Item 1. Business 4
2. Properties 12
3. Legal Proceedings 13
4. Submission of Matters to a Vote of Security Holders 13
4A. Executive Officers of the Registrant 13
Part II 5. Market for Registrant's Common Equity and Related Stockholder Matters 14
6. Selected Financial Data 14
7. Management's Discussion and Analysis of Financial Condition and Results of Operations 14
8. Financial Statements and Supplementary Data 13
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 15
Part III 10. Directors and Executive Officers of the Registrant 16
11. Executive Compensation 16
12. Security Ownership of Certain Beneficial Owners and Management 16
13. Certain Relationships and Related Transactions 16
Part IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 17
PART I
Item 1. Business
Dynamics Research Corporation (referred to herein as "DRC" or the "Company") was organized in 1955 under the laws of the Commonwealth of Massachusetts.
The Company is principally engaged in providing a broad range of technical services including information systems development and operation, engineering, and management support services to organizations of the United States Department of Defense (DoD), other agencies of the U.S. and state governments and commercial companies. The Company also designs, manufactures and sells digital instruments and precision components that are primarily used in computer-controlled systems.
Information Systems Development and Operation
DRC provides systems analysis and programming support primarily to government customers. The Company designs, develops, installs, operates, and maintains custom-engineered data systems. Systems developed by DRC gather information electronically from various sources, organize the data and store it in large databases. The Company's systems enable customers to track product location and configuration and to perform detailed reliability, maintainability, quality assurance, vendor qualification and cost analyses. The Company has developed such systems for transit vehicles, missiles, submarines, surface ships, land warfare weapons, and aircraft.
The Company's major DoD information systems programs are sometimes referred to as logistics information systems. These systems are essentially product management information systems and involve inventory requirements and control, maintenance and repair, warranty analysis, supply, distribution and other functions critical to effective and economical support of both hardware and software throughout the system's life.
For nearly thirty years, the Company has assisted the U.S. Navy's Fleet Ballistic Missile program office in the design, development, and operation of inertial systems. The Company has extensive experience with the Polaris, Poseidon, and Trident missile guidance systems and submarine inertial navigation systems. The Company develops and maintains performance, reliability, and logistics databases for the inertial guidance instruments housed in those systems. These databases track detailed information on thousands of component parts comprising the systems. This information is used by the customer for a wide range of operating management tasks and decision making.
Also for the U.S. Navy, the Company provides independent analysis and monitoring of submarine-based inertial guidance systems and electronic modules. The Company's support capabilities include its Inertial Instrument Test Laboratory, which is equipped for full-scale performance testing of navigational quality inertial instruments.
Under contract with the U.S. Air Force, the Company designed, developed, implemented and operates Tactical Interim CAMS and REMIS Reporting System (TICARRS). The TICARRS databases support the operation of and aircraft and provide, upon request by the Air Force user organizations worldwide, a variety of operational reports. Data include results from flight operations and maintenance activities. Although remote computer terminals and communications interfaces are an integral part of the system, the host computer facility and its associated databases are located at a Company facility. During 1996, the Company received a subcontract to participate in the development of the Air Force's Integrated Maintenance Data System ("IMDS") as a successor to TICARRS and other existing systems.
Weapon Systems Management Information System (WSMIS) is a primary Air Force decision support tool for assessing the impacts of logistics status on potential wartime capabilities. WSMIS computes inventory requirements and purchasing needs for high-tech, high-cost aircraft spare parts to meet aircraft availability requirements. WSMIS also controls repair, manufacturing and distribution schedules to meet customer demands. WSMIS assesses the "health" and capability of the Air Force's weapon systems to meet wartime objectives. DRC served as the overall functional integrator of WSMIS and the developer of certain WSMIS modules. Currently, the Company provides operational support for the system as well as software development modifications and other changes.
During 1996, the Company was awarded a contract to implement a distributed computer-based system for managing child welfare cases handled by the State of New Hampshire's Department of Health and Human Services.
In February of 1997, DRC announced the award of a $36 million contract- $24 million of which is slated for 1997 - to install and maintain computer hardware and communication systems for the State of Ohio's Department of Health and Human Services.
Critical to the development of information systems is the Company's software development process and related tools. The Company's approach to mission-critical software stresses principles of continuous software quality evaluation and increased visibility throughout the software development life cycle. The Company uses commercially available software development tools and internally developed tools to meet the needs of software acquisition managers and developers. The Company has achieved certification Level II under standards of the Software Engineering Institute.
