to DRC and seven other companies who will
compete for tasking with a total order limitation of
$840 million.
The Treasury and GSA contracts are neither an assurance
of future revenues nor did they generate significant
revenue in 1995. But they position DRC to compete
effectively and open the door for future opportunities.
As we expand beyond our traditional focus on the
Department of Defense, these contracts also provide
credibility for DRC in competing for commercial systems
and services work. In our precision components
manufacturing business, we also recognized the need to
change our strategy to achieve growth. We determined
that more aggressive marketing and communication of
our technological capabilities was needed and the
development of higher volume products was necessary
for growth and improved profitability. This new strategy
began to pay off with sales growth in 1993 which
is continuing in 1996. Sales of commercial products
accounted for 22% of total revenue in 1995 and we have
targeted commercial product sales in 1996 at 27% of
total revenue.
The highlight for 1995 was a $10 million order received
in October for inkjet printer cartridge components.
This order represents 1996 delivery requirements
under a three-year supply agreement with the customer.
To meet the expanding demands, we have leased
a 27,000 square foot facility, which will provide
manufacturing and office space for our Metrigraphics
Division and we are making significant capital
investments in production equipment.
We want to call your attention to two additional
important developments. First, in January 1996,
DRC completed the acquisition of the
Massachusetts-based operations of Support Systems
Associates Inc. This acquisition strengthens our
Air Force management support business at Hanscom
Air Force Base, in Bedford, Massachusetts, where
we have been active for over a decade.
Second, the software development process within our
Systems Division underwent a rigorous review and
attained -Level 2+ certification under standards
established by the Software Engineering Institute.
This signifies a proven and repeatable software management
system with effective quality control processes.
It adds to DRC+s impressive credentials in software
development for large systems projects.
Underlying DRC+s progress and our optimism for the
future is the dedication and high quality work of
our employees. To all of them we extend our thanks.
Albert Rand John S. Andregg, Jr.
President and Chairman
Chief Executive Officer
Building on a base of distinctive competence in information technology,
Dynamics Research provides technical, engineering, and management support
services to a wide range of clients in the Department of Defense and other
federal agencies.
l Our systems analysis, design, and software
development skills produce innovative solutions for our clients.
l As systems integrators,
we design, build, and
test a variety of
advanced systems.
l A creative technical
staff dedicated to the
highest level of service
for our clients is at the
heart of DRC+s success.
Using the Power of Digital Technology:
A Common Thread Across DRC+s Business
Dynamics Research Corporation+s business includes a
broad mix of technical services and engineered products.
A common thread that connects this diverse business is
the application of digital technologies to enhance system
capabilities and performance. Our service efforts
include development of large computer-based information
systems with specialized features designed to allow
managers of expensive systems to use their assets for
maximum effectiveness. We build computer controlled
systems to test other complex systems. We support our
customers in the acquisition and management of
electronic systems and the insertion of advanced
technologies into existing systems. We utilize current
software and hardware technologies to transition older
technology systems to new, higher performance computer
technology. In the systems and services part of our
business, we continue our long association with many
different branches and agencies of the Department
of Defense, providing a wide range of technical,
engineering, and management support services. Our
experience in information technology and project
management is now finding new markets in non-defense
government agencies.
Our precision products include encoders that convert
motion and position information into digital signals
used to control machine tools, robotics, engine
performance and many other electronically controlled
systems. We also manufacture components critical to
the operation of computer controlled inkjet printers.
We produce high precision products that give our
customers a competitive edge in their markets. Our
success in this growing business is based on our
expertise in encoder technology and electroforming
processes. Innovative techniques for quality control
have enhanced our ability to meet exacting
specifications while adhering to demanding production
schedules for our customers.
The following sections of this report describe
important developments and other aspects of our
principal business areas.
High Precision Manufacturing For Commercial Markets
Dynamics Research manufactures a growing family of
high precision encoders. These motion sensing devices
convert analog information to digital form and are
essential components in a wide range of computer
controlled systems and equipment. With automation
becoming increasingly important in manufacturing operations,semiconductor
processing, and medical
equipment, opportunities for encoder sales continue
to increase.
A key strategy for expanding our encoder business is
to develop strong working relationships with OEM
customers. We provide custom engineering services that
adapt our products to specific requirements and enable
us to explore a variety of new opportunities. While
these projects may initially involve only modest
production, many have the potential for growth.
The largest single factor in the growth of our encoder
business is a product used in automotive fuel control
systems. These devices are manufactured in volume in
our high speed, highly automated facility now in its
second full year of operation.
Electroformed products are manufactured in our
Metrigraphics Division. Using sophisticated metal
deposition technology, we create a variety of
microminiature components to precision standards.
The ability to hold critical tolerances with superior
edge definition is important in the manufacture of
products used in a wide range of high technology
applications. Our largest market is currently for
nozzles used in ink jet printers, a growth market
fueled by rising sales of computer printers for home
and business use.In addition to volume manufacturing
of electroformed parts, we produce prototype parts for
use in new equipment under test and development. Our
ability to provide a high level of responsive service
for low volume requirements allows us to develop early
working relationships with customers as they attempt
to position emerging products for growth in new markets.
New processes are being developed by Metrigraphics to
electroform three dimensional precision structures
which are expected to have an expanding number of
future uses in miniaturized products and systems.
