UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
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 number 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 Identification No.)
Incorporation or Organization)
60 FRONTAGE ROAD
ANDOVER, MASSACHUSETTS 01810-5498
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (978) 475-9090
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
NONE NOT APPLICABLE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.10 Par Value
(Title of Class)
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 .
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
As of March 20, 1997, the aggregate market value of Common
Stock held by nonaffiliates of the Registrant was $62,042,861 and the number
of shares of Common Stock, $.10 par value, of the Registrant outstanding was
6,322,521.
Documents Incorporated By Reference
Portions of the 1997 Annual Report to Shareholders are incorporated by
reference in Parts I and II. Portions of the Registrant's Proxy
Statement for the 1998 Annual Meeting of Shareholders are incorporated
by reference in Part III.
The Exhibit Index is on pages 24 and 25.
DYNAMICS RESEARCH CORPORATION
Form 10-K
For the Fiscal Year Ended December 31, 1997
Part I Page
Item 1. Business 4
2. Properties 11
3. Legal Proceedings 12
4. Submission of Matters to a Vote of
Security Holders 12
4A. Executive Officers of the Registrant 12
Part II
5. Market for Registrant's Common Equity and
Related Stockholder Matters 13
6. Selected Financial Data 13
7. Management's Discussion and Analysis of
Financial Condition and Results
of Operations 13
8. Financial Statements and Supplementary
Data 13
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 14
Part III
10. Directors and Executive Officers of the
Registrant 15
11. Executive Compensation 15
12. Security Ownership of Certain Beneficial
Owners and Management 15
13. Certain Relationships and Related
Transactions 15
Part IV
14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 16
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 comprises four divisions: Systems, Test
Equipment, Metrigraphics and Encoder.
The Company's Systems Division is principally engaged in providing a
broad range of technical services, including information systems
development and operation, engineering, and management support services.
DRC's Test Equipment Division provides a variety of research,
engineering, and manufacturing services. The Company's Systems and Test
Equipment Division provide services to United States Department of
Defense (DoD) organizations, other U.S. and state government agencies,
and commercial entities. DRC's Metrigraphics and Encoder Divisions form
the Company's Precision Products Group. These divisions design,
manufacture, and sell digital instruments and precision components that
are primarily used in computer-controlled systems. The Precision
Products Group operates principally in the commercial marketplace.
Information Systems Development and Operation
DRC's Systems Division provides systems analysis, integration, and
software design and development services. The Division's information
technology offerings also include installation, systems operation, and
maintenance.
Systems built by DRC are used for aircraft maintenance and parts
tracking; supply chain management; training requirements; and for
managing state government health and human services commitments.
The Company's major DoD information systems programs are often referred
to as logistics information systems. These DRC-developed systems are
product management information systems that manage information on a
product's inventory requirements and control, maintenance and repair,
warranty analysis, supply, and distribution.
For nearly 30 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. In connection with these databases, the Company has
successfully integrated customer workflow and database activity
information with internet technology. This information is used by the
customer for a wide range of operating management tasks and decision
making.
During 1997, the Company continued to participate in the development of
the U.S. Air Force's Integrated Maintenance Data System (IMDS). DRC's
IMDS involvement encompasses system interface design, data conversion,
and contractor logistics support. IMDS is intended to replace a number
of existing legacy systems including the Tactical Interim CAMS and REMIS
Reporting System (TICARRS). TICARRS is a system that DRC supported for
16 years with design, development, implementation, and operation.
The DRC-developed Weapon Systems Management Information System (WSMIS)
assesses the "health" and capability of the U.S. Air Force's weapon
systems to meet wartime objectives. For the past sixteen years DRC has
served as the overall functional integrator of WSMIS and the developer
of most WSMIS modules. The Company currently provides WSMIS operational
and software development support. As a decision-support tool for
assessing the impacts of logistics status on potential wartime
capabilities, WSMIS computes inventory requirements, purchasing needs,
and logistics capability assessments for complex, high-priced aircraft
spare parts needed to meet aircraft availability requirements.
The Company is currently maintaining other decision support systems for
solving logistics problems. DRC's Execution and Prioritization of
Repair Support System (EXPRESS) is one of the primary systems supporting
the Air Force Material Command's Depot Repair Enhancement Program (DREP)
processes. EXPRESS identifies parts requirements, prioritizes needs,
evaluates the feasibility of repair, aids in driving the right items
into repair, and assists in the distribution of the repaired items.
Additional support to the DREP initiative to further improve depot-
repair processes is being provided by the DRC-developed Supportability
Analysis and Visibility (SAV) module. This modernized system will
provide key information on problem indicators, locations of assets, key
parts data that identify support problems, and a U.S. Air Force
"scorecard" to provide a common reference on the status of any given
item.
During 1997, the Company implemented a distributed computer-based
Statewide Automated Child Welfare Information System (SACWIS) for the
State of New Hampshire. This system manages child welfare cases handled
by the State of New Hampshire's Department of Health and Human Services.
The State of New Hampshire then awarded DRC a $4.5 million contract
extension to provide additional functional and technical enhancements to
the SACWIS system.
In February 1997, DRC was awarded a $36.0 million, contract to design,
deliver, install, and maintain a statewide IT infrastructure that
supports the Ohio Child Support Enforcement Tracking System (SETS).
The information technology infrastructure the Company is developing
helps automate the work of more than 4,250 Child Support Enforcement
workers throughout all of Ohio's 88 counties. In November 1997, the
State of Ohio awarded the Company an $18.9 million contract for
additional computer network infrastructure and related services. DRC
continues to provide computer hardware and software; site preparation
and installation; and technical support services for the SACWIS and Ohio
Works First system-systems that support Ohio's welfare reform
initiatives.
In December 1997, DRC also received a $28.3 million, three-year contract
from the State of Colorado, Department of Human Services to serve as a
prime contractor for its Children, Youth and Families project. The
contract is a result of a competitive procurement for the design,
development, and implementation of a child welfare and youth corrections
system consisting of software, training, and a state-wide computer
network infrastructure. The contract includes options for four
additional years of system maintenance and support valued at $14.8
million.
The Company continues to provide the U.S. Department of Treasury with
information technology services for the Internal Revenue Service and
other Treasury departments. Most of the activity under this contract
came from three large delivery orders involving:
1) Year 2000 software and system certification
2) Enforcement Revenue Information System quality systems testing and
quality assurance
3) Compliance Research Information System and associated system
support through project management, network design, and software
development
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. To this end, DRC has achieved Level-2
certification under the standards of the Software Engineering Institute
and is actively pursuing Level-3 certification.
Engineering and Management Support Services
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. The business area
utilizes a wide range of the Company's technical and management skills
to plan, analyze, design, test, support, train, maintain, and dispose of
a variety of complex systems. Systems include radar, C3I, missile,
aircraft, information, software, and munitions.
The Company provides support at all stages of the system's life cycle.
In response to emerging requirements, the Company helps its federal
Government customers define, develop, and initiate new programs. The
Company also helps customers obtain program approval, conduct strategic
planning, and evaluate proposals from private contractors. After prime
contract awards, the Company helps monitor contractor activities,
evaluate progress, and measure performance against program requirements.
The System Engineering and Technical Assistance (SETA) Group's products
and services include Computer-Based Training, systems integration, and
Business Process Improvement/Reengineering. Under a variety of
contracts, DRC supports the U.S. Air Force at bases such as Hanscom Air
Force Base, Scott Air Force Base, Langley Air Force Base, Maxwell Air
Force Base, Gunter Annex, and Peterson Air Force Base.
DRC's SETA activities support numerous programs and activities including:
Theater Battle Management Core Systems
Joint Transportation CIM Center
Air Mobility Command Enterprise Architecture
MILSTAR
Mission Planning Systems
Airborne Warning and Control System (AWACS)
Joint Surveillance Target Attack Radar System (JSTARS)
Air Force Research Lab laboratory and facilities operations
Cheyenne Mountain Upgrade
Command and Control foreign military sales
In 1995 the U.S. Air Force awarded DRC a five-year contract for
Technology Task-Order Engineering Services (TTOES). Originally valued
at up to $23.7 million, in 1997 the contract ceiling was increased to
$31.2 million. DRC has provided engineering, logistics, and software
support on programs such as the B-1B, the B-2, the B-52, the KC-135, and
the E-3A aircraft repair, maintenance, and upgrade programs. From its
origin at the Oklahoma City Air Logistics Center (ALC), DRC has expanded
its TTOES task orders to include work at other ALCS located at Warner
Robins, GA; Ogden UT; and San Antonio, TX. Recent tasking has centered
on providing support to Air Force reengineering and business process
improvement initiatives at all of these ALCs.
Since 1993 DRC has provided the US Army Aviation and Missile Command
(AMCOM) with specialized studies and analyses in aviation/missile system
development, acquisition and sustainment. The current $33.0 million
technical support prime contract supports a broad range of helicopter
and missile systems in varying life cycle stages. Additionally, DRC
supports seven other technical contracts based in Huntsville, Alabama
with acquisition logistics, systems engineering, and other related
program management services.
DRC continues to provide logistics modeling and analysis for the U.S.
Air Force Air Staff as well as for the Joint Strike Fighter program.
Since 1987 the Company has provided acquisition logistics services to
the Ballistic Missile Defense Organization.
Combining its expertise in weapon system acquisition processes with its
expertise in systems analysis, design, training and simulation, and
human factors DRC performs human-systems integration and force analysis.
Since 1987, DRC has provided force analysis support to the Army Research
Laboratory. These activities are focused on developing tools that
support analyzing soldier and system effectiveness, identifying and
assessing force improvement options (doctrine, training, leader
development, organization, and material), and ensuring soldier
considerations are addressed in force improvements. Three years ago, DRC
won a $22.5 million dollar, five year contract from the U.S. Army
Research Laboratory to provide analysis, system development and support
in several functional areas which include assessment of manpower,
personnel, and training issues; analysis of soldier systems performance;
and integration of methods and databases for use by system designers.
In addition, DRC developed methods for analyzing training requirements
and standardizing training across all branches of the military services.
The Company is in its second year of a U.S. Army four-year, contract
valued at approximately $13.0 million, to implement, apply, and manage
DRC-developed teamwork training principles to improve performance in
high-pressure environments. The project focus is on improving teamwork
in emergency-room settings at more than 15 hospitals (both civilian and
military).
As part of a five-year subcontract, DRC provided crew resource
management training to the US Air Force Air Combat Command. In 1997,
the contract was expanded to include the US Air Forces in Europe. The
Air Force has funded the base year and three option years reflecting a
value to DRC in excess of $2.5 million.
DRC is the developer of the Training System Requirements Analysis (TSRA)
Tools, which are a set of computer programs designed to help
instructional designers perform the initial phases of the Instructional
Systems Development (ISD) process. The TSRA Tools have been developed
throughout the Naval Air Warfare Center Training Systems Division
(NAWCTSD) and are widely used throughout the Department of Defense by
government and contractor organizations. The market for DRC's TSRA
Tools has expanded outside the military to include the Federal Aviation
Administration and National Mine Health and Safety Academy.
As a subcontractor to Lockhead Martin, DRC is supporting the U.S. Army's
Warfighter 2000 Simulation (WARSIM). DRC services include conceptual
modeling, Manpower and Personnel Analysis and safety engineering efforts
associated with WARSIM. The Company is also providing system
engineering and software engineering support to the Integrated
Development Team.
DRC is also a subcontractor to Lockheed Martin for the Close Combat
Tactical Trainer (CCTT) program. CCTT simulates Army tank and
mechanized infantry units from vehicle crews to the battalion level.
CCTT uses distributed, interactive simulation technology to provide a
"virtual" training environment. DRC conducts all manpower and personnel
integration activities associated with the CCTT. DRC is also playing a
similar role in a subcontract to Lockheed Martin on the United Kingdom
Combined Arms Tactical Trainer, the UK's version of the CCTT.
DRC is a subcontractor to Raytheon on the U.S. Air Force National Air
and Space Model (NASM). The Company is developing conceptual models and
collecting data on mission space objects and processes.
The Company continues to provide independent analysis and monitoring of
submarine-based, inertial guidance systems and electronic modules for
the U.S. Navy's Fleet Ballistic Missile Program Office. DRC's Inertial
Instrument Test Laboratory, is equipped for full-scale performance
testing of navigational quality inertial instruments.
DRC's Test Equipment Division provides research, engineering, and
manufacturing services to the DoD and commercial customers. In the DoD
market, the Test Equipment Division designs, constructs, installs,
trains, and supports test equipment used in the U.S. Navy Trident
program. In addition, DRC is involved in the ongoing design efforts for
the U.S. Navy's advanced submarine programs, including their ballistic
submarine system scheduled for activation in the 21st century. The
Division also developed a scenario generator and training device for the
Joint-Tactical Information Distribution System (JTIDS). DRC's device,
the JTIDs Training Device (JTD), will be used by the U.S. Air Force and
the U.S. Navy to train personnel in field-usage of the JTIDS terminals.
In 1996, DRC obtained an exclusive license from SBC Communications to
develop and market "Sleuth," its telephone fraud-detection control
system. Currently, five regional bell operating companies (RBOCs)
located throughout the United States are using "Sleuth" to combat
telephone fraud. Recently, the Division upgraded "Sleuth" to broaden
the types of suspicious telephone calling patterns that can be detected.
The Division is also involved in the design of a closed-loop system used
in the field of parameter control in semiconductor manufacture. This
process is being developed along with other companies under the auspices
of the U.S. Navy in the San Diego, California, Space and Naval Warfare
Systems Center. DRC is also performing computer-aided, semiconductor
circuit analysis for a number of commercial companies. In cooperation
with Rockwell Collins Company, the Division manufactures a highly
accurate Global Position System (GPS) receiver.
DRC's Precision Products Group
The commercial operations of DRC's Precision Products Group are
segmented in two divisions:
DRC's Encoder Division designs, manufactures, and markets a line of
digital encoders that convert analog motion and position information
into digital signals used in a wide variety of industrial products and
systems which include: machine tools, robotics, engine fuel-control
systems, packaging equipment, and pick-and-place machines. DRC's
digital encoding devices are essential elements of today's
electronically controlled systems and equipment.
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 and in circuitry used in
certain medical instruments. Metrigraphics' superior ability to design
and manufacture components and hold critical tolerances is an important
driver for a wide range of high-technology applications.
Metrigraphics' largest market is currently for nozzles used in inkjet
printer cartridges. In addition to its electroform parts for printers
and medical instruments, Metrigraphics manufactures precision glass
parts for computer peripherals, factory automation equipment, electronic
instrumentation, and semiconductor equipment. The Company has
completed a $6.0 million capital program, including state-of-the-art
automated production and inspection equipment, to support high volume
customers.
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 1997, the Company's revenues from contracts with the
DoD, either as prime contractor or subcontractor, accounted for approximately
66% 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 certain 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 1997, 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 1997, the Company's U.S. government business consisted of
approximately 115 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 significantly 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 31, 1997, the Company's backlog of unfilled orders
was approximately $110.0 million compared with $73.2 at December 28, 1996.
The Company expects that substantially all of its backlog on December 31,
1997 will be filled during the year ending December 31, 1998. 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 photolithographic
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 $1.4 million (inclusive of overhead
and other indirect costs) on new product and service development during the
year ended December 31, 1997, as compared to expenditures of $2.7 million
during 1996 and $1.9 million during 1995.
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 31, 1997, the Company had approximately 1,455 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. Properties
The Company leases offices and other facilities, totaling
approximately 330,000 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
29 locations across the United States. The Company owns a 135,000
square foot facility in Andover, Massachusetts that is utilized for its
defense service operations and corporate administrative offices.
The Company's total rental cost for 1997 was $2.5 million.
The Company believes its properties are adequate for its present
needs. See Note 6 to the Consolidated Financial Statements included
in the Company's 1997 Annual Report to Shareholders for a description
of the Company's lease obligations.
Item 3. Legal Proceedings
The Company is not a party to any material litigation.
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.
Age Position
John S. Anderegg, Jr. 74 Chairman and Director
Albert Rand 71 President, and Chief Executive Officer
and Director
John L. Wilkinson 58 Vice President, Human Resources and Clerk
Douglas R. Potter 47 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. Previously he was Vice President, Treasurer,
and Chief Financial Officer of SofTech, Inc. of Waltham, Massachusetts
from 1990 to 1993.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The common stock of the Company is traded on the NASDAQ National Market
under the symbol (DRCO).
The high and low bid prices for the quarters in 1996 and 1997
and the number of holders of record of the Company's common stock are
described in the Company's Annual Report to Shareholders for 1997
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 1997 and does not anticipate doing so for the
foreseeable future.
Item 6. Selected Financial Data
The section entitled, "Five Year Summary of Selected Financial Data"
in the Company's Annual Report to Shareholders for 1997 is incorporated
herein by reference.
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 1997 is incorporated herein by reference.
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 31, 1997, December
28, 1996 and December 30, 1995
Consolidated Statements of Operations for the three years ended
December 31, 1997
Consolidated Statements of Shareholders' Investment for the three
years ended December 31, 1997
Consolidated Statements of Cash Flows for the three years ended
December 31, 1997
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 1997.)
Report of Independent Public Accountants on Schedules to
Consolidated Financial Statements
Schedule VIII - Valuation and Qualifying Accounts for the three
years ended December 31, 1997
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 16, and Management's
Discussion and Analysis of Financial Condition and Results of
Operations presented on pages 17-19, of the Company's Annual Report
to Shareholders for the year 1997, 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. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
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 199765 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 31, 1997,
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.
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 1997 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 31, 1997.
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 19976 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 31, 1997.
Item 13. Certain Relationships and Related Transactions
Not applicable.
PART IV
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 1997.
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 20, 1998. 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 20, 1998
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 U.S. Government,
and currently more than 66% 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 on 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 affectimpact 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 27, 1998
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 27th of March, 1998.
/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/ Martin V. Joyce, Jr.
Martin V. Joyce, Jr. Director
/s/ Kenneth F. Kames
Kenneth F. Kames 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 31, 1997
(in thousands of dollars)
ALLOWANCE FOR DOUBTFUL ACCOUNTS AND SALES RETURNS
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
Additions charged to expense (86)
Write-off of uncollectible accounts, net (37)
Balance, December 31, 1997 $217
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 Form of Consulting Agreement between Dynamics Research
Corporation and Albert Rand. (Incorporated by reference to the
Registrant's Form 10-Q for the quarter ended 3/31/97)
10.8 Form of Supplemental Retirement Pension Agreement between
Dynamics Research Corporation and Albert Rand. (Incorporated by
reference to the Registrant's Form 10-Q for the quarter ended
3/31/97)
10.9 Credit Agreement dated October 2, 1997 between Dynamics
Research Corporation and a syndicate of banks and financial
institutions, with Brown Brothers Harriman and Company as the
agent.
10.10 Amended 1993 Equity Incentive Plan
10.11 Amended 1995 Stock Option Plan for Non-Employee Directors
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 31, 1997 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 counscel
23.1 Consent of Independent Accountants (Arthur Andersen LLP)
dated March 30, 1998 filed herewith.
99.0 Important Factors Regarding Forward-Looking Statements.
<TABLE> <S> <C>
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<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 542
<SECURITIES> 0
<RECEIVABLES> 49572
<ALLOWANCES> 0
<INVENTORY> 3377
<CURRENT-ASSETS> 56037
<PP&E> 50326
<DEPRECIATION> 28098
<TOTAL-ASSETS> 78859
<CURRENT-LIABILITIES> 29637
<BONDS> 10000
0
0
<COMMON> 737
<OTHER-SE> 38410
<TOTAL-LIABILITY-AND-EQUITY> 78859
<SALES> 27598
<TOTAL-REVENUES> 159377
<CGS> 20700
<TOTAL-COSTS> 139317
<OTHER-EXPENSES> 13815
<LOSS-PROVISION> (123)
<INTEREST-EXPENSE> 108
<INCOME-PRETAX> 6137
<INCOME-TAX> 2008
<INCOME-CONTINUING> 4129
<DISCONTINUED> 0
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financial highlights
1995 1996 1997
(In thousands of dollars, except share and employee data)
Revenue $ 103,941 $ 130,163 $ 159,377
Net income 559 1,729 4,129
Net income per share - basic* .09 .28 .66
Net income per share - diluted* .09 .27 .64
Backlog 61,284 73,200 110,001
Number of employees 1,249 1,349 1,455
Number of shares outstanding* 6,185,049 6,263,025 6,288,872
*Restated for the April 1997 10% stock dividend.
To Our Shareholders
Dynamics Research Corporation (DRC) revenues grew 22 percent in 1997,
bringing total sales to a record $159 million for the year. Much of this
growth is attributable to initiatives put in place earlier that are now
bearing fruit. We enter 1998 with a substantial backlog and are committed
to sustaining the strong growth achieved during the past two years.
Financial Results
Revenues for the year ended December 31, 1997 increased to $159.4 million
from $130.2 million for 1996. Net income for 1997 advanced to $4,129,000,
or $.66 per basic share and $.64 per diluted share, from $1,729,000, or
$.28 per basic share and $.27 per diluted share, the prior year. Results for
1997 include a one-time net income benefit realized during the third quarter
amounting to $1.0 million, or $.16 per share, from the refund of income taxes
and related interest. Sales for the Systems and Test Equipment divisions
totaled $131 million for the year, or 83 percent of revenues, while
sales for the Precision Manufactured Products divisions equaled $28 million,
or 17 percent of 1997 revenues.
Expanding Beyond Core Defense Initiatives
We continue to make excellent progress on changing our business mix to
promote growth and improve profitability. We are accomplishing this by using
the expertise and systems developed in our Department of Defense work for
other government agencies and businesses. Approximately 34 percent of this
year's revenues were generated from non-defense sources and sales of our
precision manufactured products-up from 26 percent last year, while
defense-related projects accounted for 66 percent of sales. Our long-stated
goal is to achieve a 50/50 balance between defense and non-defense revenues.
The most significant area of growth in 1997 was our state government
business. We won several major contracts, competing effectively against
well-known management consulting firms and computer hardware vendors. Our
success in this arena stems from a strong track record with existing clients,
an advantageous cost structure, and Systems Engineering Institute Level II
certification, a difficult-toobtain classification designed to ensure the
consistency, quality and comprehensiveness of DRC's systems integration
programs.
Major Wins
Major non-defense information system contracts awarded to
DRC in 1997 include:
A $36-million contract for the State of Ohio's Department of Health
and Human Services system for tracking child support payments;
A second, $19-million contract with Ohio to provide
computer hardware and software for an automated child welfare system;
A $28-million, seven-year contract with the State of
Colorado's child protection and juvenile justice agencies; Expansion
of an existing contract supporting a case-management system for New
Hampshire's Department of Health and Human Services; and
A $3-million contract for evaluating and certifying
year 2000 conversions for Internal Revenue Service information systems.
Pioneering New Military Niches
Reengineering consulting, logistics planning, decision support systems
and supply chain management-core DRC competencies-continue to constitute
the bulk of our defense business. Significantly, the realignment of
military budgets is generating greater demand for DRC's information
technology expertise. Opportunities are arising to manage programs that
are being privatized and to reengineer customer workflow to achieve
better efficiencies. We are also winning projects in new niches where
DRC has proven expertise. Key projects in this category include:
A three-year, $12-million extension of an existing contract supporting the
U.S. Navy's specialized semiconductor production facility in San Diego,
California. DRC engineers model and simulate semiconductor performance
before the chips are actually produced.
Marketing a test device for joint tactical communications, a sophisticated
display device that collects and synthesizes positioning information from
ships, airplanes and ground stations.
A $13 million, four-year program for the U.S. Army known as MedTeams grew to
$2.7 million in 1997 from $800,000 in 1996. This innovative program, which
draws upon DRC's experience in training combat flight crews, analyzes and
improves emergency room teamwork in civilian and military hospitals.
Telecommunications Initiative
One of the most promising areas of growth at DRC is the Sleuth
telecommunications fraud control system, a product initially developed by
Pacific Bell and now marketed and maintained by DRC under an exclusive
license. Accounting for $2.6 million of DRC revenues in 1997, Sleuth is used
to monitor calling card fraud by SBC Communications (formerly Southwest Bell
and Pacific Bell), Ameritech, Bell Atlantic, Bell South, U.S. West and is
soon to be installed in the NYNEX operations acquired by Bell Atlantic.
