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 28, 1996
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. [ ]
As of March 14, 1997, the aggregate market value of Common Stock
held by nonaffiliates of the Registrant was $42,889,183 and the number
of shares of Common Stock, $.10 par value, of the Registrant outstanding
was 5,698,325.
Documents Incorporated By Reference
Portions of the 1996 Annual Report to Shareholders are incorporated by
reference in Parts I and II. Portions of the Registrant's Proxy
Statement for the 1997 Annual Meeting of Shareholders are incorporated
by reference in Part III.
The Exhibit Index is on pages 25 and 26.
DYNAMICS RESEARCH CORPORATION
Form 10-K
For the Fiscal Year Ended December 28, 1996
Part I Page
Item 1. Business 4
2. Properties 12
3. Legal Proceedings 13
4. Submission of Matters to a Vote of Security Holders 13
4A. Executive Officers of the Registrant 13
Part II
5. Market for Registrant's Common Equity and
Related Stockholder Matters 14
6. Selected Financial Data 14
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
8. Financial Statements and Supplementary Data 13
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 15
Part III
10. Directors and Executive Officers of the Registrant 16
11. Executive Compensation 16
12. Security Ownership of Certain Beneficial Owners
and Management 16
13. Certain Relationships and Related Transactions 16
Part IV
14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 17
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 information 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. and state governments and commercial companies. The Company also
designs, manufactures and sells digital instruments and precision components
that are primarily used in computer-controlled systems.
Information Systems Development and Operation
DRC 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 to perform detailed reliability, maintainability, quality assurance,
vendor qualification and cost analyses. The Company has developed such
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 both hardware and software throughout the
system's life.
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.
Under contract with the U.S. Air Force, the Company designed,
developed, implemented and operates Tactical Interim CAMS and
REMIS Reporting System (TICARRS). The TICARRS databases support the operation
of F-15 and F-16 aircraft and provide, upon request by the Air Force user
organizations worldwide, a variety of operational reports. Data include
results from flight operations and maintenance activities. Although remote
computer terminals and communications interfaces are an integral part of
the system, the host computer facility and its associated databases are
located at a Company facility. During 1996, the Company received a
subcontract to participate in the development of the Air Force's
Integrated Maintenance Data System ("IMDS") as a successor to TICARRS
and other existing systems.
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 provides operational support for
the system as well as software development modifications and other
changes.
During 1996, the Company was awarded a contract to implement a
distributed computer-based system for managing child welfare cases handled by
the State of New Hampshire's Department of Health and Human Services.
In February of 1997, DRC announced the award of a $36 million contract-
$24 million of which is slated for 1997 - to install and maintain computer
hardware and communication systems for the State of Ohio's Department of
Health and Human Services.
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
achieved certification Level II under standards of the Software
Engineering Institute.
The Company has developed AdaMAT, a software program licensed to both
government and commercial customers, as a tool for an Ada software
engineering environment. 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 allowing visibility into the quality of the code at any given point in
time.
Engineering and Management Support Services
The Company increased its research and development efforts during 1995
and 1996 in connection with an object-oriented system and software
development tool which enables developers to build applications using
diagrams. This tool supports team-based development and includes capabilities
for automated source code and documentation generation.
During 1996, the Company entered into an agreement with Pacific Bell, a
subsidiary of Pacific Telsis Group, to market, support and enhance Pacific
Bell's telephone fraud control system known as "Sleuth". The Sleuth system
is used to detect potential fraudulent usage of "alternate billing services"
such as calling cards, and is currently used by five other Regional Bell
Operating Companies (RBOC's) in addition to Pacific Bell. The Company intends
to enhance the Sleuth system to support the existing Sleuth user group, and to
market the system to other potential users.
Under various DoD contracts, the Company has performed a variety of
services for its U.S. Government customers to assist them in planning
and managing 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 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 customers define,
develop, and initiate new programs. The Company also helps customers
obtain program approval, conduct strategic planning, and evaluate
proposals from industry. After prime contract awards, the Company helps
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) contract, 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. DRC was a
subcontractor on one of the winning teams, and was subsequently added as
a subcontractor to several of the other winning bidders. A 1996
acquisition included a prime contract to provide support services under the
TEMS program.
In 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 as well as other Air Force
logistics centers. 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 program since 1990.
In 1996, the Defense Information Systems Agency (DISA) awarded
multiple contracts under its Defense Enterprise Integration Services
(DEIS-II) program. DRC is a member of the winning Computer Sciences
Corporation team. DEIS-II 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-II program. DRC
also performed as a subcontractor to Computer Sciences Corporation under
the predecessor DEIS contract since 1993.
The Company supports the DoD in the area of acquisition logistics.
DRC technical staff help customers plan and manage the
implementation of program requirements throughout all phases of the
acquisition process. 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 contract from the Federal Aviation Administration for a radar
performance monitoring and analysis system and a 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).
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 provided 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 provide 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 previous 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.
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.
During 1996, the Company was awarded a 4-year U.S. Army contract
valued at approximately $13 million, to apply certain teamwork training
principles developed to improve performance in high pressure
environments, to emergency room settings in civilian and military
hospitals.
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. Recently, the suite of HARDMAN III tools
has been consolidated into a single windows-based application called
"IMPRINT" (Improved Performance Research Integration Tool).
DRC is a subcontractor to Lockheed Martin on the U.S. Army's Warfighter
2000 Simulation. WARSIM will provide training for commanders and their
staffs. DRC is leading the conceptual modeling, MANPRINT, and safety aspects
of the effort. DRC is also providing system engineering and software
engineering support to the Integrated Development Team.
DRC is a subcontractor to Lockheed Martin 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.
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
1996, the Company increased its support for the Navy in connection with
the development of new processes for fabricating semiconductors
"hardened" to survive severe environments.
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 prime contracts to serve Federal
agencies other than DoD. The first award was from 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. Through the end of 1996, the Company has
achieved approximately $1.3 million of revenue under this contract.
The second 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.
Digital Instruments and Precision Components
The Company operates two units that produce digital instuments and
precision components 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
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,
became fully operational in 1994 and has continued through 1996.
The Metrigraphics Division uses photolithographic processes to
manufacture optical discs, scales and reticles that are used for
precision measurement. Metrigraphics also uses various metal 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. These products are a substantial
portion of the sales of the Metrigraphics Division. In December 1995, the
Company leased 27,000 square feet in Wilmington, Massachusetts to provide
space for a second electroform production facility. During 1995 and 1996,
approximately $7 million has been incurred for the purchase of production
equipment to expand the Company's electroform capacity.