DRC+s encoders and electroformed parts are designed
to meet critical requirements for precision and
performance. These devices are manufactured using sophisticated equipment
that allows us to achieve consistently superior quality and reliability.
l Quality of miniature
electroformed parts is
maintained in our clean
room manufacturing
environments.
l Using advanced metal deposition techniques,
Metrigraphics produces precise microminiaturized
structures.
l Our use of automated
inspection technology
ensures high standards
of quality in manufacturing.
Our successful history of service with DoD is opening new opportunities to
provide other federal agencies with technical services, including software
management, data communications, systems integration, and business process
re-engineering.
l Our staff builds on years of specialized
experience
to help customers improve
system effectiveness.
l We offer a step-by-step process
of systems re-engineering
to help clients reduce
costs and streamline their business processes.
l We help customers
capitalize on the latest
technologies and use
existing resources in new,
more efficient ways.
Opening New Markets With Government Customers
In recent years, Dynamics Research has made a concerted
effort to broaden its business by providing services
to customers throughout the Federal government. These
efforts were rewarded in 1995 with the receipt of two
significant contracts, one from the U.S. Department of
the Treasury and the other from the General Services
Administration (GSA).
The Treasury Department selected Dynamics Research as
a prime contractor to provide information processing
support services to the Internal Revenue Service in
connection with their long-term systems modernization
program, as well as other Treasury organizations.
The scope of work will be spread over three
functional areas: information systems and
services, federal information processing
acquisitionservices, and socio-technical services.
To win this award, we assembled a team of industry
experts whose capabilities complement ours.
Our GSA contract, which was announced in December 1995,
positions Dynamics Research to provide a broad range
of information technology services to federal agencies.
Services may be provided in several functional
areas, including: software management, data
communications, satellite communications, system
acquisition support, business process re-engineering,
and systems integration.
DRC+s many years of high-quality service to the
Department of Defense, in a wide array of information
technologies and management support areas, provided the
basis for the Treasury and GSA selections. As a result
of these two contracts, Dynamics Research is well
positioned to expand its customer base beyond the
DoD agencies and provide a wide range of technical,
engineering, and management support services to
other areas of the Federal government.
High-Quality Services For Our DoD Customers
Dynamics Research continues to build on its long
working relationship with the U.S. Department of
Defense. In recent years, we have adapted our services
to respond to the changing needs of our military
customers. Through our involvement with high priority
projects, our services improve deployability and joint
operations, while increasing readiness on a
cost-effective basis.
Dynamics Research has provided engineering and
information technology services to the U.S. Navy
for 40 years. Continuing this long association, we
are using Internet techniques and protocols to develop
a private and secure network for the Trident
community. This electronic network will allow Trident
personnel to communicate more effectively, to update
critical information more rapidly, and to access a wide
range of information on the Trident guidance
system. This paperless system will replace older
methods and create new efficiencies in analyzing and
avoiding problems.
The U.S. Air Force is also a major core customer of
Dynamics Research. We provide operations and
maintenance system support for F-15 and F-16
aircraft; we provide logistics, modeling, and
analysis services; and we perform a wide array of
acquisition management support services for Air Force
electronic systems. In 1995, Dynamics Research won a
significant contract to provide technical and
engineering services to the Air Force Logistics Center
at Tinker Air Force Base in Oklahoma. We will be
helping to insert new technology into existing Air
Force systems to improve lifecycle costs,
productivity, efficiency, and reliability. Business
process re-engineering is part of this effort as we
develop new working methods that take advantage of
new labor-saving technologies.
We work closely with military clients to help them
take advantage
of advances in information technology. Through our
involvement with priority projects, we assist clients
in achieving high levels of mission readiness at
reduced costs.
l We use -reverse engineering+ and software
simulation to design components for insertion into
older systems.
l Rigorous testing ensures that DRC hardware
meets exacting standards of performance and reliability.
l We are developing systems to support the
assessment of manpower and training requirements
for joint service operations.
High-Quality Services For Our DoD Customers - Continued
Information technology and the power of digital
systems are at the core
of DRC+s business.
For the U.S. Army Research Laboratory, we are
providing analysis, system development, and support
in the assessment of manpower, personnel, and training
issues. One aspect of this work is our support of a
high-visibility project for the Joint Chiefs of Staff
in which we are documenting the Universal Joint Task
List used in planning and training for all branches
of the military. Software is being developed for this
program to provide greater efficiency in analyzing
and measuring the performance and lifecycle costs
of military systems.
In our Test Division, we are developing innovative ways to permit rugged
and highly stable
replacement electronics for older military systems to be available
from a secure source at
an affordable cost. We are developing and applying -reverse+ engineering
techniques in which
we analyze existing electronic components, determine the key operating p
arameters, and reproduce these components together with appropriate
documentation for installation and maintenance. Using software techniques
to design and test these components on an -as you go+ basis, we are able to
develop replacement components in a highly cost-effective manner.
To provide the level of service and hands-on involvement
that our customers require, we have established field
offices at several different locations, including:
Arlington, VA, St. Louis, Oklahoma City, Colorado
Springs, Dayton, OH and Scott Air Force Base, IL. These
field offices keep us close to our customers and
allow us to respond quickly to
new opportunities in our areas of expertise, including
logistics, systems integration, business process
re-engineering, training, and engineering support.