Precision Manufactured Products
Identifying new medical, high technology and consumer applications for
electroformed circuits and conductors was a primary focus for the
Metrigraphics Division in 1997. DRC is now seeking to develop potential
high-volume products in collaboration with household-name manufacturers
in several industries. Electroform products expanded beyond consumer and
office markets this year, as we produced products to be used in
engineering, cartography and industrial packaging applications.
Within the Encoder Division, high-volume production of diesel fuel
pump encoders for a major auto parts supplier remained strong, and we
are pursuing other volume production opportunities with original
equipment manufacturers.
Laying Groundwork for Future Growth
Entering 1998, our goals for the year are to maintain a 20 percent
growth curve, further improve margins and continue diversifying into non-
defense business. We anticipate that state government work will be a
major area of growth again this year. Our greatest emphasis going
forward is on the expansion of our commercial base, particularly within
the Systems Division.
We are constantly balancing the drive to invest in initiatives that
will generate strong future returns against the need to bring results to the
bottom line today. DRC is aggressively exploring and qualifying potential
new markets and technologies in which we expect to have a strong competitive
advantage. Our success in securing state health and human service agency
contracts is a prime example of how our strategy of migrating core
competencies into new, growing markets has paid off.
Among the many product and market development initiatives now
underway are:
Expansion of DoD work for programs undergoing privatization, particularly
those involving reengineering and logistics support;
Gaining entree through year 2000 date conversion contracts to the market for
revitalizing or replacing Bull computers in private corporations and state
and local governments;
Identifying and developing new applications for electroforming processes for
fine precision structures.
During the year we established a line of credit of up to $45 million
that gives us the flexibility to pursue new opportunities. The strength
of our board was augmented with the addition of two new directors:
Martin V. Joyce, Jr. and Kenneth F. Kames. Mr. Joyce is a vice president
of A.T. Kearney, Inc., a leading management consulting firm, and has far-
reaching expertise in the software and information technology industry.
Mr. Kames spearheads new business development for The Gillette Company
and brings a strong background in acquisitions and joint ventures. As
has been our practice in the past, we declared a 10 percent stock
dividend in April 1997 to increase the liquidity of DRC stock.
DRC is at an exciting point in its history. We are in the right place at the
right time to benefit from major changes in the marketplace. Much of the
credit for this goes to our employees who are willing and able to move
quickly to capitalize on new opportunities, as well as to our shareholders
for their ongoing support.
Sincerely,
John S. Anderegg, Jr. Albert Rand
Chairman President and
Chief Executive Officer
poised to profit
from market forces
The market for information technology services and devices is changing
faster than ever, buffeted by major social, technological and economic
trends. DRC is constantly reevaluating and reshaping its capabilities to
capitalize on these changing market conditions.
Major Market Forces
Shifting defense priorities driving demand for sophisticated information
systems that improve efficiency and lower costs;
Acquisition of information technology among state governments to improve
data tracking systems and meet more stringent federal reporting
requirements;
Telecommunications industry deregulation, resulting in consolidation and
the rise of innovative new service providers; and
Product advances across a wide range of industries enabled by the
miniaturization of electronics.
The pages that follow detail only a few of the many initiatives
percolating within DRC to take advantage of these trends.
Health and Human Services
Market Force
Recent legislation has mandated comprehensive computerized tracking and
management capabilities at state health and human service agencies.
The Response
Leverage expertise in designing and maintaining complex management
information systems to address the burgeoning state market.
supporting welfare reform
When the State of Ohio needed to establish the computer and communications
infrastructure for a statewide system to monitor child support payments, it
turned to DRC. In February 1997, DRC received a $36 million contract to
design, procure, install and maintain the computer hardware and
communications networks supporting 4,400 caseworkers throughout the state's
88 counties.
DRC's performance on the initial contract was a key factor in
winning additional work from Ohio. In November, it won a second contract
totaling nearly $19 million to provide computer hardware, software and
technical su
pport services in support of the Ohio Works First initiative
and its automated child welfare information system.
DRC's work for Ohio has primarily focused on providing systems
integration services. Its work for health and human service agencies in
the states of New Hampshire and Colorado has focused on developing and
implementing sophisticated software-based management information systems
for child welfare.
decision support systems
The complex logistics behind day-to-day maintenance and support typically
account for two-thirds of the costs of aircraft operations. As the Air Force
seeks lower-cost ways to meet its high maintenance standards, it is using
innovative decision support software and Internet-based communications
systems devised by DRC.
DRC software engineers have accessed an existing information system to
create a logistics model for managing the location and movement of
repair parts to and among the Air Force's five domestic Air Logistics
Center maintenance depots. The software tracks the availability of
maintenance bays, mechanics and machinery; forecasts space and equipment
demand; and schedules all repairs. It also manages the timely delivery of
replacement parts, eliminating costly inventory build up.
To facilitate fast access to this mission-critical supply chain, DRC has
also implemented a highly secure Web site that enables maintenance staff
around the country to review schedules and trace the location of parts.
Aircraft Maintenance
Market Force
The Department of Defense is striving to make weapons system maintenance
as cost-efficient as possible without jeopardizing readiness or
reliability.
The Response
Devise software-based decision support systems and secure Internet
communications to optimize maintenance operations.
fraud control system
In 1996, DRC obtained an exclusive license to maintain and market a
telephone fraud detection system from a unit of SBC Communications that
detects potentially fraudulent credit card calls. The system is now used
by all five regional Bell operating companies, and is soon to be
installed in the NYNEX operations acquired by Bell Atlantic.
DRC software engineers have upgraded the Fraud Control System into a
comprehensive product that detects suspicious calling patterns in all
long-distance calls. With deregulation continuing to blur the lines
between Bell operating companies, local exchange carriers and
independent telephone companies, all carriers will benefit from putting
universal fraud control measures in place. DRC is exploring
opportunities with several major computer and telecommunications
equipment vendors about marketing the Fraud Control System to local
exchange carriers, independents and major international
telecommunications companies.
Telecommunications
Industry Deregulation
Market Force
Telecommunications industry deregulation has resulted in a wave of
consolidations and the rise of innovative new service providers.
The Response
Enhancing a Fraud Control System currently in use by Regional Bell
Operating Companies and making it an attractive cost-control tool for
independent telephone companies and local exchange carriers.
Miniaturization of Electronics
Market Force
The miniaturization of electronics is resulting in the deployment of
next-generation medical, high technology and consumer products.
The Response
Partner with product designers at major manufacturers to engineer DRC's
electroformed circuits and components into new miniature devices.
precision electroforming
The miniaturization of electronics is opening new markets for DRC-
already one of the largest independent suppliers of high-precision miniature
circuits, disks and other optical components. These devices are manufactured
through a process known as electroforming, whereby a thin, flexible metal
layer is deposited on glass, film or ceramic substrates in patterns with
tolerances of less than one micron.
DRC currently produces nozzles for controlling the flow of ink for business
and industrial ink jet printers, as well as flexible circuits used in imaging
electronics for intravascular catheters used in angioplasty. DRC is
collaborating with design engineers at major medical, high technology,
recreational equipment, automobile and household equipment manufacturers to
devise new high volume applications for its electroformed precision parts.
Command, Control and Communications
Market Force
In an effort to better coordinate and streamline operations, branches of
the military are seeking to integrate differing communications
protocols.
The Response
A unique DRC workstation tests devices that receive and synthesize
tactical data and positioning information from diverse military sources.
improving tactical communications
Entering the large and fast-growing marketplace for command, control and
communications systems, DRC has developed a unique tool that tests
critical communications devices and simulates the theater of operation.
DRC's test device (Joint Tactical Information Distribution System Test
Device), gauges the efficiency and functionality of equipment
transmitting and receiving tactical data to or from such diverse sources
as satellites, aircraft, ships and groundbased installations. These
devices, which identify and locate forces within a particular geographic
region-the Persian Gulf, for example-must integrate information that
comes in a range of different formats, including voice, data, or
scrambled and unscrambled frequencies.
Comprised of a computer workstation and sophisticated communications
electronics, the test device processes data from these diverse sources
and displays the location of forces as icons on a large screen. The test
device's simulation capabilities make it an excellent training device.
It also represents an area of potential growth for DRC because of its
unique ability to integrate data from multiple sources. Currently in use
as a training system at Naval and Air Force bases, the next-generation
system will operate as an interface device connecting forces within the
theater of operation.
<TABLE>
Five Year Summary of Selected Financial Data
<CAPTION>
(in thousands of dollars, exceop share and employee data)
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Revenue $ 159,377 $ 130,163 $ 103,941 $ 102,964 $ 101,102
Operating income 6,245 3,345 1,018 632 3,242
Net income 4,129 1,729 559 224 1,834
Net income per
common share - basic* .66 .28 .09 .04 .30
Net income per
common share - diluted* .64 .27 .09 .04 .29
Total assets 78,859 71,102 53,946 53,977 59,494
Long-term debt
(excluding current
portion) 10,000 300 1,500 2,717 3,900
Shareholders'
investment 39,147 35,239 33,206 32,713 32,437
Shareholders'
investment per share* 6.22 5.63 5.37 5.28 5.25
Return on shareholders'
investment(%) 10.55 4.9 1.7 .7 5.7
Backlog 110,001 73,200 61,284 43,679 51,257
Cash flow from
operations 7,980 1,035 7,499 5,721 1,397
Research and
development expense 1,441 2,702 1,949 224 2,007
Capital expenditures 5,104 9,266 4,441 2,444 12,144
Number of shares
outstanding
at end of year* 6,288,872 6,263,025 6,185,049 6,194,593 6,171,966
Number of employees 1,455 1,349 1,249 1,130 1,188
</TABLE>
<TABLE>
Quarterly Data**
<CAPTION>
(in thousands of dollars, except per share data) unaudited
1st 2nd 3rd 4th
1997
<S> <C> <C> <C> <C>
Revenue $ 33,008 $ 40,146 $ 43,269 $ 42,954
Operating income 764 1,609 1,471 2,401
Net income 326 824 1,723 1,256
Net income per common
share - basic* .05 .13 .27 .20
Net income per common
share - diluted* .05 .13 .27 .19
1996
Revenue $ 26,627 $ 28,373 $ 29,929 $ 45,234
Operating income 434 873 1,465 573
Net income 209 498 831 191
Net income per common
share - basic* .03 .08 .13 .03
Net income per common
share - diluted* .03 .08 .13 .03
1995
Revenue $ 21,929 $ 23,936 $ 24,354 $ 33,722
Operating income (loss) (602) 550 544 526
Net income (loss) (388) 318 309 320
Net income (loss) per
common share - basic* (.06) .05 .05 .05
Net income (loss) per
common share - diluted* (.06) .05 .05 .05
</TABLE>
* Restated for the April 1997 10% stock dividend.
** Prior to 1997 the Company used a 13-period accounting year, each with
four weeks. The first three quarters contained 12 weeks, and the fourth
fiscal quarter contained 16 weeks. The Company now employs a
calendar-month accounting year.
Management's Discussion and Analysis
of Financial Condition and Operating Results
Results of Operations
This discussion and analysis should be read in conjunction with and is
intended to supplement the information set forth in the Company's
consolidated financial statements and related notes.
The following table sets forth, for the periods indicated, the percentage
which certain items in the Consolidated Statements of Operations bear to
revenue:
1997 1996 1995
Revenue
Contract revenue 82.7% 77.5% 77.7%
Product sales 17.3 22.5 22.3
Total revenue 100.0 100.0 100.0
Costs and Expenses
Cost of contract revenue* 90.0 91.7 90.5
Cost of product sales* 75.0 69.9 75.8
Total cost of sales 87.4 86.8 87.2
Selling, engineering and
administrative expenses 8.7 10.6 11.8
Total operating costs 96.1 97.4 99.0
Operating income 3.9 2.6 1.0
Interest expense, net 0.1 0.4 0.2
Income before income taxes 3.9 2.2 0.8
Provision for income taxes 1.3 0.8 0.3
Net income 2.6% 1.4% 0.5%
*These amounts represent a percentage of contract revenue and product
sales, respectively.
The following comments should be read in conjunction with the foregoing table:
Contract Revenue
Contract revenue increased by 30.6% or $30,901,000 in 1997 over 1996 and 24.9%
or $20,122,000 in 1996 over 1995. Approximately 60% of the 1997 increase is
attributable to major contracts with the State of Ohio for statewide network
infrastructure for Human Services systems and with the state of Colorado for
similar network infrastructure as well as software system implementation
services. The remainder of the increase in contract revenue was broad-based
with growth contributions from additional work received under the Company's
long running core U.S. Navy program, technical and management services
programs for the U.S. Army, Air Force and Navy, and services for the U.S.
Department of the Treasury. The 1996 increase from 1995 was the result of
increases in work for the U.S. Navy, U.S. Air Force, defense logistics and
engineering support contracts as well as new state contracts. Much of
the Company's defense revenue relates to the development and operation
of computer-based management information and logistics support systems,
as well as other information technology services. Revenue for this segment
also includes tasks to provide Year 2000 validation and compliance services
for the Internal Revenue Service.
Product Sales
Product sales decreased during 1997 by 5.8% or $1,687,000 as compared to
1996. This was principally the result of decreased sales of electroformed
components partially offset by increased sales of custom encoders across a
wide range of customers. The 26.3% or $6,100,000 growth in product sales in
1996, as compared with 1995, is attributable primarily to increased sales of
electroformed components for a line of commercial ink-jet printers, and
increased sales of a line of custom encoders for a customer in the
automotive industry.
Cost of Contract Revenue
Cost of contract revenue as a percentage of contract revenue decreased
to 90.0% in 1997 from 91.7% in 1996. In the fourth quarter of 1996, the
Company incurred a one-time pre-tax charge of $1,800,000 for unrecoverable
costs associated with an Air Force contract. Cost of contract revenue,
excluding the 1996 one-time charge, increased from 89.9% in 1996 to 90.0% in
1997, principally as a result of increased subcontract costs related to the
development of a statewide infrastructure under the state of Ohio Human
Services system contract. Cost of contract revenue as a percentage of
contract revenue increased to 91.7% in 1996 from 90.5% in 1995.
Cost of Goods
Cost of goods as a percentage of product sales increased from 69.9% in
1996 to 75.0% in 1997. This increase was primarily the result of
decreased production levels of electroformed components during 1997.
Cost of goods as a percentage of product sales decreased from 75.8% in
1995 to 69.9% in 1996 as a result of the substantial increase in
production levels of electroformed components for a line of ink-jet
printers and of a custom encoder product line.
Selling, Engineering and Administrative Expenses
Selling, engineering and administrative expenses as a percentage of sales
decreased by 1.9% in 1997 from 1996, reflecting flat spending while revenue
grew 22%. The increased expense in 1996 from 1995 was principally due to
increased research and development efforts by the Company in connection with
a software design and development tool and research and development spending
in connection with the Company's efforts to enter the telecommunication fraud
detection market. Excluding research and development, selling, engineering
and administrative costs decreased as a percentage of total revenue from
9.9% of sales in 1995 to 8.5% in 1996 and 7.8% in 1997.
Interest Expense, (Net)
Interest expense, (net) decreased to $108,000 in 1997 from $547,000 in
1996. The change was due to interest income of $740,000 related to an
income tax credit which was received during the year, partially offset
by increased interest expense resulting from an increase in the average
level of the Company's borrowings as a result of additional working capital
requirements associated with the substantial increase in revenue. Higher
average borrowings resulted in higher interest expense for 1996 from 1995 and
resulted from capital expenditures in 1996 of $9,266,000, including $4,900,000
in connection with a program to increase electroforming manufacturing
capacity, combined with $2,000,000 expended for a January 1996 acquisition of
a defense services business.
Provision for Income Taxes
The Company's effective income tax rate for 1997 was 32.7% compared to
38.2% for 1996 and 34.0% for 1995. The Company's tax provision for 1997
reflects a one-time benefit of $747,000 resulting from a refund of income
taxes relating to the Company's prior years research and development expenses.
The 1995 rate was favorably affected by research and development credits as
well as somewhat lower net state tax rates.
Backlog
The Company's funded backlog of unfilled orders at the end of 1997 was
$110,000,000, an increase of 50.3% from the $73,200,000 at the end of 1996.
The Company's funded backlog at the end of 1995 was $61,300,000. The 1995
balance included $10,000,000 related to a commercial order for inkjet printer
components. A portion of the Company's backlog is based on annual purchase
contracts and the amount of the backlog as of any date can be affected by the
timing of such order receipts and deliveries thereunder.
Liquidity and capital resources
The Company's primary sources of liquidity have been cash flow from
operations and bank credit lines. The principal drivers of cash flow are
earnings, adjusted for depreciation and amortization, aggregate billed
and unbilled receivables in the Company's government and state businesses,
and capital expenditures. The sum of receivables and unbilled expenditures
and fees on contracts in process increased in 1997 and 1996 as a result of
the substantial increase in revenue during each of the years. However, the
1997 billed and unbilled receivables balance is comparable to 1996 and 1995
when measured in terms of days' sales. Capital expenditures, which had
increased from $4,400,000 in 1995 to $9,266,000 in 1996 principally in
connection with a program to increase electroforming manufacturing capacity,
were $5,104,000 in 1997.
The Company announced during October, 1997 that it had signed a long-
term credit agreement that provides unsecured loans in an aggregate principal
amount of up to $45 million. This credit facility consists of a revolving
loan of up to $30 million for working capital purposes and up to $15 million
for acquisitions. This facility provides the Company with greater flexibility
to finance the growth of its business and to pursue new opportunities.
At December 31, 1997, $20,000,000 was available for working capital
purposes under the Company's long-term credit facility. The Company
believes that its liquid assets, cash flows from operations and availability
under its credit facility will be sufficient to support its normal operating
and capital requirements for 1998. The Company does not have any significant
capital commitments as of December 31, 1997 outside the ordinary course of
business.
Year 2000
The Company has established a steering committee to coordinate the
identification, evaluation and implementation of changes to its entire
computer infrastructure necessary to achieve a year 2000 data conversion
with no disruption to its business operations or customers. The Company
is also communicating with its suppliers and others with whom it does
business to coordinate year 2000 conversions. These actions are necessary to
ensure that the systems and applications the Company utilizes will recognize
and process year 2000 and beyond data. The cost of compliance and its effect
on the Company's future results of operations has not yet been determined.
Impact of Inflation and Changing Prices
Overall, inflation has not had a material impact on the Company's operations.
In addition, the terms of Defense contracts, which accounted for approximately
66% of the Company's revenues in 1997, are generally for one year and include
salary increase factors for future years, thus reducing the potential impact
of inflation on the Company.
Forward-Looking Information
This report includes certain forward-looking statements about the
Company's business including the effect of the federal budget on the
Company's sales, response to the Company's product and services offerings,
growth in revenues, capital spending, research and development spending and
customer mix. Such forward-looking statements are subject to risk and
uncertainties that could cause the actual results to vary materially.
These risks and uncertainties, discussed in more detail in the Company's
Form 10-K for the year ended December 31, 1997, include 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 fixedprice contracts, supply difficulties, warranty claims, and
factors affecting the business segments in which the Company operates and the
economy generally.
<TABLE>
Consolidated Balance Sheets
<CAPTION>
At December 31, 1997, December 28, 1996
and December 30, 1995
(in thousands of dollars, except share data)
1997 1996 1995
Assets
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 542 $ 234 $ 777
Receivables, less allowances of
$217, $340 and $402 17,397 19,436 16,095
Unbilled expenditures and fees on
contracts in process 32,175 22,690 16,383
Inventories 3,377 3,211 2,612
Refundable income taxes 878 1,436 286
Prepaid expenses and
other current assets 1,668 1,247 1,284
Total current assets 56,037 48,254 37,437
Property, plant and equipment, at cost:
Land 1,126 1,126 1,126
Building 7,774 7,774 7,774
Machinery and equipment 39,130 38,861 31,537
Leasehold improvements 2,296 2,109 1,815
Total property, plant and
equipment, at cost 50,326 49,870 42,252
Less-accumulated depreciation
and amortization 28,098 28,266 25,743
Net property, plant
and equipment 22,228 21,604 16,509
Excess of purchase price over
net assets of business acquired,
net of accumulated amortization 594 1,244 -
Total assets $ 78,859 $ 71,102 $ 53,946
Liabilities and Shareholders' Investment
Current liabilities:
Notes payable $ - $ 10,600 $ -
Accounts and drafts payable 8,355 8,925 3,550
Accrued payroll and
employee benefits 8,032 6,998 6,416
Deferred contract and
other revenue 35 42 983
Other accrued expenses 4,216 852 1,691
Current deferred income taxes 8,999 6,091 4,407
Current portion of long-term debt - 1,201 1,217
Total current liabilities 29,637 34,709 18,264
Long-term debt, less
current portion 10,000 300 1,500
Deferred income taxes 75 854 976
Commitments and contingencies
Shareholders' Investment
Preferred stock, par value,
$.10 per share, 5,000,000 shares
authorized, none issued - - -
Common stock, par value, $.10 per share:
Authorized - 15,000,000 shares
Issued - 7,366,484 shares in 1997,
6,689,767 shares in 1996 and
6,618,880 shares in 1995 737 669 662
Less: Treasury stock - 1,077,612
shares in 1997, and 996,108 shares
in 1996 and 1995, at par value (108) (100) (100)
Capital in excess of par value 14,506 9,516 9,219
Retained earnings 24,012 25,154 23,425
Total shareholders' investment 39,147 35,239 33,206
Total liabilities and
shareholders' investment $ 78,859 $ 71,102 $ 53,946
The accompanying notes are an integral part of these consolidated
financial statements.
</TABLE>
Dynamics Research Corporation
<TABLE>
Consolidated Statements of Operations
<CAPTION>
For the three years ended December 31, 1997
(in thousands of dollars, except share data)
1997 1996 1995
<S> <C> <C> <C>
Revenue:
Contract revenue $ 131,779 $ 100,878 $ 80,756
Product sales 27,598 29,285 23,185
Total revenue 159,377 130,163 103,941
Costs and expenses:
Cost of contract revenue 118,617 92,512 73,077
Cost of goods 20,700 20,476 17,579
Selling, engineering and
administrative expenses 13,815 13,830 12,267
Total operating costs and expenses 153,132 126,818 102,923
Operating income 6,245 3,345 1,018
Interest expense, net 108 547 171
Income before provision for
income taxes 6,137 2,798 847
Provision for income taxes 2,008 1,069 288
Net income $ 4,129 $ 1,729 $ 559
Net income per common
share - basic* $ .66 $ .28 $ .09
Net income per common
share - diluted* $ .64 $ .27 $ .09
Basic weighted average number
of common shares outstanding* 6,275,455 6,243,170 6,163,422
Diluted weighted average number
of common shares outstanding* 6,506,013 6,466,841 6,261,526
*Restated for the April 1997 10% stock dividend.
</TABLE>
<TABLE>
For the three years ended December 31, 1997
(in thousands)
<CAPTION>
Common Stock Capital in
Issued Treasury Stock Excess of Retained
Shares Par Value Shares Par Value Par Value Earnings
<S> <C> <C> <C> <C> <C> <C>
Balance at December
31, 1994 6,571 $ 657 (940) $ (94) $ 9,284 $ 22,866
Year 1995
Stock options
exercised 48 5 - - 159 -
Treasury stock
purchased - - (56) (6) (224) -
Net income - - - - - 559
Balance at December
30, 1995 6,619 $ 662 (996) $ (100) $ 9,219 $ 23,425
Year 1996
Stock options
exercised 71 7 - - 297 -
Net income - - - - - 1,729
Balance at December
28, 1996 6,690 $ 669 (996) $ (100) $ 9,516 $ 25,154
Year 1997
Stock options
exercised 107 11 - - 540 -
Treasury stock
purchased - - (82) (8) (760) -
10% Stock dividend 569 57 - - 5,210 (5,271)
Net income - - - - - 4,129
Balance at December
31, 1997 7,366 $ 737 (1,078) $ (108) $14,506 $24,012
The accompanying notes are an integral part of these consolidated
financial statements.
