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 September 30, 1999.
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 November 8, 1999 was 7,363,375
shares.
DYNAMICS RESEARCH CORPORATION
INDEX
Page
Part I Financial Information Number
Item 1. Financial Statements
Consolidated Balance Sheets -
September 30, 1999 and December 31, 1998. . . . . 3
Consolidated Statements of Operations -
Three and Nine Months Ended September 30, 1999 and
September 30, 1998 . . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1999 and
September 30, 1998 . . . . . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements . . . . 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K . . . . . 15
Signature . . . . . . . . . . . . . . . . . . . . . . . . 16
PART I. FINANCIAL INFORMATION
DYNAMICS RESEARCH CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars except share data)
(unaudited)
ASSETS September 30, 1999 December 31, 1998
CURRENT ASSETS:
Cash and cash equivalents $ 9,410 $ 97
Receivables, less allowances of
$931 in 1999 and $316 in 1998 38,953 33,016
Unbilled expenditures and
fees on contracts in process 25,681 31,869
Inventories 2,419 2,647
Prepaid expenses and
other current assets 1,277 967
Total current assets 77,740 68,596
Property, plant and equipment, at cost
Land 1,126 1,126
Building 7,774 7,774
Machinery and equipment 44,550 42,266
Less accumulated depreciation
and amortization (37,462) (32,741)
Net property, plant and equipment 15,988 18,425
Other non-current assets - 742
Total assets $ 93,728 $ 87,763
LIABILITIES AND SHAREHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Unsecured notes payable $ 30,300 $ -
Accounts and drafts payable 14,195 10,300
Accrued payroll and employee benefits 9,752 7,782
Accrued contract loss provisions 6,667 -
Other accrued expenses 2,076 2,330
Accrued and current deferred income taxes 2,800 7,189
Net liabilities of discontinued operations 302 1,768
Total current liabilities 66,092 29,369
Long-term debt - 26,800
Deferred income taxes 452 348
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 - 8,737,801 shares in 1999
and 8,733,016 in 1998 874 873
Less: Treasury stock - 1,379,426 in 1999
and 1,363,826 in 1998, at par value (138) (136)
Capital in excess of par value 27,546 27,474
Retained earnings (accumulated deficit) (1,098) 3,035
Total shareholders' investment 27,184 31,246
Total liabilities and
shareholders' investment $ 93,728 $ 87,763
The accompanying notes are an integral part of these consolidated financial
statements.
DYNAMICS RESEARCH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands of dollars, except per share data)
(unaudited)
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
Sept. 30, 1999 Sept. 30, 1998 Sept. 30, 1999 Sept. 30, 1998
Revenue $ 48,241 $ 44,379 $ 143,600 $ 134,684
Costs and expenses:
Cost of revenue 44,200 38,555 138,267 116,649
Selling, engineering
and administrative
expenses 4,241 4,405 12,515 12,152
Total costs
and expenses 48,441 42,960 150,782 128,801
Operating income (loss) (200) 1,419 (7,182) 5,883
Interest expense, net 591 408 1,668 1,163
Income (loss) from
continuing operations
before provision
(benefit) for
income taxes (791) 1,011 (8,850) 4,720
Provision (benefit)
for income taxes (189) 432 (3,355) 1,983
Income (loss) from
continuing operations (602) 579 (5,495) 2,737
Loss from discontinued
operations, net of
applicable tax benefit - (1,084) - (2,949)
Gain on disposal of
discontinued operations,
net of applicable
tax provision - - 1,362 -
Net loss $ (602) $ (505) $ (4,133) $ (212)
Per share data
Per common share - Basic
Income (loss) from
continuing
operations $ (.08) $ .08 $ (.75) $ .36
Net loss $ (.08) $ (.07) $ (.56) $ (.03)
Per common share - Diluted
Income (loss) from
continuing
operations $ (.08) $ .07 $ (.75) $ .35
Net loss $ (.08) $ (.07) $ (.56) $ (.03)
Weighted average common
shares outstanding -
Basic 7,357,179 7,504,679 7,359,706 7,541,328
Weighted average common
Shares outstanding -
Diluted 7,357,179 7,781,761 7,359,706 7,818,410
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)
Nine Nine
Months Ended Months Ended