The Company has developed AdaMAT, a software program licensed to both government and commercial customers, as a tool for an Ada software engineering environment. AdaMAT helps Ada users and managers of Ada development efforts adhere to specific programming practices and program development goals during coding, testing, and maintenance of the software by allowing visibility into the quality of the code at any given point in time.
Engineering and Management Support Services
The Company increased its research and development efforts during 1995 and 1996 in connection with an object-oriented system and software development tool which enables developers to build applications using diagrams. This tool supports team-based development and includes capabilities for automated source code and documentation generation.
During 1996, the Company entered into an agreement with Pacific Bell, a subsidiary of Pacific Telsis Group, to market, support and enhance Pacific Bell's telephone fraud control system known as "Sleuth". The Sleuth system is used to detect potential fraudulent usage of "alternate billing services" such as calling cards, and is currently used by five other Regional Bell Operating Companies (RBOC's) in addition to Pacific Bell. The Company intends to enhance the Sleuth system to support the existing Sleuth user group, and to market the system to other potential users.
Under various DoD contracts, the Company has performed a variety of services for its U.S. Government customers to assist them in planning and managing their large system development programs. This business area utilizes a wide range of technical and management skills of Company personnel to plan, analyze, design, test, support, train, maintain, and dispose of a variety of complex systems. Systems include radar, C3I, missile, aircraft, information, software, munitions, and soldier protective gear.
The Company provides support at all stages of a system's life. In response to emerging requirements, the Company helps customers define, develop, and initiate new programs. The Company also helps customers obtain program approval, conduct strategic planning, and evaluate proposals from industry. After prime contract awards, the Company helps monitor contractor activities, evaluate progress, and measure performance against program requirements.
Under the umbrella of the U.S. Air Force Technical and Engineering Management Support (TEMS) contract, the Company has supported, among others, the following programs out of the Air Force Electronic Systems Center at Hanscom Air Force Base in Massachusetts:
o Milstar o Airborne Warning and Control System (AWACS) o Joint Surveillance Target Attack Radar System (JSTARS) o Mission Planning Systems o Cheyenne Mountain Upgrade o U.S. Transportation Command/Air Mobility Command Support o PEACE SHIELD Air Defense System o Airborne Battlefield Command and Control Center o Over-the-Horizon Radar o Theater Battle Management Core Systems (TBMCS)
DRC served as a prime contractor under the TEMS program from 1984 to 1993. During 1993, the Air Force recompeted the TEMS program. DRC was a subcontractor on one of the winning teams, and was subsequently added as a subcontractor to several of the other winning bidders. A 1996 acquisition included a prime contract to provide support services under the TEMS program.
In 1995, the U.S. Air Force awarded to the Company a 5-year contract (one year plus four option years) valued, depending on customer task ordering, at up to $23.7 million. Under the contract, DRC will provide technical and engineering services to the U.S. Air Force Air Logistics Center at Tinker AFB, Oklahoma as well as other Air Force logistics centers. Initial tasking under the new contract included orders to provide independent test and evaluation services of certain avionics and software under the Air Force B-1B aircraft program. DRC has been supporting the B-1B program since 1990.
In 1996, the Defense Information Systems Agency (DISA) awarded multiple contracts under its Defense Enterprise Integration Services (DEIS-II) program. DRC is a member of the winning Computer Sciences Corporation team. DEIS-II is an indefinite order, indefinite quantity program that may be a vehicle for a wide variety of tasks which DRC will perform for DISA and related agencies. In particular, DRC brings its experience in Business Process Re-Engineering (BPR), as well as systems development, integration and migration, to the DEIS-II program. DRC also performed as a subcontractor to Computer Sciences Corporation under the predecessor DEIS contract since 1993.
The Company supports the DoD in the area of acquisition logistics. DRC technical staff help customers plan and manage the implementation of program requirements throughout all phases of the acquisition process. In 1995, the Company received a five-year contract (one year plus four option years) to provide logistics modeling and analysis for the U.S. Air Force Air Staff, with a potential value depending upon tasking of up to $6.9 million. The Company also received a contract from the Federal Aviation Administration for a radar performance monitoring and analysis system and a contract for logistics modeling support for the DoD's Joint Advanced Strike Technology program. From 1987 to present the Company has provided acquisition logistics services to the Ballistic Missile Defense Organization (BMDO).