</TABLE>
<TABLE>
Consolidated Statements of Cash Flows
For the three years ended December 31, 1997
(in thousands of dollars)
1997 1996 1995
<S> <C> <C> <C>
Cash provided by operations:
Net income $ 4,129 $ 1,729 $ 559
Depreciation and amortization 5,376 4,927 4,002
Increase (decrease) in deferred
income taxes (779) (122) 111
Provision for receivable reserves (123) (62) (184)
8,603 6,472 4,488
Cash provided by (used for)
working capital:
Receivables 2,162 (3,279) (972)
Unbilled expenditures and fees
on contracts in process (9,485) (6,307) 1,811
Inventories (166) (599) (259)
Refundable income taxes 558 (1,150) 599
Prepaid expenses and other
current assets (421) 37 46
Accounts and drafts payable (570) 5,375 108
Accrued payroll and
employee benefits 1,034 582 1,767
Deferred contract and other revenue (7) (941) 89
Other accrued expenses 3,364 (839) 156
Current deferred income taxes 2,908 1,684 (334)
(623) (5,437) 3,011
Net cash provided by operations 7,980 1,035 7,499
Cash used for investing activities:
Additions to property and
equipment, net (5,104) (9,266) (4,441)
Net assets of business
acquired, net (250) (2,000) -
Net cash used for
investing activities (5,354) (11,266) (4,441)
Cash provided by (used for)
financing activities:
Net borrowings (repayments)
under line of credit agreements (10,600) 10,600 (1,200)
Principal payments under
long-term borrowings (1,501) (1,216) (1,221)
Proceeds from long-term borrowings 10,000 - -
Proceeds from exercise
of stock options 551 304 164
Purchase of treasury shares (768) - (230)
Net cash provided by (used for)
financing activities (2,318) 9,688 (2,487)
Net increase (decrease)
in cash and cash equivalents 308 (543) 571
Cash and cash equivalents
at the beginning of the year 234 777 206
Cash and cash equivalents
at the end of the year $ 542 $ 234 $ 777
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 792 $ 635 $ 435
Income taxes $ 430 $ 1,237 $ 160
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Dynamics Research Corporation and its wholly-owned subsidiaries (the Company).
All material intercompany transactions and balances have been eliminated
in consolidation.
Revenue Recognition
The Company provides services under fixed-price, cost reimbursement, time
and material, and level of effort contracts. Revenues under
cost-reimbursement and fixed-price contracts are recognized as costs are
incurred and include applicable fees in the proportion that costs incurred
bear to total estimated costs. When a loss is indicated on any contract
in process, provision for the total estimated loss is made at that time.
For time and material and level of effort types of contracts, revenues are
recorded as the costs are incurred. Costs related to cetain contracts,
including applicable indirect costs (for the year after 1995), are subject
to audit by the U.S. Government. Revenues from such contracts have been
recorded at amounts expected to be realized upon final settlement. Deferred
contract revenue represents the amounts billed on certain contracts in excess
of costs and fees incurred to date.
Income Taxes
The Company accounts for income taxes using the liability method as set
forth in Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes." Under the liability method, deferred taxes
are determined based upon the difference between the financial statement and
tax bases of assets and liabilities using enacted tax rates in effect in the
years in which the differences are expected to reverse. The deferred tax
provision represents the change in deferred tax asset/liability balance.
Cash and Cash Equivalents
The Company considers all cash investments with original maturies of three
months or less to be cash equivalents.
Unbilled Expenditures and Fees on Contracts in Process
Unbilled expenditures and fees on contracts in process consist of costs and
estimated earnings in excess of billings on uncompleted government contracts
and are comprised principally of amounts, including retainage, for which
billings could not be presented under the terms of the contracts at the
balance sheet dates. Unbilled expenditures and fees on contracts in process
with the U.S. Government at December 31, 1997 were $29,437,000 compared to
$22,690,000 at December 28, 1996, and $16,383,000 at December 30, 1995.
The approximate number of U.S. Government contracts has varied between 100
and 150 during the past five years, with 115 contracts open at December 31,
1997. Receivables under the U.S. Government contacts at December 31, 1997
were $8,808,000 compared to $14,363,000 at December 28, 1996 and $12,551,000
at December 30, 1995.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market,
and consist of materials, labor and overhead. There are no amounts in
inventories relating to contracts having production cycles longer than
one year.
(in thousands of dollars) 1997 1996 1995
Work in process $ 1,364 $ 1,411 $ 686
Raw materials and subassemblies 2,013 1,800 1,926
Total $ 3,377 $ 3,211 $2,612
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation and
amortization are provided in amounts sufficient to amortize the cost of such
assets over the estimated useful lives using principally the straight-line
method for plant and equipment. Leasehold improvements are amortized over
the remaining term of the lease of the life of the related asset, whichever
is shorter.
Fair Value of Financial Instruments
The Company's financial instruments consist mainly of cash and
equivalents, accounts receivable and accounts payable. The carrying
amounts of the Company's cash and equivalents, accounts receivable and
accounts payable approximate their fair value due to the short-term
nature of these instruments.
Use of Estimates
The preparation of financial statements in conformity with the generally
accepted accounting principles requires management to make estimated and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Stock-Based Compensation
Effective January 1, 1996, the Company adopted the provision of SFAS No. 123,
"Accounting for Stock-Based Compensation," (See Note 5). The Company has
elected to continue to account for stock options at intrinsic value with
disclosure of the effects of fair value accounting on net income and earnings
per share on a pro forma basis.
Net Income Per Common Share
SFAS No. 128, "Earnings per Share," requires the computation of basic and
diluted earnings per share. Basic earnings per share is computed by
dividing net income by the weighted average number of shares of common
stock outstanding during the year. Diluted earnings per share is determined
by giving effect to the excercise of stock options using the treasury
stock method.
(in thousands of dollars,
except per share data)
Year Ended December 1997 1996 1995
Net Income $ 4,129 $ 1,729 $ 559
Weighted-average shares* 6,275 6,243 6,163
Dilutive effect of options* 231 224 98
Adjusted weighted-average shares 6,506 6,467 6,261
Basic earnings per share* $ .66 $ .28 $ .09
Diluted earnings per share* $ .64 $ .27 $ .09
SFAS No. 128 was adopted in 1997. As a result, reported primary earnings per
share for 1996 and 1995 were restated and there was no effect on fully
diluted earnings per share. The effect of this accounting change on
previously reported earnings per share was as follows:
Years Ended December 1996 1995
Primary earnings per share,
as previously reported* $ .27 $ .09
Effect of SFAS No. 128 .01 .00
Basic earnings per share, as restated* $ .28 $ .09
*Restated for the April 1997 10% stock dividend.
Accounting Pronouncements
The Financial Accounting Standards Board issued two new statements in June
1997. SFAS No. 130, "Reporting Comprehensive Income," establishes standards
for reporting and display of comprehensive income and it components. SFAS
No. 131, "Disclosure about Segments of an Enterprise and Related
Information," establishes standard for the way that public business
enterprises report information and operating segments in annual financial
statements and requires reporting of selected information in interim
financial reports. Both statements are effective for fiscal years beginning
after December 15, 1997. The required disclosuresfor SFAS No. 130 will be
included in the Company's quarterly report on Form 10-Q for the first quarter
of 1998. The required disclosures for SFAS No. 131 will be included in the
Company's 1998 annual report on Form 10-K.
2. Income Taxes
The components of the provisions for federal and state income taxes
are as follows:
<TABLE>
(in thousands of dollars)
1997 1996 1995
<S> <C> <C> <C>
Currently payable (refundable)
Federal $ (747) $ (513) $ 447
State - (101) 160
Total (747) (614) 607
Deferred
Federal 2,387 1,253 (260)
State 368 430 (59)
Total 2,755 1,683 (319)
Total provision $ 2,008 $ 1,069 $ 288
The major items contributing to the difference between the statutory
U.S. federal income tax rate of 34% and the Company's effective tax
rates are as follows:
(in thousands of dollars)
1997 1996 1995
Provision at statutory rate $ 2,086 $ 951 $ 288
State income tax, net of
federal tax benefit 365 217 50
Tax Credit refund (747) - -
Other, net 304 (99) (50)
Provision for income taxes $ 2,008 $ 1,069 $ 288
</TABLE>
The tax credit refund resulted from a refund of income taxes relating to the
Company's prior year research and development expenses. The tax effects
of significant temporary difference that comprise the deferred tax assets
and liabilities as of December 31, 1997 and December 28, 1996 are as follows:
(in thousands of dollars) 1997 1996
Unbilled costs and fees and deferred
contact revenue, net $ (11,074) $ (8,730)
Accrued expenses 1,961 2,044
Receivable reserves 88 130
Inventory reserves 16 239
Other 10 226
Current deferred tax liabilities, net (8,999) (6,091)
Accelerated tax depreciation 4 (285)
State net operating loss carryforwards 213 -
Other (292) (569)
Non-current deferred tax liabilities (75) (854)
Total defferd tax liabilities, net (9,074) (6,945)
Total deferred tax assets and total deferred tax liabilities were $4,939,000
and $14,013,000 respectively at December 31, 1997 compared with $2,639,000
and $9,584,000, respectively at December 28, 1996.
3. Employee Benefit Programs
The company has a noncontributory defined benefit pension plan covering
substantially all of its employees. Pension plan benefits are generally
based on years of service and compensation during the final years of
employment. The Company's funding policy is to contribute at least the
minimum amount required by the Employee Retirement Income Security Act
of 1974 or additional amounts to assure that plan assets will be adequate
to provide retirement benefits. Contributions are intended to provide not
only for benefits attributed to service to date, but also for those expected
to be earned in the future.
Net pension cost for 1997, 1996 and 1995 included the following
components:
(in thousands of dollars) 1997 1996 1995
Service cost - benefits earned
during the period $ 1,555 $ 1,380 $ 1,042
Interest cost on projected
benefit obligation 2,235 2,031 1,822
Actual return on plan assets (3,485) (1,599) (3,074)
Net amortization and deferred items 1,436 (255) 2,195
Net periodic pension costs $ 1,741 $ 1,587 $ 1,355
The following table sets forth the plan's funded status and amounts
recognized in the Company's consolidated financial statements at December 31,
1997, December 28, 1996 and December 30, 1995:
<TABLE>
Actuarial present value of benefit obligations
(in thousands of dollars) 1997 1996 1995
<S> <C> <C> <C>
Vested $ 29,389 $ 26,459 $ 23,845
Nonvested 837 639 560
Accumulated benefit obligation 30,226 27,098 24,405
Effect of projected future
salary increases 5,467 3,734 3,608
Projected benefit obligation for
service rendered to date 35,693 30,832 28,013
Plan assets at fair market value 30,256 25,609 23,104
Projected benefit obligation in
excess of plan assets (5,437) (5,223) (4,909)
Unrecognized net loss (gain) from
past experience different from that
assumed and effect of changes in
assumptions 1,377 727 196
Prior service cost not yet recognized
in periodic pension cost 1,699 1,919 2,139
Unrecognized net obligation at January
1, 1987 being recognized over 15 years 140 175 211
Net pension liability recognized in the
Consolidated Balance Sheets at
December 31, 1997, December 28, 1996
and December 30, 1995 $ (2,221) $ (2,402) $ (2,363)
</TABLE>
The weighted-average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of
the projected benefit obligation were 7.0% and 4.0% in 1997 and 7.25% and
3.5% in 1996 and 1995. The expected long-term rate of return on assets
was 9% in 1997, 1996 and 1995.
The Company has established a Supplemental Executive Retirement Plan ("SERP")
for a certain key employee providing for annual benefits commencing on the
sixth anniversary of the Executive's retirement. The cost of these benefits
is being charged to expense and accrued using a projected unit credit
method. The charge to expense for the year ended December 31, 1997 was
$203,000.
The Company also maintains a cash or deferred savings plan (401(k)
plan), under which employees may reduce their compensation and have such
"elective deferrals" contributed to the plan on their behalf. The
Company contributes to the plan an amount equal to 25% of the first 6%
of an employee's elective deferrals. The Company contributed $719,000 to
the plan for 1997, $634,000 for 1996 and $578,000 for 1995. The elective
deferrals are invested in one or more collective investment funds at the
participant's direction. The Company's contributions are invested in
guaranteed investment contracts and are paid to the employee upon
termination, subject to forfeiture of any non-vested portion if
termination occurs within the first five years of employment.
4. Lines of Credit and Long-Term Debt
Long-term debt consists of the following:
(in thousands of dollars) 1997 1996
Long-term credit facility $ 10,000 $ -
Mortgage note payable - 1,500
Other - 1
Less - current portion - (1,201)
$ 10,000 300
The Company entered into a long-term credit agreement with a syndicate of
banks and financial institutions that provide unsecured loans in the
aggregate principal amount of up to $45 million. The credit facility
consists of a revolving loan of up to $30 million for working capital
purposes and up to $15 million for acquisitions. The credit agreement
provides for interest at the prime rate or LIBOR plus .50% (at the Company's
option) and a fee of .20% of any unused portion of the line. The agreement
expires October, 2000 and is renewable annually. The agreement stipulates
that the Company maintains minimum levels of tangible net worth and
specified fixed coverage ratios. The $15 million acquisition line converts
to a three-year term loan in October, 1999, with quarterly principal and
interest payments. This long-term credit facility replaced the Company's
short-term lines of credit.
The Mortgage note payable to a bank, with interest at LIBOR plus 1%, adjusted
quarterly, due in quarterly payments of $300,000 plus interest through
February 1998, secured by cerain land and buildings, was paid in full in
May 1997.
The Company had unsecured lines of credit at December 28, 1996, with various
banks that provided for maximum borrowings fo $19,000,000, of which
$10,600,000 was utilized. Borrowings under these lines of credit were
payable upon demand with interest at the prevailing prime interest rate or at
a lower rate quoted by the respective banks. The Company's average interest
rate on outstanding borrowings at December 28, 1996 was 6.3%.
5. Stock Option Plans
The Company has stock option plans which are administered by the
Compensation Committee of the Board of Directors who determine which
employees receive options and the number and option price of shares
covered by each such option.
The 1993 Equity Incentive Plan (1993 Plan) permits the Company to grant
incentive stock options, stock appreciation rights (SAR), awards of
nontransferable shares of restricted common stock and deferred grants of
common stock. Options also remain outstanding under the Company's 1983
Stock Option Plan (1983 Plan), which terminated in 1993. Options granted
under both plans may be either incentive stock options or non-qualified
stock options. The option price shall not be less than the fair market
value at the time the option is granted, and the option period may not
be greater than 10 years from the date the option is granted.
Options under the plans have normally been exercisable in three equal
installments commencing one year from the date of the grant.
The Company's 1995 Stock Option Plan for Non-Employee Directors provides
for each outside director to receive options to purchase 5,000 shares of
Common Stock at the first annual meeting at which such director is
elected, and options to purchase 1,000 shares of Common Stock at each
annual meeting thereafter so long as he or she remains an eligible
director. Such directors cannot be an employee of the Company or one of
its subsidiaries or a holder of five percent or more of the Company's
Common Stock. The excercise price of such options will be the fair market
value of the Common Stock on the date of grant. Each option is
non-transferable except upon death, expires 10 years after the date of grant
and becomes exercisable in three equal installments on the first, second and
third anniversary of the date of grant. A total of 110,000 shares has been
reserved for issuance of which 78,200 shares remained available for grant
at December 31, 1997.
Transaction involving the plans are summarizes as follows:*
<TABLE>
1997 1996 1995
Weighted Weighted Weighted
Number Average Number Average Number Average
of shares Price of shares Price of shares Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding 622,368 $ 5.43 549,457 $ 4.72 396,981 $ 4.24
at beginning
of year
Granted 59,350 9.05 152,900 7.25 204,600 5.25
Exercised (109,082) 4.97 (77,976) 3.87 (52,124) 3.14
Cancelled - - (2,013) 5.27 - -
Outstanding
at end
of year 572,636 $ 5.91 622,368 $ 5.43 549,457 4.72
Exercisable
at end of
year 346,453 334,168 332,761
*Restated for the April 1997 10% stock dividend.
</TABLE>
At December 31, 1997, under the 1993 Plan, 1,000,000 shares have been
reserved, of which 590,750 shares were available for future grants.
The Company has computed the pro forma disclosures required under SFAS No.
123 for options granted in 1996 and 1997 using the Black-Scholes option
pricing model prescribed by SFAS No. 123. The assumptions in the
Black-Scholes calculation was that the risk free interest rate was 6%, the
expected life of the option was 9.2 years, the volatility of the Company's
stock was 69.7% and there was no expected dividend yield.
Options to purchase 59,350 shares were granted in 1997 with a weighted
average fair value of $7.1 and options to purchase 152,900 shares were
granted in 1996 with a weighted average fair value of $5.65. Options to
purchase 204,600 shares were granted in 1995 with a weighted average fair
value of $4.16.
The Company accounts for the Stock Option Plan under APB Opinion No. 25
under which no compensation cost has been recognized. Had compensation
costs for these plans been determined consistent with SFAS No. 123, the
Company's net income and earnings per share would have been reduced to the
following pro forma amounts:
1997 1996 1995
Net Income
As reported 4,129,000 1,729,000 559,000
Pro forma 3,474,000 1,311,000 419,000
Earnings per share - basic
As reported .66 .28 .09
Pro forma .55 .21 .07
Earnings per share - diluted
As reported .64 .27 .09
Pro forma .52 .20 .07
Because the SFAS No.123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost
may not be representative of that to be expected in future years.
6. Commitments and Contingencies
The Company conducts certain of its operations in facilities which are under
long-term operating leases expiring at various dates through 2003, with
various options to renew through 2005. It is expected that in the normal
course of business, leases that expire will be renewed or relaced. Rent
expense under these leases (exclusive of real estate taxes, insurance and
other expenses payable under the terms of the leases) was approximately
$2,524,000 in 1997, $2,130,000 in 1996, and $1,636,000 in 1995. The
aggregate minimum lease commitment for the Company's facilities on December
31, 1997 was $7,645,000, payable as follows: $2,922,000 in 1998, $2,225,000
in 1999, $1,585,000 in 2000, $503,000 in 2001, $355,000 in 2002 and $55,000
in 2003.
7. Preferred Stock Purchase Rights
On July 14, 1988, and as amended on September 6, 1989, the Company declared a
dividend distribution of one preferred stock purchase right (Right) for every
outstanding share of common stock. The Rights have attached to all
outstanding shares of common stock, and no separate Rights certificates will
be issued. The Rights will become exercisable upon the earlier to occur of
(i) the date which is the tenth business day following a public announcement
that a person of group of affiliated or associated persons has acquired, or
obtained the right to acquire, beneficial ownership of 15% or more of the
outstanding shares of common stock or (ii) the tenth business day following
the commencement or announcement of an intention to make a tender offer or
exchange offer that would result in a person or group owning 30% or more of
the outstanding common stock.
When exercisable, each Right entitles the registered holder to purchase from
the Company one tenth of a share of its Series A Participating Preferred
Stock, $.10 par value, at a price of $40.00 per each one tenth share of
preferred stock. Until a Right is exercised, the holder thereof, as such,
will have no rights as a shareholder of the Company including, without
limitation, the right to vote or to receive dividends. The Rights may be
redeemed by the Company at the discretion of the Board of Directors, at a
price of $.01 per Right, and they expire on July 27, 1998.
8. Acquisition
On January 23, 1996 the Company acquired the Massachusetts-based operations
of Support Systems Associates, Inc. (SSAI), a private company headquartered
in Hauppauge, New York. The Company paid $2,000,000 in cash for the
acquired business, which had revenue of approximately $5,900,000 in 1995.
The acquired assets included a prime contract to provide services to the U.S.
Air Force. In January 1997, the Company paid an additional $125,000 to the
seller based upon the achievement of certain thresholds as provided for in
the acquisition agreement. A final additional payment of $125,000 was made
in November 1997. The acquisition was accounted for as a purchase. The
excess of the purchase price over the fair market value of the net assets
acquired is being amortized over 30 months.
9. Business Segments
The Company provides computer systems services, other engineering and
management support services and manufactures position and motion sensors and
other precision components. The Systems and services segment provides
specialized technical services to the Department of Defense and other
customers and produced approximately 83%, 77% and 78% of total Company
revenues in 1997, 1996 and 1995, respectively. These services include the
development and operation of computer-based management information systems
where sophisticated software programs are applied to collect, analyze, store
and retrieve information regarding the location, design, configuration,
maintenance status and performance test history of the individual components
parts of major weapons systems. This segment also includes contracts to
provide network infrastructure for State Human Services systems as well as
software system implementation services. The Precision products segment
produces encoders, which are used to measure rotary or linear movement, and
precision-patterned glass and electroformed metal products. The Precision
products segment's primary market is located in the United States. In 1997,
sales to two commercial customers represented 6% of the total Company sales.
These customers operate in the automotive and computer-peripheral industries.
Identifiable assets by business segment include both assets directly
identified with those operations and an allocable share of jointly used
assets. General corporate assets consist primarily of cash and the Company's
Andover, Massachusetts corporate headquarters.
Summarized financial information by business segment for 1997, 1996 and 1995
are as follows:
<TABLE>
(in thousands of dollars) 1997 1996 1995
<S> <C> <C> <C>
Revenue:
Systems and services $ 131,779 $ 100,878 $ 80,756
Precision products 27,598 29,285 23,185
Total revenue $ 159,377 $ 130,163 $ 103,941
Operating income:
Systems and services $ 3,767 $ (2,263) $ (1,907)
Precision products 2,478 5,608 2,925
Total operating income $ 6,245 $ 3,345 $ 1,018
Total Assets
Systems and service $ 52,285 $ 44,292 $ 34,953
Precision products 14,637 15,556 9,584
Corporate 11,937 11,254 9,406
Total assets $ 78,859 $ 71,102 $ 53,946
Depreciation and amortization:
Systems and services $ 2,963 $ 2,848 $ 2,663
Precision products 1,840 1,640 879
Corporate 573 439 460
Total depreciation and amortization $ 5,376 $ 4,927 $ 4,002
Capital expenditures:
Systems and services $ 3,244 $ 2,583 $ 1,753
Precision products 1,065 5,999 2,494
Corporate 795 684 194
Total capital expenditures $ 5,104 $ 9,266 $ 4,441
</TABLE>
The management of Dynamics Research Corporation is responsible for the
accuracy and internal consistency of all information contained in this annual
report, including the consolidated financial statements. Management has
followed those generally accepted accounting principles which it believes to
be most appropriate to the circumstances of the Company, and has made what
it believes to be reasonable and prudent judgments and estimates where
necessary.
Dynamics Research Corporation operates under a system of internal accounting
controls designed to provide reasonable assurance that its financial records
are accurate, that the assets of the Company are protected, and that the
financial statements present fairly the financial position and results of
operations of the Company. The internal accounting control system is tested,
monitored and revised as necessary.
Three directors of the Company, not members of management, serve as the
Audit Committee of the Board of Directors and are the principal means
through which the Board supervises the performance of the financial
reporting duties of management. The Audit Committee meets with management
and the Company's independent auditors several times a year to review the
results of external audits of the Company and to discuss plans for future
audits. At these meetings the Audit Committee also meets privately with the
independent auditors to assure its free access to them.
The Company's independent auditors, Arthur Andersen LLP, audited the
financial statements prepared by the management of Dynamics Research
Corporation. Their report on these statements is presented below.
Albert Rand Douglas R. Potter
President, Chief Executive Officer Vice President of Finance,
Chief Financial Officer
To Dynamics Research Corporation:
We have audited the accompanying consolidated balance sheets of Dynamics
Research Corporation (a Massachusetts corporation) and subsidiaries as of
December 31, 1997, December 28, 1996 and December 30, 1995, and the related
consolidated statements of operations, shareholders' investment and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Dynamics Research
Corporation and subsidiaries as of December 31, 1997, December 28, 1996 and
December 30, 1995, and the results of their operations and their cash flows
for the years then ended in conformity with generally accepted accounting
principles.
Boston, Massachusetts, Arthur Andersen LLP
February 20, 1998
Directors and Officers
Directors
Dr. Francis J. Aguilar*
Professor of Business Administration, Emeritus
Harvard University, Graduate School
of Business Administration
John S. Anderegg, Jr.
Chairman, Dynamics Research Corporation
Martin V. Joyce, Jr.*
Vice President, A.T. Kearney, Inc.