<TABLE>
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
<CAPTION>
(in thousands of dollars, except per share data)1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Revenue $103,941$102,964$101,102$102,581$97,701
Operating income 1,018 632 3,242 6,377 5,684
Net income 559 224 1,834 4,014 3,630
Net income per common share** .10 .04 .33 .70 .61
Total assets 53,946 53,977 59,494 48,877 45,397
Long-term debt
(excluding current portion) 1,500 2,717 3,900 - -
Shareholders' investment 33,206 32,713 32,437 30,805 27,550
Shareholders' investment per share** 5.91 5.81 5.78 5.47 4.74
Return on shareholders' investment (%) 1.7 .7 5.7 13.0 13.2
Backlog 61,284 43,679 51,257 54,547 52,609
Cash flow from operations 7,499 5,721 1,397 9,468 3,416
Research and development expense1,949 224 2,007 1,463 698
Capital expenditures 4,441 2,444 12,144 4,732 3,710
Number of shares outstanding
at end of year**5,622,7725,631,4485,610,8785,632,264 5,815,598
Number of employees 1,249 1,130 1,188 1,189 1,195
</TABLE>
QUARTERLY DATA***
(in thousands of dollars, except per share data) unaudited
1995 1st Qtr2nd Qtr 3rd Qtr4th Qtr
Revenue $21,929$23,936 $24,354$33,722
Operating income/ (lLoss) (602) 550 544 526
Net income/ (lLoss) (388) 318 309 320
Net income/ (lLoss) per common share (.07) .06 .06 .06
1994 1st Qtr2nd Qtr 3rd Qtr4th Qtr
Revenue $22,692$23,656 $21,573$35,043
Operating income/ (lLoss) 696 580 (2,699) 2,055
Net income/ (lLoss) 390 302 (1,734) 1,266
Net income/ (lLoss) per common share .07 .05 (.31) .22
1993 1st Qtr2nd Qtr 3rd Qtr4th Qtr
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
* Retroactively adjusted for the May 1994, February 1993, and February
1992 stock dividends.* Retroactively adjusted for the May 1994 and
February 1993 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 30, l995, December 31, 1994 and December 25, 1993
(in thousands of dollars, except per share data) 1995 1994 1993
Assets
Current assets:
Cash and cash equivalents $ 777 $ 206 $140
Receivables, less allowances of $402, $586 and $418 16,095 14,939
20,016
Unbilled expenditures and fees on contracts in process 16,383 18,194
17,053
Inventories 2,612 2,353 2,630
Refundable income taxes 286 885 553
Prepaid expenses and other current assets 1,284 1,330 1,315
Total current assets $37,437 $37,907 $41,707
Property, plant and equipment, at cost:
Land 1,126 1,126 1,126
Building 7,774 7,774 7,774
Machinery and equipment 31,537 28,857 27,637
Leasehold improvements 1,815 1,377 1,835
Total property, plant and equipment, at cost 42,252 39,134 38,372
Less-accumulated depreciation and amortization 25,743 23,064 20,585
Net property, plant and equipment 16,509 16,070 17,787
Total assets $53,946 $53,977 $ 59,494
Liabilities and Shareholders' Investment
Current liabilities:
Notes payable $ - $1,200 $3,301
Accounts and drafts payable 3,550 3,442 4,327
Accrued payroll and employee benefits 1,1436,416 5644,649
1,1474,736
Accrued pension 2,363 1,329 909
Accrued vacation 2,061 1,863 1,970
Other accrued benefits 849 893 710
Deferred contract and other revenue 983 894 3,073
Other accrued expenses 1,691210 1,535 944
Current deferred income taxes 4,407888 4,741 4,531
Current portion of long-term debt 1,217 1,221 1,200
Total current liabilities 18,264 17,68222,112
Long-term debt, less current portion 1,500 2,717 3,900
Deferred income taxes 976 865 1,045
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 - 6,618,880 shares in 1995, 6,571,495 shares in 1994 and
6,028,155 shares in 1993 662 657 603
Less: Treasury stock - 996,108 shares in 1995, 940,047 shares in 1994
and 927,357 shares in 1993, at par value (100) (94) (93)
Capital in excess of par value 9,219 9,284 6,977
Retained earnings 23,425 22,866 24,950
Total shareholders' investment 33,206 32,713 32,437
Total liabilities and shareholders' investment$53,946 $53,977 $ 59,494
The accompanying notes are an integral part of these consolidated financial
statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three years ended December 30, 1995
(in thousands of dollars, except per share data) 1995 1994 1993
Revenue:
Contract revenue $80,756 $84,891 $88,085
Product sales 23,185 18,073 13,017
Total revenue 103,941 102,964 101,102
Costs and expenses:
Cost of contract revenue 73,077 77,398 74,523
Cost of goods 17,579 14,571 10,768
Selling, engineering and administrative expenses 12,267 10,363
12,569
Total operating costs and expenses 102,923 102,332 97,860
Operating income 1,018 632 3,242
Interest expense, net 171 431 250
Income before provision for income taxes 847 201 2,992
Provision (benefit) for income taxes 288 (23) 1,158
Net income $ 559 $ 224 $1,834
Net income per common share** $ .10 $ .04 $ .33
Weighted average number of common shares outstanding** 5,603,111
5,638,700 5,633,354
* Retroactively adjusted for the May 1994 stock dividend and February 1993
stock dividends.