The Company combines its expertise in the weapon system acquisition process with expertise in systems analysis, design, training and simulation, and human factors to perform human-systems integration and force analysis. DRC has provided force analysis support to the Army Research Laboratory since 1987. Force Analysis activities are focused on developing tools that support analysis of soldier and system effectiveness, identify and assess force improvement options (doctrine, training, leader development, organization, and material), and ensure that soldier considerations are addressed in force improvements. In 1995, DRC won a $22.5 million 5-year contract from the U.S. Army Research Laboratory to provide analysis, system development and support in several functional areas, including assessment of manpower, personnel and training issues, analysis of soldier systems performance, and integration of methods and databases for use by system designers. Under the Company's previous contract, begun in 1991, DRC developed a set of automated manpower and personnel integration analysis tools that are used to analyze system cost versus performance to help maintain optimal system performance at an affordable price. DRC also developed methods for analyzing training requirements to promote standardized training across the military services.
Through its human-systems integration efforts, the Company helps the military benefit through improved performance and effectiveness, by matching soldiers to the tasks they must perform; cost and resource savings, by making soldiers more effective and by automating tasks; and more effective system design, by documenting relationships of design options to eventual performance.
During 1996, the Company was awarded a 4-year U.S. Army contract valued at approximately $13 million, to apply certain teamwork training principles developed to improve performance in high pressure environments, to emergency room settings in civilian and military hospitals.
HARDMAN III, a suite of microcomputer-based tools developed by DRC, estimates a weapon system's manpower and training requirements, calculating manpower requirements by military specialty, skill level, pay grade, and maintenance level for every unit within a specified force structure. This suite of tools also allows analysts to locate and distribute system-level requirements to lower-level tasks with consistency; estimate and set required parameters for personnel quality constraints that affect job performance; and evaluate contractor designs on the basis of performance requirements, available maintenance support, and operator crew sizes. The training model estimates a weapon system's total course costs, costs per graduate, instructor requirements, and training man-day requirements. The HARDMAN software has been used on over fifteen Army weapon systems. Recently, the suite of HARDMAN III tools has been consolidated into a single windows-based application called "IMPRINT" (Improved Performance Research Integration Tool).
DRC is a subcontractor to Lockheed Martin on the U.S. Army's Warfighter 2000 Simulation. WARSIM will provide training for commanders and their staffs. DRC is leading the conceptual modeling, MANPRINT, and safety aspects of the effort. DRC is also providing system engineering and software engineering support to the Integrated Development Team.
DRC is a subcontractor to Lockheed Martin for the Close Combat Tactical Trainer program (CCTT). CCTT will simulate Army tank and mechanized infantry units from vehicle crews to the battalion level. CCTT will use distributed, interactive simulation technology to provide a "virtual" training environment. DRC will conduct all manpower and personnel integration activities such as training, human factors engineering, system safety, health hazards, and survivability, and will develop modules of software for CCTT that generate tactical exercises and that assess unit performance.
The Company's Test Equipment Division provides a variety of research, engineering, and manufacturing services in support of the U.S. Navy, including test equipment services for the Trident submarine's inertial gyroscopes, accelerometers, and other components. Also for the Navy, the Company has developed an automated system used for the design, simulation, synthesis, analysis, and verification of integrated circuits, printed circuit boards, and entire electronic systems. During 1996, the Company increased its support for the Navy in connection with the development of new processes for fabricating semiconductors "hardened" to survive severe environments.
During 1994, the Company's Systems and Test Divisions competitively bid and won an Air Force contract to produce a test system for secure tactical communications devices. Company systems engineers are responsible for the integration of commercially available components with sophisticated software supplied by a subcontractor. The system operates with a DEC Alpha workstation. Future system sales depend on system performance capabilities as well as cost and customer budget factors.
During 1995, DRC was awarded two prime contracts to serve Federal agencies other than DoD. The first award was from the U.S. Department of the Treasury to provide information technology support services to the Internal Revenue Service and other Treasury departments. The contract is for one year plus four one-year options with an aggregate ceiling of $200 million. The contract may be used for a broad range of information system development, acquisition support, and other management services. The Treasury made multiple awards and expects the best technical and management performing contractors to obtain the highest level of tasking over the life of the program. Through the end of 1996, the Company has achieved approximately $1.3 million of revenue under this contract. The second award, from the General Services Administration, permits DRC to provide a broad range of information technology services including software management, communications systems support, satellite communications systems, acquisition support, and system engineering under the GSA's Federal Systems Integration and Management program (FEDSIM). This contract may serve as a vehicle for services to the GSA as well as other Federal agencies.
