-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, U5Ne3C1YnU/WAJEkfN1BI3m4b4p3qdh9nEuWvuCGH7q+kRnftGXg7T3E1mVtREBW PZ7/9RwNk7AuNeM0LkAvnw== 0000030822-99-000003.txt : 19990514 0000030822-99-000003.hdr.sgml : 19990514 ACCESSION NUMBER: 0000030822-99-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990513 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DYNAMICS RESEARCH CORP CENTRAL INDEX KEY: 0000030822 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 042211809 STATE OF INCORPORATION: MA FISCAL YEAR END: 1229 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-02479 FILM NUMBER: 99619781 BUSINESS ADDRESS: STREET 1: 60 FRONTAGE ROAD CITY: ANDOVER STATE: MA ZIP: 01810-5498 BUSINESS PHONE: 9784759090 MAIL ADDRESS: STREET 1: 60 FRONTAGE ROAD CITY: ANDOVER STATE: MA ZIP: 01810-5498 10-Q 1 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, 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 May 7, 1999 was 7,353,590 shares. DYNAMICS RESEARCH CORPORATION INDEX Page Part I Financial Information Number Item 1. Financial Statements Consolidated Balance Sheets - March 31, 1999 and December 31, 1998 . . . . . . 3 Consolidated Statements of Income - Three Months Ended March 31, 1999 and March 31, 1998 . . . . . . . . . . . . . . . . . 4 Consolidated Statements of Cash Flows - Three Months Ended March 31, 1999 and March 31, 1998 . . . . . . . . . . . . . . . . . 5 Notes to Consolidated Financial Statements . . . . . 6 Item 2. Management's Discussion and Analysis 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 March 31, 1999 December 31, 1998 CURRENT ASSETS: Cash and cash equivalents $ 178 $ 97 Receivables, less allowances of $318 in 1999 and $316 in 1998 29,865 33,016 Unbilled expenditures and fees on contracts in process 35,138 32,169 Inventories 2,471 2,647 Refundable income taxes 9 9 Prepaid expenses and other current assets 1,099 958 Total current assets 68,760 68,896 Property, plant and equipment, at cost Land 1,126 1,126 Building 7,774 7,774 Machinery and equipment 42,900 42,271 Less accumulated depreciation and amortization (34,294) (32,742) Net property, plant and equipment 17,506 18,429 Other non-current assets 1,111 742 Total assets $ 87,377 $ 88,067 LIABILITIES AND SHAREHOLDERS' INVESTMENT CURRENT LIABILITIES: Accounts and drafts payable $ 9,673 $ 10,300 Accrued payroll and employee benefits 9,631 7,782 Other accrued expenses 2,736 2,630 Accrued and current deferred income taxes 7,481 7,189 Net liabilities of discontinued operations 2,292 1,772 Total current liabilities 31,813 29,673 Long-term debt 22,850 26,800 Deferred income taxes 345 348 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 - 8,733,016 shares in 1999 and 8,733,016 in 1998 873 873 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 27,417 27,474 Retained earnings 4,217 3,035 Total shareholders' investment 32,369 31,246 Total liabilities and shareholders' investment $ 87,377 $ 88,067 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 Three Months Ended Months Ended March 31, 1999 March 31, 1998 Revenue $ 46,549 $ 41,988 Costs and expenses: Cost of revenue 39,890 35,889 Selling, engineering and administrative expenses 4,096 3,691 Total costs and expenses 43,986 39,580 Operating income 2,563 2,408 Interest expense, net 526 343 Income from continuing operations before provision for income taxes 2,037 2,065 Provision for income taxes 855 862 Income from continuing operations 1,182 1,203 Loss from discontinued operations, net of applicable tax benefit of $400 in 1998 - 566 Net income $ 1,182 $ 637 Per share data Per common share - basic Income from continuing operations* $ .16 $ .16 Net income (loss)* $ .16 $ .08 Per common share - diluted Income from continuing operations* $ .16 $ .15 Net income (loss)* $ .16 $ .08 Weighted average common shares outstanding - Basic * 7,365,290 7,558,686 Weighted average common shares outstanding - Diluted * 7,441,150 7,900,324 The accompanying notes are an integral part of these consolidated financial statements. * Retroactively adjusted for the May 1998 20% stock dividend. DYNAMICS RESEARCH CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands of dollars) (unaudited) Three Three Months Ended Months Ended March 31, 1999 March 31, 1998 Cash provided by operations: Net income $ 1,182 $ 637 Adjustments to reconcile net income to cash Provided by operating activities: Loss from discontinued operations - 566 Depreciation and amortization 1,552 1,762 Deferred income taxes (3) (7) Provision for receivable reserves 2 6 2,733 2,964 Cash provided by (used for) working capital: Receivables 3,149 (11,231) Unbilled expenditures and fees on contracts in process (2,969) (3,875) Inventories 176 753 Refundable income taxes - 2 Prepaid expenses and other current assets (141) 26 Accounts and drafts payable (627) 2,696 Accrued payroll and employee benefits 1,849 308 Other accrued expenses 106 (2,452) Accrued and current deferred income taxes 292 638 1,835 (13,135) Net cash provided by (used for) continuing operations 4,568 (10,171) Net cash provided by (used for) discontinued operations 528 (375) Cash provided by (used for) operating activities 5,096 (10,546) Cash used for investing activities: Additions to property and equipment related to continuing operations, net (629) (888) Additions to property and equipment related to discontinued operations, net (8) (73) Investments (369) - Net cash used for investing activities: (1,006) (961) Cash provided by (used for) financing activities: Borrowing (payments) under revolving long-term credit agreement, net (3,950) 13,150 Proceeds from the exercise of stock