The customers for both of these divisions are primarily
manufacturing 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 element 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 1996, the Company's revenues from contracts with the DoD,
either as prime contractor or subcontractor, accounted for approximately
74% of the Company's total revenues. The Company's government contracts
fall into one of three categories: (1) fixed price, (2) time and
materials, and (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 profit margin. Under a cost plus fixed fee contract, the
government reimburses the Company for its allowable direct expenses and
allowable and allocable indirect costs and pays a negotiated fee. In
1996, approximately 65% of the Company's government contracts revenue
was under fixed price or time and material contracts, while
approximately 35% of revenue was under costs plus fixed fee contracts.
During 1996, the Company's U.S. Government business consisted of
approximately 105 separate contracts on 60 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 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 28, 1996, the Company's backlog of unfilled orders was
approximately $73,200,000 compared with $61,284,000 at December 30,
1995. The Company expects that substantially all of its backlog on
December 28, 1996 will be filled during the year ending December 31,
1997. 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 because various agencies perform certain types of
services which might otherwise be performed by the Company. The
principal competitive factors for defense services are price,
performance, technical competence and reliability. In addition, in the
commercial business, the Company also competes with other manufacturers
of encoders, electroform vendors and 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 $2,702,000 (inclusive of overhead
and other indirect costs) on new product and service development during
the year ended December 28, 1996, as compared to expenditures of
$1,949,000 during 1995 and $224,000 during 1994.
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 28, 1996, the Company had 1,349 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 231,000 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 three leases totaling
113,000 square feet, expiring in 2000, with options to the year 2005.
The remaining leased facilities consist of offices in 24 locations
across the United States. The Company owns a 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 1996 was $2,014,000.
The Company believes its properties are adequate for its present
needs. See Note 8 to the Consolidated Financial Statements included in
the Company's 1996 Annual Report to Shareholders for a description of
the Company's lease obligations.
Item 3. Legal Proceedings
The Company is not a party to any material litigation.
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. 73 42 Chairman
Albert Rand 70 37 President and Chief Executive Officer
John L. Wilkinson 57 15 Vice President, Human Resources
Douglas R. Potter 46 3 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. He was Vice President, Treasurer, and Chief
Financial Officer of SofTech, Inc. of Waltham, Massachusetts from 1990
to 1993.
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
NASDAQ National Market under the symbol (DRCO).
The high and low bid prices for the quarters in 1995 and 1996 and
the number of holders of record of the Company's common stock are
described in the Company's Annual Report to Shareholders for 1996 under
the caption "Stock Prices" and "Number of Shareholders," and such
information is incorporated herein by reference.
In September 1984, the Board of Directors indicated its intention
not to declare cash dividends to preserve cash for the future growth and
development of the Company. The Company did not declare any cash
dividends between 1984 and 1996 and does not anticipate doing so for the
foreseeable 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 1996 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 1996 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 28, 1996, December 30, 1995
and December 31, 1994
Consolidated Statements of Operations for the three years ended
December 28, 1996
Consolidated Statements of Shareholders' Investment for the three
years ended December 28, 1996
Consolidated Statements of Cash Flows for the three years ended
December 28, 1996
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 1996.)
Report of Independent Public Accountants on Schedules to
Consolidated Financial Statements
Schedule VIII - Valuation and Qualifying Accounts for the three
years ended December 28, 1996
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 11, and Management's
Discussion and Analysis of Financial Condition and Results of
Operations presented on pages 12-14, of the Company's Annual Report to
Shareholders for the year 1996, 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 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 28, 1996, 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.
Mr. Albert Rand, president and chief executive officer reported on form 5
the sale of shares of the Company's Common Stock during 1996 for which
form 4 was inadvertently not filed.
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 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 28, 1996.
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 28, 1996.
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 that are filed with this Form 10-K,
or that are incorporated herein by reference, are set
forth in the Exhibit Index, which appears in Part IV of this
report on pages 24 and 25.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the
last quarter of fiscal 1996.
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 7, 1997. 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 7, 1997
Exhibit 99
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 74% of the Company's revenue is derived from the
Department of Defense business. During the past, 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. 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.
Governmental 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 up 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. Contracts
with state and other governmental entities are subject to the same or
similar risks.
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 affect 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 21, 1997
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 21st of March,
1997.
/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 28, 1996
(in thousands of dollars)
ALLOWANCE FOR DOUBTFUL ACCOUNTS AND SALES RETURNS
Balance, December 25, 1993 $418
Additions charged to expense 222
Write-off of uncollectible accounts, net (54)
Balance, December 31, 1994 $586
Additions charged to expense (2)
Write-off of uncollectible accounts, net (182)
Balance, December 30, 1995 $402
Additions charged to expense (54)
Write-off of uncollectible accounts, net (8)
Balance, December 28, 1996 $340
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 certificate.
4.2 Preferred stock certificate.
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. (Incorporated by reference
to the Registrant's Form 10-K for the year ended 12/27/87)
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)
10.4 Form of Dynamics Research Corporation Indemnification
Agreement for Directors. (Incorporated by reference to the
Registrant's Form 10-K for the year ended 12/28/91)
10.5 Form of Dynamics Research Corporation Severance Agreement for
Messrs. Anderegg and Rand. (Incorporated by reference to the
Registrant's Form 10-K for the year ended 12/28/91)
10.6 Dynamics Research Corporation Deferred Compensation Plan for
Non-Employee Directors. (Incorporated by reference to the
Registrant's Form 10-K for the year ended 12/28/91)
10.7 Mortgage Agreement dated February 5, 1993 between Dynamics
Research Corporation and ABN AMRO Bank, N.V. (Incorporated by
reference to the Registrant's Form 8-K on May 5, 1993)
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 28, 1996 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 counsel
23.1 Consent of Independent Accountants (Arthur Andersen LLP)
dated March 26, 1997 filed herewith.
99.0 Important Factors Regarding Forward-Looking Statements.
* Management contract of compensatory plan or arrangement.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-28-1996
<PERIOD-END> DEC-28-1996
<CASH> 234
<SECURITIES> 0
<RECEIVABLES> 42126
<ALLOWANCES> 0
<INVENTORY> 3211
<CURRENT-ASSETS> 48254
<PP&E> 49870
<DEPRECIATION> 28266
<TOTAL-ASSETS> 71102
<CURRENT-LIABILITIES> 34709
<BONDS> 1501
0
0
<COMMON> 669
<OTHER-SE> 34570
<TOTAL-LIABILITY-AND-EQUITY> 71102
<SALES> 29285
<TOTAL-REVENUES> 130163
<CGS> 20476
<TOTAL-COSTS> 112988
<OTHER-EXPENSES> 13830
<LOSS-PROVISION> (62)
<INTEREST-EXPENSE> 547
<INCOME-PRETAX> 2798
<INCOME-TAX> 1069
<INCOME-CONTINUING> 1729
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1729
<EPS-PRIMARY> .3
<EPS-DILUTED> .3
</TABLE>
Financial Highlights
1994 1995 1996
(In thousands of dollars, except share
and employee data)
Revenue $ 102,964 $ 103,941 $ 130,163
Net income 224 559 1,729
Net income per share .04 .10 .30
Backlog 43,679 61,284 73,200
Number of employees 1,130 1,249 1,349
Number of shares outstanding 5,631,448 5,622,772 5,693,659
To Our Shareholders
In 1996 Dynamics Research Corporation's revenue grew 25 percent to
$130.2 million, finally moving up from a plateau just above $100
million where the Company's sales had been for several years.