Digital Instruments and Precision Components
The Company operates two units that produce digital instuments and precision components for commercial markets, the Encoder Division and the Metrigraphics Division. The Encoder Division designs, manufactures and markets a line of digital encoders used to sense position in equipment. These products use optical techniques to convert motion to digital signals that can then be used to control the speed and position of devices such as machine tools, computer peripherals, robotics arms and medical equipment.
Beginning in late 1992 and continuing through 1993, the Company invested in a specialized production line and produced a line of encoders for an automotive industry manufacturing customer. This line of encoders is designed into a fuel pump and is used to control fuel flow and reduce emissions. Manufacturing on the line commenced in 1993, became fully operational in 1994 and has continued through 1996.
The Metrigraphics Division uses photolithographic processes to manufacture optical discs, scales and reticles that are used for precision measurement. Metrigraphics also uses various metal deposition processes, including electroplating and electroforming, to produce a variety of precision components. Products include printheads and oriface plates used in electronic printers.
Using a process called electroforming, DRC manufactures precision components used in inkjet cartridges. These products are a substantial portion of the sales of the Metrigraphics Division. In December 1995, the Company leased 27,000 square feet in Wilmington, Massachusetts to provide space for a second electroform production facility. During 1995 and 1996, approximately $7 million has been incurred for the purchase of production equipment to expand the Company's electroform capacity.
The customers for both of these divisions are primarily manufacturing companies which integrate the Company's components into their equipment. Encoder and Metrigraphics engineers work closely with customer engineers to design and develop prototypes to meet customer product requirements. Repeat orders for these customer-designed components are a significant element of sales. High quality standards and competitive unit costs are critical aspects of this business.
United States Government Contracts
Contracts for the Company's defense services are obtained by marketing and technical personnel employed by the Company. The Company's other products are sold by sales personnel employed by the Company and sales representatives.
During 1996, the Company's revenues from contracts with the DoD, either as prime contractor or subcontractor, accounted for approximately 74% of the Company's total revenues. The Company's government contracts fall into one of three categories: (1) fixed price, (2) time and materials, and (3) cost plus fixed fee. Under a fixed price contract, the customer pays an agreed upon price for the Company's services or products, and the Company bears the risk that increased or unexpected costs may reduce its profits or cause it to incur a loss. Conversely, to the extent the Company incurs actual costs below anticipated costs on these contracts, the Company could realize greater profits. Under a time and materials contract, the government pays the Company a fixed hourly rate intended to cover salary costs and related indirect expenses plus a profit margin. Under a cost plus fixed fee contract, the government reimburses the Company for its allowable direct expenses and allowable and allocable indirect costs and pays a negotiated fee. In 1996, approximately 65% of the Company's government contracts revenue was under fixed price or time and material contracts, while approximately 35% of revenue was under costs plus fixed fee contracts.
During 1996, the Company's U.S. Government business consisted of approximately 105 separate contracts on 60 different programs. The Company's contracts with the government are generally subject to termination at the convenience of the government; however, the Company would be reimbursed for its allowable costs to the time of termination and would be paid a proportionate amount of the stipulated profit attributable to the work actually performed. Although government contracts may extend for several years, they are generally funded on an annual basis and are subject to reduction or cancellation in the event of changes in government requirements or budgetary concerns. If the U.S. Government curtails expenditures for research, development and consulting activities, such curtailment might have an adverse impact on the Company's sales and earnings.
Backlog
At December 28, 1996, the Company's backlog of unfilled orders was approximately $73,200,000 compared with $61,284,000 at December 30, 1995. The Company expects that substantially all of its backlog on December 28, 1996 will be filled during the year ending December 31, 1997. The Company has a number of multi-year contracts with agencies of the U.S. Government on which actual funding generally occurs on an annual basis. The Company's business does not have seasonal characteristics but a portion of its funded backlog is based on annual purchase contracts, and the amount of funded backlog as of any date can be affected by the timing of order receipts and deliveries thereunder.
Competition
The Company competes with both domestic and foreign firms, including larger diversified companies and smaller specialized firms. The U.S. government's own in-house capabilities are also, in effect, competitors of the Company because various agencies perform certain types of services which might otherwise be performed by the Company. The principal competitive factors for defense services are price, performance, technical competence and reliability. In addition, in the commercial business, the Company also competes with other manufacturers of encoders, electroform vendors and suppliers of precision measurement scales. The principal competitive factors effecting the precision components manufacturing business are price, product quality and custom engineering to meet customer system requirements.
