<PAGE>
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 March 31, 2000.
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
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(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
60 Frontage Road, Andover, Massachusetts 01810-5498
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(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 May 8, 2000 was 7,550,799 shares.
<PAGE>
DYNAMICS RESEARCH CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
Part I Financial Information Number
------
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets -
March 31, 2000 and December 31, 1999................... 3
Consolidated Statements of Income -
Three Months Ended March 31, 2000 and
March 31, 1999......................................... 4
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 2000 and
March 31, 1999......................................... 5
Notes to Consolidated Financial Statements............... 6
Item 2. Management's Discussion and Analysis
Financial Condition and Results of Operations............ 10
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K....................... 13
Signature........................................................ 14
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
DYNAMICS RESEARCH CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars except share data)
<TABLE>
<CAPTION>
(unaudited)
Assets March 31, 2000 December 31, 1999
- ------ -------------- -----------------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 233 $ 2,267
Receivables, net of allowances of $872 in 2000 and $790 in 1999 32,986 34,917
Unbilled expenditures and fees on contracts in process 23,139 18,609
Inventories 2,514 2,735
Prepaid expenses and other current assets 1,937 1,593
----------- -----------
Total current assets 60,809 60,121
Net property, plant and equipment 14,793 15,067
----------- -----------
Total assets $ 75,602 $ 75,188
=========== ===========
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities
Notes payable $ 18,177 $ 19,700
Accounts payable 10,187 11,641
Accrued payroll and employee benefits 12,343 9,435
Other accrued expenses 6,586 7,840
Current deferred income taxes 1,962 1,575
Net liabilities of discontinued operations 32 273
----------- -----------
Total current liabilities 49,287 50,464
----------- -----------
Deferred income taxes 1,190 919
Commitments and contingencies
Stockholders' Equity
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
Issued - 8,908,150 shares in 2000 and 8,742,750 in
1999 891 874
Treasury stock - 1,379,426 shares in 2000 and
1,379,426 shares in 1999, at par value (138) (138)
Capital in excess of par value 28,136 27,560
Accumulated deficit (3,764) (4,491)
----------- -----------
Total stockholders' equity 25,125 23,805
----------- -----------
Total liabilities and stockholders' equity $ 75,602 $ 75,188
=========== ===========
</TABLE>
3
<PAGE>
DYNAMICS RESEARCH CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in thousands of dollars except share data)
(unaudited)
<TABLE>
<CAPTION>
Three Three
Months Ended Months Ended
March 31, 2000 March 31, 1999
-------------- --------------
<S> <C> <C>
Contract revenue $ 41,172 $ 39,759
Product sales 6,618 6,790
----------- -----------
Total revenue 47,790 46,549
Costs and expenses
Cost of contract revenue 37,329 35,120
Cost of goods 4,905 4,770
----------- -----------
Total cost of revenue 42,234 39,890
Selling, engineering and administrative expenses 4,044 4,096
----------- -----------
Total operating costs and expenses 46,278 43,986
----------- -----------
Operating income 1,512 2,563
Interest expense, net 569 526
----------- -----------
Income from continuing operations before provision
for income taxes 943 2,037
Provision for income taxes 387 855
----------- -----------
Income from continuing operations 556 1,182
Gain from discontinued operations, net of tax 171 -
----------- -----------
Net income $ 727 $ 1,182
=========== ===========
Earnings per share
- ------------------
Per common share - basic
Income from continuing operations $ 0.08 $ 0.16
Gain from discontinued operations 0.02 -
----------- -----------
Net income $ 0.10 $ 0.16
----------- -----------
Per common share - diluted
Income from continuing operations $ 0.07 $ 0.16
Gain from discontinued operations 0.02 -
----------- -----------
Net income $ 0.09 $ 0.16
----------- -----------
Weighted average shares outstanding
- -----------------------------------
Basic 7,448,524 7,365,290
Diluted 7,792,712 7,441,150
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
DYNAMICS RESEARCH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
(in thousands of dollars)
(unaudited)
<TABLE>
<CAPTION>
Three Three
Months Ended Months Ended
March 31, 2000 March 31, 1999
-------------- --------------
<S> <C> <C>
Cash provided by operations:
Net income $ 727 $ 1,182
Adjustments to reconcile net income to cash
provided by (used for ) operating activities:
Income from discontinued operations (171) -
Depreciation and amortization 1,067 1,552
Deferred income taxes 658 289
