Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[x] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended June 30, 1998.
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 No.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
Incorporation or Organization) Identification No.)
60 Frontage Road, Andover, Massachusetts 01810-5498
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (978) 475-9090
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 .
The number of shares outstanding of the Registrant's Common stock,
par value $.10 per share, at August 11, 1998 was 7,496,042 shares.
DYNAMICS RESEARCH CORPORATION
INDEX
Page
Number
Part I Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets -
June 30, 1998 and December 31, 1997. . . . . 3
Consolidated Statements of Income -
Three and Six Months Ended June 30, 1998 and
June 30, 1997 . . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1998 and
June 30, 1997 . . . . . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements . . . 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . 8
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . 12
Signature . . . . . . . . . . . . . . . . . . . . . . . . . . 13
PART I. FINANCIAL INFORMATION
DYNAMICS RESEARCH CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars except share data)
(unaudited)
ASSETS June 30, 1998 December 31, 1997
CURRENT ASSETS:
Cash and cash equivalents $ 303 $ 542
Receivables, less allowances of
$198 in 1998 and $217 in 1997 48,131 17,397
Unbilled expenditures and fees
on contracts in process 23,309 32,175
Inventories 2,580 3,377
Refundable income taxes 873 878
Prepaid expenses and
other current assets 1,529 1,668
Total current assets 76,725 56,037
Property, plant and equipment, at cost
Land 1,126 1,126
Building 7,774 7,774
Machinery and equipment 43,402 41,426
Less accumulated depreciation
and amortization (31,194) (28,098)
Net property, plant and equipment 21,108 22,228
Excess of purchase price over net assets
of business acquired, net 71 594
Total assets $ 97,904 $ 78,859
LIABILITIES AND SHAREHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Accounts and drafts payable $ 11,696 $ 8,355
Accrued payroll and employee benefits 9,655 8,032
Other accrued expenses 4,123 4,251
Accrued and current
deferred income taxes 9,071 8,999
Total current liabilities 34,545 29,637
Long-term debt 24,000 10,000
Deferred income taxes 75 75
SHAREHOLDERS' INVESTMENT:
Preferred stock, par value $.10 per share -
5,000,000 shares authorized, none issued
Common stock, par value $.10 per share -
Authorized - 30,000,000 shares
Issued - 8,711,416 shares in 1998
and 7,366,484 in 1997 871 737
Less: Treasury stock - 1,125,274 in 1998
and 1,077,612 in 1997, at par value (113) (108)
Capital in excess of par value 29,227 14,506
Retained earnings 9,299 24,012
Total shareholders' investment 39,284 39,147
Total liabilities and
shareholders' investment $ 97,904 $ 78,859
The accompanying notes are an integral part of these consolidated financial
statements.
DYNAMICS RESEARCH CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in thousands of dollars, except per share data)
(unaudited)
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 1998 June 30, 1997 June 30,1998 June 30, 1997
Product sales and
contract revenue:
Contract revenue $ 41,695 $ 33,322 $ 76,768 $ 60,196
Product sales 7,392 6,824 15,274 12,958
Total revenue 49,087 40,146 92,042 73,154
Costs and expenses:
Cost of
contract revenue 38,305 30,044 69,632 53,815
Cost of goods 5,766 5,210 11,652 10,379
Selling, engineering
and administrative
expenses 5,196 3,283 9,499 6,587
Total costs and expenses 49,267 38,537 90,783 70,781
Operating income (loss) (180) 1,609 1,259 2,373
Interest expense, net 412 193 755 398
Income (loss) before
provision for
income taxes (592) 1,416 504 1,975
Provision for (benefit
from) income taxes (248) 592 211 825
Net income (loss) $ (344) $ 824 $ 293 $ 1,150
Net income (loss) per
common share - Basic * $ (.05) $ .11 $ .04 $ .15
Net income (loss) per
common share -
Diluted * $ (.05) $ .11 $ .04 $ .15
Weighted average common
shares outstanding -
Basic * 7,583,693 7,525,426 7,568,673 7,522,484
Weighted average common
Shares outstanding -
Diluted * 7,583,693 7,769,728 7,890,011 7,766,786
* Retroactively adjusted for the May 1998 20% stock dividend.
The accompanying notes are an integral part of these consolidated financial
statements.