* 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 30, 1995
(in thousands)
Common Stock Capital in
Issued Treasury StockExcess ofRetained
SharesPar ValueSharesPar ValuePar ValueEarnings
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
Year 1995
Stock options exercised 48 5 - - 159 -
Treasury stock purchased - - (56) (6) (224) -
Net income - - - - - 559
Balance at December 30, 1995 6,619 $662(996) $(100) $9,219
$23,425
The accompanying notes are an integral part of these consolidated financial
statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three years ended December 30, 1995
(in thousands of dollars) 1995 1994 1993
Cash provided by operations:
Net income $ 559 $ 224 $1,834
Depreciation and amortization 4,002 4,161 3,872
Increase (decrease) in deferred income taxes111 (180) (32)
Provision for receivable reserves (1842) 222 63
4,488670 4,427 5,737
Cash provided by (used for) working capital:
Receivables (9721,154) 4,855(4,269)
Unbilled expenditures and fees on contracts in process 1,811 (1,141)
(839)
Inventories (259) 277 (623)
Refundable income taxes 599 (332) 997
Prepaid expenses and other current assets 46 (15) (442)
Accounts and drafts payable 108 (885) (550)
Accrued payroll and employee benefits 1,767 (87) 58
Deferred contract and other revenue 89 (2,179) 193
Other accrued expenses 156(325) 591 365
Accrued and Ccurrent deferred income taxes(334)147210 770
3,0112,829 1,294(4,340)
Net cash generated in operations 7,499 5,721 1,397
Cash used for investing activities:
Additions to property and equipment, net(4,441)(2,444)(12,144)
Cash provided by (used for) financing activities:
Net borrowings (repayments) under line of credit agreementsline-of-credit
agreements (1,20021) (2,065) 3,081
Proceeds from issuance of the mortgage loan - - 6,000
Principal payment under long-term borrowingsmortgage agreement (1,22100)
(1,200) (900)
Proceeds from exercise of stock options 164 97 213
Purchase of treasury shares (230) (43) (415)
Net cash provided by generated (used for) in financing activities
(2,487) (3,211) 7,979
Net increase (decrease) in cash and cash equivalents 571 66 (2,768)
Cash and cash equivalents at the beginning of the year206 140 2,908
Cash and cash equivalents at the end of the year $ 777 $ 206 $ 140
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 435 $ 583 $ 276
Income taxes $ 160 $ 265 $ 905
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, Tthe Company accounts for income
taxes using adopted the liability method as set forth in 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 provision represents the change in deferred tax
asset/liability balance. 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) 1995 1994 1993
Work in process $ 686 $ 603 $ 632
Raw materials and subassemblies 1,926 1,750 1,998
Total $2,612 $2,353 $2,630
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.
Fair Value of Financial Instruments. In 1995, the Company adopted Statement
of Financial Accounting Standards No. 107 (SFAS 107), "Disclosures About
the Fair Value of Financial Instruments," which requires disclosure about
financial instruments, whether or not recognized on the balance sheet. The
carrying amount reported in the balance sheet for cash and cash
equivalents, accounts receivable and accounts payable approximate fair
value due to the short term nature of these instruments. The mortgage note
bears a variable interest rate of LIBOR plus 1% and, as such, the fair
value of the note approximates the carrying value.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Net Income Per Common Share. Net income per common share is based on net
income and the weighted average number of common shares outstanding during
each year after giving effect to stock options considered to be dilutive
common stock equivalents. Fully diluted net income per common share is not
materially different from primary net income per common share.
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) 1995 1994 1993
Currently payable (refundable)
Federal $ 447 $(354) $ 517
State 160 (24) 172
Total $ 607 $(378) $ 689
Deferred
Federal $(26035)$297 $ 366
State (5984) 58 103
Total $(319) $355 $ 469
Total provision (benefit) $ 288 $(23) $1,158
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) 1995 1994 1993
Provision at statutory rate $ 288 $ 68 $1,017
State income tax, net of federal tax benefit 50 23 182
R&D tax credit (50) (100) -
Other, net - (14) (41)
Provision (benefit) for income taxes $ 288 $(23) $1,158
Significant items comprising deferred tax assets and liabilities are as
follows:
(in thousands of dollars) 1995 1994
Unbilled costs and fees and deferred contract revenue, net $
(6,557) $(6,768)
Accrued expenses 1,559334 1,338
Receivable reserves 161 230
Inventory reserves 21695 155
Other 214588 304
Current deferred tax liabilities, net $(4,407379)$(4,741)
Accelerated tax depreciation $(516) $(581)
Other (460) (284)
Non-current deferred tax liabilities $(976) $(865)
Total deferred tax liabilities, net $(5,38355) $(5,606)
Total deferred tax assets and total deferred tax liabilities were
$27,150533196,000 and $7,5332,178817,000,
respectively at December 30, 1995 compared with $27,027633,000 and
$72,633027,000, respectively
at December 31, 1994
.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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 1995, 1994 and 1993 included the following components:
(in thousands of dollars) 1995 1994 1993
Service cost - benefits earned during the period $1,042 $1,309 $ 1,108
Interest cost on projected benefit obligation 1,822 1,666 1,544
Actual return on plan assets (3,704) 685 (1,662)
Net amortization and deferred items 2,195 (2,198) (116)
Net periodic pension cost $1,355 $1,462 $ 874
The following table sets forth the plan's funded status and amounts
recognized in the Company's consolidated financial statements at December
30, 1995, December 31, 1994 and December 25, 1993:
(in thousands of dollars) 1995 1994 1993
Actuarial present value of benefit obligations:
Vested $23,845 $18,327$19,814
Nonvested 560 466 569
Accumulated benefit obligation 24,405 18,793 20,383
Effect of projected future salary increases 3,608 2,644 2,595
Projected benefit obligation for service rendered to date 28,013
21,437 22,978
Plan assets at fair market value 23,104 19,600 19,639
Projected benefit obligation less than (in excess of) plan assets
(4,909) (1,837) (3,339)
Unrecognized net gain from past experience different
from that assumed and effects of changes in assumptions 196
(2,097) (430)
Prior service cost not yet recognized in net periodic pension cost
2,139 2,359 2,579
Unrecognized net obligation at January 1, 1987 being recognized
over 15 years 211 246 281
Net pension liability recognized in the Consolidated Balance Sheets
at December 30, 1995, December 31, 1994 and December 25, 1993 $
(2,363) $(1,329)$(909)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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 7.25% and 3.5% in 1995, 8.5% and 3.5% in
1994 and 7.25% and 3% in 1993. The expected long-term rate of return on
assets was 9% in 1995, 1994 and 1993. A substantial portion of the
projected benefit obligation increase from 1994 to 1995 was attributable to
the decrease in the discount rate to reflect current market conditions,
while the substantial decrease from 1993 to 1994 was due to the increase of
the discount rate resulting from the increase in long-term corporate rates.