Sept. 30, 1999 Sept. 30, 1998
Cash provided by operations:
Net loss $ (4,133) $ (212)
Adjustments to reconcile net loss to cash
provided by operating activities
(Gain) loss from discontinued operations (1,362) 2,949
Non-cash stock compensation 116 -
Provision for impairment
of investment in Empresa 1,424 -
Depreciation and amortization 4,721 4,873
Deferred income taxes - (36)
Provision for receivable reserves 615 (19)
1,381 7,555
Cash provided by (used for) working capital:
Receivables (6,552) (15,063)
Unbilled expenditures and
fees on contracts in process 6,188 4,537
Inventories 228 680
Prepaid expenses and other current assets (310) 333
Accounts and drafts payable 3,895 (1,865)
Accrued payroll and employee benefits 1,970 677
Accrued contract loss provisions 6,667 -
Other accrued expenses (254) (1,396)
Accrued and current deferred income taxes (4,285) (305)
7,547 (12,402)
Net cash provided by (used for)
continuing operations 8,928 (4,847)
Net cash used for discontinued operations (104) (2,413)
Cash provided by (used for)
operating activities 8,824 (7,260)
Cash used for investing activities:
Additions to property, plant
and equipment related to
continuing operations, net (2,267) (2,458)
Additions to property, plant
and equipment related to
discontinued operations, net (17) (194)
Investment in Empresa (682) -
Net cash used for investing activities: (2,966) (2,652)
Cash provided by (used for) financing activities:
Borrowings under revolving
credit agreement, net 3,500 12,000
Proceeds from the exercise of stock options 14 346
Purchase of treasury shares (59) (2,272)
Net cash provided by financing activities 3,455 10,074
Net increase in cash and cash equivalents 9,313 162
Cash and cash equivalents at
the beginning of the period 97 542
Cash and cash equivalents at the
end of the period $ 9,410 $ 704
Supplemental disclosures of cash flow information:
Cash paid during the nine month period for:
Interest $ 1,838 $ 531
Income taxes $ 195 $ 10
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 nine months
ended September 30, 1999 may not be indicative of the results that
may be expected for the fiscal year ending December 31, 1999.
Certain reclassifications have been made to prior year amounts to
conform to the current year presentation.
Note 2. Credit Arrangements
On September 30, 1999, the Company amended its revolving credit
agreement. The amended agreement provides for borrowings of up to
$35,000,000, based upon assets consisting of inventory,
receivables and real estate. The Company granted the banks
security in all of its assets. Covenants under the new agreement
include a requirement that the Company must have earnings before
interest and taxes of $1 each month, adjusted for certain
severance accruals, bank and legal fees. At September 30, 1999,
the Company was in compliance with all covenants under the amended
agreement. The interest rate under the amended agreement is prime
plus two percent. The banks waived all known events of default
under the prior credit agreement. At September 30, 1999,
borrowing under the agreement was $30,300,000 and $4,700,000 was
available. The amended credit agreement expires January 31, 2000,
therefore all borrowings under the agreement are classified as
short term in the accompanying balance sheet. The Company is
currently in negotiations with several financial institutions and
believes it will be able to obtain alternate financing prior to
the expiration of the current agreement, although no assurances can be made.
If the Company is able to obtain alternate financing at the current levels,
the Company believes it will have adequate resources to fund operations for
the next twelve months.
Note 3. Contract Losses
Results for the third quarter of 1999 reflect pre-tax charges of
$1,275,000 to provide for cost overruns on two fixed price
software development contracts. During the second quarter of
1999, the Company recorded an additional $11,047,000 loss
provision on a third fixed price software development contract.
These charges are reflected in results of operations of the
Systems and Services division.