DYNAMICS RESEARCH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
(unaudited)
Six Six
Months Ended Months Ended
June 30, 1998 June 30, 1997
Cash provided by (used for) operations:
Net income $ 293 $ 1,150
Depreciation and amortization 3,615 2,440
Deferred income taxes 0 (254)
Provision for receivable reserves (19) (11)
3,889 3,325
Cash provided by (used for)
working capital:
Receivables (30,715) (3,512)
Unbilled expenditures and fees
on contracts in process 8,866 1,917
Inventories 797 (306)
Refundable income taxes 5 300
Prepaid expenses and other current assets 139 143
Accounts and drafts payable 3,341 (1,566)
Accrued payroll and employee benefits 1,623 1,883
Other accrued expenses (128) 540
Accrued and current deferred income taxes 72 760
(16,000) 159
Net cash provided by
(used for) operations (12,111) 3,484
Cash used for investing activities:
Additions to property, plant and
equipment, net (1,976) (3,043)
Excess of purchase price over net assets
of business acquired, net - (125)
Net cash used for investing activities: (1,976) (3,168)
Cash provided by
(used for) financing activities:
Net borrowings under
line of credit agreements 14,000 1,500
Principal payments under
long-term borrowings - (1,500)
Proceeds from the exercise of
stock options 186 363
Purchase of treasury shares (338) (472)
Net cash provided by
(used for) financing activities 13,848 (109)
Net increase (decrease) in cash
and cash equivalents (239) 207
Cash and cash equivalents at
the beginning of the period 542 234
Cash and cash equivalents at
the end of the period $ 303 $ 441
Supplemental disclosures of cash flow information:
Cash paid during the six month period for:
Interest $ 674 $ 384
Income taxes $ 139 $ 325
The accompanying notes are an integral part of these consolidated financial
statements.
DYNAMICS RESEARCH CORPORATION
Notes to Consolidated Financial Statements
Note 1. Basis of Reporting
The unaudited consolidated financial statements presented herein have been
prepared by the registrant pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information in footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles has been condensed
or omitted pursuant to such rules and regulations, although the registrant
believes that the disclosures are adequate to make the information
presented not misleading. The accompanying consolidated financial
statements have not been audited by independent accountants, but in the
opinion of the management such financial statements include all adjustments,
consisting only of normal recurring adjustments, necessary to fairly
present the results of operations.
The results of operations for the three months and six months ended
June 30, 1998 may not be indicative of the results that may be expected for
the fiscal year ending December 31, 1998.
Note 2. Inventories
Inventories are comprised of the following (in thousands of dollars):
June 30, 1998 December 31, 1997
Work in process $ 394 $ 1,364
Raw materials and subassemblies 2,186 2,013
Total inventories $ 2,580 $ 3,377
Note 3. Net Income Per Common Share
The Company adopted Statement of Financial Accounting Standard No.
128, "Earnings per Share," ("SFAS 128") in the year ended December 31,
1997. SFAS 128 requires the presentation of basic and diluted EPS.
Basic net income per share is computed by dividing income available to
common shareholders by the weighted average number of common shares
outstanding for the period. Diluted net income per share is computed
using the weighted average number of common shares outstanding plus the
dilutive effect of common stock equivalents (using the treasury stock
method).
The following table presents the calculation of earnings per share:
(in thousands except share and per share data)
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 1998 June 30, 1997 June 30, 1998 June 30, 1997
Net income (loss) $ (344) $ 824 $ 293 $ 1,150
Basic:
Weighted average
common shares
outstanding 7,583,693 7,525,426 7,568,673 7,522,484
Net income
(loss) per share $ (.05) $ .11 $ .04 $ .15
Diluted:
Weighted average
common shares
outstanding 7,583,693 7,525,426 7,568,673 7,522,484
Dilutive effect
of stock options - 244,302 321,338 244,302
Weighted average
common and common
equivalent shares
outstanding 7,583,693 7,769,728 7,890,011 7,766,786
Net income (loss)
per share $ (.05) $ .11 $ .04 $ .15
Note 4. New Accounting Pronouncements
In March 1998, Statement of Position 98-1, "Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"), was
issued which provides guidance on applying generally accepted accounting
principles in addressing whether and under what condition the costs of
internal-use software should be capitalized. SOP 98-1 is effective for
transactions entered into in fiscal years beginning after December 15, 1998.
The Company does not expect the impact of adopting SOP 98-1 to be material
to results of future operations or cash flows.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS 130"). SFAS 130 requires the presentation of comprehensive income
and its components. Comprehensive income presents a measure of all changes
in equity that results from recognized transactions and other economic events
during the period other than transactions with stockholders. SFAS 130 is
effective for the fiscal years beginning after December 15, 1997. The
Company adopted SFAS 130 in the first quarter of 1998. There were no items
of "other comprehensive income" requiring disclosure in the three and six
month periods ended June 30, 1998.