Research and Development
The Company expended approximately $2,702,000 (inclusive of overhead and other indirect costs) on new product and service development during the year ended December 28, 1996, as compared to expenditures of $1,949,000 during 1995 and $224,000 during 1994.
Raw Materials
Raw materials and components are purchased from a large number of independent sources and are generally available in sufficient quantities to meet current requirements.
Environmental Matters
Compliance with federal, state and local provisions relating to the protection of the environment has not had and is not expected to have a material effect upon the capital expenditures, earnings or competitive position of the Company.
Employees
At December 28, 1996, the Company had 1,349 employees.
Proprietary Information
Patents, trademarks and copyrights are not materially important to the business of the Company. The United States Government has certain proprietary rights in processes and data developed by the Company in its performance of government contracts.
Item 2.
Item 2. Properties
The Company leases offices and other facilities, totaling approximately 231,000 square feet, which are utilized for its defense services, manufacturing and warehousing operations as well as its marketing and engineering offices. The Company has manufacturing and office space in Wilmington, Massachusetts under three leases totaling 113,000 square feet, expiring in 2000, with options to the year 2005. The remaining leased facilities consist of offices in 24 locations across the United States. The Company owns a 135,000 square foot facility in Andover, Massachusetts. This building was purchased in 1993 and is utilized for its defense service operations and corporate administrative offices.
The Company's total rental cost for 1996 was $2,014,000.
The Company believes its properties are adequate for its present needs. See Note 8 to the Consolidated Financial Statements included in the Company's 1996 Annual Report to Shareholders for a description of the Company's lease obligations.
Item 3.
Item 3. Legal Proceedings
The Company is not a party to any material litigation.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.
Item 4A. Executive Officers of the Registrant
The following is a list of the names and ages of the executive officers of the Company indicating all positions and offices held by each person and each person's principal occupations or employment during the past five years. The executive officers were elected by the Board of Directors and will hold office until the next annual election of officers and their successors are elected and qualified, or until their earlier resignation or removal by the Board of Directors. There are no family relationships between any executive officers and directors.
Years of Age Service Position
John S. Anderegg, Jr. 73 42 Chairman
Albert Rand 70 37 President and Chief Executive Officer
John L. Wilkinson 57 15 Vice President, Human Resources
Douglas R. Potter 46 3 Vice President of Finance, Chief Financial Officer
Each of the persons named above has served in the position indicated for more than five years, with the exception of Douglas R. Potter. Mr. Potter was appointed Vice President of Finance and Chief Financial Officer in November 1993. He was Vice President, Treasurer, and Chief Financial Officer of SofTech, Inc. of Waltham, Massachusetts from 1990 to 1993.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The common stock of Dynamics Research Corporation is traded on the NASDAQ National Market under the symbol (DRCO).
The high and low bid prices for the quarters in 1995 and 1996 and the number of holders of record of the Company's common stock are described in the Company's Annual Report to Shareholders for 1996 under the caption "Stock Prices" and "Number of Shareholders," and such information is incorporated herein by reference.
In September 1984, the Board of Directors indicated its intention not to declare cash dividends to preserve cash for the future growth and development of the Company. The Company did not declare any cash dividends between 1984 and 1996 and does not anticipate doing so for the foreseeable future.
Item 6.
Item 6. Selected Financial Data
The section entitled, "Five Year Summary of Selected Financial Data" in the Company's Annual Report to Shareholders for 1996 is incorporated herein by reference.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report to Shareholders for 1996 is incorporated herein by reference.
Item 8.
Item 8. Financial Statements and Supplementary Data
The following financial statements are filed as part of this Annual Report:
Report of Independent Public Accountants
Consolidated Balance Sheets at December 28, 1996, December 30, 1995 and December 31, 1994
Consolidated Statements of Operations for the three years ended December 28, 1996
Consolidated Statements of Shareholders' Investment for the three years ended December 28, 1996
Consolidated Statements of Cash Flows for the three years ended December 28, 1996
Notes to Consolidated Financial Statements
(The consolidated financial statements and related notes listed above are incorporated by reference to the Company's Annual Report to Shareholders for the year 1996.)