options - 145 Purchase of treasury shares (59) (222) Net cash provided by (used for) financing activities (4,009) 13,073 Net increase (decrease) in cash and cash equivalents 81 1,566 Cash and cash equivalents at the beginning of the year 97 542 Cash and cash equivalents at the end of the period $ 178 $ 2,108 Supplemental disclosures of cash flow information: Cash paid during the quarterly period for: Interest $ 440 $ 235 Income taxes $ 164 $ 62 The accompanying notes are an integral part of these consolidated financial statements. DYNAMICS RESEARCH CORPORATION Notes to Consolidated Financial Statements Note 1. Basis of Presentation 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. Note 2. Inventories Inventories are comprised of the following (in thousands of dollars): March 31, 1999 December 31, 1998 Work in process $ 512 $ 475 Raw materials and subassemblies 1,959 2,172 Total inventories $ 2,471 $ 2,647 Note 3. Discontinued Operations In the fourth quarter of 1998, the Company adopted a plan to sell the telecommunications fraud control business unit. Accordingly, 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 Income, Consolidated Balance Sheets and Consolidated Statements of Cash Flows and have been reported as "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 business unit for the quarters ended March 31, 1999 and 1998 were $455,000 and $967,000, respectively. Net operating losses of the telecommunications business were $703,000 and $969,000 for the quarters ended March 31, 1999 and 1998, respectively. The results for the quarter ended March 31, 1999 have been charged against the accrual established at the date the plan of disposal was adopted. Note 4. 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 March 31, 1999 and March 31, 1998 are as follows: Identifiable Systems Continuing and Metri- Corpor- Operations Services Encoder graphic Other ate Total March 31, 1999 Net sales (1) $39,759 $3,490 $3,300 - - $46,549 Operating profit(loss) 1,433 (41) 1,171 - - 2,563 Identifiable assets at March 31, 1999 65,558 5,560 4,533 - 11,726 87,377 March 31, 1998 Net sales (1) 34,106 4,882 2,999 1 - 41,988 Operating profit(loss) 1,469 306 1,044 (411) - 2,408 Identifiable assets at March 31, 1998 65,346 6,963 6,063 214 14,054 92,640 (1) Net sales and operating profit are presented after the elimination of intersegment transactions which are not material. Item 2. Management Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998 Total revenues increased 11% to $46,549,000 in the first quarter of 1999 compared with $41,988,000 in the first quarter of 1998. Contract revenue for the Systems and Services segment increased 17% to $39,759,000 in the first quarter of 1999 compared with $34,106,000 in the first quarter of 1998. The growth was principally attributable to broad-based growth in the Company's defense business as well as increased revenue from three major state contracts and other information technology services. First quarter 1999 Metrigraphic Division sales increased 10% to $3,300,000 compared to $2,999,000 in the same period in 1998. This increase was primarily related to higher sales of electroformed components across a broad range of customers, including one in the medical products industry, offset by reduced sales to a customer in the inkjet printer market. The Company also had higher sales of prototype electroformed components to a number of customers in the first quarter of 1999 compared to the same period in 1998. Encoder Division sales decreased 29% to $3,490,000 in 1999 from $4,882,000 for the same period in 1998. The decrease primarily relates to reductions in sales of custom encoders to a customer in the automotive industry as well as decreased sales to certain of the Company's customers who have significant sales in Asian markets. Cost of revenue increased 11% to $39,890,000 in the first quarter of 1999, compared with $35,889,000 in the first quarter of 1998, commensurate with the increase in revenues. Cost of revenue as a percentage of revenue was 86% and 85% in the first quarters of 1999 and 1998, respectively. Selling, engineering and administrative expenses increased 11% in the first quarter of 1999 to $4,096,000 compared to $3,691,000 in the first quarter of 1998. General corporate staffing-related and other administrative support expenses were increased to support the higher business base. Operating income of the Systems and Services segment as a percentage of segment revenue decreased to 3.6% in the first quarter of 1999 compared to 4.3% in the first quarter of 1998. This decrease is attributable to higher expenses related to technology and business development efforts in the first quarter of 1999 compared to the same period in 1998. The Encoder segment reported an operating loss of $41,000 in the first quarter of 1999 compared to operating income of $306,000 in the first quarter of 1998. The decrease in operating profit is primarily the result of lower gross profit contributions attributable to the decrease in sales and the increase in selling, engineering and administrative expenses, discussed above. In the fourth quarter of 1998, the Company adopted a plan to sell the telecommunications fraud control business unit. Accordingly, 1999 results from the telecommunications fraud control business unit are charged to the loss on disposal accrued at the date the plan was adopted. First quarter 1998 results have been restated to conform to this presentation. The results of discontinued operations do not reflect any interest expense or any allocation of management expense. Revenues for the telecommunications business unit for the quarters ended March 31, 1999 and 1998 were $455,000 and $967,000, respectively. Net operating losses of the telecommunications business were $703,000 and $969,000 for the quarters ended March 31, 1999 and 1998, respectively. These amounts are not included in sales or operating income as reported in the Consolidated Statements of Income. In December 1998, DRC entered into an agreement with Empresa, Inc.