In July 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"), which is effective for
fiscal years beginning after December 15, 1997. Interim reporting
disclosures are not required in the first year of adoption. SFAS 131
specifies revised guidelines for determining an entity's operating segments
and the type and level of financial information to be disclosed. SFAS 131
changes current practice under SFAS 14 by establishing a new framework on
which to base segment reporting. The management approach required by SFAS
131 expands the required disclosures for each segment. The Company will
adopt SFAS 131 in the fourth quarter of 1998 and is currently determining
the impact of such adoption on its reporting as currently presented.
Note 5. Shareholder Rights Plan
In June 1998, the Board of Directors approved the renewal of the Company's
existing shareholder rights plan by adopting a new shareholder rights plan.
One new right will be issued on July 27, 1998 (the expiration date of the
shareholder rights plan presently in effect) for each share of the Company's
common stock outstanding on that date. The new shareholder rights plan
establishes a new series of preferred stock.
Item 2. Management's Discussion and Analysis
Overview
Dynamics Research Corporation (the "Company" or DRC) provides information
technology services for government and private-sector clients. The Company
develops and operates complex computer systems and communications networks,
and provides engineering and management consulting services. DRC also
designs and manufactures high-precision components for industrial measurement
and control.
The Company has focused on broadening its customer base utilizing the
expertise and systems developed in Department of Defense work to service
other government agencies and businesses. Non-defense information technology
services and sales of precision manufactured products accounted for
approximately 43% of revenues for the first six months of 1998, up from 34%
in calendar year 1997. The Company continues to invest in non-defense
markets, specifically telecommunications fraud control systems and software
technologies.
Results of Operations
Three Months Ended June 30, 1998 Compared to
Three Months Ended June 30, 1997
Total revenues increased 22% to $49,087,000 in the second quarter of 1998
compared with $40,146,000 in the second quarter of 1997. Contract revenue
for the systems and service segment increased 23% for the second quarter of
1998 compared with the second quarter of 1997. The growth was principally
attributable to performance on two major state contracts as well as
broad-based growth in the Company's defense business. The Company is
providing the State of Ohio's Department of Health and Human Services with
statewide computer network infrastructure. Similar infrastructure as well as
software implementation services are being provided for the State of
Colorado's child protection and juvenile justice agencies. The Company is
continuing to pursue additional opportunities both within the Department of
Defense, other Federal agencies and state governments.
Second quarter 1998 product sales increased 8% compared to the same period
in 1997. This growth was primarily related to increased sales of
electroformed components to an inkjet printer manufacturer and increased
sales of custom encoders to a customer in the automotive industry. The
precision manufactured products segment has not been adversely affected by
the General Motors strike to any significant degree.
Cost of contract revenue as a percentage of contract revenue increased to
92% in the second quarter of 1998 compared to 90% in the second quarter of
1997. This increase is attributable to increased investment in
telecommunications fraud control systems as well as greater level of effort
on certain lower margin contracts.
Cost of goods as a percentage of product sales for the second quarter of
1998 increased to 78% from 76% for the same period in 1997. This increase
was related to a change in the precision manufactured products sales mix
away from certain high margin electroformed components in the second quarter
of 1998 as compared to the same period in 1997.
Selling, engineering and administrative expenses increased 58% for the
second quarter of 1998 compared to the second quarter of 1997. The increase
is a result of an increase in the Company's selling expenses in connection
with the Company's business development initiative in the telecommunications
industry (as described below).
DRC has made significant investments in telecommunications fraud control
systems and software technologies. Second quarter 1998 results include
$2,300,000 million of net development cost related to the telecommunications
business and $598,000 of costs related to software technology development.
Second quarter 1997 results include $486,000 and $528,000 of costs related
to the telecommunications business and software technology development,
respectively.
The Company's involvement in the telecommunications industry dates to 1996,
when the Company obtained an exclusive license to enhance, market and
maintain a telecommunications fraud control system developed by Pacific Bell.
This entry into the telecommunications market brought SBC Communications,
Ameritech, Bell Atlantic, Bell South and U.S. West as ongoing system users
and customers. The Company has made system enhancements to broaden the
types of telephone fraud detected and to position the product for sale to
competitive local exchange carriers and others.
The Company's software development technology initiative has produced a
product known as VisualMagic( that the Company believes is advantageous for
developing and operating complex internet-based applications. Further,
VisualMagic( facilitates continuous upgrading and modification of these
rapidly changing internet systems. The Company intends to spin-off this
business as a separately financed entity with the Company retaining an
equity position.
Net interest expense increased to $412,000 in the second quarter of 1998
compared with $193,000 in the second quarter of 1997. Substantial revenue
growth and delays in billing certain government customers in 1998 resulted
in higher working capital requirements that were funded with additional
borrowings. Billing and collections are expected to improve in the third and
fourth quarter of 1998.