Provision for receivable reserves 82 2
----------- -----------
2,363 3,025
----------- -----------
Cash provided by (used for) working capital:
Receivables 1,849 3,149
Unbilled expenditures and fees on contracts in process (4,530) (2,969)
Inventories 221 176
Prepaid expenses and other current assets (344) (141)
Accounts payable (1,454) (627)
Accrued payroll and employee benefits 2,908 1,849
Other accrued expenses (1,254) 106
----------- -----------
(2,604) 1,543
----------- -----------
Net cash provided by (used for) continuing operations (241) 4,568
Net cash provided by (used for) discontinued operations (70) 528
----------- -----------
Cash provided by (used for) operating activities (311) 5,096
----------- -----------
Cash (used for) investing activities:
Additions to property and equipment related to
continuing operations (793) (629)
Additions to property and equipment related to
discontinued operations - (8)
Investments - (369)
----------- -----------
Net cash used for investing activities: (793) (1,006)
----------- -----------
Cash provided by (used for) financing activities:
Repayment of working capital agreement (19,700) (3,950)
Proceeds from short-term bridge mortgage 7,500 -
Net borrowings under revolving credit agreement 10,677 -
Proceeds from the exercise of stock options 593 -
Purchase of treasury shares - (59)
----------- -----------
Net cash used for financing activities (930) (4,009)
----------- -----------
Net increase (decrease) in cash and cash equivalents (2,034) 81
Cash and cash equivalents at the beginning of the year 2,267 97
----------- -----------
Cash and cash equivalents at the end of the period $ 233 $ 178
=========== ===========
Supplemental information
Cash paid for interest $ 365 $ 440
Cash paid for taxes $ 51 $ 164
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
DYNAMICS RESEARCH CORPORATION
Notes to Consolidated Financial Statements
------------------------------------------
Note 1. Significant Accounting Policies
- ----------------------------------------
Basis of Presentation
- ---------------------
The accompanying consolidated financial statements include the accounts of the
company and its wholly owned subsidiaries. All material intercompany
transactions and balances have been eliminated in consolidation. Certain prior
period amounts have been reclassified to conform to current period presentation.
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 the rules and regulations of the
Securities and Exchange Commission, 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 the three months ended March 31, 2000 may not be indicative of the results
that may be expected for the fiscal year ended December 31, 2000.
Risks, Uncertainties and Use of Estimates
- -----------------------------------------
The company is subject to certain business risks specific to the industries in
which it operates, including estimates of costs to complete contract
obligations, changes in government policies and procedures, government
contracting issues and risks associated with technological development. The
preparation of financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reported period. Actual results could differ from those
estimates.
Inventories
- -----------
<TABLE>
<CAPTION>
Inventories stated at the lower of cost or market (in thousands of dollars):
- --------------------------------------------------------------------------------
March 31, 2000 December 31, 1999
------------------- -------------------
<S> <C> <C>
Work in process $ 563 $ 630
Raw materials and subassemblies 1,951 2,105
------------------- -------------------
Total inventories $ 2,514 $ 2,735
=================== ===================
</TABLE>
Property, Plant and Equipment
- -----------------------------
<TABLE>
<CAPTION>
Property, plant and equipment stated at cost (in thousands of dollars):
- --------------------------------------------------------------------------------
March 31, 2000 December 31, 1999
------------------- -------------------
<S> <C> <C>
Land $ 1,126 $ 1,126
Building 7,774 7,774
Machinery and equipment 42,809 42,016
Leasehold improvements 2,548 2,548
------------------- -------------------
Total property, plant and equipment 54,257 53,464
Less accumulated depreciation and
amortization 39,464 38,397
------------------- -------------------
Net property, plant and equipment $ 14,793 $ 15,067
=================== ===================
</TABLE>
6
<PAGE>
New Accounting Pronouncements
- -----------------------------
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. As issued, SFAS No. 133 is effective
for all fiscal quarters of all fiscal years beginning after June 15, 1999, with
earlier application encouraged. In May 1999, the FASB delayed the effective date
of SFAS No. 133 for one year to fiscal years beginning after June 15, 2000. The
company does not currently have derivative instruments and does not expect the
adoption of SFAS No. 133 to have a material impact on its financial position or
results of operations.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements.