Report of Independent Public Accountants on Schedules to Consolidated Financial Statements
Schedule VIII - Valuation and Qualifying Accounts for the three years ended December 28, 1996
The foregoing schedule is included as part of Item 14 of this Annual Report on Form 10-K
All other financial statements and schedules have been omitted because the information required to be submitted has been included in the financial statements and related notes or they are either not applicable or not required under the rules of Regulation S-X.
Quarterly financial data presented on page 11, and Management's Discussion and Analysis of Financial Condition and Results of Operations presented on pages 12-14, of the Company's Annual Report to Shareholders for the year 1996, are also incorporated herein by reference. With the exception of the portions listed in the above index, the Annual Report referred to above is not to be deemed filed as part of the financial statements.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
Information with respect to Directors of the Registrant in the section entitled "Election of Directors" in the Company's definitive proxy Statement for the 1996 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year ended December 28, 1996, is incorporated herein by reference.
Information relating to the Executive Officers of the Company is included in Item 4A of Part I of this Form 10K.
Mr. Albert Rand, president and chief executive officer reported on form 5 the sale of shares of the Company's Common Stock during 1996 for which form 4 was inadvertently not filed.
Item 11.
Item 11. Executive Compensation
Information called for by this item is incorporated by reference from the section entitled "Compensation and Related Matters" in the Company's definitive Proxy Statement for the 1996 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year ended December 28, 1996.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information called for by this item is incorporated by reference from the sections entitled "Common Stock Ownership of Certain Beneficial Owners and Management" in the Company's definitive Proxy Statement for the 1996 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year ended December 28, 1996.
Item 13.
Item 13. Certain Relationships and Related Transactions
Not applicable.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) and (2) Financial Statements and Schedules - See Item 8.
(a) (3) Exhibits. The exhibits that are filed with this Form 10-K, or that are incorporated herein by reference, are set forth in the Exhibit Index, which appears in Part IV of this report on pages 24 and 25.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the last quarter of fiscal 1996.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES TO CONSOLIDATED FINANCIAL STATEMENTS
To Dynamics Research Corporation:
We have audited in accordance with generally accepted auditing standards, the consolidated financial statements included in Dynamics Research Corporation's annual report to shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated February 7, 1997. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed in the accompanying index is the responsibility of the company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Boston, Massachusetts, February 7, 1997
Exhibit 99
IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS
The following factors, among others, could cause the Company's actual results and performance to differ materially from those contained in forward-looking statements made in this report and presented elsewhere by or on behalf of the Company from time to time.
Uncertainties as to Department of Defense and Other Federal Agency Budgets
The Company has historically derived a substantial portion of its revenue from contracts and subcontracts with the Government, and currently more than 74% of the Company's revenue is derived from the Department of Defense business. During the past, the Company's defense business has been adversely affected by significant changes in defense spending. Overall U.S. defense budgets have been declining, and the effects of this general decline and attendant increased competition within the consolidating defense industry is expected to continue. Funding limitations could result in a reduction, delay, or cancellation of existing or emerging programs. These factors, among others, have reduced the Company's revenue and operating margins on its defense contracts in recent fiscal periods. The Company anticipates that competition in all defense-related areas will continue to be intense and that, accordingly, there will be continued significant competition when the Company's defense contracts are rebid and continued significant competitive pressure to lower prices, which may reduce profitability in this area of the Company's business. Any reduction in the level or profitability of the Company's defense business, if not offset by new commercial business or other business with the federal government, will adversely affect the Company's business, financial condition and results of operations.
A significant portion of the Company's government contracts are renewable on an annual basis, or are subject to the exercise of contractual options. Also, multi-year contracts often require funding actions by the Government on an annual or more frequent basis. As a result, the Company's business could experience material adverse consequences should the Government budget not include funds required to sustain the programs under which DRC operates.
Government Contracting Risks
A significant portion of the Company's government contracts are of a time and materials nature, with fixed hourly rates that are intended to cover salaries, benefits, other indirect costs of operating the business and profit. The pricing of such contracts is based upon estimates of future costs and assumptions as to the aggregate volume of business that the Company will perform in a certain business division or other relevant unit. For long term contracts, the Company must estimate the costs necessary to complete the defined statement of work and recognize revenues or losses in accordance with such estimates. However, actual costs may vary materially from the estimates made from time to time, necessitating adjustments to reported revenue and net income. Underestimates of the costs associated with a project would adversely affect the Company's overall profitability and could have a material adverse effect on the Company's business, financial condition and results of operations.