Importantly, this growth was achieved across all of our operations.
We expect that the initiatives now in place-in particular, a strategy
of applying our core business competencies as a defense contractor to
other federal and state agencies, as well as the private sector-will
yield strong results in 1997. Net income for 1996 more than tripled
to $1,729,000 or $.30 per share, from $559,000, or $.10 per share the
prior year.
For the final 16 weeks of 1996, revenue rose 34 percent to $45.2
million from $33.7 million for the corresponding quarter last year.
Net income for the quarter was $191,000, or $.03 per share, compared
with $320,000, or $.06 per share, for the same period in 1995,
reflecting a one-time pre-tax charge of $1.8 million for certain
nonrecoverable costs related to a U.S. Air Force Contract.
Revenue growth was broad based across our four principal operating
divisions-Systems, Test Equipment, Encoder and Metrigraphics-with
each group achieving top-line sales growth in excess of 23 percent.
Sales for the Systems and Test Equipment divisions totaled $100.9
million, or 77 percent of revenues, while commercial sales for the
precision manufactured products divisions rose 26 percent to $29.3
million, accounting for 23 percent of 1996 revenues.
Leveraging Information Technology Expertise
Much of our growth was due to the leveraging of our information
technology expertise to secure several major new contracts or expand
existing contracts within the Systems and Test Equipment divisions.
These include:
A one-year, $4.5 million contract for an auto-mated case-management system
for the State of New Hampshire's Department of Health and Human Services.
A four-year contract valued at potentially $13 million from the U.S. Army to
analyze and improve teamwork among emergency room personnel in
both civilian and military hospitals.
Expansion of our existing core Navy program with an award from the U.S. Navy
for approximately $5 million in 1996 to develop advanced capabilities for
design and fabrication of radiation-hardened semiconductors for use in
Trident II missiles.
In addition, through the January 1996 acquisition of the Massachusetts
operations of Support Systems Associates, Inc., DRC was able to increase the
level of management and technical support to the U.S. Air Force's
Electronics Systems Center. Building upon many years of aircraft maintenance
systems experience, DRC won a role as a subcontractor in developing the
next-generation aircraft maintenance information system. The Company is also
subcontracting to Computer Sciences Corporation on a $3 billion worldwide
integration and systems engineering program for the U.S. Defense Information
Systems Agency.
Subsequent to year end, DRC's Systems Division was awarded a $36
million contract-$24 million of which is slated for 1997-to install
and maintain computer hardware and communications systems for the
State of Ohio's Department of Health and Human Services. The move
toward upgrading computer systems for state agencies responsible for
child welfare programs should yield new business opportunities for
DRC beyond its current New Hampshire and Ohio contracts. We also see
opportunities for the expansion of a broad contract with the U.S.
Department of Treasury, which includes support for the Internal
Revenue Service's tax modernization program.
Going After High-Volume Commercial Sales
During the year we saw strong growth in our two precision
manufactured products divisions, Encoder and Metrigraphics, primarily
due to a strategy of identifying high-volume manufacturing
opportunities for major commercial customers. An ongoing contract for
the production of nozzles for ink-jet printer cartridges represented
$8 million in sales in 1996, while encoders for diesel-engine fuel
pumps accounted for $5.5 million in sales. We are working to ensure
the extension of these existing contracts and are aggressively
seeking new high-volume medical, consumer and other applications for
our electroforming and sensor manufacturing capabilities.
Investing for Future Growth
DRC made significant investments in capital equipment and research
and development programs in 1996. Approximately $5 million was
spent on capital equipment for the Metrigraphics Division, providing
us with state-of-the-art quality control systems and ample capacity
for precision manufacturing business growth.
We continue to invest in the development of new business areas. DRC has
assumed responsibility for supporting the Sleuth fraud control system
developed by Pacific Bell Telephone Company. Sleuth is currently used by six
regional Bell operating companies.
1997 Goals and Outlook
Rapid advances in computer and communications technology, and the
dynamic shift in the organizational structure, objectives and budget
for the Department of Defense (DoD) has resulted in new business
opportunities for DRC. We view ourselves as a strategic partner,
helping our customers adapt to these changes and operate in a leaner, more
efficient fashion.
We also strive to attune ourselves to the marketplace and identify
opportunities for transferring DRCOs expertise into new areas. In
addition to increasing DoD work, one of our primary objectives for
1997 is to expand the proportion of business from the private sector,
as well as federal and state agencies. Ultimately, our long-range
goal is to achieve a 50/50 balance between our defense and commercial
work.
Looking ahead, overall company growth, as well as a changing business mix
should help us to compete effectively in existing and new markets and to
improve profitability. Long-term plans call for growing our current divisions
and seeking selective acquisitions that will strengthen our business base in
information technology and commercial manufacturing.
An important addition was made to DRC's senior management team in October
with the recruitment of Dr. Martin M. Dresser to the post of vice president
and general manager of DRC's Systems Division. He brings to the job stellar
technical credentials and years of senior management experience in growing
new business lines for pre-eminent engineering and defense concerns.
The early 1990's presented a difficult business climate for DRC, but
we emerged a much stronger and strategically diversified company.
Credit for this accomplishment lies with our employees, whose diligence,
inventiveness and adaptability drive our business. Their talents and efforts
are greatly appreciated.
Sincerely,
Albert Rand John S. Anderegg, Jr.
President and Chairman
Chief Executive Officer
Trident II: Managing Lifecycle Requirements
Constant testing and evaluation is necessary to verify the integrity
of original components and the operability of replacement parts
throughout a weapon system's lifecycle. As an extension of its
longstanding program, supporting the U.S. Navy's Polaris, Poseidon
and Trident missile guidance and navigation systems, DRC's Test
Equipment Division supplies manufacturers with test equipment to
ensure the accuracy of navigational instruments for Trident II
missiles. DRC also re-engineers and replaces obsolete circuits
through a process of extracting their electrical characteristics and
reproducing functionality using state-of-the-art semiconductor
components. At a Naval research center, DRC is supporting development
of new processes for fabricating semiconductors that will survive
severe conditions.
Integrated Expertise
Since the close of the Cold War, the military has sought more efficient, cost-
effective ways to conduct operations without jeopardizing the readiness
or reliability of weapons systems, personnel and equipment. This goal
has resulted in a number of initiatives, including the re-engineering of
many systems and programs, and the integration of new technologies. DRC
develops innovative conceptual approaches for guiding the military through
these changes by mobilizing integrated teams of experts in information
technology, manpower and skills analysis, logistics and engineering.