SAB 101 provides interpretative guidance on the recognition, presentation and
disclosure of revenue. SAB 101 must be applied no later than the second quarter
of 2000. Although the company believes that SAB 101 will not have a material
effect on the company's results of operations or financial position, the company
is continuing to evaluate the potential effects as additional guidance becomes
available.
Earnings Per Common Share
- -------------------------
Basic earnings per share is computed by dividing net income by the weighted
average number of shares of common stock outstanding during the period. For
periods in which earnings are positive, diluted earnings per share is determined
by giving effect to the exercise of stock options using the treasury stock
method.
Due to their antidilutive effect, 128,800 and 431,764 stock options were
excluded in the first quarter of 2000 and 1999, respectively.
<TABLE>
For the periods ended March 31, 2000 1999
- --------------------------------------------------------------------------------------------------------
(in thousands, except share and per share data)
<S> <C> <C>
Income from continuing operations $ 556 $ 1,182
Income from discontinued operations 171 -
------------------ ------------------
Net income $ 727 $ 1,182
================== ==================
Weighted-average shares outstanding 7,448,524 7,365,290
Dilutive effect of options 344,188 75,860
------------------ ------------------
Adjusted weighted-average shares outstanding 7,792,712 7,441,150
================== ==================
Income from continuing operations per share - basic $ .08 $ .16
Income from discontinued operations per share - basic .02 -
------------------ ------------------
Net income per share - basic $ .10 $ .16
================== ==================
Income from continuing operations per share - diluted $ .07 $ .16
Income from discontinued operations per share - diluted .02 -
------------------ ------------------
Net income per share - diluted $ .09 $ .16
================== ==================
</TABLE>
7
<PAGE>
Note 2. Restructuring
- ---------------------
In the fourth quarter of 1999, the company adopted a restructuring plan intended
to reduce overhead costs and increase efficiencies. The company recorded a
restructuring charge of $1.2 million to provide for severance and other exit
costs for approximately 100 involuntarily terminated employees, of which $1.0
million was recorded as cost of contract revenue and the remainder as selling,
engineering and administrative expense. During the first quarter of 2000, the
company expended approximately $0.3 million related to severance costs and
outplacement services for 30 employees. It is presently expected that the
restructuring plan will be completed by the end of 2000. At March 31, 2000, the
remaining restructuring reserve totaled $.9 million.
Note 3. Discontinued Operations
- -------------------------------
In June 1999, the company completed the sale of its previously discontinued
Telecommunications Fraud Control business. The sale agreement provided for
royalties of up to $1.8 million over the next three years. During the first
quarter of 2000, the company received and recognized $0.2 million of royalty
income, net of tax.
In the first three months of 2000 $0.2 million was charged against the reserve
established at the date the plan of disposal was adopted.
Revenue, costs, expenses, assets and liabilities and cash flows of the
discontinued 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
Income from discontinued operations, net of taxes, as Net liabilities of
discontinued operations, and as Net cash provide by (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
Note 4. Debt
- ------------
On September 30, 1999, the company entered into an amended agreement with a
syndicate of banks. The amended agreement provided a secured working capital
line of credit of up to $35 million, based on assets consisting primarily of
inventory, receivables and real estate. Interest on the outstanding balance was
at the prime rate plus 2%. The agreement included a fee of 0.375% on the unused
portion of the credit line. At December 31, 1999, the company was not in
compliance with a covenant included in the agreement regarding minimum earnings
before income taxes. The amended agreement expired January 31, 2000. At December
31, 1999, $19.7 million was outstanding under the agreement.
On February 10, 2000, the company finalized a three year $20 million secured
revolving credit agreement (the "Revolver") and a six-month $7.5 million interim
mortgage loan (the "Interim Mortgage") on the company's real estate. Proceeds
were used to pay off existing debt. The Revolver expires on February 10, 2003.