Kenneth F. Kames
Vice President, New Business Development, The Gilette Company
General James P. Mullins*
USAF retired
Albert Rand
President and Chief Executive Officer, Dynamics Research Corporation
*Member of the Audit Committee
Member of the Compensation Committees
Officers
John S. Anderegg, Jr.
Chairman
Albert Rand
President, Chief Executive Officer
Arthur Brown
Vice President, Contracts, Systems Division
William G. Clautice
Vice President, Strategic Programs,
Test Equipment Division
Dr. Martin M. Dresser
Vice President, General Manager,
Systems Division
Victor J. Garber
Vice President, Acquisition Engineering, Systems Division
Dr. Joseph W. Griffin, Jr.
Vice President, Systems Development,
Systems Division
Edward C. Johnson
Vice President, Marketing, Systems Division
Chester Ju
Vice President, Encoder Division and Metrigraphics Division
John M. Nauseef
Vice President, Dayton Operations,
Systems Division
Douglas R. Potter
Vice President of Finance and
Chief Financial Officer
Richard P. Rappaport
Vice President, Test Equipment Division
John L. Wilkinson
Vice President, Human Resources, Clerk
David C. Proctor
Treasurer, Assistant Clerk
CORPORATE HEADQUARTERS
60 Frontage Road
Andover, Massachusetts 01810-5498
Telephone: (978) 475-9090
Fax: (978) 475-8205
Internet: www.drc.com
AUDITORS
Arthur Andersen LLP
225 Franklin Street, Boston, Massachusetts 02110
LEGAL COUNSEL
Ropes & Gray
One International Place, Boston, Massachusetts 02110
TRANSFER AGENT
American Stock Transfer & Trust Company, 46th floor
40 Wall Street, New York, New York 10005
Telephone: (800) 937-5449
STOCK PRICES
Bid price by quarter 1997 1996
High Low High Low
First quarter $10.13 $8.25 $7.73 $5.23
Second quarter 9.38 7.75 8.18 5.68
Third quarter 11.50 8.13 9.21 6.82
Fourth quarter 14.25 9.75 10.00 7.85
*Restated for the April 1997 10% stock dividend.
The bid and asked prices of the Company's common stock on February 24, 1998
were $11.88 and $12.13, respectively. Prices shown reflect inter-dealer
prices, without retail mark-up, mark-down, or commission and may not
necessarily represent actual transactions. Source: Monthly Statistical
Report of the National Association of Securities Dealers, Inc. - NASDAQ.
COMMON STOCK
The Company's stock is traded on the NASDAQ National Market System, Symbol:
DRCO; and listed in newspapers as DynamR., DynRsh. or DynRsearch.
NUMBER OF SHAREHOLDERS
The approximate number of shareholders of record at February 24, 1998 was
960. As of February 24, 1998 there were 6,291,372 common shares outstanding.
FORM 10-K
A copy of DRC's Form 10-K, which is filed annually with the Securities and
Exchange Commission, will be sent without charge to any shareholder
requesting it in writing to the Treasurer's office, Dynamics Research
Corporation, 60 Frontage Road, Andover, Massachusetts 01810-5498.
ANNUAL MEETING
The 1998 Annual Meeting of Shareholders will be held at 3:30 PM on April 28,
1998 at the State Street Bank and Trust Building, 33rd floor, 225 Franklin
Street, Boston, Massachusetts 02110.OTHER DRC OFFICE LOCATIONS
Alabama
2361 Fairlane Drive, Montgomery
Meadow Green Center, Madison
California
61 Columbia, Aliso Viejo
4811 Chippendale Drive, Sacramento
Colorado
1250 Academy Park Loop, Colorado Springs
900 East Louisiana Ave., Denver
1700 Lincoln Street, Denver
Florida
11800 Research Parkway, Orlando
Georgia
605 Richard Russell Parkway, Warner Robins
Illinois
1 Colony Square, O'Fallon
Maryland
45370 Alton Lane, California
Massachusetts
93 Border Street, West Newton
50-60 Concord Street, Wilmington
209 Burlington Road, Bedford
293 Boston Post Road, Marlborough
500 Research Drive, Wilmington
Missouri
Northwest Plaza Office Tower, St. Ann
New Hampshire
49 Donovan Street, Concord
New Mexico
10010 Indian School Road N.E., Albuquerque
Ohio
230 Northland Boulevard, Cincinnati
2900 Presidential Drive, Fairborn
50 West Broad Street, Columbus
460-70 Starr Avenue, Columbus
Oklahoma
3000 Tower Drive, Del City
Oregon
19545 NW Von Neuman Drive, Beaverton
Texas
8000 IH-10 West, San Antonio
Virginia
2550 Huntington Ave., Alexandria
1755 Jefferson Davis Highway, Arlington
1919 Commerce Drive, Hampton
612 Nevan Road, Virginia Beach
Amended as of
February 17, 1997
DYNAMICS RESEARCH CORPORATION
1993 EQUITY INCENTIVE PLAN
1. PURPOSE
The purpose of this 1993 Equity Incentive Plan (the "Plan") is to
advance the interests of Dynamics Research Corporation (the "Company")
by enhancing its ability to attract and retain employees and other
persons or entities who are in a position to make significant
contributions to the success of the Company and its subsidiaries through
ownership of shares of the Company's common stock ("Stock").
The Plan is intended to accomplish these goals by enabling the
Company to grant Awards in the form of Options, Stock Appreciation
Rights, Restricted Stock or Unrestricted Stock Awards, Deferred Stock
Awards, Performance Awards, Loans or Supplemental Grants, or
combinations thereof, all as more fully described below.
2. ADMINISTRATION
The Plan will be administered by the Compensation Committee (the
"Committee") of the Board of Directors of the Company (the "Board").
The Committee will have authority, not inconsistent with the express
provisions of the Plan and in addition to other authority granted under
the Plan, to (a) grant Awards at such time or times as it may choose;
(b) determine the size of each Award, including the number of shares of
Stock subject to the Award; (c) determine the type or types of each
Award; (d) determine the terms and conditions of each Award; (e) waive
compliance by a Participant (as defined below) with any obligations to
be performed by the Participant under an Award and waive any term or
condition of an Award; (f) amend or cancel an existing Award in whole or
in part (and if an award if canceled, grant another Award in its place
on such terms as the Committee shall specify), except that the Committee
may not, without the consent of the holder of an Award, take any action
under this clause with respect to such Award if such action would
adversely affect the rights of such holder; (g) prescribe the form or
forms of instruments that are required or deemed appropriate under the
Plan, including any written notices and elections required of
Participants, and change such forms from time to time; (h) adopt, amend
and rescind rules and regulations for the administration of the Plan;
and (i) interpret the Plan and decide any questions and settle all
controversies and disputes that may arise in connection with the Plan.
Such determinations and actions of the Committee, and all other
determinations and actions of the Committee made or taken under
authority granted by any provision of the Plan, will be conclusive and
will bind all parties. Nothing in this paragraph shall be construed as
limiting the power of the Committee or the Board to make adjustments
under Section 7.3 or Section 8.6.
3. EFFECTIVE DATE AND TERM OF PLAN
The Plan will become effective on the date on which it is approved
by the stockholders of the Company. Grants of Awards under the plan may
be made prior to that date (but after Board adoption of the Plan),
subject to such approval of the Plan.
No Award may be granted under the Plan after [ ], but
Awards previously granted may extend beyond that date.
4. SHARES SUBJECT TO THE PLAN
Subject to adjustment as provided in Section 8.6 below, the
aggregate number of shares of Stock that may be delivered under the Plan
will be 1,000,000. If any Award requiring exercise by the Participant
for delivery of Stock terminates without having been exercised in full,
or if any Award payable in Stock or cash is satisfied in cash rather
than Stock, the number of shares of Stock as to which such Award was not
exercised or for which cash was substituted will be available for future
grants.
Stock delivered under the Plan may be either authorized but
unissued Stock or previously issued Stock acquired by the Company and
held in treasury. No fractional shares of Stock will be delivered under
the Plan.
5. ELIGIBILITY AND PARTICIPATION
Those eligible to receive Awards under the Plan ("Participants")
will be persons in the employ of the Company or any of its subsidiaries
("Employees") and other persons or entities (including without
limitation non-Employee directors of the Company or a subsidiary of the
Company) who, in the opinion of the Committee, are in a position to make
a significant contribution to the success of the Company or its
subsidiaries. A "subsidiary" for purposes of the Plan will be a
corporation in which the Company owns, directly or indirectly, stock
possessing 50% or more of the total combined voting power of all classes
of stock.
6. TYPES OF AWARDS
6.1. OPTIONS
(a) Nature of Options. An Option is an Award entitling the
recipient on exercise thereof to purchase Stock at a specified exercise
price.
Both "incentive stock options," as defined in Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code") (any Option
intended to qualify as an incentive stock option being hereinafter
referred to as an "ISO"), and Options that are not incentive stock
options, may be granted under the Plan. ISOs shall be awarded only to
Employees.
(b) Exercise Price. The exercise price of an Option will be
determined by the Committee subject to the following:
(1) The exercise price of an ISO shall not be less than 100%
(110% in the case of an ISO granted to a ten-percent shareholder)
of the fair market value of the Stock subject to the Option,
determined as of the time the Option is granted. A "ten-percent
shareholder" is any person who at the time of grant owns, directly
or indirectly, or is deemed to own by reason of the attribution
rules of section 424(d) of the Code, stock possessing more than 10%
of the total combined voting power of all classes of stock of the
Company or of any of its subsidiaries.
(2) In no case may the exercise price paid for Stock which is
part of an original issue of authorized Stock be less than the par
value per share of the Stock.
(3) The Committee may reduce the exercise price of an Option
at any time after the time of grant, but in the case of an Option
originally awarded as an ISO, only with the consent of the
Participant.
(c) Duration of Options. The latest date on which an Option may
be exercised will be the tenth anniversary (fifth anniversary, in the
case of an ISO granted to a ten-percent shareholder) of the day
immediately preceding the date the Option was granted, or such earlier
date as may have been specified by the Committee at the time the Option
was granted.
(d) Exercise of Options. Options granted under any single Award
will become exercisable at such time or times, and on such conditions,
as the Committee may specify. The Committee may at any time and from
time to time accelerate the time at which all or any part of the Option
may be exercised.
Any exercise of an Option must be in writing, signed by the proper
person and delivered or mailed to the Company, accompanied by (1) any
documents required by the Committee and (2) payment in full in
accordance with paragraph (e) below for the number of shares for which
the Option is exercised.
(e) Payment for Stock. Stock purchased on exercise of an Option
must be paid for as follows: (1) in cash or by check (acceptable to the
Company in accordance with guidelines established for this purpose),
bank draft or money order payable to the order of the Company or (2) if
so permitted by the instrument evidencing the Option (or in the case of
an Option which is not an ISO, by the Committee at or after grant of the
Option), (i) through the delivery of shares of Stock which have been
outstanding for at least six months (unless the Committee expressly
approves a shorter period) and which have a fair market value on the
last business day preceding the date of exercise equal to the exercise
price, or (ii) by delivery of a promissory note of the Option holder to
the Company, payable on such terms as are specified by the Committee, or
(iii) by delivery of an unconditional and irrevocable undertaking by a
broker to deliver promptly to the Company sufficient funds to pay the
exercise price, or (iv) by any combination of the permissible forms of
payment; provided, that if the Stock delivered upon exercise of the
Option is an original issue of authorized Stock, at least so much of the
exercise price as represents the par value of such Stock must be paid
other than by the Option holder's promissory note or personal check.
(f) Discretionary Payments. If the market price of shares of
Stock subject to an Option (other than an Option which is in tandem with
a Stock Appreciation Right as described in Section 6.2 below) exceeds
the exercise price of the Option at the time of its exercise, the
Committee may cancel the Option and cause the Company to pay in cash or
in shares of Common Stock (at a price per share equal to the fair market
value per share) to the person exercising the Option an amount equal to
the difference between the fair market value of the Stock which would
have been purchased pursuant to the exercise (determined on the date the
Option is cancelled) and the aggregate exercise price which would have
been paid. The Committee may exercise its discretion to take such
action only if it has received a written request from the person
exercising the Option, but such a request will not be binding on the
Committee.
6.2. Stock Appreciation Rights.
(a) Nature of Stock Appreciation Rights. A Stock Appreciation
Right is an Award entitling the recipient on exercise of the Right to
receive an amount, in cash or Stock or a combination thereof (such form
to be determined by the Committee), determined in whole or in part by
reference to appreciation in Stock value.
In general, a Stock Appreciation Right entitles the Participant to
receive, with respect to each share of Stock as to which the Right is
exercised, the excess of the share's fair market value on the date of
exercise over its fair market value on the date the Right was granted.
However, the Committee may provide at the time of grant that the amount
the recipient is entitled to receive will be adjusted upward or downward
under rules established by the Committee to take into account the
performance of the Stock in comparison with the performance of other
stocks or an index or indices of other stocks. The Committee may also
grant Stock Appreciation Rights that provide, in such limited
circumstances following a change in control as the Committee may specify
(as determined by the Committee) the holder of such Right will be
entitled to receive, with respect to each share of Stock subject to the
Right, an amount equal to the excess of a specified value (which may
include an average of values) for a share of Stock during a period
preceding such change in control over the fair market value of a share
of Stock on the date the Right was granted.
(b) Grant of Stock Appreciation Rights. Stock Appreciation Rights
may be granted in tandem with, or independently of, Options granted
under the Plan. A Stock Appreciation Right granted in tandem with an
Option which is not an ISO may be granted either at or after the time
the Option is granted. A Stock Appreciation Right granted in tandem
with an ISO may be granted only at the time the Option is granted.
(c) Rules Applicable to Tandem Awards. When Stock Appreciation
Rights are granted in tandem with Options, the following will apply:
(1) The Stock Appreciation Right will be exercisable only at
such time or times, and to the extent, that the related Option is
exercisable and will be exercisable in accordance with the
procedure required for exercise of the related Option.
(2) The Stock Appreciation Right will terminate and no longer
be exercisable upon the termination or exercise of the related
Option, except that a Stock Appreciation Right granted with respect
to less than the full number of shares covered by an Option will
not be reduced until the number of shares as to which the related
Option has been exercised or has terminated exceeds the number of
shares not covered by the Stock Appreciation Right.
(3) The Option will terminate and no longer be exercisable
upon the exercise of the related Stock Appreciation Right.
(4) The Stock Appreciation Right will be transferable only
with the related Option.
(5) A Stock Appreciation Right granted in tandem with an ISO
may be exercised only when the market price of the Stock subject to
the Option exceeds the exercise price of such option.
(d) Exercise of Independent Stock Appreciation Rights. A Stock
Appreciation Right not granted in tandem with an Option will become
exercisable at such time or times, and on such conditions, as the
Committee may specify. The Committee may at any time accelerate the
time at which all or any part of the Right may be exercised.
Any exercise of an independent Stock Appreciation Right must be in
writing, signed by the proper person and delivered or mailed to the
Company, accompanied by any other documents required by the Committee.
6.3. Restricted and Unrestricted Stock.
(a) Nature of Restricted Stock Award. A Restricted Stock Award
entitles the recipient to acquire, for a purchase price equal to par
value, shares of Stock subject to the restrictions described in
paragraph (d) below ("Restricted Stock").
(b) Acceptance of Award. A Participant who is granted a
Restricted Stock Award will have no rights with respect to such Award
unless the Participant accepts the Award by written instrument delivered
or mailed to the Company accompanied by payment in full of the specified
purchase price, if any, of the shares covered by the Award. Payment may
be by certified or bank check or other instrument acceptable to the
Committee.
(c) Rights as a Stockholder. A Participant who receives
Restricted Stock will have all the rights of a stockholder with respect
to the Stock, including voting and dividend rights, subject to the
restrictions described in paragraph (d) below and any other conditions
imposed by the Committee at the time of grant. Unless the Committee
otherwise determines, certificates evidencing shares of Restricted Stock
will remain in the possession of the Company until such shares are free
of all restrictions under the Plan.
(d) Restrictions. Except as otherwise specifically provided by
the Plan, Restricted Stock may not be sold, assigned, transferred,
pledged or otherwise encumbered or disposed of, and if the Participant
ceases to be an Employee or otherwise suffers a Status Change (as
defined at Section 7.2(a) below) for any reason, must be offered to the
Company for purchase for the amount of cash paid for the Stock, or
forfeited to the Company if no cash was paid. These restrictions will
lapse at such time or times, and on such conditions, as the Committee
may specify. The Committee may at any time accelerate the time at which
the restrictions on all or any part of the shares will lapse.
(e) Notice of Election. Any Participant making an election under
Section 83(b) of the Code with respect to Restricted Stock must provide
a copy thereof to the Company within 10 days of the filing of such
election with the Internal Revenue Service.
(f) Other Awards Settled with Restricted Stock. The Committee
may, at the time any Award described in this Section 6 is granted,
provide that any or all the Stock delivered pursuant to the Award will
be Restricted Stock.
(g) Unrestricted Stock. The Committee may, in its sole
discretion, approve the sale to any Participant of shares of Stock free
of restrictions under the Plan for a price which is not less than the
par value of the Stock.
6.4. Deferred Stock.
A Deferred Stock Award entitles the recipient to receive shares of
Stock to be delivered in the future. Delivery of the Stock will take
place at such time or times, and on such conditions, as the Committee
may specify. The Committee may at any time accelerate the time at which
delivery of all or any part of the Stock will take place. At the time
any Award described in this Section 6 is granted, the Committee may
provide that, at the time Stock would otherwise be delivered pursuant to
the Award, the Participant will instead receive an instrument evidencing
the Participant's right to future delivery of Deferred Stock.
6.5. Performance Awards; Performance Goals.
(a) Nature of Performance Awards. A Performance Award entitles
the recipient to receive, without payment, an amount in cash or Stock or
a combination thereof (such form to be determined by the Committee)
following the attainment of Performance Goals. Performance Goals may be
related to personal performance, corporate performance, departmental
performance or any other category of performance deemed by the Committee
to be important to the success of the Company. The Committee will
determine the Performance Goals, the period or period during which
performance is to be measured and all other terms and conditions
applicable to the Award.
(b) Other Awards Subject to Performance Condition. The Committee
may, at the time any Award described in this Section 6 is granted,
impose the condition (in addition to any conditions specified or
authorized in this Section 6 or any other provision of the Plan) that
Performance Goals be met prior to the Participant's realization of any
payment or benefit under the Award.
6.6. Loans and Supplemental Grants.
(a) Loans. The Company may make a loan to a Participant ("Loan"),
either on the date of or after the grant of any Award to the
Participant. A Loan may be made either in connection with the purchase
of Stock under the Award or with the payment of any Federal, state and
local income tax with respect to income recognized as a result of the
Award. The Committee will have full authority to decide whether to make
a Loan and to determine the amount, terms and conditions of the Loan,
including the interest rate (which may be zero), whether the Loan is to
be secured or unsecured or with or without recourse against the
borrower, the terms on which the Loan is to be repaid and the
conditions, if any, under which it may be forgiven. However, no Loan
may have a term (including extensions) exceeding ten years in duration.
(b) Supplemental Grants. In connection with any Award, the
Committee may at the time such Award is made or at a later date, provide
for and grant a cash award to the Participant ("Supplemental Grant") not
to exceed an amount equal to (1) the amount of any federal, state and
local income tax on ordinary income for which the Participant may be
liable with respect to the Award, determined by assuming taxation at the
highest marginal rate, plus (2) an additional amount on a grossed-up
basis intended to make the Participant whole on an after-tax basis after
discharging all the Participant's income tax liabilities arising from
all payments under this Section 6. Any payments under this subsection
(b) will be made at the time the Participant incurs Federal income tax
liability with respect to the Award.
7. EVENTS AFFECTING OUTSTANDING AWARDS
7.1. Death.
If a Participant dies, the following will apply:
(a) All Options and Stock Appreciation Rights held by the
Participant immediately prior to death, to the extent then exercisable,
may be exercised by the Participant's executor or administrator or the
person or persons to whom the Option or Right is transferred by will or
the applicable laws of descent and distribution, at any time within the
one year period ending with the first anniversary of the Participant's
death (or such shorter or longer period as the Committee may determine),
and shall thereupon terminate. In no event, however, shall an Option or
Stock Appreciation Right remain exercisable beyond the latest date on
which it could have been exercised without regard to this Section 7.
Except as otherwise determined by the Committee, all Options and Stock
Appreciation Rights held by a Participant immediately prior to death
that are not then exercisable shall terminate at death.
(b) Except as otherwise determined by the Committee, all
Restricted Stock held by the Participant must be transferred to the
Company (and, in the event the certificates representing such Restricted
Stock are held by the Company, such Restricted Stock will be so
transferred without any further action by the Participant) in accordance
with Section 6.3 above.
(c) Any payment or benefit under a Deferred Stock Award,
Performance Award, or Supplemental Grant to which the Participant was
not irrevocably entitled prior to death will be forfeited and the Award
canceled as of the time of death, unless otherwise determined the
Committee.
7.2. Termination of Service (Other Than By Death).
If a Participant who is an Employee ceases to be an Employee for
any reason other than death, or if there is a termination (other than by
reason of death) of the consulting, service or similar relationship in
respect of which a non-Employee Participant was granted an Award
hereunder (such termination of the employment or other relationship
being hereinafter referred to as a "Status Change"), the following will
apply:
(a) Except as otherwise determined by the Committee, all Options
and Stock Appreciation Rights held by the Participant that were not
exercisable immediately prior to the Status Change shall terminate at
the time of the Status Change. Any Options or Rights that were
exercisable immediately prior to the Status Change will continue to be
exercisable for a period of three months (or such longer period as the
Committee may determine), and shall thereupon terminate, unless the
Award provides by its terms for immediate termination in the event of a
Status Change or unless the Status Change results from a discharge for
cause which in the opinion of the Committee casts such discredit on the
Participant as to justify immediate termination of the Award. In no
event, however, shall an Option or Stock Appreciation Right remain
exercisable beyond the latest date on which it could have been exercised
without regard to this Section 7. For purposes of this paragraph, in
the case of a Participant who is an Employee, a Status Change shall not
be deemed to have resulted by reason of (i) a sick leave or other bona
fide leave of absence approved for purposes of the Plan by the
Committee, so long as the Employee's right to reemployment is guaranteed
either by statute or by contract, or (ii) a transfer of employment
between the Company and a subsidiary or between subsidiary, or to the
employment of a corporation (or a parent or subsidiary corporation of
such corporation) issuing or assuming an option in a transaction to
which section 424(a) of the Code applies.
(b) Except as otherwise determined by the Committee, all
Restricted Stock held by the Participant at the time of the Status
Change must be transferred to the Company (and, in the event the
certificates representing such Restricted Stock are held by the Company,
such Restricted Stock will be so transferred without any further action
by the Participant) in accordance with Section 6.3 above.
(c) Any payment or benefit under a Deferred Stock Award,
Performance Award, or Supplemental Grant to which the Participant was
not irrevocably entitled prior to the Status Change will be forfeited
and the Award cancelled as of the date of such Status Change unless
otherwise determined by the Committee.
7.3. Certain Corporate Transactions.
In the event of a consolidation or merger in which the Company is
not the surviving corporation or which results in the acquisition of
substantially all the Company's outstanding Stock by a single person or
entity or by a group of persons and/or entities acting in concert, or in
the event of the sale or transfer of substantially all the Company's
assets or a dissolution or liquidation of the Company (a "covered
transaction"), all outstanding Awards (except as provided below) will
terminate as of the effective date of the covered transaction; provided,
however, that:
(a) all outstanding Options shall become exercisable
immediately prior to such covered transaction;
(b) the Committee may in its sole discretion, prior to the
effective date of such covered transaction, (i) make each
outstanding Stock Appreciation Right exercisable in full, (ii)
remove the restrictions from each outstanding share of Restricted
Stock, (iii) cause the Company to make any payment and provide any
benefit under each outstanding Deferred Stock Award, Performance
Award and Supplemental Grant which would have been made or provided
with the passage of time had such covered transaction not occurred
and the Participant not suffered a Status Change (or died), and
(iv) forgive all or any portion of the principal of or interest on
a Loan; and
(c) the Committee may arrange, subject to consummation of
such covered transaction, for the assumption of any or all Awards
by the surviving or acquiring corporation or an affiliate thereof
or for the grant of replacement awards for any or all Awards which,
in the judgment of the Committee, are substantially equivalent and
which in the case of incentive options shall satisfy the
requirements of section 424(a) of the Code.