U.S. Air Force Electronics Systems Center
As part of a multi-year contract to support the U.S. Air Force, DRC
provides a range of services in support of the acquisition of electronics
systems. DRC's work for the Air Force's Air Mobility Command (AMC), after it
assumed responsibility for the Air Force's fleet of aerial refueling tankers,
is representative of the Company's unique blend of expertise. AMC had to plan
for tanker maintenance and flight crews, and ensure that the tankers were in
the right place at the right time. DRC brought in a team with experience in
military cargo transport, systems engineering and logistics to analyze and
define requirements for a management information system that tracks and
directs the tankers.
New Hampshire BRIDGES
A federal initiative to improve the flow of information between state and
federal agencies tracking child welfare cases created an incentive for states
to replace their outdated database systems. In 1995, DRC began marketing its
information technology services to state health and human services and child
welfare programs. Within less than a year, the Company was awarded a one-year,
$4.5 million contract to provide software and networking capabilities for an
automated case-management system, known as BRIDGES, for the State of
New Hampshire's Department of Health and Human Services. The system
provides caseworkers and the courts with up-to-date information for
tracking more than 11,000 children.
Venturing into New Markets
Leveraging its expertise in large-scale military information systems, DRC is
aggressively targeting business opportunities with nondefense federal
and state agencies, as well as the commercial sector. Among its current
projects are major implementations of distributed network computing
systems in New Hampshire and Ohio, and the development of tools for
performing cost/benefit analyses related to the tax system modernization
program underway at the Internal Revenue Service. Under an innovative
contract, DRC is bridging civilian and military markets to bring
technology developed to improve aircraft crew performance under high-
stress conditions to the medical emergency room arena.
MedTeams
Hospital emergency room staffs and combat flight crews all work in
high pressure environments. Decisions they must make in as little as
20 seconds may well have life or death consequences. The ability to
manage information and function as a cohesive team greatly increases
the probability of a positive outcome. DRC's behavioral scientists
recognized an opportunity to adapt a teamwork training program designed for
U.S. Army Aviation cockpit crews-a program that annually saves an estimated
12 to 15 lives and $30 million-to a medical setting. DRC scientists pursued
the concept and in 1996 secured a four-year contract valued at potentially
$13 million from the U.S. Army Research Laboratory for Team Performance in
Emergency Medicine (MedTeams) to analyze and improve emergency room teamwork
in civilian and military hospitals.
Diesel Fuel Pumps
DRC's Encoder Division designs and assembles electro-mechanical devices that
calibrate and control motion in sensitive, expensive machinery. A 1994
regulatory mandate for stricter controls on diesel emissions created a major
new market opportunity for DRC. The Company now manufactures encoders for
engine fuel pumps for diesel-powered sport utility vehicles, pickup trucks and
commercial vans. The encoder is a critical component of a computer control
system that gauges the amount of fuel injected into the cylinders, so the
optimum amount is used, minimizing the unburned fuel that creates exhaust
fumes.
Competitive Drive
The engine behind much of DRC's growth and improved profitability in 1996 was
the Company's Precision Manufactured Products segment, which is comprised of
two divisions: Encoder and Metrigraphics. Since 1992, segment revenues have
grown at an annualized rate of 30 percent due to a strategy of securing
high-volume manufacturing contracts in broad commercial markets. Both divisions
are driven by the imperative to make customers more competitive by providing
them with custom-designed components that result in higher performance,
precision and more cost-competitive machinery and products.
Medical Electronics
Metrigraphics designs and produces circuits, disks and screens using
a process known as electroforming, whereby a thin, flexible metal
film is deposited in precise patterns. Medical devices such as
electronic cameras incorporated into heart catheters represent a
major potential market for Metrigraphics' technology. These miniature
cameras enable medical technicians to view blockage within the aorta
during angioplasty procedures. DRC's Metrigraphics Division produces
miniature flexible circuits that connect the electronics in the
camera head. The Company's ability to manufacture precise and finely
calibrated circuits gives it a competitive edge in this fast-growing
market.
Growth Through Adaptation
The ability to identify and move quickly to take advantage of new
opportunities in a fast-changing business environment is crucial to DRC's
growth. In addition to investing heavily in research and development and
employee training programs, DRC has long fostered an "intrepreneurial" culture
that encourages employees to incubate and champion new business lines. This
organizational philosophy has made the Company adept at evolving and thriving
in a highly transitional marketplace.
Sleuth Fraud Control
Employees from DRC's Beaverton, Oregon office targeted Pacific Bell
Telephone Company as a strategic business prospect that could benefit
from DRC's unique combination of technical skills and long-term customer
support capabilities. DRC's efforts resulted in an exclusive license to
maintain and market Pacific Bell's Sleuth telephone fraud detection and
control software system, which is currently used by six regional Bell
operating companies.
<TABLE>
Five Year Summary of Selected Financial Data
<CAPTION>
1996 1995 1994 1993 1992
(in thousands of dollars,
except share and
employee data)
<S> <C> <C> <C> <C> <C>
Revenue $130,163 $103,941 $102,964 $101,102 $102,581
Operating income 3,345 1,018 632 3,242 6,377
Net income 1,729 559 224 1,834 4,014
Net income per common share .30 .10 .04 .33 .70
Total assets 71,102 53,946 53,977 59,494 48,877
Long-term debt
(excluding
current portion) 300 1,500 2,717 3,900 -
Shareholders' investment 35,239 33,206 32,713 32,437 30,805
Shareholders' investment 6.19 5.91 5.81 5.78 5.47
per share
Return on shareholders'
investment(%) 4.9 1.7 .7 5.7 13.0
Backlog 73,200 61,284 43,679 51,257 54,547
Cash flow from operations 1,035 7,499 5,721 1,397 9,468
Research and development
expense 2,702 1,949 224 2,007 1,463
Capital expenditures 9,266 4,441 2,444 12,144 4,732
Number of shares outstanding
at end of year 5,693,659 5,622,772 5,631,448 5,610,878 5,632,264
Number of employees 1,349 1,249 1,130 1,188 1,189
</TABLE>
Quarterly Data*
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
(in thousands of dollars,
except per share data)
unaudited
1996
Revenue $26,627 $28,373 $29,929 $45,234
Operating income 434 873 1,465 573
Net income 209 498 831 191
Net income per common share .04 .09 .15 .03
1995
Revenue $21,929 $23,936 $24,354 $33,722
Operating income (loss) (602) 550 544 526
Net income (loss) (388) 318 309 320
Net income (loss) per
common share (.07) .06 .06 .06
1994
Revenue $22,692 $23,656 $21,573 $35,043
Operating income (loss) 696 580 (2,699) 2,055
Net income (loss) 390 302 (1,734) 1,266
Net income (loss) per
common share .07 .05 (.31) .22
* 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.