The company plans to refinance the Interim Mortgage prior to its maturity on
August 10, 2000. The Revolver provides for borrowings of up to the lesser of $20
million or 80% of eligible accounts receivable. Interest on the outstanding
balance of the Revolver and the Mortgage is at the prime rate and is payable
monthly. The agreement includes a fee of 0.375% on the unused portion of the
Revolver. Beginning in 2001, in the event that the company achieves certain
financial milestones, the company may elect an interest rate of LIBOR plus 2%,
and the fee on the unused Revolver will be reduced to 0.25%. At March 31, 2000,
$18.2 million was
8
<PAGE>
available for the company to borrow based on eligible accounts receivables and
$10.7 million was outstanding under the Revolver.
Substantially all of the company's assets serve as collateral under the
Revolver, except the corporate office facility in Andover, Massachusetts, which
collateralizes the Mortgage. The Revolver requires the company to meet certain
financial covenants including maintaining a minimum tangible net worth, cash
flow and debt coverage ratios, as well as limits the company's ability to incur
additional debt, to pay dividends, to purchase capital assets, to sell or
dispose of assets, to make additional acquisitions or investments, or to enter
into new leases, among other restrictions. The company was in compliance with
all covenants on March 31, 2000.
Note 5. Commitments and Contingencies.
- ---------------------------------------
As a defense contractor, the company is subject to many levels of audit and
review, including the Defense Contract Audit Agency (DCAA), the Inspector
General, the Defense Criminal Investigative Service, the General Accounting
Office, the Department of Justice and Congressional Committees. As a result of
certain DCAA audit findings, the United States Government is temporarily
deferring a portion of its payments to the company. The company believes it has
substantially remedied the findings of the DCAA and expects the effects of
payment deferral will be temporary and not significant. Currently, the United
States Government is temporarily deferring payment of approximately $0.9 million
of accounts receivable.
Note 6. 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 three months ended
March 31, 2000 and March 31, 1999 are as follows (in thousands of dollars):
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Identifiable
Systems Continuing
and Metri- Operations
Services Encoder graphics Corporate Total
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
March 31, 2000
Net sales (1) $41,172 $4,493 $2,125 $ - $47,790
Operating income 662 377 473 - 1,512
Identifiable assets at
March 31, 2000 56,356 6,175 2,556 10,515 75,602
March 31, 1999
Net sales (1) $39,759 $3,490 $3,300 $ - $46,549
Operating income (loss) 1,433 (41) 1,171 - 2,563
Identifiable assets at
March 31, 1999 65,558 5,560 4,533 11,726 87,377
</TABLE>
(1) Net sales and operating income are presented after the elimination of
intersegment transactions, which are not material.
One customer accounted for 8.1% and 11.6% of total revenue from continuing
operations in the first three months of 2000 and 1999, respectively. During the
first quarter of 2000 and 1999, revenue from Department of Defense (DoD)
customers represented 71% and 61% of total revenue from continuing operations,
respectively. Revenue earned from one significant DoD contract represented 15.9%
and 10.2% of total revenue from continuing operations in the first three months
of 2000 and 1999, respectively.
9
<PAGE>
Item 2. Management Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations
Total revenue increased 2.7% to $47.8 million in the first quarter of 2000
compared with $46.5 million in the first quarter of 1999. Contract revenue for
the Systems and Services segment increased 3.6% to $41.2 million in the first
three months of 2000 compared with $39.8 million in the same period last year.
The increase was primarily due to revenue from engineering services which
increased $6.2 million, or 21.8%, compared with the same period in 1999. This
increase more than offset a decline in state services revenue. The first quarter
of 1999 results included significant one-time revenue related to infrastructure
installation under the company's contract with the Colorado Department of Human
Services.
Product sales decreased slightly to $6.6 million in the first three months of
2000 compared with $6.8 million in the same period of 1999. Metrigraphics
Division sales decreased to $2.1 million in the first quarter of 2000 compared
to $3.3 million in the first quarter of 1999. The decline in Metrigraphics
sales, attributable principally to lower sales of electroformed inkjet printer
nozzle plates, is expected to continue as the company seeks to expand its
customer base in the computer peripherals, medical instruments, factory
automation, electrical instruments, semiconductor equipment and
telecommunications fiber optic industries.