Governmental awards of contracts are subject to regulations and procedures that permit formal protests by losing bidders. Such protests may result in significant delays in the commencement of expected contractual effort, or the reversal of a previous award decision, which could have a material adverse effect on the Company's business, financial condition and results of operations.
Because of the complexity and scheduling of contracting with the government, from time to time costs are incurred in advance of contractual funding by the government. In some circumstances, such costs may not be recovered in whole or in part under subsequent Government contractual actions. Failure to collect such amounts may have material adverse consequences on the Company's business, financial condition and results of operations.
Costs incurred in connection with government contracts are generally subject to after-the-fact audits. Such audits may result in material disallowances, which could have an adverse effect on the Company's business, financial condition and results of operations.
A substantial portion of the Company's government contracting business is as a subcontractor. In such circumstances, the Company generally bears the risk that the prime contractor will meet its performance obligations to the government under the prime contract and that the prime contractor will have the financial capability to pay the Company amounts due under the subcontract. The inability of a prime contractor to perform or make required payments could have a material adverse effect on the Company's business, financial condition and results of operations.
The Government has the right to terminate contracts for convenience. In such a termination, the Company would generally recover costs incurred up to termination, costs required to be incurred in connection with the termination, and a portion of the fee earned commensurate with the work performed to termination. However, significant adverse effects on the Company's indirect cost pools may not be recoverable in connection with a termination for convenience. Contracts with state and other governmental entities are subject to the same or similar risks.
Dependence or Key Personnel
The Company is dependent on its key technical personnel. In addition, certain technical contributors may have specific knowledge and experience related to various Government customer operations that would be difficult to replace in a timely fashion. The loss of the services of key personnel could have a material adverse effect on the Company's ability to perform required services under certain contracts, or to retain such business after the expiration of the current contract, or to win new business where certain personnel have been identified as key personnel in the proposal, any of which could have a material adverse effect on the Company's business, financial condition and results of operations.
Competition
The government contracting business is subject to intense competition, both technical and pricing, from numerous companies, many of which have significantly greater financial, technical and marketing resources than the Company.
Competition in the market for the Company's commercial products is also intense. There is a significant lead time for developing such business, and it involves significant capital investment including development of prototypes and investment in manufacturing equipment. The Company's precision products business has a number of competitors, many of which have significantly greater financial, technical and marketing resources than the Company.
Risks Associates with New Markets and New Products
In its efforts to enter new markets, including government agencies other than the Department of Defense and commercial markets, the Company faces significant competition from other companies that have prior experience with such potential customers as well as significantly greater financial, technical and marketing resources than the Company. As a result, the Company's efforts to enter such new markets may be unsuccessful or may not achieve the level of success sought by the Company.
The Company has announced software products for commercial markets. There is no assurance that the Company's software products will meet with market acceptance or that the Company will be able to compete in the development and distribution of such products with competitors that have significantly greater resources and experience.
Concentration of Customers
Within the Department of Defense, individual services and program offices account for a significant portion of the Company's government business. Two customers account for a significant portion of the revenue of the Company's commercial manufacturing divisions. No assurance can be provided that any of these customers will continue as such or will continue at current levels. A decrease in orders from these customers would have an adverse effect on the Company's profitability, and the loss of any large customer could have a material adverse effect on the Company's business, financial condition and results of operations.
Risk of Product Claims
The Company's precision manufactured products are generally designed to operate as important components of complex systems or products, and defects in DRC products could cause the customer's product or systems to fail or perform below expectations. Like other manufacturing companies, the Company may be subject to claims for alleged performance issues relating to its products. There can be no assurance any such claims, if made, will not have a material adverse effect on the Company's business, financial conditions or results of operations.
Risk of Economic Events Effecting the Company's Business Segments
Certain of the Company's precision products are components of commercial products. Factors that affect the production and demand for such products, including economic events, competition, technological change and productions stoppages, could adversely affect demand for the Company's products. Certain of the Company's products are incorporated into capital equipment, such as machine tools and other automated production equipment, used in the manufacture of other products. As a result, this portion of the Company's business may be subject to fluctuations in the manufacturing sector of the overall economy. An economic recession could have a material adverse effect on the rate of orders received by the commercial divisions. Significantly lower production volumes resulting in under-utilization of the Company's manufacturing would adversely affect the Company's profitability.