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:
1996 1995 1994
Revenue
Contract revenue 77.5% 77.7% 82.4%
Product sales 22.5 22.3 17.6
Total revenue 100.0 100.0 100.0
Costs and Expenses
Cost of contract revenue* 91.7 90.5 91.2
Cost of goods* 69.9 75.8 80.6
Total cost of sales 86.8 87.2 89.3
Selling, engineering and
administrative expenses 10.6 11.8 10.1
Total operating costs 97.4 99.0 99.4
Operating income 2.6 1.0 0.6
Interest expense, net 0.4 0.2 0.4
Income before provision for
income taxes 2.2 0.8 0.2
Provision for income taxes 0.8 0.3 0.0
Net income 1.4% 0.5% 0.2%
*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
Contract revenue increased by 24.9% or $20,122,000 in 1996 over 1995
compared to a 4.9% or $4,135,000 decrease in 1995 over 1994. The
increase in contract revenue in 1996 was broad-based with growth
contributions from additional work received under the Company's long-running
core Navy program, the January 1996 acquisition of the Massachusetts-based
operations of an Air Force services business, and Department of Defense
logistics and engineering support contracts awarded in 1995 and 1996, as well
as new state contracts. Much of the Company's revenue relates to the
development and operation of computer-based management information and
logistics support systems, as well as other information technology services.
The Company is continuing to pursue additional programs both within the
Department of Defense and with other government agencies.
Product Sales
Product sales in 1996 increased 26.3% or $6,100,000 as compared with
1995. This was principally the result of increased sales of electroformed
components for a line of commercial ink-jet printers, and increased sales of
a line of custom encoders for a customer in the automotive industry. The
growth in product sales in 1995, 28.3% or $5,112,000, as compared with 1994
was attributable to increased production of parts for commercial ink-jet
printers.
Cost of Contract Revenue
Cost of contract revenue as a percentage of contract revenue increased from
90.5% in 1995 to 91.7% in 1996. In the fourth quarter of 1996, the Company
incurred a one-time pre-tax charge of $1,800,000 for unrecoverable costs
associated with an Air Force contract. Cost of contract revenue as a
percentage of contract revenue decreased from 91.2% in 1994 to 90.5% in 1995,
partially the result of a nonrecurring charge of $750,000 which was taken
during 1994 relating to staff reductions. The high level of cost of contract
revenue in 1995 and 1994 reflected reduced profitability on the Company's
major Air Force programs, TEMS and TICARRS. Under TEMS, the Company operated
as a subcontractor during 1994 and 1995 at reduced hourly rates as compared
with its prior prime-contractor status. TICARRS, a fixed-price contract,
showed a loss in 1994 and continued in 1995 with no recorded profit.
Cost of Goods
Cost of Goods as a percentage of product sales decreased from 80.6%
in 1994 to 75.8% in 1995 and 69.9% in 1996. This decrease was primarily the
result of increasing production levels of electroformed components for a line
of ink-jet printers and a custom encoder product line. Both of these product
lines became fully operational during 1994.
Selling, Engineering and Administrative Expenses
Selling, engineering and administrative expenses increased by 12.7%
or $1,563,000 in 1996 from 1995, and by 18.4% or $1,904,000 in 1995 from 1994.
These increases were principally due to increased research and development
efforts by the Company during both 1995 and 1996 in connection with a software
design and development tool and research and development spending in 1996 in
connection with the Company's efforts to enter the telecommunication fraud
detection market. Excluding research and development expenses, selling,
engineering and administrative costs represented 8.5% sales in 1996 and
9.9% in 1995.
Interest Expense, Net
Interest expense, net increased to $547,000 in 1996 from $171,000 in 1995
due to an increase in the average level of the Company's borrowing during
1996. Capital expenditures in 1996 of $9,266,000 principally in connection
with a program to increase electroforming manufacturing capacity, combined
with the Company's January 1996 acquisition, resulted in the higher level of
borrowings for 1996.
Provision (Benefit) for Income Taxes
Provision (benefit) for income taxes was 38.2% for 1996, compared to 34.0%
for 1995 and (11.4%) for 1994. The Company accounts for income taxes using
the liability method as set forth in Statement of Financial Accounting
Standards No. 109. The 1995 and 1994 rates were favorably affected by
research and development credits as well as somewhat lower net state tax
rates.
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 1.4 to 1 at December 28, 1996 compared to 2.1 to 1 at the end
of 1995. The change in this ratio is principally attributable to the funding
required to support the 1996 capital expenditure program coupled with a
January 1996 acquisition.
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 slightly
from the end of 1994 to 1995, while increasing at the end of 1996 as a result
of the 24.9% increase in sales. However, the 1996 billed and unbilled balance
is comparable to 1995 when measured in terms of days sales. Capital
expenditures increased to $9,266,000 in 1996 and to $4,441,000 in 1995 from
$2,444,000 in 1994 principally in connection with a program to increase
electroform manufacturing capacity.
At December 28, 1996, $8,400,000 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 be sufficient to
support its normal operating and capital requirements for 1997. In February
1997, the Company announced that it had been awarded a $36 million, five-year
contract by the State of Ohio to provide information technology products and
services. During 1997, significant expenditures are expected to be made to
acquire and install computer hardware under this contract, which may require
increased levels of borrowings. As of December 28, 1996, the Company
does not have any major capital commitments.
The Company's backlog of unfilled orders at the end of 1996 was $73,200,000,
an increase of 19.4% from the $61,284,000 at the end of 1995. The Company's
backlog at the end of 1994 was $43,679,000. The 1995 balance included
$10,000,000 related to a commercial order for ink-jet printer components. A
portion of the Company's backlog is based on annual purchase contracts and
the amount of the backlog as of any date is affected by the timing of such
order receipts and deliveries thereunder.
Impact of Inflation and Changing Prices
Overall, inflation has not had a material impact on the Company's
operations. In addition, the terms of Department of Defense contracts, which
accounted for approximately 74% of the Company's revenues in 1996, 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 28, 1996, 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 operates and the economy generally.