Encoder Division sales increased 28.7% to $4.5 million in the first three months
of 2000 from $3.5 million for the same period in 1999, attributable primarily to
an increase in automotive industry sales. The level of automotive industry sales
attained in the first quarter of 2000 is expected to be sustained at least into
the second quarter of 2000. Nevertheless, future sales of this product line are
uncertain and are dependent on automotive industry demand and product life
cycles.
Total gross margin was $5.6 million and $6.7 million in the first quarter of
2000 and 1999, respectively, representing 11.6% and 14.3% of total revenue for
the same periods. The decline in gross margin resulted primarily from a shift in
sales mix principally away from higher margin Metrigraphics sales toward lower
margin Systems and Services, and Encoder Division sales.
Gross margin on contract revenue was $3.8 million and $4.6 million for the first
three months of 2000 and 1999, respectively, representing 9.3% and 11.7% of
contract revenue in the first quarter of 2000 and 1999, respectively.
In the first quarter of 2000 and 1999, gross margin on product sales was $1.7
million and $2.0 million, respectively, representing 25.9% and 29.7% of product
sales in the first three months of 2000 and 1999, respectively.
Selling, engineering and administrative expenses and net interest expense were
$4.0 million and $0.6 million, respectively, in the first three months of 2000,
both essentially flat compared with the same period last year.
Income tax expense was $0.4 million, or 41% of pre-tax income, in the first
quarter of 2000 compared with $0.9 million, or 42% of pre-tax income for the
first three months of 1999.
The first quarter of 2000 results included $0.2 million income from discontinued
operations, net of tax, which resulted from receipt of royalties from the
company's sale of the discontinued Telecommunications Fraud Control business in
1999.
In the fourth quarter of 1999, the company adopted a restructuring plan intended
to reduce overhead costs and increase efficiencies. The company recorded a
restructuring charge of $1.2 million to provide for severance and other exit
costs for approximately 100 employees, of which $1.0 million was recorded as
cost of contract revenue and the remainder as selling, engineering and
administrative expense. The charge was comprised
10
<PAGE>
primarily of severance costs and outplacement services to be provided to
involuntarily terminated employees. During the first quarter of 2000, the
company expended approximately $0.3 million related to severance costs and
outplacement services for 30 employees. It is presently expected that the
restructuring plan will be completed by the end of 2000. At March 31, 2000, the
remaining restructuring reserve totaled $.9 million.
The company's total employment at March 31, 2000 was 1,591, down from 1,613 at
December 31, 1999.
The company's backlog of unfilled orders was $99.4 million at March 31, 2000, up
from $97.1 million at March 31, 1999.
Liquidity and Capital Resources
Cash used for continuing operations in the first quarter of 2000 was $0.2
million resulting from increased unbilled expenditures and fees on contracts in
process, and decreased accounts payable and other accrued expenses, partially
offset by positive cash earnings, increased accrued payroll and employee
benefits and decreased receivables. As described in Note 5, currently the United
States Government is temporarily deferring payment on approximately $0.9 million
of accounts receivable. Cash provided by continuing operations in the first
three months of 1999 was $4.6 million attributable to positive cash earnings and
accrued payroll and employee benefits, partially offset by increased unbilled
expenditures and fees on contracts in process.
Cash used for investing activities was $0.8 million and $1.0 million in the
first three months of 2000 and 1999, respectively, primarily related to the
purchase of property, plant and equipment for continuing operations. In
addition, in the first quarter of 1999, the company invested $.4 million in
Empresa, Inc.
On February 10, 2000, the company finalized a three-year $20.0 million secured
revolving credit agreement (the "Revolver") and a six-month $7.5 million interim
mortgage loan (the "Interim Mortgage") on the company's real estate. Proceeds
were used to pay off existing debt. The Revolver expires on February 10, 2003.