8. GENERAL PROVISIONS
8.1. Documentation of Awards.
Awards will be evidenced by such written instruments, if any, as
may be prescribed by the Committee from time to time. Such instruments
may be in the form of agreements to be executed by both the Participant
and the Company, or certificates, letters or similar instruments, which
need not be executed by the Participant but acceptance of which will
evidence agreement to the terms thereof.
8.2. Rights as a Stockholder, Dividend Equivalents.
Except as specifically provided by the Plan, the receipt of an
Award will not give a Participant rights as a stockholder; the
participant will obtain such rights, subject to any limitations imposed
by the Plan or the instrument evidencing the Award, upon actual receipt
of Stock. However, the Committee may, on such conditions as it deems
appropriate, provide that a Participant will receive a benefit in lieu
of cash dividends that would have been payable on any or all Stock
subject to the Participant's Award had such Stock been outstanding.
Without limitation, the Committee may provide for payment to the
Participant of amounts representing such dividends, either currently or
in the future, or for the investment of such amounts on behalf of the
Participant.
8.3. Conditions on Delivery of Stock.
The Company will not be obligated to deliver any shares of Stock
pursuant to the Plan or to remove restriction from shares previously
delivered under the Plan (a) until all conditions of the Award have been
satisfied or removed, (b) until, in the opinion of the Company's
counsel, all applicable federal and state laws and regulation have been
complied with, (c) if the outstanding Stock is at the time listed on any
stock exchange, until the shares to be delivered have been listed or
authorized to be listed on such exchange upon official notice of notice
of issuance, and (d) until all other legal matters in connection with
the issuance and delivery of such shares have been approved by the
Company's counsel. If the sale of Stock has not been registered under
the Securities Act of 1933, as amended, the Company may require, as a
condition to exercise of the Award, such representations or agreements
as counsel for the Company may consider appropriate to avoid violation
of such Act and may require that the certificates evidencing such Stock
bear an appropriate legend restricting transfer.
If an Award is exercised by the Participant's legal representative,
the Company will be under no obligation to deliver Stock pursuant to
such exercise until the Company is satisfied as to the authority of such
representative.
8.4. Tax Withholding.
The Company will withhold from any cash payment made pursuant to an
Award an amount sufficient to satisfy all federal, state and local
withholding tax requirements (the "withholding requirements").
In the case of an Award pursuant to which Stock may be delivered,
the Committee will have the right to require that the Participant or
other appropriate person remit to the Company an amount sufficient to
satisfy the withholding requirements, or make other arrangements
satisfactory to the Committee with regard to such requirements, prior to
the delivery of any Stock. If and to the extent that such withholding
is required, the Committee may permit the Participant or such other
person to elect at such time and in such manner as the Committee
provides to have the Company hold back from the shares to be delivered,
or to deliver to the Company, Stock having a value calculated to satisfy
the withholding requirement.
If at the time an ISO is exercised the Committee determines that
the Company could be liable for withholding requirements with respect to
a disposition of the Stock received upon exercise, the Committee may
require as a condition of exercise that the person exercising the ISO
agree (a) to inform the Company promptly of any disposition (within the
meaning of section 424(c) of the Code) of Stock received upon exercise,
and (b) to give such security as the Committee deems adequate to meet
the potential liability of the Company for the withholding requirements
and to augment such security from time to time in any amount reasonably
deemed necessary by the Committee to preserve the adequacy of such
security.
8.5. Nontransferability of Awards.
No Award (other than an Award in the form of an outright transfer
of cash or Unrestricted Stock) may be transferred other than by will or
by the laws of descent and distribution, and during an employee's
lifetime an Award requiring exercise may be exercised only by the
Participant (or in the event of the Participant's incapacity, the person
or persons legally appointed to act on the Participant's behalf).
8.6. Adjustments in the Event of Certain Transactions.
(a) In the event of a stock dividend, stock split or combination
of shares, recapitalization or other change in the Company's
capitalization, or other distribution to common stockholders other than
normal cash dividends, after the effective date of the Plan, the
Committee will make any appropriate adjustments to the maximum number of
shares that may be delivered under the Plan under Section 4 above.
(b) In any event referred to in paragraph (a), the Committee will
also make any appropriate adjustments to the number and kind of shares
of stock or securities subject to Awards then outstanding or
subsequently granted, any exercise prices relating to Awards and any
other provision of Awards affected by such change. The Committee may
also make such adjustments to take into account material changes in law
or in accounting practices or principles, mergers, consolidations,
acquisitions, dispositions or similar corporate transactions, or any
other event, if it is determined by the Committee that adjustments are
appropriate to avoid distortion in the operation of the Plan.
8.7. Employment Rights, Etc.
Neither the adoption of the Plan nor the grant of Awards will
confer upon any person any right to continued retention by the Company
or any subsidiary as an Employee or otherwise, or affect in any way the
right of the Company or subsidiary to terminate an employment, service
or similar relationship at any time. Except as specifically provided by
the Committee in any particular case, the loss of existing or potential
profit in Awards granted under the Plan will not constitute an element
of damages in the event of termination of an employment, service or
similar relationship even if the termination is in violation of an
obligation of the Company to the Participant.
8.8. Deferral of Payments.
The Committee may agree at any time, upon request of the
Participant, to defer the date on which any payment under an Award will
be made.
8.9. Past Services as Consideration.
Where a Participant purchases Stock under an Award for a price
equal to the par value of the Stock the Committee may determine that
such price has been satisfied by past services rendered by the
Participant.
9. EFFECT, DISCONTINUANCE, CANCELLATION, AMENDMENT AND
TERMINATION
Neither adoption of the Plan nor the grant of Awards to a
Participant will affect the Company's right to grant to such Participant
awards that are not subject to the Plan, to issue to such Participant
Stock as a bonus or otherwise, or to adopt other plans or arrangements
under which Stock be issued to Employees.
The Board may at any time or times amend the Plan or any
outstanding Award for any purpose which may at the time be permitted by
law, or may at any time terminate the Plan as to any further grants of
Awards, provided that (except to the extent expressly required or
permitted by the Plan) no such amendment will, without the approval of
the stockholders of the Company, effectuate a change for which
stockholder approval is required in order for the Plan to continue to
qualify for the award of ISOs under section 422 of the Code and to
continue to qualify under Rule 16b-3 promulgated under Section 16 of the
1934 Act.
As Amended
April 3, 1997
DYNAMICS RESEARCH CORPORATION
1995 STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS
1. PURPOSE
The purpose of this 1995 Stock Option Plan for Non-Employee
Directors (the "Plan") is to advance the interests of Dynamics Research
Corporation (the "Company") by enhancing the ability of the Company to
attract and retain non-employee directors who are in a position to make
significant contributions to the success of the Company and to align the
interest of those directors more closely with the stockholders.
2. ADMINISTRATION
The Plan shall be administered by a committee (the "Committee") of
the Board of Directors (the "Board") of the Company designated by the
Board for that purpose. Unless and until a Committee is appointed the
Plan shall be administered by the entire Board, and references in the
Plan to the "Committee" shall be deemed references to the Board. The
Committee shall have authority, not inconsistent with the express
provisions of the Plan, (a) to grant options in accordance with the Plan
to such directors as are eligible to receive options; (b) to prescribe
the form or forms of instruments evidencing options and any other
instruments required under the Plan and to change such forms from time
to time; (c) to adopt, amend and rescind rules and regulations for the
administration of the Plan; (d) to accelerate the vesting of or
otherwise change the terms of any option granted hereunder; and (e) to
interpret the Plan and to decide any questions and settle all
controversies and disputes that may arise in connection with the Plan.
Such determinations of the Committee shall be conclusive and shall bind
all parties.
3. EFFECTIVE DATE AND TERM OF PLAN
The Plan shall become effective on the date on which the Plan is
approved by the Board of Directors of the Company, subject to approval
by the shareholders of the Company. No option shall be granted under
the Plan after the completion of ten years from the date on which the
Plan was adopted by the Board, but options previously granted may extend
beyond that date.
4. SHARES SUBJECT TO THE PLAN
(a) Number of Shares. Subject to adjustment as provided in
Section 4(c), the aggregate number of shares of the Company's common
stock (the "Stock") that may be delivered upon the exercise of options
granted under the Plan shall be 100,000. If any option granted under
the Plan terminates without having been exercised in full, the number of
shares of Stock as to which such option was not exercised shall be
available for future grants within the limits set forth in this Section
4(a).
(b) Shares to be Delivered. Shares delivered under the Plan shall
be authorized but unissued Stock or, if the Board so decides in its sole
discretion, previously issued Stock acquired by the Company and held in
treasury. No fractional shares of Stock shall be delivered under the
Plan.
(c) Changes in Stock. In the event of a stock dividend, stock
split or combination of shares, recapitalization or other change in the
Company's capital stock, after the effective date of the Plan, the
number and kind of shares of stock or securities of the Company subject
to options then outstanding or subsequently granted under the Plan, the
maximum number of shares or securities that may be delivered under the
Plan, the exercise price, and other relevant provisions shall be
appropriately adjusted by the Committee, whose determination shall be
binding on all persons.
5. ELIGIBILITY FOR OPTIONS
Directors eligible to receive options under the Plan ("Eligible
Directors") shall be those directors who are not employees of the
Company or of any subsidiary of the Company.
6. TERMS AND CONDITIONS OF OPTIONS
(a) Number of Options.
On the date of the first annual meeting of stockholders following
the adoption of this Plan each Eligible Director who is elected,
reelected or continuing as a director on such date shall be awarded on
such date an option covering 5,000 shares of Stock; thereafter, at each
annual meeting or meeting of the board of directors at which a new
Eligible Director is elected to the Board or following the election by
the Board of a new Eligible Director to the Board, he or she shall be
awarded an option covering 5,000 shares of Stock; and at each annual
meeting subsequent to the annual meeting at which the initial grant was
made to an Eligible Director and at which he or she is reelected or is
continuing as a director, he or she shall be awarded an additional
option covering 1,000 shares of Stock.
(b) Exercise Price. The exercise price of each option shall be
100% of the fair market value per share of the Stock on the date the
option is granted. In no event, however, shall the option price be
less, in the case of an original issue of authorized stock, than par
value per share. For purposes of this paragraph, (A) the fair market
value of a share of Stock on any date shall be the Closing Price on such
day or, if there was no Closing Price on such day, the latest day prior
thereto on which there was a Closing Price; and (B) the "Closing Price"
of the Stock on any business day will be the last sale price as reported
on the principal market on which the Stock is traded or, if no last sale
is reported, then the mean between the highest bid and lowest asked
prices on that day.
(c) Duration of Options. The latest date on which an option may
be exercised (the "Final Exercise Date") shall be the date which is ten
years from the date the option was granted.
(d) Exercise of Options.
(1) Each option shall become exercisable to the extent of one-
third of the shares covered thereby on the date of the Annual Meeting
held in each of the first, second and third years following the date of
grant, except that options granted on dates other than the date of the
Annual Meeting shall become exercisable to the extent of one-third of
the shares covered thereby on each of the first, second and third
anniversaries of the date of the grant.
(2) Any exercise of an option shall be in writing, signed by
the proper person and delivered or mailed to the Company, accompanied by
(i) any documentation required by the Committee and (ii) payment in full
for the number of shares for which the option is exercised.
(3) The Committee shall have the right to require that the
individual exercising the option remit to the Company an amount
sufficient to satisfy any federal, state, or local withholding tax
requirements (or make other arrangements satisfactory to the employer
with regard to such taxes) prior to the delivery of any Stock pursuant
to the exercise of the option. If permitted by the Committee the
individual exercising the option may elect, at such time and in such
manner as the Committee may prescribe, to have the Company hold back
from the transfer Stock having a value calculated to satisfy such
withholding obligation. In the case of an individual subject to Section
16(b) of the Exchange Act, no such election shall be effective unless
made in compliance with the applicable requirements of Rule 16b-3 or any
successor Rule under the Securities Exchange Act of 1934, as amended
(the "Exchange Act").
(4) If an option is exercised by the executor or administrator of a
deceased director, or by the person or persons to whom the option has
been transferred by the director's will or the applicable laws of
descent and distribution, the Company shall be under no obligation to
deliver Stock pursuant to such exercise until the Company is satisfied
as to the authority of the person or persons exercising the option.
(e) Payment for and Delivery of Stock. Stock purchased under the
Plan shall be paid for as follows: (i) in cash or by check (acceptable
to the Company in accordance with guidelines established for this
purpose), bank draft or money order payable to the order of the Company;
(ii) through the delivery of shares of Stock (which, in the case of
shares of Stock acquired from the Company, have been outstanding for at
least six months) having a fair market value on the last business day
preceding the date of exercise equal to the purchase price; (iii) by
having the Company hold back from the shares transferred upon exercise
Stock having a fair market value on the last business day preceding the
date of exercise equal to the exercise price; (iv) by delivery of an
unconditional and irrevocable undertaking by a broker to deliver
promptly to the Company sufficient funds to pay the purchase price; or
(v) by any combination of the permissible forms of payment; provided,
that if the Stock delivered upon exercise of the option is an original
issue of authorized Stock, at least so much of the exercise price as
represents the par value of such Stock shall be paid other than with a
personal check or promissory note of the option holder.
An option holder shall not have the rights of a shareholder with
regard to awards under the Plan except as to Stock actually received by
him or her under the Plan.
The Company shall not be obligated to deliver any shares of Stock
(a) until, in the opinion of the Company's counsel, all applicable
federal and state laws and regulations have been complied with, and
(b) if the outstanding Stock is at the time listed on any stock
exchange, until the shares to be delivered have been listed or
authorized to be listed on such exchange upon official notice of
issuance, and (c) until all other legal matters in connection with the
issuance and delivery of such shares have been approved by the Company's
counsel. If the sale of Stock has not been registered under the
Securities Act of 1933, as amended, the Company may require, as a
condition to exercise of the option, such representations or agreements
as counsel for the Company may consider appropriate to avoid violation
of such Act and may require that the certificates evidencing such Stock
bear an appropriate legend restricting transfer.
(f) Nontransferability of Options. No option may be transferred
other than by will or by the laws of descent and distribution, and
during a director's lifetime an option may be exercised only by him or
her.
(g) Death. Upon the death of any Eligible Director granted
options under this Plan, all options not then exercisable shall
terminate. All options held by the director that are exercisable
immediately prior to death may be exercised by his or her executor or
administrator, or by the person or persons to whom the option is
transferred by will or the applicable laws of descent and distribution,
at any time within one year after the director's death (subject,
however, to the limitations of Section 6(c) regarding the maximum
exercise period for such option). After completion of that one-year
period, such options shall terminate to the extent not previously
exercised.
(h) Other Termination of Status of Director. If a director's
service with the Company terminates for any reason other than death, all
options held by the director that are not then exercisable shall
terminate. Options that are exercisable on the date of termination
shall continue to be exercisable for a period of three months (subject
to Section 6(c)). After completion of that three-month period, such
options shall terminate to the extent not previously exercised, expired
or terminated.
(i) Mergers, etc. In the event of a consolidation or merger in
which the Company is not the surviving corporation or which results in
the acquisition of substantially all the Company's outstanding Stock by
a single person or entity or by a group of persons and/or entities
acting in concert, or in the event of a sale or transfer of
substantially all of the Company's assets or a dissolution or
liquidation of the Company, all options hereunder will terminate;
provided, that 20 days prior to the scheduled date of the stockholders
meeting to vote upon any such merger, consolidation sale, dissolution,
or liquidation as set forth in the related proxy statement, or if there
shall be no such meeting, 20 days prior to the effective date of any
such transaction, all options outstanding hereunder that are not
otherwise exercisable shall become immediately exercisable, and
provided, further that in the event such a transaction is to be
accounted for as a pooling of interests, the Company shall provide for
the surviving or acquiring corporation or an affiliate thereof to grant
each holder of an option hereunder outstanding at the time of the
transaction replacement options on substantially equivalent terms.
7. EFFECT, DISCONTINUANCE, CANCELLATION, AMENDMENT, TERMINATION
AND EFFECTIVENESS
Neither adoption of the Plan nor the grant of options to a
director shall affect the Company's right to grant to such director
options that are not subject to the Plan, to issue to such directors
Stock as a bonus or otherwise, or to adopt other plans or arrangements
under which Stock may be issued to directors.
The Committee may at any time terminate the Plan as to any further
grants of options. The Committee may at any time or times amend the
Plan for any purpose which may at the time be permitted by law.
[EXECUTION COPY]
REVOLVING CREDIT AND TERM LOAN AGREEMENT
Dated as of October 1, 1997
by and among
DYNAMICS RESEARCH CORPORATION,
DRC ENCODER, INC.,
DRC METRIGRAPHICS, INC.,
DRC SOFTWARE, INC. and
DRC TELECOM, INC.,
as the Borrowers,
and
THE LENDERS PARTY HERETO
and
BROWN BROTHERS HARRIMAN & CO.,
as Agent and as Swing Line Lender
DYNAMICS RESEARCH CORPORATION
CREDIT AGREEMENT
TABLE OF CONTENTS
SECTION PAGE
1. DEFINITIONS AND RULES OF INTERPRETATION 1
1.1. Definitions 1
1.2. Rules of Interpretation 10
2. THE CREDIT FACILITIES 11
2.1. Amounts and Terms 11
2.2. Fees 14
2.3. Reduction of Commitments 15
2.4. Revolving Credit Notes 16
2.5. Term Note 16
2.6. Swing Line Note 16
2.7. Interest on Loans 16
2.8. Requests for Loans 17
2.9. Conversion and Continuation 18
2.10. Funds for Loans 19
3. PREPAYMENT OF THE LOANS; RESERVES 19
3.1. Voluntary Prepayments 19
3.2. Mandatory Prepayments 20
4. CERTAIN GENERAL PROVISIONS 20
4.1. Funds for Payments 20
4.2. Computations 21
4.3. Inability to Determine Adjusted LIBOR 21
4.4. Illegality 21
4.5. Additional Costs, Etc 22
4.6. Capital Adequacy 23
4.7. Certificate 23
4.8. Indemnity 23
4.9. Interest on Overdue Amounts 24
4.10. Mitigation 24
4.11. Joint and Several Obligations 24
5. REPRESENTATIONS AND WARRANTIES 24
5.1 Organization, Standing, etc. of the Borrowers 24
5.2 Subsidiaries 25
5.3 Qualification 25
5.4 Financial Information; Disclosure, etc. 25
5.5 Licenses, etc. 25
5.6 Material Agreements 26
5.7 Tax Returns and Payments 26
5.8 Indebtedness, Liens and Investments, etc. 26
5.9 Title to Properties; Liens 26
5.10 Litigation, etc. 26
5.11 Authorization; Compliance with Other Instruments 27
5.12 Governmental Consent 27
5.13 Regulation U, etc 27
5.14 Employee Retirement Income Security Act of 1974 27
5.15 Environmental Matters 28
5.16 Use of Proceeds 28
5.17 Investment Company Act; Public Utility Holding Company
Act 29
6. AFFIRMATIVE COVENANTS OF THE BORROWERS 29
6.1 Records and Accounts 29
6.2 Financial Statements, Certificates and Information 29
6.3 Legal Existence; Compliance with Laws, etc. 31
6.4 Insurance 31
6.5 Payment of Taxes 31
6.6 Payment of Other Indebtedness, etc. 32
6.7 Further Assurances 32
6.8 Depository Account 32
6.9 Use of Proceeds 32
6.10 No Further Negative Pledges 32
6.11 Regulation U 33
7. CERTAIN NEGATIVE COVENANTS OF THE BORROWERS 33
7.1 Indebtedness 33
7.2 Mortgages, Liens, etc. 34
7.3 Loans, Guarantees and Investments 35
7.4 Leases 36
7.5 Mergers and Consolidations 37
7.6 Sale of Assets 37
7.7 Capital Expenditures 37
7.8 Distributions 38
7.9 Compliance with ERISA 38
7.10 Transactions with Affiliates 38
7.11 Observance of Subordination Provisions, etc. 38
7.12 Environmental Liabilities 38
7.13 Subsidiaries 39
7.14 Material Adverse Change 39
8. FINANCIAL COVENANTS 39
9. DEFAULTS; REMEDIES 40
9.1 Events of Default; Acceleration 40
9.2 Remedies on Default, etc. 42
10. CLOSING CONDITIONS 42
10.1. Loan Documents, etc 42
10.2. Corporate Action 42
10.3. Incumbency Certificate 42
10.4. Opinions of Counsel 42
10.5. Payment of Fees 43
10.6. Real Estate Mortgage 43
11. CONDITIONS TO ALL LOANS 43
11.1. Accuracy of Representations; No Event of Default 43
11.2. No Legal Impediment 43
11.3. Additional Conditions to Facility B Loans 43
12. THE AGENT. 44
12.1. Appointment, Powers and Immunities 44
12.2. Reliance by Agent 44
12.3. Defaults 44
12.4. Rights as a Lender 45
12.5. Indemnification 45
12.6. NonReliance on Agent and Other Lenders 45
12.7. Failure to Act 46
12.8. Resignation of Agent 46
12.9. Cooperation of Lenders 46
12.10. Amendment of 12 46
12.11. Reliance 46
13. SETOFF, ETC 47
14. EXPENSES 47
15. INDEMNIFICATION 48
16. SURVIVAL OF COVENANTS, ETC 48
17. ASSIGNMENT AND PARTICIPATION 48
17.1. Assignment by the Lenders 48
17.2. Assignment by Borrowers 49
17.3 Participations by the Lenders 49
17.4 Replacement of Lender 49
18. FOREIGN LENDER 50
19. NOTICES, ETC. 51
20. GOVERNING LAW 52
21. HEADINGS 52
22. COUNTERPARTS 52
23. ENTIRE AGREEMENT, ETC 53
24. WAIVER OF JURY TRIAL 53
25. CONSENTS, AMENDMENTS, WAIVERS, ETC 53
26. CONFIDENTIALITY 54
27. SEVERABILITY 54
28. NATURE OF LENDER'S OBLIGATIONS 54
SCHEDULES AND EXHIBITS
Schedule 5.2 Subsidiaries
Schedule 5.4 Financial Statements
Schedule 5.5 Licenses
Schedule 5.6 Material Agreements
Schedule 5.8 Existing Indebtedness
Schedule 5.10 Litigation
Schedule 5.12 Consents
Schedule 5.15 Hazardous Materials
Schedule 7.2 Encumbrances
Exhibit A Form of Swing Line Loan Participation Certificate
Exhibit B-1 Form of Facility A Revolving Credit Note
Exhibit B-2 Form of Facility B Revolving Credit Note
Exhibit B-3 Form of Term Note
Exhibit B-4 Form of Swing Line Note
Exhibit C Form of Loan Request
Exhibit D Form of Compliance Certificate
Exhibit E Form of Opinion of Borrowers' Counsel
REVOLVING CREDIT AND TERM LOAN AGREEMENT
This REVOLVING CREDIT AND TERM LOAN AGREEMENT is made as of the 1st
day of October, 1997, by and among DYNAMICS RESEARCH CORPORATION, a
Massachusetts corporation ("DRC"), DRC ENCODER, INC., a Massachusetts
corporation ("Encoder"), DRC METRIGRAPHICS, INC., a Massachusetts
corporation ("Metrigraphics"), DRC SOFTWARE, INC., a Massachusetts
corporation ("Software"), DRC TELECOM, INC., a Massachusetts corporation
("Telecom"), and BROWN BROTHERS HARRIMAN & CO., a New York limited
partnership ("BBH&Co"), as a Lender (as defined below), as Agent (as
defined below) for itself and the other Lenders and as Swing Line Lender
(as defined below), BANKBOSTON, N.A., a national banking association
("BankBoston"), THE CHASE MANHATTAN BANK, a New York banking corporation
("Chase"), STATE STREET BANK AND TRUST COMPANY, a Massachusetts trust
company ("State Street"), CITIZENS BANK OF MASSACHUSETTS, a
Massachusetts financial institution ("Citizens") and the other Lenders
from time to time party hereto.