Consolidated Balance Sheets
<TABLE>
At December 28, 1996, December 30, 1995 and December 31, 1994
(in thousands of dollars, except share data)
<CAPTION>
1996 1995 1994
Assets
<S> <C> <C> <C>
Current Assets:
Cash and cash equivalents $ 234 $ 777 $ 206
Receivables, less allowances
of $340, $402 and $586 19,436 16,095 14,939
Unbilled expenditures and fees on
contracts in process 22,690 16,383 18,194
Inventories 3,211 2,612 2,353
Refundable income taxes 1,436 286 885
Prepaid expenses and other
current assets 1,247 1,284 1,330
Total current assets 48,254 37,437 37,907
Property, Plant and Equipment, at Cost:
Land 1,126 1,126 1,126
Building 7,774 7,774 7,774
Machinery and equipment 38,861 31,537 28,857
Leasehold improvements 2,109 1,815 1,377
Total property, plant and
equipment, at cost 49,870 42,252 39,134
Less-accumulated depreciation
and amortization 28,266 25,743 23,064
Net property, plant
and equipment 21,604 16,509 16,070
Excess of purchase price over net
assets of business acquired,
net of amortization 1,244 - -
Total assets $ 71,102 $ 53,946 $ 53,977
Liabilities and Shareholders' Investment
Current Liabilities:
Notes payable $ 10,600 $ - $ 1,200
Accounts and drafts payable 8,925 3,550 3,442
Accrued payroll and employee benefits 6,998 6,416 4,649
Deferred contract and other revenue 42 983 894
Other accrued expenses 852 1,691 1,535
Current deferred income taxes 6,091 4,407 4,741
Current portion of long-term debt 1,201 1,217 1,221
Total current liabilities 34,709 18,264 17,682
Long-term debt, less current portion 300 1,500 2,717
Deferred income taxes 854 976 865
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 - 6,689,767 shares in 1996,
6,618,880 shares in 1995 and
6,571,495 shares in 1994 669 662 657
Less: Treasury stock - 996,108 shares
in 1996 and 1995, and 940,047 shares
in 1994, at par value (100) (100) (94)
Capital in excess of par value 9,516 9,219 9,284
Retained earnings 25,154 23,425 22,866
Total shareholders' investment 35,239 33,206 32,713
Total liabilities and
shareholders' investment $ 71,102 $ 53,946 $ 53,977
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<TABLE>
Consolidated Statements of Operations
<CAPTION>
For the three years ended
December 28, 1996 1996 1995 1994
(in thousands of dollars,
except per share data)
<S> <C> <C> <C>
Revenue:
Contract revenue $100,878 $ 80,756 $ 84,891
Product sales 29,285 23,185 18,073
Total revenue 130,163 103,941 102,964
Costs and Expenses:
Cost of contract revenue 92,512 73,077 77,398
Cost of goods 20,476 17,579 14,571
Selling, engineering and
administrative expenses 13,830 12,267 10,363
Total operating costs and expenses 126,818 102,923 102,332
Operating Income 3,345 1,018 632
Interest expense, net 547 171 431
Income Before Provision for Income Taxes 2,798 847 201
Provision (benefit) for income taxes 1,069 288 (23)
Net Income $ 1,729 $ 559 $ 224
Net Income Per Common Share $ .30 $ .10 $ .04
Weighted Average Number of Common
Shares Outstanding 5,675,609 5,603,111 5,638,700
The accompanying notes are an integral part of these consolidated
financial statements.
</TABLE>
Consolidated Statements of Shareholders' Investment
<TABLE>
For the three years
ended December 28, 1996
(in thousands)
<CAPTION>
Common Stock
Issued Treasury Stock Capital in Retained
Shares Par Value Shares Par Value Excess of Earnings
Par Value
<S> <C> <C> <C> <C> <C> <C>
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
Year 1996
Stock options exercised 71 7 - - 297 -
Net income - - - - - 1,729
Balance at
December 28, 1996 6,690 $ 669 (996) $(100) $ 9,516 $ 25,154
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
Consolidated Statements of Cash Flows
For the three years ended December 28, 1996
(in thousands of dollars)
1996 1995 1994
Cash Provided by Operations:
Net income $ 1,729 $ 559 $ 224
Depreciation and amortization 4,927 4,002 4,161
Increase (decrease) in deferred income taxes (122) 111 (180)
Provision for receivable reserves (62) (184) 222
6,472 4,488 4,427
Cash Provided by (Used for) Working Capital:
Receivables (3,279) (972) 4,855
Unbilled expenditures and fees
on contracts in process (6,307) 1,811 (1,141)
Inventories (599) (259) 277
Refundable income taxes (1,150) 599 (332)
Prepaid expenses and other current assets 37 46 (15)
Accounts and drafts payable 5,375 108 (885)
Accrued payroll and employee benefits 582 1,767 (87)
Deferred contract and other revenue (941) 89 (2,179)
Other accrued expenses (839) 156 591
Current deferred income taxes 1,684 (334) 210
(5,437) 3,011 1,294
Net cash provided by operations 1,035 7,499 5,721
Cash Used for Investing Activities:
Additions to property and equipment, net (9,266) (4,441) (2,444)
Acquisition (2,000) - -
Net cash used for investing activities (11,266) (4,441) (2,444)
Cash Provided by (Used for)
Financing Activities:
Net borrowings (repayments) under
line of credit agreements 10,600 (1,200) (2,065)
Principal payment under
long-term borrowings (1,216) (1,221) (1,200)
Proceeds from exercise of stock options 304 164 97
Purchase of treasury shares - (230) (43)
Net cash provided by (used for)
financing activities 9,688 (2,487) (3,211)
Net Increase (Decrease) in
Cash and Cash Equivalents (543) 571 66
Cash and Cash Equivalents at the
Beginning of the Year 777 206 140
Cash and Cash Equivalents at the
End of the Year $ 234 $ 777 $ 206
Supplemental Disclosures of
Cash Flow Information:
Cash paid during the year for:
Interest $ 635 $ 435 $ 583
Income taxes $ 1,237 $ 160 $ 265
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
The Company provides services under fixed-price, cost-reimbursement,
time-and-material, and level-of-effort contracts. 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. For
time-and-material and level-of-effort contracts, revenues are recorded as
costs are incurred. Unbilled expenditures and fees on contracts in process
represent the recoverable amounts of contract revenue under contracts in
process which were not billable at the balance sheet date. Such amounts
generally become billable upon completion of a specific phase of the contract,
negotiation of contract modifications, completion of government audit or upon
acceptance by the government. Costs related to certain contracts, including
applicable indirect costs, are subject to audit by the U.S. Government.
Revenues from such contracts have been recorded at amounts expected to be
realized upon final settlement. Deferred contract revenue represents the
amounts billed on certain contracts in excess of costs and fees incurred
to date.
Income Taxes
The Company accounts for income taxes using the liability method 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 tax rates currently in effect in the
years in which the differences are expected to reverse. The deferred tax
provision represents the change in the net deferred tax liability balance.
Cash and Cash Equivalents
The Company considers all cash investments with original maturities
of three months or less to be cash equivalents.
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.
1996 1995 1994
(in thousands of dollars)
Work in process $ 1,411 $ 686 $ 603
Raw materials and subassemblies 1,800 1,926 1,750
Total $ 3,211 $ 2,612 $ 2,353
Property, Plant and 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.
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, notes
payable and accounts payable approximates 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.
Stock-Based Compensation
The Company accounts for its stock-based compensation plans under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation," which is effective for 1996. SFAS
No. 123 establishes a fair value based method of accounting for stock-based
compensation plans. The Company has adopted the disclosure only alternative
under SFAS No. 123, which requires disclosure of the pro forma effects on
earnings and earnings per share as if SFAS No. 123 had been adopted as well
as certain other information. See Note 7 - Stock Option Plans for required
disclosures.