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 $578,120 to the plan
for 1995, $581,305 for 1994 and $534,321 for 1993. 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 30, l995, the Company had unsecured lines of credit with
various banks that provide for maximum borrowings of $21,000,000, of which
none 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 30, 1995) or at a lower rate quoted by the respective banks. The
Company's average interest rate on outstanding borrowings at December 31,
1994 and December 25, 1993 was 7.0% and 3.8% respectively. While the
arrangements do not have termination dates, the terms are reviewed and may
be revised periodically.
5. LONG-TERM DEBT
(in thousands of dollars)
Long-term debt consists of the following: 1995 1994
Mortgage note payable to a bank, bearing interest at LIBOR plus 1%
(6.9% through February 1, 1996, at which time the interest rate is
to be adjusted) due in quarterly payments of $300,000 plus interest
through February 1998, secured by certain land and buildings.$ 2,700
$ 3,900
Other 17 38
Less - current portion (1,217) (1,221)
$1,500 $2,717
Future maturities of long-term debt are as follows:1996 $ 1,217
1997 1,200
1998 300
$2,717
The Mortgage Agreement, as amendedammended February 1, 1995, 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 was amended and Tthe Company washas
been in compliance with the amended covenants throughout 1995.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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. The Company accounts for these plans under
APB No. 25 under which no compensation has been recognized.
On April 27, 1993, the Company's shareholders approved Tthe 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 under the Company's 1983 Stock Option Plan (1983 Plan) which
terminated in 1993. Options granted under the 1983 Plan on or before
December 31, 1986 must be exercised in the order grantedare 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 10 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.
The Company's 1995 Stock Option Plan for Non-Employee Directors provides
for each outside director to receive options to purchase 5,000 shares of
Common Stock at the first annual meeting at which such director is elected,
and options to purchase 1,000 shares of Common Stock at each annual meeting
thereafter so long as he or she remains an eligible director. Such
directors cannot be an employee of the Company or one of its subsidiaries
or a holder of five percent or more of the Company's Common Stock. The
exercise price of such options will be the fair market value of the Common
Stock on the date of grant. Each option is non-transferable except upon
death, expires 10 years after the date of grant and becomes exercisable in
three equal installments on the first, second and third anniversary of the
date of grant. A total of 100,00 shares has been reserved for issuance of
which 85,000 shares remained available at December 31, 1995.
Transactions involving the plans are summarized as follows:**
1995 1994 1993
Shares under option:
Outstanding at beginning of year 360,892 429,129 481,704
Granted 18671,000 - 38,500
Exercised (47,385) (34,120) (79,986)
Canceled - (34,117) (11,089)
Outstanding at end of year 49984,507 360,892 429,129
Price range of options outstanding$3.38-$7.42$3.46-$7.42$2.60-$7.42
Exercisable at end of year 302,510 315,602 315,205
* Retroactively restated for the May 1994 stock dividend
* Retroactively adjusted for the May 1994 stock dividend.
At December 30, l995, under the 1993 Plan, 440,000 shares have been
reserved, of which 247,000 shares wereare available for future grants.
On April 25, 1995, the Company's shareholders approved the 1995 Stock
Option Plan for Non-Employee Directors which terminates in 2005.
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, and the option
period may not be greater than 10 years from the date the option is
granted. Options under the plan are normally exercisable in three equal
installments commencing one year from the date of the grant. Transactions
involving the plan are summarized as follows:
1995
Shares Under Option:
Outstanding at beginning of year 100,000
Granted 15,000
Exercised -
Canceled -
Outstanding at end of year 85,000
Price of options outstanding $4.38
Exercisable at end of year None
Note: The Company Elected not to implement the Statement of Financial
Accounting Standard No. 123 - Accounting for Stock-Based Compensation for
the fiscal year ended 1995. The Company plans to comply with Statement No.
123 by providing footnote disclosure for the fiscal year ending December,
1996.
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
20011999, with various options to renew through 20054. Rent expense under
these leases (exclusive of real estate taxes, insurance and other expenses
payable under the terms of the leases) was approximately $1,636,000 in 1995
and $1,800,000 in 1994 and $1,887,000 in 1993.