Note 4. Discontinued Operations
In December 1998, with the Board of Director's approval, the
Company adopted a plan of disposal for its telecommunications
fraud control business and recorded an estimated loss on disposal
of $4,148,000 before tax. In June 1999, the Company sold this
business for $1.7 million plus royalties of up to $1.8 million
over the next three years based on the buyer's fraud control
product sales. Any royalties paid pursuant to the agreement will
be included in operations when received. The sale resulted in a
favorable adjustment to the estimated loss on disposal of
discontinued operations recorded in fiscal 1998. Accordingly, a
pretax gain on disposal of discontinued operations of $2,197,000
has been recorded. Included in the accompanying balance sheet is
a $302,000 accrued liability related to the discontinued
operations. Severance payments to former employees, leases that
were not assumed by the buyer as well as unpaid accounting and
legal fees, among other things, are included in the remaining
accrual.
The revenues, costs, expenses, assets and liabilities and cash
flows of the telecommunications business have been excluded from
the respective captions in the Consolidated Statements of
Operations, Consolidated Balance Sheets and Consolidated
Statements of Cash Flows and have been reported as "Gain (loss)
from discontinued operations, net of applicable income taxes," as
"Net liabilities of discontinued operations," and as "Net cash
used for discontinued operations" for all periods presented. The
results of discontinued operations do not reflect any interest
expense or any allocation of corporate general and administrative
expense. Revenues for the telecommunications fraud control
business for the quarters ended September 30, 1999 and 1998 were
$0 and $251,000, respectively. Net operating losses of this
business were $0 and $1,889,000 for the quarters ended September
30, 1999 and 1998, respectively.
Note 5. Investment in Empresa, Inc.
In December 1998, DRC agreed to acquire an interest in Empresa Inc.
in exchange for a perpetual license to VisualMagic software development
technology, cash and certain other assets. In the second quarter of 1999,
the Company wrote off its $1,424,000 investment in Empresa, Inc. due to the
business uncertainties of the early-stage business. Third quarter 1999
and 1998 results include $0 and $494,000 of costs related to VisualMagic
development.
Note 6. Inventories
Inventories are comprised of the following (in thousands of dollars):
Sept. 30, 1999 December 31, 1998
Work in process $ 495 $ 475
Raw materials and subassemblies 1,924 2,172
Total inventories $ 2,419 $ 2,647
Note 7. Net Income Per Common Share
Statement of Financial Accounting Standards No. 128, "Earnings
per Share," requires the computation of basic and diluted
earnings per share. Basic earnings per share is computed by
dividing net income by the weighted average number of shares of
common stock outstanding during the year. Diluted earnings per
share is determined by giving effect to the exercise of stock
options using the treasury stock method. The diluted effect of
stock options was 67,069 shares for the three and nine months ended
September 30, 1999 and have been omitted in the computation of diluted
earnings per share because they would have been antidilutive for those
periods.
Three Months Ending September 30, 1999 1998
Income (loss) from continuing operations $ (602,000) $ 579,000
Net loss (602,000) (505,000)
Weighted-average shares 7,357,179 7,504,679
Dilutive effect of options - 277,082
Adjusted weighted-average shares 7,357,179 7,781,761
(Loss) income from continuing
operations per share - basic $ (.08) $ .08
Net loss per share - basic $ (.08) $ (.07)
(Loss) income from
continuing operations - diluted $ (.08) $ .07
Net loss per share - diluted $ (.08) $ (.07)
Nine Months Ending September 30, 1999 1998
Income (loss) from continuing operations $(5,495,000) $ 2,737,000
Net loss (4,133,000) (212,000)
Weighted-average shares 7,359,706 7,541,328
Dilutive effect of options - 277,082
Adjusted weighted-average shares 7,359,706 7,818,410
(Loss) inome from continuing
operations per share - basic $ (.75) $ .36
Net loss per share - basic $ (.56) $ (.03)
(Loss) income from continuing
operations - diluted $ (.75) $ .35
Net loss per share - diluted $ (.56) $ (.03)
Note 8. Segment Information.
Identifiable assets by business segment include both assets
directly identified with those operations and an allocable share
of jointly used assets.
Summarized financial information by business segment for the
quarters ended September 30, 1999 and September 30, 1998 are as follows:
Identifiable
Systems Continuing
and Metri- Operations
Services Encoder graphics Other Corporate Total
September 30, 1999
Net sales (1) $ 41,394 $ 3,168 $ 3,679 $ - $ - $ 48,241
Operating income
(loss) (842) (309) 1,128 - (177) (200)
Identifiable
assets at
September
30, 1999 66,197 5,681 2,914 - 18,936 93,728
September 30, 1998
Net sales (1) 37,851 3,956 2,572 - - 44,379
Operating income
(loss) 1,318 (21) 616 (494) - 1,419
Identifiable
assets at
September
30, 1998 61,234 6,116 5,074 166 12,289 84,879
(1) Net sales and operating profit are presented after the elimination of
intersegment transactions which are not material.