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.
2. U.S. Government Contracts
The approximate number of U.S. Government contracts to which the Company is a
party has varied between approximately 100 and 150 during the past five years,
with 105 contracts open at December 28, 1996. Receivables under U.S.
Government contracts at December 28, 1996 were $14,363,000 compared to
$12,551,000 at December 30, 1995, and $12,505,000 at December 31, 1994.
Unbilled expenditures and fees on contracts in process consist of costs and
estimated earnings in excess of billings on incompleted 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 28, 1996 were $22,690,000 compared to
$16,383,000 at December 30, 1995, and $18,194,000 at December 31, 1994.
Overhead and general and administrative costs charged to U.S. Government
contracts are subject to audit for the years after 1994.
3. Income Taxes
<TABLE>
The components of the provisions (benefit) for federal and state
income taxes are as follows:
<captio>
1996 1995 1994
(in thousands of dollars)
<S> <C> <C> <C>
Currently Payable (Refundable)
Federal $ (513) $ 447 $ (354)
State (101) 160 (24)
Total (614) 607 (378)
Deferred
Federal 1,253 (260) 297
State 430 (59) 58
Total 1,683 (319) 355
Total provision (benefit) $ 1,069 $ 288 $ (23)
The major items contributing to the difference between the statutory U.S.
federal income tax rate of 34% and the Company's effective tax rates are
as follows:
1996 1995 1994
(in thousands of dollars)
Provision at statutory rate $ 951 $ 288 $ 68
State income tax, net of
federal tax benefit 217 50 23
R&D tax credit - (50) (100)
Other, net (99) - (14)
Provision (benefit) for
income taxes $ 1,069 $ 288 $ (23)
</TABLE>
The tax effects of significant temporary differences that comprise the
deferred tax assets and liabilities as of December 28,1996 and December 30,
1995 are as follows:
1996 1995
(in thousands of dollars)
Unbilled costs and fees and deferred
contract revenue, net $ (8,730) $ (6,557)
Accrued expenses 2,044 1,559
Receivable reserves 130 161
Inventory reserves 239 216
Other 226 214
Current deferred tax liabilities, net (6,091) (4,407)
Accelerated tax depreciation (285) (516)
Other (569) (460)
Non-current deferred tax liabilities (854) (976)
Total deferred tax liabilities, net $ (6,945) $ (5,383)
Total deferred tax assets and total deferred tax liabilities were $2,639,000
and $9,584,000, respectively at December 28, 1996 compared with $2,150,000
and $7,533,000, respectively at December 30, 1995.
The Company has state investment tax credit and federal research and
development credit carry forwards of $320,000 and $111,000, respectively at
December 28, 1996.
4. 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. 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 1996, 1995 and 1994 included the following
components:
1996 1995 1994
(in thousands of dollars)
Service cost - benefits earned
during the period $ 1,380 $ 1,042 $ 1,309
Interest cost on projected
benefit obligation 2,031 1,822 1,666
Actual return on plan assets (1,599) (3,704) 685
Net amortization and deferred items (225) 2,195 (2,198)
Net periodic pension cost $ 1,587 $ 1,355 $ 1,462
The following table sets forth the plan's funded status and amounts
recognized in the Company's consolidated financial statements at December 28,
1996, December 30, 1995 and December 31, 1994:
1996 1995 1994
(in thousands of dollars)
Actuarial Present Value of
Benefit Obligations:
Vested $ 26,459 $ 23,845 $ 18,327
Nonvested 639 560 466
Accumulated benefit obligation 27,098 24,405 18,793
Effect of projected future
salary increases 3,734 3,608 2,644
Projected benefit obligation for
service rendered to date 30,832 28,013 21,437
Plan assets at fair market value 25,609 23,104 19,600
Projected benefit obligation
in excess of plan assets (5,223) (4,909) (1,837)
Unrecognized net loss (gain) from
past experience different
from that assumed and effects of
changes in assumptions 727 196 (2,097)
Prior service cost not yet recognized
in net periodic pension cost 1,919 2,139 2,359
Unrecognized net obligation
at January 1, 1987 being
recognized over 15 years 175 211 246
Net pension liability recognized
in the Consolidated Balance Sheets
at December 28, 1996, December 30,
1995 and December 31, 1994 $ (2,402) $ (2,363) $ (1,329)
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 1996 and 1995 and 8.5%
and 3.5% in 1994. The expected long-term rate of return on assets was 9% in
1996, 1995 and 1994. 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.
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 an employee's elective
deferrals. The Company contributed $634,462 to the plan for 1996, $578,120
for 1995 and $581,305 for 1994. 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
nonvested portion if termination occurs within the first five years of
employment.
5. Notes Payable and Lines of Credit
At December 28, 1996, the Company had unsecured lines of credit with
various banks that provide for maximum borrowings of $19,000,000, of
which $10,600,000 was utilized. Borrowings under these lines of credit are
payable on demand and bear interest at the prevailing prime interest rate
(8.25% at December 28, 1996) or at a lower rate quoted by the respective
banks. The Company's average interest rate on outstanding borrowings at
December 28, 1996 and December 31, 1994 was 6.3% and 7.0%, respectively.
While the arrangements do not have termination dates, the terms are reviewed
and may be revised periodically.
6. Long-term Debt
Long-term debt consists of the following:
1996 1995
(in thousands of dollars)
Mortgage note payable to a bank, bearing interest
at LIBOR plus 1%, adjusted quarterly
(6.5% through February 3, 1997), due in quarterly
payments of $300,000 plus interest through
February 1998, secured by certain land and buildings $ 1,500 $ 2,700
Other 1 17
Less-current portion (1,201) (1,217)
$ 300 $ 1,500
Future maturities of long-term debt are $1,201,000 in 1997 and $300,000 in
1998.
The Mortgage Agreement, as amended December 18, 1996, contains covenants
requiring maintenance of certain operating ratios, minimum balances of net
worth and specified fixed charge coverage ratios. The Company was in
compliance with all covenants at December 28, 1996 or obtained a waiver
for any events of non-compliance.
7. Stock Option Plans
The Company has stock option plans which are administered by the Compensation
Committee of the Board of Directors which determines the employees to receive
options and the number and option price of shares covered by each such option.
The 1993 Equity Incentive Plan (1993 Plan) permits the Company to grant
incentive stock options, stock appreciation rights (SAR), awards of
nontransferable shares of restricted common stock and deferred grants of
common stock. Options also remain outstanding under the Company's 1983
Stock Option Plan (1983 Plan), which terminated in 1993. Options granted
under both plans may be either incentive stock options or non-qualified
stock options. In the case of an incentive stock option, 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 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 employees of the Company or holders 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 100,000 shares has been
reserved for issuance, of which 82,000 shares remained available at
December 28, 1996.