The company plans to refinance the Interim Mortgage prior to maturity on August
10, 2000. The Revolver provides for borrowings of up to the lesser of $20.0
million or 80% of eligible accounts receivable. At March 31, 2000, $18.2 million
was available based on eligible accounts receivable for the company to borrow
and $10.7 million was outstanding under the Revolver. The company was in
compliance with all covenants on March 31, 2000.
In the first quarter of 2000, the company realized $0.6 million in proceeds from
the exercise of stock options.
The company's expected cash flows for the year 2000 are subject to certain
trends, events and uncertainties. The company's requirements for additional
property, plant and equipment are expected to be in the range of expenditures
incurred over the past three years. Related to the company's contract with the
Colorado Department of Human Services, the company had accrued at December 31,
1999 and expects in the year 2000 to expend an estimated $3 million in excess of
amounts to be received under the contact in order to complete its obligation
under the contract.
The company's need for, cost of, and access to funds are dependent on future
operating results, as well as conditions external to the company. The company
believes that its current assets, cash flows from operations and available lines
of credit are sufficient to support its normal operations and capital
requirements for the foreseeable future.
11
<PAGE>
Year 2000 Date Conversion
The Year 2000 problem concerns the inability of information systems to recognize
properly and process data-sensitive information beyond January 1, 2000. The
company was Year 2000 compliant at December 31, 1999. The company has not
experienced any material Year 2000 problems to date and does not expect to
experience any such difficulties.
Forward-Looking Information
This report includes certain forward-looking statements about the company's
business, including, but not limited to, the effect of the federal budget on the
company's sales, response to the company's product and service offerings, growth
in revenue, costs to complete fixed-price contracts, capital spending,
restructuring spending and the benefits thereof, customer mix and changes in
capital markets. Such forward-looking statements are subject to risk and
uncertainties that could cause actual results to vary materially from those
expected. These risks and uncertainties, discussed in more detail in the
company's Form 10-K for the year ended December 31, 1999, include, but are not
limited to, possible reductions in federal or state funding for the company's
customers, concentration of customers and potential customers in a particular
industry, risk of sustaining existing contracts and orders at the same or
increasing levels and obtaining new contracts, high levels of competition and
difficulties of entering into new markets, government contracting issues
including the outcomes of audits and investigations, costs of completing fixed-
priced contracts, changes in interest rates and capital markets funds
availability, supply difficulties, warranty claims, factors affecting the
business segments in which the company operates and the economy in general.
12
<PAGE>
PART II. OTHER INFORMATION
Item 6. (a) Exhibits
(10.13) Amendment to Loan and Security Agreement dated February 10,
2000 by and among Dynamics Research Corporation and its
Subsidiaries and Brown Brothers Harriman & Company and
Family Bank FSB.
(27.1) Financial Data Schedule
Item 6. (b) Reports on Form 8-K
On March 24, 2000, the Company filed a report on Form 8-K relating
to the signing of the Loan and Security Agreement, and the signing
of the Mortgage Security Agreement and Assignment dated February 10,
2000.
13
<PAGE>
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: May 15, 2000 By: /s/ David Keleher
-------------------------
David Keleher
Vice President of Finance, Chief Financial Officer
14
<PAGE>
AMENDMENT TO LOAN AND SECURITY AGREEMENT
----------------------------------------
DATED FEBRUARY 10, 2000 AMONG
-----------------------------
DYNAMICS RESEARCH CORPORATION, DRC ENCODER, INC., DRC METRIGRAPHICS,
--------------------------------------------------------------------
INC., DRC SOFTWARE, INC., AND DRC TELECOM, INC.