Summarized financial information by business segment for the nine months
end September 30, 1999 and September 30, 1998 are as follows:
Identifiable
Systems Continuing
and Metri- Operations
Services Encoder graphics Other Corporate Total
September 30, 1999
Net sales (1) $ 123,126 $ 9,760 $ 10,714 $ - $ - $ 143,600
Operating income
(loss) (8,578) (597) 3,594 (1,424) (177) (7,182)
Identifiable
assets at
September
30, 1999 66,197 5,681 2,914 - 18,936 93,728
September 30, 1998
Net sales (1) 112,882 13,120 8,681 1 - 134,684
Operating income
(loss) 4,314 358 2,713 (1,502) - 5,883
Identifiable
assets at
September
30, 1998 61,234 6,116 5,074 166 12,289 84,879
(1) Net sales and operating profit are presented after the elimination of
intersegment transactions which are not material.
Item 2. Management's Discussion and Analysis
Results of Operations
Three Months Ended September 30, 1999 Compared to
Three Months Ended September 30, 1998
Total revenues of $48,241,000 in the third quarter of 1999
increased 9% from $44,379,000 in the third quarter of 1998.
Contract revenue for the Systems and Services segment increased 9%
to $41,394,000 in the third quarter of 1999 compared with
$37,851,000 in the third quarter of 1998. The increase is
attributable to a significant increases in revenues in the core
defense business, partially offset by a decrease in revenue on
state contracts.
Third quarter 1999 Metrigraphics Division sales increased 43% to
$3,679,000 compared to $2,572,000 for the same period in 1998.
This increase was primarily related to higher sales of
electroformed components to one customer in the medical products
industry, higher sales to a customer in the inkjet printer market
and an overall increase in sales of other electroformed
components.
Encoder Division sales decreased 20% to $3,168,000 in 1999 from
$3,956,000 for the same period in 1998. The decrease primarily
relates to reductions in sales of custom encoders to a customer in
the automotive industry.
Cost of revenue increased 15% to $44,200,000 in the third quarter
of 1999, compared with $38,555,000 in the third quarter of 1998.
Cost of revenue as a percentage of revenue was 92% and 87% in the
third quarters of 1999 and 1998, respectively. The increase in
cost of revenue is primarily attributable to the increase in sales
and charges of $1,275,000 to provide for cost overruns on two
fixed-price software development contracts. The lower gross
margin percentage in the third quarter of 1999 reflects higher
revenues in our core defense business which has lower average
margins than certain state contracts under which the Company
performed during the same period in 1998.
Selling, engineering and administrative expenses decreased 4% in
the third quarter of 1999 to $4,241,000 compared to $4,405,000 in
the third quarter of 1998. The decrease is primarily related to
fewer Company-funded research and development efforts in the third
quarter of 1999 compared to the same period in 1998.
The Systems and Services segment reported an operating loss of
$842,000 for the three months ended September 30, 1999 compared to
operating income of $1,318,000 for the same period in 1998.
Results for the third quarter of 1999 reflect the cost overrun
charges and higher revenues in our core defense business which has
lower margins than certain state contracts under which the Company
performed during the same period in 1998 as discussed above.
Operating income of the Metrigraphics segment increased 83% to
$1,128,000 in the third quarter of 1999, compared with $616,000
for the same period in 1998. The increase is primarily
attributable to the increase in sales.
The Encoder segment reported an operating loss of $309,000 in the
third quarter of 1999 compared to an operating loss of $21,000 in
the third quarter of 1998. The decrease in operating profit is
primarily the result of lower gross profit contributions
attributable to the decrease in sales.
Net interest expense increased to $591,000 in the third quarter of
1999 compared with $408,000 in the third quarter of 1998. The
weighted average interest rate on the Company's borrowings was
10.31% and 6.7% in the third quarter of 1999 and 1998,
respectively.