<TABLE>
Transactions involving the plans are summarized as follows:
<CAPTION>
1996 1995 1994
Weighted Weighted Weighted
Number of Average Number of Average Number of Average
Shares Price Shares Price Shares Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 499,507 $5.19 360,892 $4.66 429,129 $4.52
Granted 139,000 7.97 186,000 5.77 - -
Exercised (70,887) 4.26 (47,385) 3.45 (34,120) 2.86
Canceled (1,830) 5.80 - - (34,117) 4.75
Outstanding at
end of year 565,790 $5.97 499,507 $5.19 360,892 $4.66
Exercisable at
end of year 303,789 302,510 315,602
</TABLE>
At December 28, 1996, under the 1993 Plan, 440,000 shares have been
reserved, of which 111,000 shares were available for future grants.
The Company has computed the pro forma disclosures required under SFAS No.
123 for options granted in 1995 and 1996 using the Black-Scholes option
pricing model required by SFAS No. 123. The assumptions in the Black-Scholes
calculation were that the risk free interest rate was 6%, the expected life
of the option was 9.5 years, the volatility of the Company's stock was 71%
and there was no expected dividend yield.
Options to acquire 139,000 shares were granted in 1996 with a weighted
average fair value of $6.22 and options to purchase 186,000 shares were
granted in 1995 with a weighted average fair value of $4.58. For the year
ended December 28, 1996, the pro forma net income, giving effect to SFAS No.
123, would have been $1,272,000 or $.23 per share, compared to the reported
net income of $1,729,000 or $.30 per share. For the year ended December 30,
1995, the pro forma net income, giving effect to SFAS No. 123, would have
been $419,000 or $.07 per share, compared to the reported net income of
$559,000 or $.10 per share.
8. Commitments and Contingencies
The Company conducts certain of its operations in facilities which are under
long-term operating leases expiring at various dates through 2003, with
various options to renew through 2005. Rent expense under these leases
(exclusive of real estate taxes, insurance and other expenses payable under
the terms of the leases) was approximately $2,130,000 in 1996, $1,636,000
in 1995 and $1,800,000 in 1994. The aggregate minimum lease commitment for
the Company's facilities on December 28, 1996 was $6,531,000, payable as
follows: $2,197,000 in 1997, $1,806,000 in 1998, $1,171,000 in 1999, $850,000
in 2000, $241,000 in 2001, $198,000 in 2002 and $68,000 in 2003.
9. 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, its holder, 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.
10. Acquisition
On January 23, 1996 the Company acquired the Massachusetts-based operations
of Support Systems Associates, Inc. (SSAI) for $2,000,000 in cash. The
acquired operations had revenue of approximately $5,900,000 in 1995 and
included a prime contract to provide services to the U.S. Air Force. In
January 1997, the Company paid an additional $125,000 to the seller based
upon the achievement of certain thresholds as provided for in the acquisition
agreement, this amount will be included in the "Excess of purchase price over
net of business acquired." A second payment of $125,000 may be due in late
1997 or in 1998. The acquisition was accounted for as a purchase and the
excess of the purchase price over the fair market value of the net assets
acquired is being amortized over 30 months.
11. Business Segments
The Company provides computer systems services and 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 77% of total Company revenues in 1996.
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
Precision 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
represented 11% of the total Company sales in 1996. These customers
operate in the automotive and computer-peripheral industries.
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, Massachusetts corporate headquarters.
Summarized financial information by business segment for 1996, 1995
and 1994 are as follows:
1996 1995 1994
(in thousands of dollars)
Revenue:
Systems and services $ 100,878 $ 80,756 $ 84,891
Precision products 29,285 23,185 18,073
Total Revenue $ 130,163 $ 103,941 $ 102,964
Operating Income:
Systems and services $ (2,263) $ (1,907) $ (290)
Precision products 5,608 2,925 922
Total operating income $ 3,345 $ 1,018 $ 632
Total Assets:
Systems and services $ 44,292 $ 34,953 $ 36,573
Precision products 15,556 9,587 6,878
Corporate 11,254 9,406 10,526
Total Assets $ 71,102 $ 53,946 $ 53,977
Depreciation and Amortization:
Systems and services $ 2,848 $ 2,663 $ 2,932
Precision products 1,640 879 772
Corporate 439 460 457
Total depreciation
and amortization $ 4,927 $ 4,002 $ 4,161
Capital Expenditures:
Systems and services $ 2,583 $ 1,753 $ 1,971
Precision products 5,999 2,494 347
Corporate 684 194 126
Total capital expenditures $ 9,266 $ 4,441 $ 2,444
Management's Responsibility for Financial Statement
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 Officer Vice 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 28, 1996, December 30, 1995 and December 31, 1994, 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 28, 1996, December 30, 1995
and December 31, 1994, and the results of their operations and their cash flows
for the years then ended in conformity with generally accepted accounting
principles.
Boston, Massachusetts,
February 7, 1997 Arthur Andersen LLP
Corporate Information
Auditors
Arthur Andersen LLP
225 Franklin Street,
Boston, Massachusetts 02110
Legal Councel
Ropes & Gray
One International Place
Boston, Massachusetts 02110
Transfer Agent
American Stock Transfer & Trust Company
40 Wall Street, 46th floor
New York, New York 10005
Telephone: 800-937-5449
Stock Prices
Bid price by quarter 1996 1995
High Low High Low
First quarter $ 8.50 $ 5.75 $ 4.75 $ 2.75
Second quarter 9.00 6.25 4.75 4.00
Third quarter 10.13 7.50 7.50 4.13
Fourth quarter 11.00 8.63 9.50 5.50
The bid and asked prices of the Company's common stock on February 7,
1997 were $9.625 and $10.125, 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, Symbol:
DRCO; and listed in newspapers as DynamR., DynRsh. or DynRsearch.
Number of Shareholders
The approximate number of shareholders of record at February 7, 1997
was 1000. As of February 7, 1997 there were 5,693,659 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 TreasurerOs office,
Dynamics Research Corporation, 60 Frontage Road, Andover,
Massachusetts 01810-5498.
Annual Meeting
The 1997 Annual Meeting of Shareholders will be held at 3:30 PM on
April 22, 1997 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,
Emeritus, 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,
Test Equipment Division
Dr. Martin M. Dresser
Vice President, General Manager, Systems Division
Victor J. Garber
Vice President, Acquisition Engineering, Systems Division
Dr. Joseph W. Griffin, Jr.
Vice President, Systems Development,
Systems Division
Edward C. Johnson
Vice President, Marketing, Systems Division
Chester Ju
Vice President, Encoder Division and
Metrigraphics Division
John M. Nauseef
Vice President, Dayton Operations, Systems Division
Douglas R. Potter
Vice President of Finance, 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
John R.D. McClintock
Clerk