1. DEFINITIONS AND RULES OF INTERPRETATION.
1.1. Definitions. The following terms shall have the meanings
set forth in this 1 or elsewhere in the provisions of this Credit
Agreement referred to below:
ABN AMRO Loan. The meaning specified in 8(d).
Adjusted LIBOR. With respect to any LIBOR Loan for any
Interest Period, an interest rate per annum (rounded upwards, if
necessary, to the next 1/100 of 1%) equal to (a) the LIBOR for such
Interest Period multiplied by (b) the Statutory Reserve Rate.
Affected Lender. The meaning specified in 17.4.
Affiliate. As applied to any Person, a spouse of such Person,
any relative (by blood, adoption or marriage) of such Person within the
third degree, any managing member, director or officer of such Person,
any corporation, association, firm or other entity of which such Person
is a managing member, director or officer and any other Person directly
or indirectly controlling, controlled by or under direct or indirect
common control with such Person.
Agent. BBH&Co in its capacity as agent for the Lenders
hereunder, as well as its successors and assigns in such capacity
pursuant to 12.8.
Available Facility A Commitment. The Facility A Commitment
less the sum of (i) the outstanding principal amounts advanced under
Facility A and (ii) the outstanding principal amounts advanced as Swing
Line Loans.
Available Facility B Commitment. The Facility B Commitment
less the outstanding principal amounts advanced under Facility B.
Available Total Commitment. The Available Facility A
Commitment plus the Available Facility B Commitment.
Base Rate. For any date, a rate per annum equal to the higher
of (i) the Federal Funds Effective Rate in effect on such day plus one-
half of one percent (.50%) or (ii) the annual rate of interest publicly
announced from time to time by the Agent as its "commercial base rate"
in effect on such day.
Base Rate Loans. Loans bearing interest calculated by reference
to the Base Rate.
Base Rate Margin. The meaning specified in 2.7(a).
Borrower. Each of DRC, Encoder, Metrigraphics, Software and Telecom.
Business Day. Any day on which banking institutions in
Boston, Massachusetts are open for the transaction of banking business
and, in the case of LIBOR Loans, also a day which is a LIBOR Business
Day.
Capital Expenditures. Any payment made directly or indirectly
by DRC or any of its Subsidiaries for the purpose of acquiring or
constructing fixed assets, real property or equipment which in
accordance with GAAP would be added as a debit to the Consolidated fixed
asset account of DRC and its Subsidiaries, including without limitation
amounts paid or payable under any conditional sale or other title
retention agreement or under any lease or other periodic payment
arrangement which is of such a nature that payment obligations of a
Borrower thereunder would be required by GAAP to be capitalized and
shown as liabilities on the Consolidated balance sheet of DRC and its
Subsidiaries.
Capitalization. As of the date of any determination thereof,
the sum of (a) Tangible Net Worth and (b) Indebtedness for borrowed
money of DRC and its Subsidiaries on a Consolidated basis.
Capitalized Leases. Leases under which a Person is the lessee
or obligor, the discounted future rental payment obligations under which
are required to be capitalized on the balance sheet of such Person in
accordance with GAAP.
Change in Control. Shall be deemed to have occurred if any
Person or group (within the meaning of Rule 13d-5 of the Securities and
Exchange Commission as in effect on the date hereof) shall own directly
or indirectly, beneficially or of record, shares representing more than
50%, on a fully-diluted basis, of the aggregate ordinary voting power of
DRC.
Closing Date. The first date on which the conditions set
forth in 10 and 11 have been satisfied and any Loans are made.
Code. The Internal Revenue Code of 1986, as amended.
Commitment. As to any Lender, such Lender's portion of the
Total Commitment equal to such Lender's Percentage.
Commitment Fee. The meaning specified in 2.2(b)
Consolidated. With reference to any term herein, shall mean
that term as applied to the accounts of DRC and its Subsidiaries,
consolidated in accordance with GAAP.
Conversion Date. October 1, 1999.
Credit Agreement. This Credit Agreement, including the
Schedules and Exhibits hereto.
Current Lines of Business. The lines of business conducted by
the Borrower and its Subsidiaries on the Closing Date and any business
and activities incidental thereto, including: (i) the provision of
computer systems services and other engineering and management support
services to the Department of Defense and other customers, including the
development and operation of computer-based management information
systems in which software programs are applied to collect, analyze,
store and retrieve information relating to component parts of weapons
systems; (ii) the manufacture of position and motion sensors and other
precision components, including encoders that measure movement, and
precision-patterned glass and electroformed metal products; (iii) the
telephone fraud detection and control business; and (iv) the object-
oriented development software business.
Debt Coverage Certificate. The meaning specified in 2.7(a)
Debt Coverage Ratio. The meaning specified in 2.7(a).
Dollars or $. Dollars in lawful currency of the United States
of America.
Drawdown Date. The date on which any Loan is made or is to be
made, and the date on which any Loan is converted or continued in
accordance with 2.9.
EBITDA. For any period, the Consolidated Net Income of DRC
and its Subsidiaries for such period adjusted by adding back thereto
amounts deducted in computing such Consolidated Net Income in respect of
(a) Interest Expense of DRC and its Subsidiaries, (b) taxes in respect
of income and profits of DRC and its Subsidiaries and (c) depreciation
and amortization of DRC and its Subsidiaries.
Employee Benefit Plan. Any employee benefit plan within the
meaning of Section 3(3) of ERISA maintained or contributed to by a
Borrower or any ERISA Affiliate, or with respect to which a Borrower or
any ERISA Affiliate has actual or contingent liability, in each case
other than a Multiemployer Plan.
Environmental Laws. Any and all applicable current and future
treaties, laws, rules, regulations, codes, ordinances, orders, decrees,
judgments, injunctions, notices or binding agreements issued,
promulgated or entered into by any governmental authority, relating in
any way to the environment, preservation or reclamation of natural
resources or human exposure to or the management or Release or
threatened Release of any Hazardous Material.
ERISA. The Employee Retirement Income Security Act of 1974,
as amended.
ERISA Affiliate. Any Person which is treated as a single
employer with a Borrower under Section 414 of the Code or Section 4001
of ERISA.
ERISA Reportable Event. A reportable event with respect to a
Guaranteed Pension Plan within the meaning of 4043 of ERISA and the
regulations promulgated thereunder as to which the requirement of notice
has not been waived.
Event of Default. The meaning specified in 9.1.
Facility A. The meaning specified in 2.1.
Facility A Commitment. The meaning specified in 2.1.
Facility A Revolving Credit Note. The meaning specified in 2.4.
Facility A Maturity Date. October 1, 2000, subject to
extension pursuant to 2.4.
Facility B. The meaning specified in 2.1.
Facility B Commitment. The meaning specified in 2.1.
Facility B Revolving Credit Note. The meaning specified in 2.4.
Federal Funds Effective Rate. For any day, the weighted
average (rounded upwards, if necessary, to the next 1/100 of 1%) of the
rates on overnight Federal funds transactions with members of the
Federal Reserve System arranged by Federal funds brokers, as published
on the next succeeding Business Day by the Federal Reserve Bank of New
York, or, if such rate is not so published for any day that is a
Business Day, the average (rounded upwards, if necessary, to the next
1/100 of 1%) of the quotations for such day for such transactions
received by the Agent from three Federal funds brokers of recognized
standing selected by it.
GAAP. Generally accepted accounting principles in the United
States of America.
Guaranteed Pension Plan. Any Employee Benefit Plan the
benefits of which are guaranteed on termination in full or in part by
the PBGC pursuant to Title IV of ERISA.
Hazardous Materials. All explosive or radioactive substances
or wastes, hazardous or toxic substances or wastes, pollutants, solid,
liquid or gaseous wastes, including petroleum or petroleum distillates,
asbestos or asbestos-containing materials, polychlorinated biphenyls or
materials or equipment containing polychlorinated biphenyls, radon gas,
infectious or medical wastes and all other substances or wastes of any
nature regulated pursuant to any Environmental Law.
Indebtedness. All obligations, contingent and otherwise, that
in accordance with GAAP should be classified upon a Person's balance
sheet as liabilities, including: (a) all debt and similar monetary
obligations, whether direct or indirect; (b) all liabilities secured by
any mortgage, pledge, security interest, lien, charge, or other
encumbrance existing on property owned or acquired by such Person
subject thereto, whether or not the liability secured thereby shall have
been assumed; (c) all obligations in respect of Capitalized Leases; and
(d) all guarantees, endorsements and other contingent obligations
whether direct or indirect in respect of indebtedness owed by others,
including any obligation to supply funds to or in any manner to invest
in, directly or indirectly, the debtor, to purchase indebtedness, or to
assure the owner of indebtedness against loss, through an agreement to
purchase goods, supplies, or services for the purpose of enabling the
debtor to make payment of the indebtedness held by such owner or
otherwise, and the obligations to reimburse the issuer in respect of any
letters of credit.
Interest Expense. For any period, the aggregate amount
(determined in accordance with GAAP) of interest paid or payable during
such period by any Person in respect of all Indebtedness for borrowed
money, Capitalized Leases and the deferred purchase price of property.
Interest Payment Date. (a) As to any Base Rate Loan, March 31,
June 30, September 30 and December 31 and any date on which such Base
Rate Loan is converted to a LIBOR Loan; and (b) as to any LIBOR Loan,
the last day of the Interest Period relating to such LIBOR Loan;
provided, that in the event that such Interest Period is 180 days, the
90th day and the last day of such Interest Period.
Interest Period. With respect to each LIBOR Loan, the period
of one, two, three or six months, as selected by a Borrower commencing
on the Drawdown Date of such LIBOR Loan; provided that the foregoing
provisions relating to Interest Periods are subject to the following:
(a) if any Interest Period would otherwise end on a day that
is not a LIBOR Business Day, that Interest Period shall be extended to
the next succeeding LIBOR Business Day unless the result of such
extension would be to carry such Interest Period into another calendar
month, in which event such Interest Period shall end on the immediately
preceding LIBOR Business Day; and
(b) any Interest Period that would otherwise extend beyond
the Maturity Date shall end on the Maturity Date.
Investments. All expenditures made and all liabilities
incurred (contingently or otherwise), without duplication, for the
acquisition of stock or Indebtedness of, or for loans, advances, capital
contributions or transfers of property to, or in respect of any
guaranties (or other commitments as described under Indebtedness), or
obligations of, any Person. In determining the aggregate amount of
Investments outstanding at any particular time: (a) the amount of any
Investment represented by a guaranty shall be taken at not less than the
principal amount of the obligations guaranteed and still outstanding;
(b) there shall be included as an Investment all interest accrued with
respect to Indebtedness constituting an Investment unless and until such
interest is paid; (c) there shall be deducted in respect of each such
Investment any amount received as a return of capital (but only by
repurchase, redemption, retirement, repayment, liquidating dividend or
liquidating distribution); (d) there shall not be deducted in respect of
any Investment any amounts received as earnings on such Investment,
whether as dividends, interest or otherwise, except that accrued
interest included as provided in the foregoing clause (b) may be
deducted when paid; and (e) there shall not be deducted from the
aggregate amount of Investments any decrease in the value thereof.
Lenders. Each Person (including the Swing Line Lender) which
may from time to time own a Percentage of the Total Commitments,
including BBH&Co in its capacity as a Lender and as the Swing Line
Lender; provided, however, that the term "Lender" shall not include any
Participant.
LIBOR. With respect to any LIBOR Loan for any Interest
Period, the rate appearing on Page 3750 of the Telerate Service (or on
any successor or substitute page of such Service, or any successor to or
substitute for such Service, providing rate quotations comparable to
those currently provided on such page of such Service, as determined by
the Agent from time to time for purposes of providing quotations of
interest rates applicable to Dollar deposits in the London interbank
market) at approximately 11:00 a.m., London time, three Business Days
prior to the commencement of such Interest Period, as the rate for U.S.
dollar deposits with a maturity comparable to such Interest Period. In
the event that such rate is not available at such time for any reason,
the "LIBOR" with respect to such LIBOR Loan for such Interest Period
shall be the rate at which dollar deposits of $5,000,000 and for a
maturity comparable to such Interest Period are offered by the principal
London office of the Agent (or, if the Agent does not have such an
office, such office of any other Lender, as selected by the Agent) in
immediately available funds in the London interbank market at
approximately 11:00 a.m., London time, three Business Days prior to the
commencement of such Interest Period.
LIBOR Business Day. Any Business Day on which commercial
banks are open for international business (including dealings in Dollar
deposits) in London, England.
LIBOR Loans. Loans bearing interest calculated by reference
to the Adjusted LIBOR.
LIBOR Margin. The meaning specified in 2.7(a).
Licenses. The meaning specified in 5.5.
Loan Documents. This Credit Agreement, the Notes and any
other document executed and delivered in connection herewith.
Loan Request. The meaning specified in 2.8.
Loans. The Swing Line Loan and the Revolving Credit Loans
made under Facility A and the Revolving Credit Loans and the Term Loans
made under Facility B.
Maturity Date. October 1, 2002.
Moody's. Moody's Investors Service, Inc.
Multiemployer Plan. Any multiemployer plan within the meaning
of Section 3(37) of ERISA maintained or contributed to by a Borrower or
any ERISA Affiliate or with respect to which a Borrower or any ERISA
Affiliate has actual or contingent liability.
Net Income. Income (or loss), excluding extraordinary items
of income (or loss), of a Person for the period in question (taken as a
cumulative whole), after deducting therefrom all operating expenses,
reserves and other proper deductions (including any minority interest
expense), all determined in accordance with GAAP. For purposes hereof,
the Consolidated Net Income of DRC and its Subsidiaries shall include
the Net Income of any other Persons acquired prior to the date that it
either becomes a Subsidiary of such Borrower, is merged into or
consolidated with such Borrower, or such other Person's assets are
assigned, directly or indirectly, to such Borrower, provided that, in
the case of each of the foregoing, (i) the Net Income of such other
Person shall only be so included to the extent that such Net Income is
attributable to such other Person or to such assets as are acquired from
such other Person for the relevant period, all to the satisfaction of
the Agent, and (ii) any discrepancies in accounting treatment between
such Borrower and such other Person are conformed so as to make the
foregoing determination, to the satisfaction of the Agent.
Notes. The Swing Line Note, the Revolving Credit Notes and
the Term Notes.
Obligations. All indebtedness, obligations and liabilities of
the Borrowers to the Lenders, individually or collectively, existing on
the date of this Credit Agreement or arising thereafter, direct or
indirect, joint or several, absolute or contingent, matured or
unmatured, liquidated or unliquidated, secured or unsecured, arising by
contract, operation of law or otherwise, arising or incurred under the
Loan Documents or in respect of any of the Loans or the Notes or other
instruments at any time evidencing any thereof.
Outstanding. With respect to the Loans, the aggregate unpaid
principal thereof as of any date of determination.
Participant. The meaning specified in 17.3.
PBGC. The Pension Benefit Guaranty Corporation created by
4002 of ERISA and any successor entity or entities having similar
responsibilities.
Percentage. The meaning specified in 2.1(a).
Permitted Liens. The meaning specified in 7.2.
Person. Any individual, corporation, partnership, limited
liability company, trust, unincorporated association, joint venture,
organization, business, or other legal entity, and any government or any
governmental agency or political subdivision thereof.
Projections. DRC's forecasted balance sheets, profit and loss
statements and cash flow statements, all prepared on a basis consistent
with DRC's historical financial statements, together with appropriate
supporting details and statements of underlying assumptions.
Qualified Plan. A pension plan (as defined in Section 3(2) of
ERISA) intended to be tax-qualified under Section 401(a) of the IRC
which a Borrower or any ERISA Affiliate sponsors, maintains, or to which
any such Person makes, is making, or is obligated to make,
contributions, or, in the case of a multiple-employer plan (as described
in Section 4064(a) of ERISA), has made contributions at any time during
the immediately preceding period covering at least five (5) plan years,
but excluding any Multiemployer Plan.
Record. The grid attached to each Revolving Credit Note, or
the continuation of such grid, or any other similar record, including
computer records, maintained by the Agent with respect to any Revolving
Credit Loan referred to in the Revolving Credit Notes.
Refunded Swing Line Loan. The meaning specified in 2.1(d).
Release. Any spilling, leaking, pumping, pouring, emitting,
emptying, discharging, injecting, escaping, leaching, dumping,
disposing, depositing, dispersing, emanating or migrating of any
Hazardous Material in, into, onto or through the environment.
Replacement Lender. The meaning specified in 17.4.
Required Lenders. Any two or more Lenders holding in the
aggregate at least sixty-six and two-thirds percent (66 2/3%) of the
amounts Outstanding on the Loans or, if no amounts are Outstanding under
Facility A or Facility B, of the Percentages of the Total Commitment.
Revolving Credit Loan. Any revolving credit loan (including
any Swing Line Loan) made under Facility A or any revolving credit loan
made under Facility B pursuant to 2.1(b).
Revolving Credit Notes. The meaning specified in 2.4.
S&P. Standard & Poor's Ratings Group, a division of the
McGraw Hill Companies, Inc.
Senior Debt. All Indebtedness of a Person and its
Subsidiaries (without duplication) in respect of borrowed money,
Capitalized Leases and the deferred purchase price of property, other
than Subordinated Debt.
Statutory Reserve Rate. A fraction (expressed as a decimal),
the numerator of which is the number one and the denominator of which is
the number one minus the aggregate of the maximum reserve percentages
(including any marginal, special, emergency or supplemental reserves)
expressed as a decimal established by the Board of Governors of the
Federal Reserve System of the United States to which any of the Lenders
is subject for eurocurrency funding (currently referred to as
"Eurocurrency Liabilities" in Regulation D of such Board), as
appropriately adjusted by mutual agreement of the Agent and the Required
Lenders to the extent that any Lender is not subject to, or is subject
to different reserve requirements under, such regulations. Such reserve
percentages shall include those imposed pursuant to such Regulation D.
LIBOR Loans shall be deemed to constitute eurocurrency funding and to be
subject to such reserve requirements without benefit of or credit for
proration, exemptions or offsets that may be available from time to time
to any Lender under such Regulation D or any comparable regulation. The
Statutory Reserve Rate shall be adjusted automatically on and as of the
effective date of any change in any reserve percentage.
Subordinated Debt: (a) The existing Indebtedness of the
Borrowers which is designated as "Subordinated Debt" in Schedule 5.8
attached hereto, and (b) any other Indebtedness of a Borrower which
matures in its entirety and by its terms (or by the terms of the
instrument under which it is outstanding and to which appropriate
reference is made in the instrument evidencing such Subordinated Debt)
is made subordinate and junior in right of payment to the Notes and to
each Borrower's other obligations to the Lenders hereunder by provisions
reasonably satisfactory in form and substance to the Required Lenders
and their counsel.
Subsidiary. Any partnership, corporation, association, trust,
or other business entity of which DRC shall at any time own directly or
indirectly through a Subsidiary or Subsidiaries at least a majority (by
number of votes) of the outstanding Voting Interests.
Swing Line Availability. The meaning specified in 2.1(d).
Swing Line Lender. BBH&Co.
Swing Line Loan. The meaning specified in 2.1(d).
Swing Line Note. The meaning specified in 2.6.
Tangible Net Worth. As of the date of any determination
thereof, the difference of: (a) DRC's stockholders' equity; minus (b)
the sum of: (i) all intangible assets of DRC and its Subsidiaries; and
(ii) all amounts due to DRC from any of its Affiliates (other than any
other Borrower), in each case calculated on a Consolidated basis.
Term Loans. Any term loans made under Facility B pursuant to
2.1(c).
Term Note. The meaning specified in 2.5.
Total Commitment. The meaning specified in 2.1.
Unfunded Benefit Liability means the excess of a Qualified
Plan's or a Multiemployer Plan's benefit liabilities (as defined in
Section 4001(a)(16) of ERISA) over the current value of such plan's
assets, determined in accordance with the assumptions used by the plan's
actuaries for funding the plan pursuant to Section 412 of the Code for
the applicable plan year.
Voting Interests. Stock or similar interests, of any class or
classes (however designated), the holders of which are at the time
entitled, as such holders, to vote for the election of a majority of the
directors (or persons performing similar functions) of the partnership,
corporation, association, trust or other business entity involved,
whether or not the right so to vote exists by reason of the happening of
a contingency.
1.2. Rules of Interpretation.
(a) A reference to any document or agreement shall include
such document or agreement as amended, modified or supplemented from
time to time in accordance with its terms and the terms of this Credit
Agreement.
(b) The singular includes the plural and the plural
includes the singular.
(c) A reference to any law includes any amendment or
modification to such law.
(d) A reference to any Person includes its permitted
successors and permitted assigns.
(e) Accounting terms not otherwise defined herein have the
meanings assigned to them by GAAP applied on a consistent basis by the
accounting entity to which they refer.
(f) The words "include", "includes" and "including" are
not limiting.
(g) Reference to a particular "" refers to that section
of this Credit Agreement unless otherwise indicated.
(h) The words "herein", "hereof", "hereunder" and words of
like import shall refer to this Credit Agreement as a whole and not to
any particular section or subdivision of this Credit Agreement.
(i) Except as otherwise expressly provided herein, all
terms of an accounting or financial nature shall be construed in
accordance with GAAP, as in effect from time to time; provided that, if
a Borrower notifies the Agent that such Borrower requests an amendment
to any provision hereof to eliminate the effect of any change occurring
after the date hereof in GAAP or in the application thereof on the
operation of such provision (or if the Agent notifies a Borrower that
the Required Lenders request an amendment to any provision hereof for
such purpose), regardless of whether any such notice is given before or
after such change in GAAP or in the application thereof, then such
provision shall be interpreted on the basis of GAAP as in effect and
applied immediately before such change shall have become effective until
such notice shall have been withdrawn or such provision amended in
accordance herewith.
2. THE CREDIT FACILITIES.
2.1. Amounts and Terms of the Facilities.
(a) Commitments. The Borrowers wish to establish one revolving
credit facility and one standby facility with the Lenders in an
aggregate principal amount at any one time outstanding not in excess of
$45,000,000. The two credit facilities shall consist of (i) Facility A,
a revolving credit facility in an aggregate principal amount at any one
time outstanding not in excess of $30,000,000 (as such amount may be
reduced from time to time pursuant to Section 2.3, the "Facility A
Commitment") and (ii) Facility B, a standby revolving credit facility,
convertible into a term loan on the Conversion Date, in an aggregate
principal amount at any one time outstanding not in excess of
$15,000,000 (as such amount may be reduced from time to time pursuant to
Section 2.3, and on or after the Conversion Date, pursuant to Section
3.1, the "Facility B Commitment"). The Facility A Commitment and the
Facility B Commitment are collectively referred to as the "Total
Commitment". Each Lender is severally willing to establish such
revolving credit facility and such standby credit facility on behalf of
the Borrowers, subject to the terms and conditions hereafter set forth,
in the aggregate maximum amounts at any one time outstanding set forth
opposite each Lender's name and in the respective percentages set forth
opposite each Lender's name which shall be applicable to such revolving
credit facility and such standby credit facility hereunder (hereinafter
referred to as such Lender's "Percentage"):
Percentage
of Total
Lender Commitment Commitment
BBH&Co $12,000,000 26.67%
BankBoston $9,000,000 20.00%
Chase $9,000,000 20.00%
State Street $9,000,000 20.00%
Citizens $6,000,000 13.33%
TOTAL $45,000,000 100.00%
(b) Revolving Loans. Subject to the terms and conditions set
forth in this Credit Agreement, each Lender hereby severally establishes
(i) one revolving credit facility in favor of the Borrowers in the
individual principal amount of such Lender's Percentage of the
Facility A Commitment and (ii) one standby revolving credit facility in
favor of the Borrowers in the individual principal amount of such
Lender's Percentage of the Facility B Commitment, the two credit
facilities being in the aggregate principal amount of such Lender's
Percentage of the Total Commitment. Each Lender agrees to lend to any
Borrower, and any Borrower may borrow, repay, and, with respect to
Facility A, reborrow from time to time between the Closing Date and the
Facility A Maturity Date and, with respect to Facility B, reborrow from
time to time between the Closing Date and the Conversion Date, in either
case upon notice by any Borrower to the Agent given in accordance with
2.8, such sums as are requested by such Borrower up to a maximum
aggregate principal amount outstanding (after giving effect to all
amounts requested) at any one time equal to such Lender's Percentage of
the Available Total Commitment; provided, however, that the proceeds of
any and all borrowings and reborrowings under Facility A and Facility B
shall be used solely for the respective purposes described in 5.16.