The Company's effective income tax rate for the third quarter of
1999 and 1998 was a benefit of 24% and a provision of 43%,
respectively. The tax benefit recorded in the third quarter of
1999 is at a lower effective tax rate than the provision recorded
in the same period in 1998 reflecting minimum state tax payments
and the absence of operating loss carrybacks/carryforwards in
certain states. The Company accounts for income taxes using the
liability method as set forth in Statement of Financial Accounting
Standards No. 109 (SFAS 109).
Nine Months Ended September 30, 1999 Compared to
Nine Months Ended September 30, 1998
Total revenues increased 7% to $143,600,000 in the first nine
months of 1999 compared with $134,684,000 in the same period of
1998. Contract revenue for the Systems and Services segment
increased 9% to $123,126,000 in the first nine months of 1999
compared with $112,882,000 in the same period of 1998. The
increase was attributable to broad-based growth in the Company's
core defense business, offset by reductions in state business.
Metrigraphics Division sales for the first nine months of 1999
increased 23% to $10,714,000 compared to $8,681,000 in the same
period in 1998. This increase was primarily related to higher
sales of electroformed components across a range of customers,
including one in the medical products industry and one in the
inkjet printer market.
Encoder Division sales decreased 26% to $9,760,000 in the first
nine months of 1999 from $13,120,000 for the same period in 1998.
The decrease primarily related to reductions in sales of custom
encoders to a customer in the automotive industry as well as
decreased sales to certain of the Company's customers which had
significant sales in Asian markets.
Cost of revenue increased 19% to $138,267,000 in the first nine
months of 1999, compared with $116,649,000 in the same period of
1998. The increase is primarily the result of the $13,022,000 of
loss provisions the Company recorded on three fixed price software
development contracts during the second and third quarters of
1999. Cost of revenue as a percentage of revenue was 96% and 87%
in the first nine months of 1999 and 1998, respectively.
Selling, engineering and administrative expenses decreased 3% in
the first nine months of 1999 to $12,515,000 compared to
$12,152,000 in the first nine months of 1998. The decrease was
primarily attributable to reductions in research and development
expenditures for the first nine months of 1999 compared with the
same period of 1998.
The Systems and Services segment reported an operating loss of
$8,578,000 for the nine months ended September 30, 1999 compared
to operating income of $4,314,000 for the same period in 1998.
This decrease is primarily attributable to the $13,022,000 loss
provisions.
Operating income of the Metrigraphics division increased 32% to
$3,594,000 for the nine months ended September 30, 1999 compared
with $2,713,000 for the same period in the prior year. The
increase is primarily attributable to the increase in sales.
The Encoder segment reported an operating loss of $597,000 in the
first nine months of 1999 compared to operating income of $358,000
in the first nine months of 1998. The decrease in operating
profit is primarily the result of lower gross profit contributions
attributable to the decrease in sales.
In June 1999, the Company completed the sale of its previously
discontinued telecommunications fraud control business for $1.7
million and royalties of up to $1.8 million over the next three
years, based on fraud control product sales. The sale resulted in
a favorable pre-tax adjustment of $2,197,000 to the estimated pre-
tax loss on disposal of discontinued operations of $4,148,000
recorded in the fourth quarter of 1998. Third quarter 1998
results were restated to reflect the discontinuance of the
telecommunications fraud control business.
In the second quarter of 1999, the Company wrote off its
$1,424,000 investment in Empresa, Inc. due to the business
uncertainties of the early-stage business. Third quarter 1999 and
1998 results include $0 and $494,000 of costs related to
VisualMagic development.
Net interest expense increased to $1,668,000 in the first nine
months of 1999 compared with $1,163,000 in the first nine months
of 1998. Revenue growth and working capital requirements for
certain state government customers in the first nine months of
1999 resulted in higher average borrowings. The weighted average
interest rate on the Company's borrowings was 8.6% and 6.7% in the
first nine months of 1999 and 1998, respectively.
The Company's effective income tax rate for the first nine months
of 1999 and 1998 was a benefit of 38% and a provision of 42%,
respectively. The Company accounts for income taxes using the
liability method as set forth in Statement of Financial Accounting
Standards No. 109 (SFAS 109).