(Empresa), formerly Electronic Press Services Group, Inc., to acquire an interest in Empresa in exchange for a perpetual license to VisualMagic? software development technology, cash and certain other assets. The terms of the agreement provide for the Company to make its cash investment in three installments: one at the closing in December 1998, the second in February 1999, with the third expected to be made in May 1999, subject to certain performance requirements. First quarter 1999 and 1998 results include $0 and $411,000 of costs related to VisualMagic development. Net interest expense increased to $526,000 in the first quarter of 1999 compared with $343,000 in the first quarter of 1998. Revenue growth and working capital requirements for certain state government customers in the first quarter of 1999 resulted in higher average borrowings. The weighted average interest rate on the Company's borrowings was 7.7% and 6.9% in the first quarter of 1999 and 1998, respectively. The Company's effective income tax rate for the first quarter of 1999 and 1998 was 42%. 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 During the first three months of 1999, the Company's primary source of liquidity has been operating cash flow and its revolving credit facility. Working capital requirements related to the Company's revenue growth and state government contracts were funded with borrowings under the Company's credit facility. Cash generated from operations during the first quarter of 1999 was used to reduce outstanding debt $3,950,000 to $22,850,000 at March 31, 1999. Working capital decreased to $36,947,000 at March 31, 1999 from $39,223,000 at December 31, 1998. This decrease was primarily attributable to an increase accrued payroll and employee benefits, and increases in accrued income taxes. Capital spending for continuing operations during the first three months of 1999 was $629,000, consisting principally of office computer equipment. The Company spent $59,000 during the first three months of 1999 for the purchase of treasury shares compared with $222,000 during the first three months of 1998. At March 31, 1999, $17,150,000 was available for working capital purposes under the Company's revolving credit facility. The Company believes that its current 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 1999. The Company does not have any significant capital commitments at March 31, 1999 outside the ordinary course of business. 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 completed the process of identifying and is now 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 is in the process of remediating 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 are expected to be completed by mid-1999. 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 expected to be Year 2000 compliant by the end of 1999. 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 mid-1999. While the Company expects that all financial and significant IT-related systems will be Year 2000 compliant by mid-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. Currently, the Company is in the process of upgrading or replacing certain components of the phone, security, building access, HVAC and lighting systems, which is expected to be completed in early 1999. The Company anticipates that all other process control components will be Year 2000 compliant by mid-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. Any necessary interface upgrades are expected to be completed by mid-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 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 expects to complete any remediation efforts by mid-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 plans by mid-year 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 $430,000 and $475,000, of which it has expensed approximately $237,000 as of April 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, consulting fees for a Year 2000 review, and approximately $280,000 of redeployed labor expense. The total estimated cost of redeployed labor within the corporate information systems department is equal to approximately 9% of that department's total 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 strategic investment programs, cash flow requirements, research and development spending, cash flow expectations and Year 2000 readiness. 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, 1998, include ability to consummate strategic transactions related to the Company's commercial business investments, 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 The Registrant did not file any reports on Form 8-K during the quarterly period for which this report is filed. 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 13, 1999 By: /s/ Douglas R. Potter Douglas R. Potter Vice President of Finance and Chief Financial Officer (Principal financial and accounting officer) EX-27 2
5 1,000 3-MOS DEC-31-1999 MAR-31-1999 178 0 65,003 0 2,471 68,760 51,800 34,294 87,377 31,813 22,850 0 0 873 31,496 87,377 46,549 46,549 39,890 39,890 4,096 0 526 2,037 855 1,182 0 0 0 1,182 .16 .16
-----END PRIVACY-ENHANCED MESSAGE-----