Technological Change
The Company's knowledge base and skills in the Government contracting area are sophisticated and involve areas in which there have been and are expected to be significant technological change. There is no assurance that the Company will continue to be able to offer services that satisfy its customers' requirements at a competitive price. Many of the Company's products are incorporated into sophisticated machinery, equipment or electronic systems. Technological changes may be incorporated into competitor's products that may adversely affect the market for the Company's products. Further, there can be no assurance that the Company's research and product development efforts will be successful and result in new or improved products that may be required to sustain the Company's market position.
Uncertainty of Future Financing
Although the Company has no immediate plans to raise additional capital, it may in the future need to raise additional funds through public or private debt or equity financings. There can be no assurance that any such funding will be available or of the terms or timing of any such funding.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 21, 1997
DYNAMICS RESEARCH CORPORATION
by: /s/ Albert Rand Albert Rand, President (Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on the 21st of March, 1997.
/s/ Albert Rand Albert Rand Director, President, Chief Executive Officer
/s/ Douglas R. Potter Douglas R. Potter Vice President of Finance, Chief Financial Officer (Principal Financial and Accounting Officer)
/s/ John S. Anderegg, Jr. John S. Anderegg, Jr. Director, Chairman
/s/ Francis J. Aguilar Dr. Francis J. Aguilar Director
/s/ Thomas J. Troup Thomas J. Troup Director
/s/ James P. Mullins Gen. James P.Mullins Director
SCHEDULE VIII
DYNAMICS RESEARCH CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED DECEMBER 28, 1996
(in thousands of dollars)
ALLOWANCE FOR DOUBTFUL ACCOUNTS AND SALES RETURNS
Balance, December 25, 1993 $418 Additions charged to expense 222 Write-off of uncollectible accounts, net (54)
Balance, December 31, 1994 $586 Additions charged to expense (2) Write-off of uncollectible accounts, net (182)
Balance, December 30, 1995 $402 Additions charged to expense (54) Write-off of uncollectible accounts, net (8)
Balance, December 28, 1996 $340
EXHIBIT INDEX
3.0 Certificate of Incorporation and By-Laws.
3.1 Restated Articles of Organization dated May 22, 1987. (Incorporated by reference to the Registrant's Form 10-Q for the quarter ended 6/13/87)
3.2 By-Laws dated May 22, 1987. (Incorporated by reference to the Registrant's Form 10-Q for the quarter ended 6/13/87)
4.0 Instruments defining the rights of security holders, including indentures.
4.1 Common stock certificate.
4.2 Preferred stock certificate.
4.3 Rights Agreement dated as of July 14, 1988 ("Rights Agreement") between the Company and American Stock Transfer & Trust Company, as Rights Agent.* (Incorporated by reference to the Registrant's Form 8-K on July 14, 1988)
4.4 Rights Agreement Amendment No. 1 dated as of September 6, 1989.* (Incorporated by reference to the Registrant's Form 8-K on September 12, 1989)
10.0 Material Contracts
10.1 Amended 1983 Stock Option Plan. (Incorporated by reference to the Registrant's Form 10-K for the year ended 12/27/87)
10.2 1993 Equity Incentive Plan. (Incorporated by reference to the Registrant's Form 10-Q for the quarter ended 6/12/93)
10.3 1995 Stock Option Plan for non-employee directors. (Incorporated by reference to the Registrant's Form 10-K for the year ended 12/31/94)
10.4 Form of Dynamics Research Corporation Indemnification Agreement for Directors. (Incorporated by reference to the Registrant's Form 10-K for the year ended 12/28/91)
10.5 Form of Dynamics Research Corporation Severance Agreement for Messrs. Anderegg and Rand. (Incorporated by reference to the Registrant's Form 10-K for the year ended 12/28/91)
10.6 Dynamics Research Corporation Deferred Compensation Plan for Non-Employee Directors. (Incorporated by reference to the Registrant's Form 10-K for the year ended 12/28/91)
10.7 Mortgage Agreement dated February 5, 1993 between Dynamics Research Corporation and ABN AMRO Bank, N.V. (Incorporated by reference to the Registrant's Form 8-K on May 5, 1993)
13.0 Annual Report to security holders, Form 10-Q or quarterly reports to security holders.
13.1 The Company's Annual Report to Shareholders for the year ended December 28, 1996 filed herewith with the exception of the information incorporated by reference in parts I, II and IV of this Form 10-K is not deemed to be filed as part of this report.
23.0 Consents of experts and counsel
23.1 Consent of Independent Accountants (Arthur Andersen LLP) dated March 26, 1997 filed herewith.
99.0 Important Factors Regarding Forward-Looking Statements.
* Management contract of compensatory plan or arrangement.