The aggregate minimum lease commitment for the Company's facilities on
December 30, 1995 was $7,071,000, payable as follows: $1,964,000 in 1996,
$1,967,000 in 1997, $1,551,000 in 1998, $897,000 in 1999, $662,000 in 2000
and $30,000 in 2001.
The Company also leases certain equipment. Rent expense under these leases
was approximately $46,000 in 1994 and $429,000 in 1993. There was no such
rent expense in 1995.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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. SUBSEQUENT EVENT
On January 23, 1996, The Company acquired the Massachusetts-based
operations of Support Systems Associates, Inc. (SSAI), a private company
headquartered in Hauppuage, New York. The CompanyDRC paid $2,000,000
million in cash for the acquired business,contractacquired business which
had revenue of approximately $5.,900,000 million in 1995. in support of the
U.S. Air Force Electronics Systems Center at Hanscom Air Force Base. The
acquired assets included a prime contract to provide The Massachusetts-
based operation of SSAI included a prime contract to provide services under
the Air Force's Technical & Engineering Management Support (TEMS) program.
This TEMS contract has an unfunded backlog with a potential value of
approximately $24,000,000 million that may be used to support both existing
businesses and new tasking over the next three years. The acquisition will
be accounted for as a purchase.
10. 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 and services segment provides
specialized technical services to the Department of Defense and other
customers and produced approximately 78% of total Company revenues in 1995.
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
PrecisionCommercial products segment produces encoders, which are used to
measure rotary or linear movement, and precision-patterned glass and
electroformed metal products. The Precision products segment's primary
market is located in the United States. Sales to two commercial customers
represents 7% of the total Company sales. These customers operate in the
automotive and computer-peripheral industries.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
10. BUSINESS SEGMENTS
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
Andover, MA corporate headquarterscorporate headquarters.
Summarized financial information by business segment for 1995, 1994 and
1993 are as follows:
(in thousands of dollars) 1995 1994 1993
Revenue:
Defense Ssystems and services $80,756 $84,891$88,085
PrecisionCommercial products 23,185 18,073 13,017
Total Revenue $103,941$102,964 $101,102
Operating income:
Defense Ssystems and services $(1,907)$(290) $3,457
PrecisionCommercial products 2,925 922 (215)
Total operating income $1,018 $ 632 $3,242
Total assets:
Defense Ssystems and services $34,95636 $36,573 $41,744
PrecisionCommercial products 9,58752 6,878 7,432
Corporate 9,406758 10,526 10,318
Total Assets $53,946 $53,977$59,494
Depreciation and amortization:
Defense Ssystems and services $2,663522 $2,932 $2,726
PrecisionCommercial products 87945 772 674
Corporate 46035 457 472
Total depreciation and amortization $4,002 $4,161 $3,872
Capital expenditures:
Defense Ssystems and services $1,75436$1,971 $2,207
PrecisionCommercial products 2,4942 347 779
Corporate 51943 126 9,158
Total capital expenditures $4,441 $2,444 $12,144
10. 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 30, 1995 were
$16,383,000 compared to $18,194,000 at December 31, 1994, and $17,053,000
at December 25, 1993.
The approximate number of U.S. Government contracts has varied between 100
and 150 during the past five years, with 135 contracts open at December 30,
1995. Receivables under U.S. Government contracts at December 30, 1995
were $12,551,000 compared to $12,505,000 at December 31, 1994, and
$17,580,000 at December 25, 1993.
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 30, 1995, December 31, 1994 and December 25, 1993, 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 30, 1995, December 31, 1994 and
December 25, 1993, 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 14, 1996
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:
1995 1994 1993
Revenue
Contract revenue 77.7% 82.4% 87.1%
Product sales 22.3 17.6 12.9
Total revenue 100.0 100.0 100.0
Cost of contract revenue* 90.50 91.2 84.6
Cost of product sales* 75.8 80.6 82.7
Total cost of sales 87.2 89.3 84.4
Selling, engineering and administrative expenses 11.8 10.112.4
Total operating costs 99.0 99.4 96.8
Operating income 1.0 0.6 3.2
Interest expense (income), net 0.2 0.4 0.2
Income before income taxes 0.8 0.2 3.0
Provision for income taxes 0.3 0.0 1.2
Net income 0.5% 0.2% 1.8%
*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 by 4.9% or $4,135,000 in 1995 over 1994 compared
to a 3.6% or $3,194,000 decrease in 1994 over 1993. The decrease in
contract revenue in 1995 wasis principally attributabledue to the reduced
contractual scope on the Company's long-running aircraft operations and
maintenance data system, known as TICARRStion in effort on the Company's
Air Force logistics information systems programs, partially offset by
growth in new program areas. During 1994, the Company experienced revenue
reductions in several areas including the Air Force Technical, Engineering
and Management Support(TEMS) program at Hanscom Air Force Base. Also
reflected iIn 1994, TICARRS revenue was reduced by a $1,.000,000 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. Much of
the Company's revenue relates to the development and operation of computer-
based management information and logistics support systems. The Company is
The Company is continuing to pursue additional programs both within the
Department of Defense(DoD) and with other government agencies.
Contract revenue decreased 4.9% or $4,135,000 in 1995 over 1994 as compared
to a 3.6% or $3,194,000 decrease in 1994 over 1993. During 1995, 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 1995 increased 28.3% or $5,112,000 as compared with 1994.