-----------------------------------------------
AND
---
BROWN BROTHERS HARRIMAN & CO., AS ADMINISTRATIVE AGENT AND AS A
---------------------------------------------------------------
LENDER, AND FAMILY BANK, FSB, AS COLLATERAL AGENT AND AS A LENDER
-----------------------------------------------------------------
This Amendment to Loan and Security Agreement (hereinafter, the
"Amendment") is made as of the 31st day of March, 2000 by and between Dynamics
Research Corporation, DRC Encoder, Inc., DRC Metrigraphics, Inc., DRC Software,
Inc., and DRC Telecom, Inc., Massachusetts corporations with their principal
executive offices at 60 Frontage Road, Andover, Massachusetts (hereinafter,
individually and collectively, jointly and severally, the "Borrowers") and Brown
Brothers Harriman & Co., as administrative agent and as a lender, and Family
Bank, FSB, as collateral agent and as a lender (hereinafter, individually and
collectively, the "Lenders"), in consideration of the mutual covenants contained
herein and the benefits to be derived herefrom. Unless otherwise specified
herein, all capitalized terms shall have the same meaning as set forth in the
Loan Agreement (as defined hereinbelow).
W I T N E S S E T H:
-------------------
WHEREAS, the Borrowers executed and delivered to the Lenders a certain Loan
and Security Agreement dated February 10, 2000, (hereinbefore and hereinafter,
the "Loan Agreement") pursuant to which, among other things, the Lenders
extended in favor of the Borrowers a Revolving Credit in the original maximum
principal amount of $20,000,000.00; and
WHEREAS, the Borrowers have requested that the Lenders correct the error in
Section 11-9 of the Loan Agreement; and
WHEREAS, the Lenders have agreed to such correction to reflect the original
intent of the parties, BUT ONLY on the terms and conditions contained in this
--------
Amendment; and
WHEREAS, all parties have determined that this Amendment is in their
respective best interests.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. The Borrowers hereby certify to the Lenders that, to the best of the
Borrowers' knowledge and belief after due inquiry, the representations and
warranties contained in the Loan Agreement, as corrected by this Amendment, are
true as of the date hereof and that no Event of Default under the Loan Agreement
or any document executed in connection therewith has occurred and is continuing.
<PAGE>
2. Section 11-9 of the Loan Agreement is hereby amended by deleting the
words "less than" used therein and substituting the words "greater than"
therefor.
3. This Amendment and all other documents, instruments or agreements
executed in connection herewith incorporate all discussions and negotiations
between the Borrowers and the Lenders, either expressed or implied, concerning
the matters included herein, any statute, custom, or usage to the contrary
notwithstanding. No such discussions or negotiations shall limit, modify or
otherwise affect the provisions hereof. No modification, amendment, or waiver of
any provision of this Amendment or the Loan Agreement or any provision under any
other agreement, document or instrument between the Borrowers and the Lenders
shall be effective unless executed in writing by the party to be charged with
such modification, amendment or waiver, and if such party be the Lenders, then
by a duly authorized officer of each Lender.
4. Except as specifically modified herein, the Loan Agreement shall
remain in full force and effect as originally written and the Borrowers hereby
ratify and confirm all terms and conditions contained therein and further ratify
and reaffirm all representations and warranties made therein as of the date
hereof.
5. This Amendment shall be construed in accordance with and governed by
the laws of the Commonwealth of Massachusetts and shall take effect as a sealed
instrument.
IN WITNESS WHEREOF, the parties have hereunto set their hands and seals as
of the date first written above.
DYNAMICS RESEARCH CORPORATION
BY: /S/ David Keleher
-----------------
TITLE: V.P. of Finance, Chief Financial
Officer
DRC ENCODER, INC.
BY: /S/ David Keleher
-----------------
TITLE: V.P. of Finance, Chief Financial
Officer
DRC METRIGRAPHICS, INC.
BY: /S/ David Keleher
-----------------
TITLE: V.P. of Finance, Chief Financial
Officer
<PAGE>
DRC SOFTWARE, INC.
BY: /S/ David Keleher
-----------------
TITLE: V.P. of Finance, Chief Financial
Officer
DRC TELECOM, INC.
BY: /S/ David Keleher
-----------------
TITLE: V.P. of Finance, Chief Financial
Officer
ACKNOWLEDGED AND AGREED:
BROWN BROTHERS HARRIMAN & CO.
By: /s/ Timothy J. Telman
- -------------------------
Name: Timothy J. Telman
- -------------------------
Title: Vice President
FAMILY BANK, FSB
By: /S/ C. Lee Willingham
- -------------------------
Name: C. Lee Willingham
- -------------------------
Title: Vice President
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<PAGE>
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