All Revolving Credit Loans shall be made as LIBOR Loans or Base Rate
Loans, at a Borrower's option. LIBOR Loans may be converted to Base
Rate Loans and Base Rate Loans may be converted to LIBOR Loans. LIBOR
Loans shall be continued or converted to Base Rate Loans under the
circumstances, and subject to the conditions, specified in 2.9. Each
request for a Revolving Credit Loan hereunder shall constitute a
representation and warranty by each of the Borrowers that the conditions
set forth in 10 and 11, in the case of the initial Revolving Credit
Loans to be made on the Closing Date, and 11, in the case of all other
Revolving Credit Loans, have been satisfied on the date of such request.
(c) Term Loans. Each Lender hereby severally agrees that, at
the request of any Borrower, absent an Event of Default and subject to
the terms and conditions hereinafter set forth and upon the simultaneous
payment in full of principal of, and interest on, all Revolving Credit
Loans then outstanding under Facility B, it shall make a Term Loan to
such Borrower on the Conversion Date which shall be in a principal
amount not exceeding the then outstanding principal amounts which such
Lender has advanced under Facility B; provided, however, that such
payment in full of the Revolving Credit Loans then outstanding under
Facility B and the making of the Term Loans shall occur simultaneously
and the proceeds of such Term Loans shall be applied to such payment of
the Revolving Credit Loans under Facility B. Any request by a Borrower
for the Term Loans hereunder shall be made by written notice to the
Agent at least three (3) Business Days prior to the Conversion Date, and
shall be made pro rata from each of the Lenders in accordance with their
respective Percentages of the Total Commitment. Such notice shall
specify the principal amount of the Term Loans. Upon receipt of such
request for the Term Loans hereunder, the Agent shall promptly notify
the other Lenders, specifying the principal amount thereof. Each Lender
shall make its Term Loan hereunder on the Conversion Date by delivering
to the Agent the amount thereof in immediately available funds (except
to the extent the proceeds of such Term Loan are to be applied
simultaneously to the payment of the Revolving Credit Note payable to
such Lender as aforesaid), by not later than 1:00 p.m., Boston time, on
the Conversion Date. The Agent shall credit the amount of any such
funds provided by the Lenders to the account designated by the Borrower
requesting a Term Loan or, if such Borrower does not designate any
account, to DRC's regular deposit account with the Agent.
(d) Swing Line Loans.
(i) On any date prior to the Facility A Maturity Date on
which the Agent receives any Loan Request in respect of the Available
Facility A Commitment pursuant to 2.8, designated as a Swing Line Loan,
the Agent promptly shall notify the Swing Line Lender and, subject to
the terms and conditions hereof, the Swing Line Lender shall, on the
date the Agent receives such Loan Request, make an advance (each a
"Swing Line Loan") in accordance with any such notice. The aggregate
amount of Swing Line Loans at any time outstanding shall not exceed the
lesser of (A) $3,000,000 and (B) the Available Facility A Commitment
("Swing Line Availability"). Until the Facility A Maturity Date, any
Borrower may from time to time borrow, repay and reborrow under this
2.1(d). Each Swing Line Loan shall be made pursuant to a Loan Request
in respect of the Available Facility A Commitment pursuant to 2.8.
Each such Loan Request must be given no later than 12:00 p.m. (Boston
time) on the Business Day of the proposed Swing Line Loan.
Notwithstanding any other provision of this Agreement or the other Loan
Documents, the Swing Line Loans shall constitute Base Rate Loans. The
Borrowers shall repay the aggregate outstanding principal amount of each
Swing Line Loan upon demand therefor by the Agent, provided that (i)
absent an Event of Default or any other event which, with the giving of
notice or passage of time or both, would constitue an Event of Default,
the Agent shall not make such demand prior to the Business Day next
succeeding the date on which such Swing Line Loan is made and (ii) all
amounts of principal and accrued interest outstanding on the Facility A
Maturity Date or the earlier maturity by acceleration or otherwise shall
be paid in full on such date.
(ii) The Swing Line Lender, at any time and from time to
time in its sole and absolute discretion, may on behalf of each Borrower
(and each Borrower hereby irrevocably authorizes the Swing Line Lender
to so act on its behalf) request each Lender (including the Swing Line
Lender in its capacity as a Lender) to make a Revolving Credit Loan
under Facility A to such Borrower (which shall be a Base Rate Loan) in
an amount equal to such Lender's Percentage of the aggregate principal
amount of the Swing Line Loans made to such Borrower (the "Refunded
Swing Line Loan") outstanding on the date such notice is given. Unless
any of the events described in 9.1(f) or 9.1(g) shall have occurred (in
which event the procedures of 2.1(d)(iii) shall apply) and regardless
of whether the conditions precedent set forth in this Credit Agreement
to the making of a Revolving Credit Loan are then satisfied, each Lender
shall disburse directly to the Agent such Lender's Percentage of the
Refunded Swing Line Loan on behalf of the Swing Line Lender, prior to
1:00 p.m. (Boston time), in immediately available funds on the Business
Day next succeeding the date such notice is given. The proceeds of such
Revolving Credit Loans shall be immediately paid to the Swing Line
Lender and applied to repay the Refunded Swing Line Loan.
(iii) If, prior to refunding any Swing Line Loan pursuant
to 2.1(d)(ii), one of the events described in 9.1(f) or 9.1(g) shall
have occurred, then, subject to the provisions of 1.1(d)(iv) below,
each Lender will, on the date such Revolving Credit Loan was to have
been made for the benefit of a Borrower, purchase from the Swing Line
Lender an undivided participation interest in the Swing Line Loan in an
amount equal to its Percentage of such Swing Line Loan. Upon request,
each Lender will promptly transfer to the Swing Line Lender, in
immediately available funds, the amount of its participation and upon
receipt thereof the Swing Line Lender will deliver to such Lender a
Swing Line Loan Participation Certificate, substantially in the form of
Exhibit A attached hereto, dated the date of receipt of such funds and
in such amount.
(iv) Each Lender's obligation to make Revolving Credit
Loans and to purchase participating interests in accordance with this
52.1(d) shall be absolute and unconditional and shall not be affected by
any circumstance, including (A) any setoff, counterclaim, recoupment,
defense or other right which such Lender may have against the Swing Line
Lender, the Agent, any Borrower or any other Person for any reason
whatsoever, (B) the occurrence or continuance of any Event of Default or
any event which, with the giving of notice or passage of time or both
would constitute an Event of Default, (C) any inability of a Borrower to
satisfy the conditions precedent to borrowing set forth in this Credit
Agreement on the date upon which such participating interest is to be
purchased or (D) any other circumstance, happening or event whatsoever,
whether or not similar to any of the foregoing. If any Lender does not
make available to the Agent or the Swing Line Lender, as applicable, the
amount required pursuant to 2.1(d)(ii) or 2.1(d)(iii), as the case may
be, the Swing Line Lender shall be entitled to recover such amount on
demand from such Lender, together with interest thereon for each day
from the date of non-payment until such amount is paid in full at a rate
equal to the Base Rate plus the Base Rate Margin.
2.2. Fees.
(a) Funding Fee. The Borrowers agree to pay to the Agent for
the ratable account of each Lender, on the date of each Revolving Credit
Loan under Facility B, a funding fee (the "Funding Fee") calculated at
the rate of 0.5% of such Revolving Credit Loan under Facility B.
(b) Commitment Fee. The Borrowers agree to pay to the Agent
for the ratable account of each Lender, on each date that DRC delivers
to the Agent a Debt Coverage Certificate pursuant to 2.7(a) and on the
Facility A Maturity Date, a commitment fee (the "Commitment Fee")
calculated at the rate per annum set forth below on (i) at any time
prior to the Conversion Date, the daily average unused portion of such
Lender's portion of the Available Total Commitment during the
immediately preceding fiscal quarter of DRC or, if applicable, the
portion thereof ending prior to the Conversion Date (adjusted as
appropriate for any reduction or termination of any portion of the Total
Commitment pursuant to 2.3 during the immediately preceding fiscal
quarter or portion thereof), and (ii) at any time on or after the
Conversion Date, the daily average unused portion of such Lender's
portion of the Available Facility A Commitment during the immediately
preceding fiscal quarter of the Borrower or, if applicable, the portion
thereof commencing on or after the Conversion Date (adjusted as
appropriate for any reduction or termination of any portion of the
Facility A Commitment pursuant to 2.3 during the immediately preceding
fiscal quarter or portion thereof). The Commitment Fee shall be
computed on the basis of the actual number of days elapsed in a year of
360 days and shall be payable in arrears.
Debt Commitment Fee
Coverage Ratio
< 1.5 .20%
> 1.5 to < 2.0 .25%
> 2.0 to < 2.5 .30%
> 2.5 .35%
Notwithstanding the foregoing, the Commitment Fee shall be .35 %
during any period when (i) an Event of Default shall have occurred and
be continuing and shall not have been waived or (ii) the Debt Coverage
Certificate in respect of the immediately preceding Fiscal quarter shall
not have been delivered when required by 2.7(a).
(c) Agent's Fees. The Borrowers agree to pay to the Agent, for
the Agent's own account, such other fees as DRC and the Agent have
heretofore agreed upon in writing.
2.3. Reduction of Commitments. Subject to the terms and
conditions of 3, each Borrower shall have the right at any time and
from time to time upon three (3) Business Days' prior written notice to
the Agent (which shall in turn give a prompt written notice to each
Lender) to reduce by $1,000,000 or a multiple of $1,000,000 in excess
thereof or terminate entirely any portion of the Facility A Commitment
and/or of the Facility B Commitment, pro rata in accordance with each
Lender's Percentage, whereupon the Facility A Commitment and/or the
Facility B Commitment, as applicable, shall be reduced accordingly or,
as the case may be, terminated. Upon the effective date of any such
reduction or termination, the Borrowers shall pay to the Agent for the
ratable account of each Lender the full amount of any Commitment Fee
payable pursuant to 2.2(b) then accrued on the amount of the reduction.
No reduction of the Facility A Commitment and/or the Facility B
Commitment, as applicable, may be reinstated. Concurrently with each
reduction of any such commitment pursuant to this 2.3, the amount
specified in 2.1(a) as the amount of the Facility A Commitment and/or
Facility B Commitment, as the case may be, for the period in which such
reduction is made and for each subsequent period shall be reduced by an
amount equal to the amount of such reduction.
2.4. Revolving Credit Notes. The Revolving Credit Loans made by
the Lenders in respect of Facility A and Facility B shall each be
evidenced by a single promissory note of the Borrowers in substantially
the form of Exhibit B-1 attached hereto (the "Facility A Revolving
Credit Note") and Exhibit B-2 attached hereto (the "Facility B Revolving
Credit Note" and, collectively with the Facility A Revolving Credit
Note, the "Revolving Credit Notes"), each dated as of the Closing Date
and completed with appropriate insertions. The Revolving Credit Notes
shall be payable to the order of the Agent for the ratable account of
each Lender in principal amounts equal to the Facility A Commitment and
the Facility B Commitment, respectively, or, if less, the aggregate
outstanding amount of all Revolving Credit Loans made by the Lenders in
respect of the applicable Facility, plus interest accrued thereon, as
set forth below. The Borrowers irrevocably authorize the Agent to make
or cause to be made, at or about the time of the Drawdown Date of any
Revolving Credit Loans under Facility A and/or Facility B or at the time
of receipt of any payment of principal or interest on any Revolving
Credit Note, an appropriate notation on its Record reflecting the making
of such Revolving Credit Loans or (as the case may be) the receipt of
such payment and the respective pro-rata allocations to each Lender in
accordance with its respective Percentage of the Total Commitment. The
Agent shall record the outstanding amount of the Revolving Credit Loans
on the Record as prima facie evidence of the principal amount thereof
owing and unpaid to the Agent for the ratable account of the Lenders,
but the failure to record, or any error in so recording, any such amount
on the Record shall not limit or otherwise affect the obligations of the
Borrowers hereunder or under the Revolving Credit Notes to make payments
of principal of or interest on the Revolving Credit Notes when due. All
Facility A Revolving Credit Notes shall be due and payable on the
Facility A Maturity Date, provided that the Facility A Maturity Date
may, with the approval of all of the Lenders, be extended annually
thereafter for each of the next two twelve-month periods following the
Facility A Maturity Date. All Facility B Revolving Credit Notes shall
be due and payable on the Conversion Date.
2.5. Term Note. The Term Loans shall be evidenced by a single
term note in the form attached hereto as Exhibit B-3 (the "Term Note"),
payable to the order of the Agent for the ratable account of each
Lender, duly executed on behalf of each Borrower, dated the Conversion
Date and in the aggregate principal amount of the Term Loan. The
principal amount of the Term Note shall be payable in equal consecutive
quarterly installments based upon a three-year amortization schedule
beginning on the Conversion Date and ending on the Maturity Date.
2.6. Swing Line Note. The Swing Line Loans shall be evidenced by
a single promissory note in the form attached hereto as Exhibit B-4 (the
"Swing Line Note"), payable to the order of the Agent for the account of
the Swing Line Lender, dated as of the Closing Date and in the aggregate
principal amount of $3,000,000 or, if less, the aggregate outstanding
amount of all Swing Line Loans.
2.7. Interest on Loans.
(a) DRC shall deliver to the Agent on the Closing Date and on
or before the 45th day immediately following the end of each fiscal
quarter of DRC a certificate duly signed by the chief financial officer
or treasurer of DRC and reasonably satisfactory in form and substance to
the Lenders (a "Debt Coverage Certificate") setting forth the ratio of
(i) the Consolidated Senior Debt of DRC and its Subsidiaries for the
immediately preceding fiscal quarter-end to (ii) Consolidated EBITDA and
its Subsidiaries for the four (4) consecutive quarters ending on such
fiscal quarter-end (the "Debt Coverage Ratio"). Loans shall bear
interest at a rate per annum equal to the Adjusted LIBOR or Base Rate,
as the case may be, plus the applicable margin set forth below based on
the Debt Coverage Ratio (which margin is referred to, in the case of
Base Rate Loans, as the "Base Rate Margin" and, in the case of LIBOR
Loans, as the "LIBOR Margin"). Subject to subparagraph (b) below, each
change in the applicable margin based on a change in the Debt Coverage
Ratio shall be effective, with respect to all Loans outstanding on or
after the date of delivery of a Debt Coverage Certificate, from and
including the date of delivery of such certificate until the date
immediately preceding the next date of delivery of a Debt Coverage
Certificate indicating another such change.
Debt Base Adjusted LIBOR
Coverage Rate Margin Margin
Ratio
<1.5 0 .50%
>1.5 to <2.0 0 .75%
>2.0 to <2.5 0 1.00%
>2.5 0 1.50%
(b) During any period when an Event of Default shall have
occurred and be continuing or in the event that DRC fails to provide the
Agent with the Debt Coverage Certificate for any fiscal quarter of DRC,
then until such Event of Default is cured or waived or such certificate
is provided, as the case may be, the applicable margin over the Base
Rate shall be zero (0) and the applicable margin over the Adjusted LIBOR
shall be one and one-half percent (1.5%).
(c) Interest on each Base Rate Loan and LIBOR Loan shall be
computed on the basis of the actual number of days elapsed in a year of
360 days, in each case without duplication of any day in successive
Interest Periods.
(d) The Borrowers agree to pay to the Agent, for the pro rata
benefit of the Lenders, interest on each Loan in arrears on each
Interest Payment Date with respect thereto.
2.8. Requests for Loans. A Borrower shall give to the Agent
written notice in the form of Exhibit C hereto (or telephonic notice
confirmed in a writing in the form of Exhibit C hereto) of the Loans
requested from the Lenders hereunder (a "Loan Request"), no later than
12:00 noon, Boston time, (i) no less than one (1) Business Day prior to
the proposed Drawdown Date of any Base Rate Loan and (ii) no less than
three (3) LIBOR Business Days prior to the proposed Drawdown Date of any
LIBOR Loans; provided, however, that a Borrower may give to the Agent a
Loan Request for a Swing Line Loan at any time prior to 12:00 noon,
Boston time on the proposed Drawdown Date of such Swing Line Loan. Each
such notice shall specify (i) the aggregate principal amount of the
Loans requested from the Lenders specifying whether such Loans are in
respect of the Available Facility A Commitment (and, if so, whether a
Swing Line Loan) and/or the Available Facility B Commitment (and in each
case not in excess of the unused portion of the Available Total
Commitment), (ii) whether such Loans are to be LIBOR Loans or Base Rate
Loans, (iii) whether such Loans are to be Revolving Credit Loans or Term
Loans (subject, however, to 2.1(b) and 2.1(c) which respectively
provide that, under Facility B, Loans made prior to the Conversion Date
shall be Revolving Credit Loans and Loans made on the Conversion Date
shall be Term Loans), (iv) the proposed Drawdown Date of such Loans, (v)
in the case of LIBOR Loans, the Interest Period for such Loans, (vi) the
purpose or purposes to which the proceeds of such Loans shall be
applied, and (vii) such other matters as are set forth on Exhibit C.
Each Loan Request shall be in a minimum aggregate amount of $1,000,000
or a higher integral multiple of $500,000; provided, however, that each
Loan Request for a Swing Line Loan shall be in a minimum aggregate
amount of $100,000 or a higher integral multiple of $50,000. The Agent
shall then promptly notify each Lender by written notice of its
respective Percentage of the Loans requested.
2.9. Conversion and Continuation.
Each Borrower shall have the right at any time upon prior
irrevocable notice to the Agent (a) not later than 12:00 noon, Boston
time, one (1) Business Day prior to the date of conversion, to convert
any LIBOR Loan into a Base Rate Loan, (b) not later than 12:00 noon,
Boston time, three (3) LIBOR Business Days prior to conversion or
continuation, to convert any Base Rate Loan into a LIBOR Loan or to
continue any LIBOR Loan as a LIBOR Loan for an additional Interest
Period, and (c) not later than 12:00 noon, Boston time, three (3)
Business Days prior to conversion, to convert the Interest Period with
respect to any LIBOR Loan to another permissible Interest Period,
subject in each case to the following:
(i) each conversion or continuation shall be made pro
rata among the Lenders in accordance with the respective principal
amounts of the Loans comprising the converted or continued Loans;
(ii) if less than all the outstanding principal amount of
any Loans shall be converted or continued, then the resulting Loans
shall satisfy the limitations specified in the penultimate sentence
of 2.8 regarding the principal amount of Loans;
(iii) each conversion shall be effected by the Agent by
recording for the account of each Lender the new Loan of such
Lender resulting from such conversion and reducing the Loan (or
portion thereof) of such Lender being converted by an equivalent
principal amount;
(iv) accrued interest on a LIBOR Loan (or portion
thereof) being converted or continued shall be paid by the
Borrowers at the time of conversion or continuation;
(v) LIBOR Loans may only be converted at a time that is
the end of the Interest Period applicable thereto;
(vi) any portion of a Loan maturing or required to be
repaid in less than one month may not be converted into or
continued as a LIBOR Loan;
(vii) any portion of a LIBOR Loan that cannot be
converted into or continued as a LIBOR Loan by reason of the
immediately preceding clause shall be automatically converted at
the end of the Interest Period in effect for such Loan into a Base
Rate Loan; and
(viii) no Event of Default and no event which, with the
giving of notice or passage of time or both, would constitute
an Event of Default has occurred and is continuing; provided,
however, that the condition set forth in this clause (viii) shall
not be applicable to the conversion of any LIBOR Loan into a Base
Rate Loan pursuant to 2.9(a).
Each notice pursuant to this 2.9 shall be irrevocable and shall
refer to this Agreement and specify (i) the identity (including whether
such Loan is a Term Loan or a Revolving Credit Loan) and amount of the
Loan that a Borrower requests be converted or continued, (ii) whether
such Loan is to be converted to or continued as a LIBOR Loan or a Base
Rate Loan, (iii) if such notice requests a conversion, the date of such
conversion (which shall be a LIBOR Business Day) and (iv) if such Loan
is to be converted to or continued as a LIBOR Loan, the Interest Period
with respect thereto. If no Interest Period is specified in any such
notice with respect to any conversion to or continuation as a LIBOR
Loan, the Borrower shall be deemed to have selected an Interest Period
of one month's duration. The Agent shall promptly advise the other
Lenders of any notice given pursuant to this 2.9 and of each Lender's
portion of any converted or continued Loans. If the Borrower shall not
have given notice in accordance with this 2.9 to continue any LIBOR
Loans into a subsequent Interest Period (and shall not otherwise have
given notice in accordance with this 2.9 to convert such LIBOR Loans),
such LIBOR Loans shall, at the end of the Interest Period applicable
thereto (unless repaid pursuant to the terms hereof), automatically be
converted into Base Rate Loans.
2.10. Funds for Loans. Subject to the satisfaction of the other
conditions set forth herein, to the extent applicable (including 2.8),
each Lender will make available to the Agent on the proposed date of any
Loan (other than a Swing Line Loan) by wire transfer of immediately
available funds not later than 1:00 P.M., Boston time, the aggregate
amount of its Percentage of such Loans requested by the Borrowers, and
the Agent shall credit the aggregate amount so received to the
respective accounts designated by the Borrowers or, if a Borrower does
not designate any account, to DRC's regular deposit account with the
Agent.
3. PREPAYMENT OF THE LOANS; RESERVES.
3.1. Voluntary Prepayments. Each Borrower shall have the right,
at its election, to prepay the outstanding amount of any Loans, as a
whole or in part, at any time without penalty or premium, except as
provided in 4.8; provided, however, that once repaid or prepaid, Term
Loans made under Facility B may not be reborrowed. A Borrower shall
give irrevocable written notice to the Agent, no later than 12:00 noon,
Boston time, one Business Day prior to any proposed prepayment of Base
Rate Loans pursuant to this 3 and no later than 11:00 a.m., Boston
time, three LIBOR Business Days prior to any proposed prepayment of
LIBOR Rate Loans pursuant to this 3, in each case specifying the
proposed date of prepayment of the Loans and the principal amount and
accrued interest to be prepaid, and the Agent shall promptly give notice
thereof to each Lender. Each such prepayment of the Base Rate Loans
shall be in a minimum amount of the lesser of (i) $1,000,000 and
(ii) the aggregate amount outstanding under the Notes being prepaid, and
shall be accompanied by the payment of accrued interest on the principal
prepaid to the date of such prepayment. Prepayments of Term Loans under
Facility B will be applied first to the principal amount of the Term
Loan which is due on the Maturity Date and then to the installments
required to be paid on the Term Loan pursuant to 2.5 in inverse order
of maturity.
3.2. Mandatory Prepayments. If at any time the outstanding
principal amount of all Loans in respect of Facility A or Facility B
exceeds (or, in the case of any notice of reduction of the Facility A
Commitment and/or the Facility B Commitment pursuant to 2.3, would
exceed) the Facility A Commitment or the Facility B Commitment,
respectively, the Borrowers will immediately prepay the applicable Note
or Notes, subject to 4.8, in an amount necessary to cause the
outstanding principal amount of all Loans in respect of Facility A or
Facility B not to exceed the Facility A Commitment or the Facility B
Commitment, as applicable.
4. CERTAIN GENERAL PROVISIONS.
4.1. Funds for Payments.
(a) All payments of principal, interest, fees and any
other amounts due hereunder or under any of the other Loan Documents
shall be made to the Agent for the ratable account of the Lenders at 40
Water Street, Boston, Massachusetts 02109, or at such other location as
the Agent may from time to time designate, in each case in Dollars
constituting immediately available funds.