This was principally the result of growing production of electroformed
components for commercial printers and increased sales of encoders and
other precision products across a wide customer base. Product sales in
1994 increased 38.8% or $5,056,000 as compared with 1993. This principally
resulted from full production of a new line of customer encoders for a
customer in the automotive industryincrease came from both of the Company's
commercial manufacturing Divisions, Encoder and Metrigraphics.. The
Encoder Division experienced strong demand for its line of motion and
position sensing devices, including its optical encoder used in a high
volume automotive application. The Metrigraphics Division's growth is
attributable to sales of its electroformed nozzle plate used in inkjet
printer cartridges, combined with increased standard product business
across a wide customer base. Product sales in 1994 increased 38.8% or
$5,056,000 as compared with 1993. This was principally the result of full
production from the new lines of custom encoder devices and electroformed
components as well as increased business of standard and specialty devices.
Product sales in 1995 increased 28.3% or $5,112,000 as compared with 1994.
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 1994 increased 38.8% or
$5,056,000 as compared with 1993. 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 decreased
from 91.2% in 1994 to 90.5% in 1995. In the third quarter of 1994, a
nonrecurring charge of This decrease principally due to increased research
and development efforts in 1995 (which are classified under selling,
engineering and administrative expense) coupled with a nonrecurring charge
of $750,000 was taken relating to staff reductions, consisting mainly of
separation costs.which was taken in the third quarter of 1994 relating to
staff reductions, consisting mainly of separation costs. Cost reduction
actions were also taken in the fourth quarter of 1993, consisting primarily
of indirect labor staff reductions and consolidation of office space. The
high level of cost of contract revenue in 1995 and 1994, as compared to
1993, reflects reduced profitability on the Company's major Air Force
programs, TEMS and TICARRS. Under TEMS, the Company has operated as a
subcontractor during 1994 and 1995 at reduced hourly rates as compared with
prior prime contractor status. TICARRS, a fixed price contract, showed a
loss in 1994 and continued in 1995 with no recorded profit.
The cost of contract revenue, measured as a percentage of contract
revenue, increased from 84.6% in 1993 to 91.2% in 1994. This increase was
attributable to lower profit margins on specific contracts in 1994.
Cost of contract revenue as a percentage of contract revenue decreased
from 91.2% in 1994 to 90.5% in 1995. This decrease was due principally to
increased research and development efforts in 1995 and 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 84.6% in 1993 to 91.2% in 1994. This was attributable to
lower profit margins on specific contracts in 1994.
Cost of Goods as a percentage of product sales decreased from 80.6% in 1994
to 75.8% in 1995. This decrease was primarily the result of the benefit of
increased production levels of the new electroformed components for
commercial printers, resulting in manufacturing efficiencies, coupled with
a reduction in facility costs from the 1994 level.
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 the attainment
of full production levels of the new custom encoder product line and
increased production levels of the newof electroformed components for
commercial printers. Start-up costs for these product lines were incurred
in 1993 and into 1994. Production volumes for these products were achieved
during 1994 and targeted unit production levels for these products were
achieved in 1994 1995.
Cost of goods as a percentage of product sales decreased from 80.6% in 1994
to 75.8% in 1995. This decrease was primarily the result of the benefit of
increased production levels of the new 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 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.
Selling, engineering and administrative expenses increased 18.4% or
$1,904,000 in 1995 from 1994. The increase was principally due to
increased research and development efforts by the Company during 1995 in
connection with a software design and development tool expected to be
introduced in 1996.related to specific new applications. These internal
research and development efforts are expected to continue in 1996.This
increased level of research and development will continue in 1996. There
was also a decrease in general and administrative expenses as a percentage
of sales due to cost reductions taken during the year.
Selling ,engineering and administrative expenses decreased 17.6% or
$2,206,000 in 1994 over 1993. The decrease was principally due to the
completion of research and development efforts by the Company in late 1993
related to the Company's maintenance data system for the Air Force. There
was also a decrease in general and administrative expenses due to staff
reductions in late 1993.
Selling, engineering and administrative expenses increased $1,904,000 or
18.4% in 1995 from 1994. The increase was principally due to research and
development efforts by the Company related to specific programs. These
internal research and development efforts will continue in 1996. There was
also a decrease in general and administrative expenses due to reversing a
reserve taken in 1994.
Selling, engineering and administrative expenses decreased $2,206,000 or
17.6% in 1994 over 1993. The decrease was principally due to the
completion of research and development efforts by the Company in late 1993
related to the Company's maintenance data system for the Air Force. There
was also a decrease in general and administrative expenses due to staff
reductions in late 1993.
Interest expense (income), net decreased to $171,000 in 1995 from $431,000
in 1994 due to a decrease in the average level of the Company's borrowing
in 1995., The principal drivers of cash flow are earnings, adjusted for
depreciation and amortization, aggregate billed and unbilled receivables in
the Company's government business, and capital expenditures. The sum of
receivables and unbilled expenditures and fees on contracts in process
decreased significantly from the end of 1993 to 1994 and then decreased
slightly at the end of 1995. Capital expenditures increased to $4,400,000
in 1995 in connnection with a program to increase electroforming
manufacturing capacity. Early in 1993, the Company acquired its
headquarters building with a combination of cash and mortgage financing.
partially offset by higher interest rates. Interest expense, 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 interest
rates. The sum of receivables and unbilled expenditures and fees on
contracts in process decreased from 1993 to 1994 by $3,936,000 and
decreased from 1994 to 1995 by $665,000. Early in 1993, the Company
acquired its headquarters building in Andover, MA with a combination of
cash and mortgage financing.