Liquidity and Capital Resources
On September 30, 1999, the Company amended its revolving credit
agreement. The amended agreement provides for borrowings of up to
$35,000,000, based upon assets consisting of inventory,
receivables and real estate. The Company granted the banks
security in all of its assets. Covenants under the new agreement
include a requirement that the Company must have earnings before
interest and taxes of $1 each month, excluding certain adjustments.
At September 30, 1999, the Company was in compliance with all covenants
under the amended agreement. The interest rate under the
amended agreement is prime plus two percent. The banks
waived all known events of default under the prior credit agreement.
The amended credit agreement expires January 31, 2000, therefore all
borrowings under the agreement are classified as short term in the
accompanying balance sheet. The Company believes it will be able to
obtain alternative financing prior to the expiration of the current
agreement, although no assurances can be made.
During the first nine months of 1999, the Company has generated
cash from operations of $8,824,000 compared with cash used in
operations of $7,260,000 during the same period of 1998. This
improvement in cash flow is primarily the result of better
management of the Company's working capital during 1999.
Capital spending during the first nine months of 1999 was
$2,284,000, consisting principally of office computer equipment.
In light of losses resulting from cost overruns on fixed price
contracts and from non-core businesses, the Company is reviewing
and revising its operations including the bid and proposal
process, contract monitoring and review, billing and collection
terms and procedures, working capital requirements, cost of
operations, profitability of business areas, personnel matters and
strategic direction.
Year 2000 Disclosure
Many existing computer programs use only two digits, rather than
four, to represent a year. Date-sensitive software or hardware
written or developed in this fashion may not be able to
distinguish between 1900 and 2000, and programs written in this
manner that perform arithmetic operations, comparisons or sorting
of date fields may yield incorrect results when processing a Year
2000 date. This Year 2000 problem could potentially cause system
failures or miscalculations that could disrupt operations.
The Company's State of Readiness
The Company has essentially completed the process of identifying
and remediating Year 2000 issues in four areas: (i) information
technology ("IT") and financial systems, (ii) non-IT systems,
(iii) third-party vendors and suppliers and (iv) systems it has
implemented and maintains for various customers. The Company
believes its IT and non-IT systems will be Year 2000 compliant by
the end of 1999.
The Company has completed a review of its financial and other
significant IT systems and has remediated identified material Year
2000 problems. The primary required hardware and operating system
platform upgrade was completed in January 1999. Necessary
application upgrades or remediation and testing has been
completed. The Company also conducted a review of all its other
computers in 1998 (including desktops, servers and mainframes) and
has addressed all material Year 2000 problems. All of the
Company's computer and equipment vendors have been contacted to
verify Year 2000 compliance. Based on their responses, all
products requiring replacement or upgrade are Year 2000 compliant.
In the case of third party licensed commercial off-the-shelf
products, the Company has determined that they are either Year
2000 compliant or the licensor has released a compliant version
that the Company will migrate to by the end of the fourth quarter
1999. While the Company expects that all financial and
significant IT-related systems will be Year 2000 compliant by the
fourth quarter of 1999, there can be no assurance that corrective
actions will be completed in a timely manner.
The Company has completed a full review of all process control
components, including safety equipment, in manufacturing and
production facilities. The Company completed the process of
upgrading or replacing certain components of the phone, security,
building access, HVAC and lighting systems, in the third quarter
of 1999. The Company anticipates that all other process control
components will be Year 2000 compliant by the end of the fourth
quarter of 1999. However, there can be no assurance that such
upgrades and replacements will occur in a timely manner.
The Company has received Year 2000 compliance information from its
employee benefit service and other critical suppliers. The
Company continues to monitor its major power, energy and
communications service suppliers. The Company has contacted its
suppliers of financial services regarding computer interface
changes and has requested the status of their Year 2000 programs,
if this information is not readily available on their web-sites.
Based upon their responses, no material changes are necessary.
Any necessary interface upgrades are expected to be completed by
end of the fourth quarter of 1999, although the completion of such
upgrades in a timely manner depends upon the readiness and
willingness of suppliers to cooperate and provide this information
in a timely manner, and cannot be assured.