The Company's effective income tax rate for the second quarter of 1998 was
41.89% consistent with the 41.81% rate for the second quarter of 1997. The
Company accounts for income taxes using the liability method as set forth in
Statement of Financial Accounting Standards No. 109 (SFAS 109).
Six Months Ended June 30, 1998 Compared to
Six Months Ended June 30, 1997
Total revenues increased 26% to $92,042,000 in the first six months of 1998
compared with $73,154,000 in the same period of 1997. Contract revenue for
the systems and service segment increased 28% for the first six months of
1998 compared with the same period of 1997. The growth was principally
attributable to performance on the two major state contracts discussed
previously, as well as broad based growth in the Company's defense business.
Product sales during the first six months of 1998 increased 18% compared to
the same period in 1997. This growth was primarily related to the increases
in sales of electroformed components to an inkjet printer manufacturer and
sales of custom encoders to a customer in the automotive industry.
Cost of contract revenue as a percentage of contract revenue increased to
91% in the first six months of 1998 compared to 89% in the same period of
1997. This increase was attributable to investment in telecommunications
fraud control.
Cost of goods as a percentage of product sales decreased to 76% in the
first six months of 1998 from 80% for the same period in 1997. The
significant decrease was principally the result of the substantial increase
in production levels for certain key customers, without a corresponding
increase in overhead costs, partially offset by changes in the sales mix of
precision manufactured products.
Selling, engineering and administrative expenses increased 44% in the first
six months of 1998 compared to the same period in 1997. As discussed
previously, this increase is a result of higher levels of selling costs in
connection with the Company's telecommunications business initiative.
Net interest expense increased to $755,000 in the first six months of 1998
compared with $398,000 in the first six months of 1997. Substantial revenue
growth and delays in billing certain government customers resulted in higher
working capital requirements that were funded with additional borrowings.
The Company's effective income tax rate for the first six months of 1998
and 1997 were 41.9% and 41.8%, respectively.
Liquidity and Capital Resources
During the first six months of 1998, the Company's primary source of
liquidity has been its long-term credit facility. Working capital
requirements related to the substantial increase in sales and delays in
billing certain government customers have been funded with additional
borrowings under the Company's credit facility. Working capital increased to
$42,180,000 at June 30, 1998 from $26,400,000 at December 31, 1997. This
increase was primarily attributable to increases in receivables partially
offset by decreases in unbilled expenditures and fees on contracts in
process. Debt increased $14,000,000 million to $24,000,000 to support the
increase in working capital. Capital spending during the first six months of
1998 was $1,976,000, consisting principally of office computer equipment.
At June 30, 1998, $6,000,000 was available for working capital purposes
under the Company's long-term credit facility. The Company believes that
its liquid assets, cash flow from operations and available bank lines of
credit will be sufficient to support its normal operating and capital
requirements for the balance of 1998. The Company does not have any
significant capital commitments at June 30, 1998 outside the ordinary course
of business.
Year 2000
The Company expects to incur costs during the next year or two to address
the impact of the Year 2000 on its information systems. The Year 2000 issue,
common to most companies, relates to the inability of certain computer
software programs and information systems to properly recognize and process
information as the year 2000 approaches. The Company has established a
steering committee to coordinate the identification, evaluation and
implementation of changes to its entire computer infrastructure necessary to
achieve a year 2000 data conversion with no disruption to its business
operations or customers. The Company is also communicating with its
suppliers and others with whom it does business to coordinate year 2000
conversions. The Company believes that it will be able to modify or replace
any affected systems in time to minimize any detrimental effects on
operations. The cost of compliance and its effect on the Company's future
results of operations has not yet been determined.
Forward-Looking Information
This report includes certain forward-looking statements about the Company's
business including developments and intentions relating to strategic
investment programs, cash flow requirements, research and development
spending and cash flow expectations. 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 31, 1997, include
ability to consummate strategic transactions, 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 of obtaining 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.
PART II. OTHER INFORMATION
Item 6. (a) Exhibits
(27.1) Financial Data Schedule
Item 6. (b) Reports on Form 8-K
On June 25, 1998, the Company filed a report on form 8-K
relating to the adoption of a shareholder rights plan effective
July 27, 1998 and replacing the Company's previous rights plan
expiring on that date.
SIGNATURE
Pursuant to the requirements 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.
DYNAMICS RESEARCH CORPORATION
(Registrant)
Date: August 13, 1998 By: /s/ Douglas R. Potter
Douglas R. Potter
Vice President of Finance
and Chief Financial Officer
(Principal financial and
accounting officer)
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