Interest expense (income), net decreased to $171,000 in 1995 from $431,000
in 1994 due to a decrease in the average level of the Company's borrowings
in 1995 combined with lower average interest rates in 1995. The sum of
receivables and unbilled expenditures and fees on contracts in process
decreased from the end of 1993 to 1994 and then increased at the end of
1995. Early in 1993, the Company acquired its headquarters building with a
combination of cash and mortgage financing.
Provision (benefit) for income taxes was 34.0% for 1995, compared to
(11.4%) for 1994 and 38.7% for 1993. The 1995 and 1994 rates were
favorably affected by research and development expenditure credits as well
as somewhat lower state income tax rates. 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 forof 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 1995 and 1994 tax rates were favorably
affected by research and development expenditure credits as well as
somewhat lower net state income taxes.
The Company's backlog of unfilled orders at the end of 1995 was
$61,284,000, an increase of 40.3% from the $43,679,000 at the end of 1994.
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. The 1995 balance
includes $10,000,000 related to a commercial order for inkjet printer
components.
Provision (benefit) for income taxes was 34.0% for 1995, (11.4%) for 1994,
and 38.7% for 1993. 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 1995 was
$61,284,000, an increase of 40.3% from $43,679,000 in 1994. 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 2.0 to 1 at December 30, 1995 compared to 2.1 to 1 at the
end of 1994. The change in this ratio is attributable to anthe increase in
accrued payablesroll .and benefits from $4.6 million at year-end 1994 to
$6.4 million at year-end 1995, partially offset by a $1.2 million decrease
in notes payable during 1995. During 1995, noncash expenses for
depreciation and amortization and the timing of payables favorable
collections (receivables and unbilled expenditures and fees) enabled the
Company to generate $7,000,000.5 million from operations despite having net
income of only $600,000.6 million. The Company had $3,000,000 of planned
capital spending as of December 30, 1995 related to the planned increase in
electroform production capacity. Also, in January 1996, the Company paid
$2,000,000 to acquire the Massachusetts-based operations of an Air Force
services contractor.Further receivable reductions are expected during 1996.
In order to support the growth of the Company's commercial products
business, a capital spending plan has been developed to scale up production
capacity
over the next several years. Outstanding capital commitments at December
30, 1995 include $3.0 million to increase electroform production capacity.
At December 30, 1995, $21,000,000 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 19965.
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 2.0 to 1 at December 30, 1995 compared to 2.1 to 1 at the
end of 1994. The change in this ratio is attributable an increase in
payables due to timing. During 1995, noncash expenses for depreciation and
amortization and the timing of payables enabled the Company to generate $7
million from operations despite net income of only $.6 million. The
Company had no large capital spending commitments as of December 30, 1995.
At December 30, 1995, $21,000,000 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 1996.
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 accounted for approximately 78% of
the Company's revenues in 1995, are generally for one year, and include
salary increase factors for future years, thus reducing the potential
impact of inflation on the Company.
FORWARD LOOKING INFORMATION
This report includes certain forward-looking statements about the Company's
business including the effect of the federal budget on the Company's sales,
response to the Company's product and services offerings, growth in
revenues, capital spending, research and development spending and customer
mix. Such forward-looking statements are subject to risk and uncertainties
that could cause the actual results to vary materially. These risks and
uncertainties, discussed in more detail in the Company's Form 10-K for the
year ended December 30, 1995, include possible reductions in federal
funding for the Company's customers and potential customers, concentration
of customers, risks of sustaining existing contracts and orders thereunder
at the same or increasing levels and obtaining of new contracts, high
levels of competition and difficulties of entering new markets, government
contracting issues including audit adjustments and costs of completing
fixed price contracts, supply difficulties, warranty claims, and factors
affecting the business segments in which the Company operated and the
economy generally.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
78% of the Company's revenues in 1995 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 1995 1994*
High LowHigh Low
First quarter $4.75 $2.75$4.77 $3.86
Second quarter 4.75 2.754.55 3.64
Third quarter 7.50 4.134.00 3.38
Fourth quarter 9.50 5.503.75 2.75
* Retroactively adjusted for the May 1994 stock dividend.
The bid and asked prices of the Company's common stock on February 22XX,
1996 were $7.13X.XX and $7.38X.XX, 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 16xx, 1996 was
1,032x,xxx. As of February 16xx,
1996 there were 5,663,042x,xxx,xxx 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 1996 Annual Meeting of Shareholders will be held at 3:30 PM on April
23, 1996 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
William G. Clautice
Vice President, Strategic Programs
Dr. Joseph W. Griffin, Jr.
Vice President, Systems Development, Systems Division
Edward C. Johnson
Vice President, Marketing
Chester Ju
Vice President, Encoder Division and Metrigraphics Division
Jonn M. Nauseff
Vice President, Dayton Operations
Douglas R. Potter
Vice President of Finance and Chief Financial Officer
Richard P. Rappaport
Vice President, Test Equipment 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
FINANCIAL HIGHLIGHTS
(In thousands of dollars, except share data)
1995 1994
Revenue $103,941 $102,964
Net income 559 224
Net income per share* .10 .04
Backlog 61,284 43,679
Number of employees 1,249 1,130
Number of shares outstanding* 5,622,772 5,631,448
*Retroactively adjusted for the May 1994 stock dividend.