The Company completed its Year 2000 remediation, validation
testing and implementation activities for systems it had
previously implemented and has continued to maintain for various
customers in early 1999. The Company previously developed and
marketed commercial off-the-shelf products which are currently
Year 2000 compliant.
The Company's Year 2000 Risk
Based on the efforts described above, the Company currently
believes that its systems generally are Year 2000 compliant or
will be Year 2000 compliant in a timely manner. The Company has
completed the process of identifying Year 2000 issues in its IT
and non-IT systems and believes that all material remediation
efforts were completed prior to or during the third quarter of
1999. However, there can be no assurance that all Year 2000
problems will be successfully identified, or that the necessary
corrective actions will be completed in a timely manner. Failure
to successfully identify and remediate Year 2000 problems in
critical systems in a timely manner could have a material adverse
effect on the Company's results of operations, financial position
or cash flow.
In addition, the Company believes that there is risk relating to
significant service suppliers' failure to remediate their Year
2000 issues in a timely manner. Although the Company is
communicating with its suppliers regarding their Year 2000
compliance, the Company does not know whether these suppliers'
systems will be Year 2000 compliant in a timely manner. If one or
more significant suppliers are not Year 2000 compliant, this could
have a material adverse effect on the Company's results of
operations, financial position or cash flow.
The Company's Contingency Plans
The Company expects by year end 1999 to develop contingency plans
to be implemented in the event planned solutions prove ineffective
in solving Year 2000 compliance. If it were to become necessary
for the Company to implement a contingency plan, it is uncertain
whether such plan would succeed in avoiding a Year 2000 issue
which may otherwise have a material adverse effect on the
Company's results of operations, financial position or cash flow.
The Company's Costs of Year 2000 Remediation
The Company anticipates the total identified cost of its Year 2000
effort will be between $350,000 and $370,000, of which it has
expensed approximately $280,000 as of September 30, 1999. The
estimate excludes labor costs which predated the formal corporate
Year 2000 effort and certain current labor costs at the divisional
level which would be difficult to track. The total cost estimate
includes estimated and actual amounts to remediate or replace
certain software, routers, security chips and any other items or
systems identified in the Year 2000 effort, and approximately
$280,000 of redeployed labor expense. The total estimated cost of
redeployed labor within the corporate information systems
department is minor compared to the overall maintenance labor
budget through the end of the Year 2000 effort. There can be no
assurance that the costs associated with the Year 2000 problem
will not be greater than anticipated. The Company has deferred a
financial and project accounting system upgrade due to its Year
2000 efforts, but does not believe such deferral will have a
material adverse effect on the Company's business.
Forward-Looking Information
This report includes certain forward-looking statements about the
Company's business including developments and intentions relating
to negotiations and actions with the Company's banks and potential
new lenders, cash flow requirements, restructuring efforts,
research and development spending, cash flow expectations and Year
2000 . Statements that contain words such as "believes,"
"expects," "anticipates," "intends," "estimates" or similar
expressions are forward-looking statements. Forward-looking
statements involve risks and uncertainties that could cause actual
results to differ materially from those expressed or implied by
such forward-looking statements. Among these risks and
uncertainties are willingness and timing of lenders to finance the
Company and terms of lending, difficulties of successfully
effecting restructuring efforts and operational change, and
possible reductions in federal funding for the Company's customers
and potential customers, concentration of customers, risks of
sustaining existing contracts and orders 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, Year 2000
readiness and factors affecting the business segments in which the
Company operates and the economy generally and other factors which
are discussed in more detail in the Company's Form 10-K for the
year ended December 31, 1998. The Company does not undertake to
publicly update or revise any forwarding-looking statements,
whether as a result of new information, future events or
otherwise.
PART II. OTHER INFORMATION
Item 6. (a) Exhibits
(27.1) Financial Data Schedule
Item 6. (b) Reports on Form 8-K
On October 7, 1999, the Company filed a report on Form 8-K
relating to the amendment to the revolving credit
facility signed September 30, 1999.
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: November 15, 1999 By: /s/ Virginia A. Lavery
Virginia A. Lavery
Acting Chief Financial Officer
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