(b) All payments by the Borrowers hereunder and under any
of the other Loan Documents shall be made without setoff or counterclaim
and free and clear of and without deduction for any taxes, levies,
imposts, duties, charges, fees, deductions, withholdings, compulsory
loans, restrictions or conditions of any nature now imposed or levied by
any jurisdiction or any political subdivision thereof or taxing or other
authority therein unless a Borrower is compelled by law to make such
deduction or withholding or if the taxes are based upon or measured by
the income or profits of the Lenders, including profits or receipts with
respect to the Loans. If any such obligation is imposed upon a Borrower
with respect to any amount payable by it hereunder or under any of the
other Loan Documents, the Borrowers will pay to the Agent for the
ratable account of the Lenders on the date on which such amount is due
and payable hereunder or under such other Loan Document, such additional
amount in Dollars as shall be necessary to enable the Lenders to receive
the same net amount which the Lenders would have received on such due
date had no such obligation been imposed upon such Borrower. The
Borrowers will deliver promptly to the Agent certificates or other valid
vouchers for all taxes or other charges deducted from or paid with
respect to payments made by the Borrowers hereunder or under such other
Loan Document. In the event any Lender receives a refund of any taxes
or other amounts for which it has received payment from a Borrower
pursuant to this 4.1(b), such Lender shall, within 30 days from the
date of such receipt, pay the amount of such refund to such Borrower but
only to the extent of payments made by such Borrower pursuant to this
4.1(b) and net of all costs and expenses of the Agent and such Lender
relating thereto and without interest (other than interest, if any, paid
by the relevant government authority with respect to such refund);
provided, however, that the Borrowers upon request of the Agent or any
Lender, agree to repay the amount paid to a Borrower to the Agent or
such Lender if the Agent or such Lender is required to repay such refund
to such governmental authority.
4.2. Computations. All computations of interest on the LIBOR
Loans and the Base Rate Loans and of commitment or other fees shall be
based on a 360-day year and paid for the actual number of days elapsed.
Except as otherwise provided in the definition of the term "Interest
Period" with respect to LIBOR Loans, whenever a payment hereunder or
under any of the other Loan Documents becomes due on a day that is not a
Business Day, the due date for such payment shall be extended to the
next succeeding Business Day, and interest shall accrue during such
extension.
4.3. Inability to Determine Adjusted LIBOR. In the event, prior
to the commencement of any Interest Period relating to any LIBOR Loan,
the Agent shall determine that adequate and reasonable methods do not
exist in the marketplace for ascertaining the Adjusted LIBOR that would
otherwise determine the rate of interest to be applicable to any LIBOR
Loan during any Interest Period, the Agent shall give notice of such
determination (which shall be conclusive and binding on the Borrowers)
to the Borrowers. In such event (a) any Loan Request with respect to
LIBOR Loans shall be automatically withdrawn and shall be deemed a
request for Base Rate Loans, (b) each LIBOR Loan will automatically, on
the last day of the then current Interest Period thereof, become a Base
Rate Loan, and (c) the obligations of the Lenders to make LIBOR Loans
shall be suspended until the Agent determines that the circumstances
giving rise to such suspension no longer exist, whereupon the Agent
shall so notify the Borrowers.
4.4. Illegality. Notwithstanding any other provisions herein, if
any present or future law, regulation, treaty or directive or change in
the interpretation or application thereof shall make it unlawful for any
Lender to make or maintain LIBOR Loans, such Lender shall forthwith give
notice of such circumstances to the Agent who shall in turn notify the
Borrowers and thereupon (a) the commitment of such Lender to make LIBOR
Loans shall forthwith be suspended and (b) the Loans then outstanding as
LIBOR Loans from such Lender, if any, shall be converted automatically
to Base Rate Loans on the last day of each Interest Period applicable to
such LIBOR Loans or within such earlier period as may be required by
law. The Borrowers hereby agree promptly to pay the Agent on behalf of
such Lender, upon demand by such Lender accompanied by a certificate
setting forth in reasonable detail such costs, any additional amounts
necessary to compensate such Lender for any costs incurred by such
Lender in making any conversion in accordance with this 4.4, including
any interest or fees payable by such Lender to lenders of funds obtained
by it in order to make or maintain its LIBOR Loans hereunder; provided,
that to the extent permitted by applicable law, each Lender shall
maintain each LIBOR Loan until the last day of an Interest Period.
4.5. Additional Costs, Etc. If any change in any present
applicable law or if any future applicable law, which expression, as
used herein, includes statutes, rules and regulations thereunder and
interpretations thereof by any competent court or by any governmental or
other regulatory body with the administration or the interpretation
thereof and directives, instructions and notices at any time or from
time to time hereafter made upon or otherwise issued to any Lender by
any central bank or other fiscal, monetary or other authority (whether
or not having the force of law, but only if it is mandatory that such
Lender comply), shall:
(a) subject such Lender to any tax, levy, impost, duty,
charge, fee, deduction or withholding of any nature with respect to this
Credit Agreement, the other Loan Documents, or the Loans (other than
taxes based upon or measured by the income or profits of such Lender,
including without limitation profits or receipts with respect to the
Loans and other than any withholding tax imposed on any payments by the
Borrowers to such Lender); or
(b) materially change the basis of taxation (except for
changes in taxes on income or profits and except for any withholding tax
imposed on any payments by the Borrowers to the Lenders) of payments to
such Lender of the principal of or the interest on any Loans or any
other amounts payable to such Lender under this Credit Agreement or the
other Loan Documents; or
(c) impose or increase or render applicable (other than to
the extent specifically provided for elsewhere in this Credit Agreement)
any special deposit, reserve, assessment, liquidity, capital adequacy or
other similar requirements (whether or not having the force of law, but
only if it is mandatory that such Lender comply) against assets held by,
or deposits in or for the account of, or loans by, or commitments of an
office of such Lender; or
(d) impose on such Lender any other conditions or
requirements with respect to this Credit Agreement, the other Loan
Documents, the Loans, or any class of loans or commitments of which any
of the Loans forms a part;
and the result of any of the foregoing is to:
(i) increase the cost to such Lender of making, funding,
issuing or maintaining any of the Loans or its Percentage of the Total
Commitment; or
(ii) reduce the amount of principal, interest or other amount
payable to such Lender hereunder on account of any of the Loans or its
Percentage of the Total Commitment; or
(iii) require such Lender to make any payment or to forego
any interest or other sum payable hereunder, the amount of which payment
or foregone interest or other sum is calculated by reference to the
gross amount of any sum receivable or deemed received by such Lender
from the Borrower hereunder;
then, and in each such case, the Borrower will, within ten (10) Business
Days following receipt of written notice from the Agent on behalf of
such Lender, which written notice shall include a description of the
relevant change in law, calculations of the amounts payable, pay to the
Agent on behalf of such Lender such additional amounts as will be
sufficient to compensate such Lender for such additional cost,
reduction, payment or foregone interest or other sum.
4.6. Capital Adequacy. If any change in any present law,
governmental rule, regulation, policy, guideline or directive or if any
future law, governmental rule, regulation, policy, guideline or
directive (in each case whether or not having the force of law, but only
if it is mandatory that the Lender comply) or the interpretation thereof
by a court or governmental authority with appropriate jurisdiction or
any change in any such law or interpretation (including, without
limitation, any change according to a prescribed schedule of increasing
requirements, whether or not known on the date of this Credit Agreement)
affects the amount of capital required or expected to be maintained by
any Lender or any corporation controlling such Lender and such Lender
determines that the amount of capital required to be maintained by it is
increased by or based upon the existence of the Commitments or Loans
made pursuant hereto, then the Agent on behalf of such Lender may notify
the Borrower of such fact. To the extent that the costs of such
increased capital requirements are not reflected in the applicable
rate(s) of interest on the Loans, the Borrower and the Agent on behalf
of such Lender shall thereafter attempt to negotiate in good faith,
within thirty (30) days of the day on which the Borrower receives such
notice, an adjustment payable hereunder that will adequately compensate
such Lender in light of these circumstances. If the Borrower and the
Agent on behalf of such Lender are unable to agree to such adjustment
within thirty (30) days of the date on which the Borrower receives such
notice, then commencing on the date Borrower received such notice (but
not earlier than the effective date of any such increased capital
requirement), from time to time the Borrower will pay to the Agent, on
behalf of such Lender after consultation with the affected Lender, such
additional amount that will, in the Agent's reasonable determination,
provide adequate compensation to such Lender. Such Lender shall
allocate such cost increases among its customers in good faith and on an
equitable basis.
4.7. Certificate. A certificate setting forth any additional
amounts payable pursuant to 4.5, 4.6 or 4.8 and a reasonably detailed
explanation of such amounts which are due, including calculation of such
amounts, submitted by the Agent on behalf of any Lender to the
Borrowers, shall be conclusive, absent manifest error, that such amounts
are due and owing.
4.8. Indemnity. The Borrowers agree to indemnify each Lender and
to hold each Lender harmless from and against any loss, cost or expense
that such Lender may sustain or incur resulting from (a) a default by a
Borrower in payment of the principal amount of or any interest on any
Loans as and when due and payable, including any such loss or expense
arising from interest or fees payable by such Lender to lenders of funds
obtained by it in order to maintain its Loans, (b) a default by a
Borrower in making a borrowing after such Borrower has given (or is
deemed to have given) a Loan Request relating thereto in accordance with
2.8 or (c) the making of any payment or prepayment of a Loan or the
conversion of any LIBOR Loan to a Base Rate Loan on a day that is not
the last day of the applicable Interest Period with respect thereto,
including interest or fees payable by such Lender to lenders of funds
obtained by it in order to maintain any such Loans.
4.9. Interest on Overdue Amounts. Overdue principal and (to the
extent permitted by applicable law) interest on the Loans and all other
overdue amounts payable hereunder or under any of the other Loan
Documents shall bear interest payable on demand at a rate per annum
equal to (i) in the case of overdue principal and interest (to the
extent permitted by law) of any Loan, 2% plus the rate otherwise
applicable to such Loan as provided in 2.7 or (ii) in the case of any
other amount, 2% plus the then prevailing Base Rate plus the then
prevailing applicable margin, in each case until such amount shall be
paid in full (after as well as before judgment).
4.10. Mitigation. Each Lender shall take commercially
reasonable efforts (which shall not require such Lender to incur an
unreimbursed loss or unreimbursed cost or expense or otherwise take any
action inconsistent with its internal policies or suffer any
disadvantage or burden deemed by it to be significant) to assign its
rights and delegate and transfer its obligations hereunder to another of
its offices to the extent that such assignment, delegation and transfer
would reduce amounts otherwise payable by the Borrowers to such Lender
pursuant to 4.1(b), 4.4, 4.5, 4.6 and 4.8 or to make or maintain LIBOR
Loans hereunder. The Borrowers agree to pay all costs and expenses
incurred by any Lender in connection with any such assignment,
delegation and transfer.
4.11. Joint and Several Obligations. Notwithstanding any
other provision of this Credit Agreement, (i) each of the covenants,
agreements and obligations of any Borrower set forth in this Credit
Agreement or in any other Loan Document shall be the joint and several
covenants, agreements and obligations of all of the Borrowers,
regardless of whether a Borrower was the actual recipient of the
proceeds of a Loan, (ii) all representations and warranties of any
Borrower contained in this Credit Agreement or in any other Loan
Document shall be deemed to be separately made by each of the Borrowers
and (iii) any notice, request, consent, report or other information or
agreement delivered by any Borrower shall be deemed for all purposes to
be consented to, ratified and delivered by each of the Borrowers. In
furtherance of the foregoing, each Borrower acknowledges and agrees that
each covenant, agreement and obligation of any or all of the Borrowers
in this Credit Agreement or any other Loan Document is enforceable
against all Borrowers, jointly, or against any Borrower, severally.
5. REPRESENTATIONS AND WARRANTIES. In order to induce the
Lenders to enter into this Credit Agreement and to make the Loans
provided for hereunder, each Borrower makes the following
representations and warranties, which shall survive the execution and
delivery hereof and of the Notes:
5.1 Organization, Standing, etc. of the Borrowers. Each
Borrower is a corporation duly organized, validly existing and in good
standing under the laws of The Commonwealth of Massachusetts and has all
requisite corporate power and authority to own and operate its
properties, to carry on its business as now conducted and proposed to be
conducted, to enter into this Agreement, the other Loan Documents and
all other documents to be executed by it in connection with the
transactions contemplated hereby, to issue the Notes and to carry out
the terms hereof and thereof.
5.2 Subsidiaries. Schedule 5.2 attached hereto correctly
sets forth as to each Subsidiary, its name, the jurisdiction of its
incorporation, the number of shares of its capital stock of each class
outstanding and the number of such outstanding shares owned by DRC and
its other Subsidiaries. Each such Subsidiary is a corporation duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation and has all requisite corporate power
and authority to own and operate its properties and to carry on its
business as now conducted and proposed to be conducted. All of the
outstanding capital stock of each Subsidiary is validly issued,
fully-paid and nonassessable, and is owned by DRC or its Subsidiaries as
specified in Schedule 5.2, in each case free of any mortgage, pledge,
lien, security interest, charge, option or other encumbrance, other than
restrictions imposed by applicable federal and state securities laws.
5.3 Qualification. Each Borrower and its Subsidiaries are
duly qualified or licensed and in good standing as foreign corporations
duly authorized to do business in each jurisdiction in which the
character of the properties owned or the nature of the activities
conducted makes such qualification or licensing necessary.
5.4 Financial Information; Disclosure, etc. The Borrowers
have furnished the Lenders with the financial statements and other
reports listed in Schedule 5.4 attached hereto. Such financial
statements have been prepared in accordance with GAAP applied on a
consistent basis and fairly present the financial position and results
of operations of the Persons to which they purport to relate as of the
dates and for the periods indicated. Since the end of the most recent
fiscal period shown in such financial statements or in the most recent
financial statements delivered by DRC under 6.2(a), there has not been
any material adverse change in the business, operations, condition
(financial or otherwise) or properties of Borrowers and their
Subsidiaries, taken as a whole. Neither this Agreement nor any
financial statements, reports, projections or other documents or
certificates furnished to the Lenders by the Borrowers in connection
with the transactions contemplated hereby contain as of their respective
dates any untrue statement of a material fact or omit to state any
material fact necessary to make the statements herein or therein
contained not misleading. None of the Loans will render any Borrower
unable to pay its debts as they become due; no Borrower is contemplating
either the filing of a petition by it under any state or federal
bankruptcy or insolvency laws or, except as set forth on Schedule 5.4,
the liquidation of all or a major portion of its property; and no
Borrower has knowledge of any Person contemplating the filing of any
such petition against it.
5.5 Licenses, etc. Schedule 5.5 attached hereto accurately
and completely lists all authorizations, licenses, permits and
franchises of any public or governmental regulatory body which are
necessary for the conduct of the business of each Borrower and its
Subsidiaries as now conducted and the absence of which would result,
either in any case or in the aggregate, in a material adverse change in
the business, operations, affairs, condition (financial or otherwise) or
properties of (i) DRC and its Subsidiaries, taken as a whole, (ii)
Encoder and its Subsidiaries, taken as a whole, or (iii) Metrigraphics
and its Subsidiaries, taken as a whole (such authorizations, licenses,
permits and franchises, together with any extensions or renewals
thereof, being herein sometimes referred to collectively as the
"Licenses"). All of such Licenses are in full force and effect and each
Borrower and its Subsidiaries have fulfilled and performed all of their
obligations with respect thereto and have full power and authority to
operate thereunder.
5.6 Material Agreements. Schedule 5.6 attached hereto
accurately and completely lists all material agreements and contracts
which are presently in effect in connection with the conduct of the
business of any Borrower and that which was or is required to be filed
with the Securities and Exchange Commission as a "material contract"
pursuant to Item 601(b)(10) of Registration S-K promulgated by the
Securities and Exchange Commission.
5.7 Tax Returns and Payments. Each Borrower and its
Subsidiaries have filed all tax returns required by law to be filed and
have paid all material taxes, assessments and other governmental charges
levied upon any of their respective properties, assets, income or
franchises, other than those not yet delinquent and those, not material
in aggregate amount, being or about to be contested as provided in 6.7.
The charges, accruals and reserves on the books of each Borrower and its
Subsidiaries in respect of their respective taxes are adequate in the
opinion of the Borrowers, and the Borrowers know of no unpaid assessment
for additional taxes or of any basis therefor.
5.8 Indebtedness, Liens and Investments, etc. Schedule 5.8
attached hereto sets forth, as of the date hereof, (a) the amounts of
all outstanding Indebtedness of each Borrower and its Subsidiaries in
respect of borrowed money, Capitalized Leases and the deferred purchase
price of property, (b) all existing mortgages, liens and security
interests in respect of such Indebtedness, (c) all agreements which
directly or indirectly require any Borrower or its Subsidiaries to make
any material investments, loans or advances and (d) all existing
material guarantees by each Borrower and its Subsidiaries.
5.9 Title to Properties; Liens. Each Borrower and its
Subsidiaries have good and marketable title to all of their respective
properties and assets, and none of such properties or assets is subject
to any mortgage, pledge, lien, security interest, charge or encumbrance
except for (i) Permitted Liens and (ii) minor liens and encumbrances
which in the aggregate are not substantial in amount, do not in any case
materially detract from the value of the property subject thereto or
materially impair the operations of any Borrower and its Subsidiaries
and have not arisen otherwise than in the ordinary course of business.
Each Borrower and its Subsidiaries enjoy quiet possession under all
leases to which they are parties as lessees, and, to the knowledge of
each Borrower, all of such leases are valid, subsisting and in full
force and effect. None of such leases contains any provision
restricting the incurrence of indebtedness by the lessee.
5.10 Litigation, etc. Except as set forth in Schedule 5.10
attached hereto, there is no action, proceeding or investigation pending
or threatened (or any basis therefor known to any Borrower) which
questions the validity of this Credit Agreement, the Notes or the other
documents executed in connection herewith, or any action taken or to be
taken pursuant hereto, or which could reasonably be expected to result,
either in any case or in the aggregate, in any material adverse change
in the business, operations, affairs, condition (financial or otherwise)
or properties of DRC and the Subsidiaries, taken as a whole, or any of
their respective properties or in any material liability on the part of
DRC and the Subsidiaries, taken as a whole.
5.11 Authorization; Compliance with Other Instruments. The
execution, delivery and performance of this Agreement and the Notes have
been duly authorized by all necessary corporate action on the part of
each Borrower, will not result in any violation of or be in conflict
with or constitute a default under any term of the charter or by-laws of
any Borrower, or of any agreement, instrument, judgment, decree, order,
statute, rule or governmental regulation applicable to any Borrower, or
result in the creation of any mortgage, lien, charge or encumbrance upon
any of the properties or assets of any Borrower pursuant to any such
term. Neither any Borrower nor any Subsidiary is in violation of any
term of its charter or by-laws, or of any term of any material agreement
or instrument to which it is a party, or, to each Borrower's knowledge,
of any judgment, decree, order, statute, rule or governmental regulation
applicable to it.
5.12 Governmental Consent. Except as specified in
Schedule 5.12 attached hereto, no order, consent, approval or
authorization of, or declaration to or filing with, any governmental
authority (collectively, "Consents") is required to be obtained or made
by any Borrower or by any Subsidiary in connection with the execution
and delivery of this Agreement and the issuance and delivery of the
Notes pursuant hereto. Except as set forth in Schedule 5.12, all of the
Consents have been obtained and are in full force and effect.
5.13 Regulation U, etc. Neither any Borrower nor any
Subsidiary owns or has any present intention of acquiring any "margin
stock" within the meaning of Regulation U (12 CFR Part 221) of the Board
of Governors of the Federal Reserve System (herein called "margin
stock"). None of the proceeds of the Loans will be used, directly or
indirectly, by any Borrower or any Subsidiary for the purpose of
purchasing or carrying, or for the purpose of reducing or retiring any
indebtedness which was originally incurred to purchase or carry, any
margin stock or for any other purpose which might constitute the
transactions contemplated hereby a "purpose credit" within the meaning
of said Regulation U, or cause this Agreement to violate Regulation U,
Regulation T, Regulation X, or any other regulation of the Board of
Governors of the Federal Reserve System or the Securities Exchange Act
of 1934.
5.14 Employee Retirement Income Security Act of 1974. Each
Employee Benefit Plan and, to each Borrower's knowledge, each
Multiemployer Plan, is in material compliance with applicable provisions
of ERISA and the Code. No ERISA Reportable Event has occurred or, to
each Borrower's knowledge, is imminent or likely to occur. No Borrower
or ERISA Affiliate has incurred any material liability to the PBGC or
any Employee Benefit Plan or Multiemployer Plan on account of any
failure to meet the contribution requirements of any such plan, minimum
funding requirements or prohibited transactions under ERISA or the Code,
termination of a single employer plan, partial or complete withdrawal
from a Multiemployer Plan, or the insolvency, reorganization or
termination of any Multiemployer Plan, and no event has occurred or
conditions exist which present a material risk that any Borrower or
ERISA Affiliate will incur any material liability on account of any of
the foregoing circumstances. The consummation of the transactions
contemplated by this Agreement will not result in any prohibited
transaction under ERISA or the Code for which an exemption is not
available.
5.15 Environmental Matters. Except as set forth in
Schedule 5.15 attached hereto, neither any Borrower nor any Subsidiary
nor, to each Borrower's knowledge, any other Person has ever caused or
permitted any Hazardous Material to be disposed of on or under any real
property owned, leased or operated by any Borrower or any Subsidiary or
in which any Borrower or any Subsidiary has ever held, directly or
indirectly, any legal or beneficial interest or estate, and no such real
property has ever been used (either by any Borrower or any Subsidiary
or, to each Borrower's knowledge, by any other Person) as (i) a disposal
site or permanent storage site for any Hazardous Material or (ii) a
temporary storage site for any Hazardous Material. Each Borrower and
each of its Subsidiaries have been issued and are in compliance with all
material permits, certificates, licenses, approvals and other
authorizations relating to environmental matters and necessary or
desirable for their respective businesses, and have filed all
notifications and reports relating to chemical substances, air
emissions, underground storage tanks, effluent discharges and Hazardous
Material waste storage, treatment and disposal required in connection
with the operation of their respective businesses, the failure to have
or comply with which would, individually or in the aggregate, have a
material adverse effect on any Borrower or any Subsidiary. All
Hazardous Materials used or generated by any Borrower or any Subsidiary
or any business merged into or otherwise acquired by any Borrower or any
Subsidiary have been generated, accumulated, stored, transported,
treated, recycled and disposed of in compliance with all applicable laws
and regulations, the violation of which has any reasonable likelihood of
having a material adverse effect on any Borrower or any Subsidiary.
Neither any Borrower nor any Subsidiary has any liabilities with respect
to Hazardous Materials and no facts or circumstances exist which could
give rise to liabilities with respect to Hazardous Materials, which in
either case, individually or in the aggregate, could have any reasonable
likelihood of having a material adverse effect on any Borrower or any
Subsidiary.
5.16 Use of Proceeds. Each Borrower will use the proceeds of the
Loans solely for the following purposes: (i) with respect to Loans made
under Facility A, for working capital and other general corporate
purposes of the Borrowers; and (ii) with respect to Loans made under
Facility B, for (a) acquisitions and other business combinations
involving the acquisition by a Borrower or one of its Subsidiaries of
all or substantially all of the stock, assets or business or line of
business of any other Person and/or (b) the assumption of, participation
in or subcontracting under revenue-generating government contracts
and/or (c) for capital expenditures of a Borrower or any of its
Subsidiaries, in each case within the Current Lines of Business and as
permitted by the terms and conditions of this Credit Agreement;
provided, however, that no proceeds of the Loans may be used for the
purpose of or in connection with a hostile acquisition by a Borrower or
any of its Subsidiaries.
5.17 Investment Company Act; Public Utility Holding Company Act.
Neither any Borrower nor any Subsidiary is (a) an "investment company"
as defined in, or subject to regulation under, the Investment Company
Act of 1940 or (b) a "holding company" as defined in, or subject to
regulation under, the Public Utility Holding Company Act of 1935.
6. AFFIRMATIVE COVENANTS OF THE BORROWERS. Each Borrower
covenants and agrees that, so long as any Loan or Note is outstanding or
the Lenders have any Available Total Commitment:
6.1 Records and Accounts. Each Borrower will (a) keep true and
accurate records and books of account in which full, true and correct
entries will be made in accordance with GAAP and (b) maintain adequate
accounts and reserves for all taxes (including income taxes),
depreciation, depletion, obsolescence and amortization of its
properties, contingencies, and other reserves, all in accordance with
GAAP.
6.2 Financial Statements, Certificates and Information. Each
Borrower will furnish or cause to be furnished to each Lender:
(a) Within 90 days after the end of each fiscal year of DRC,
(i) the consolidated and consolidating balance sheets of DRC and its
Subsidiaries as at the end of such year and (ii) the related
consolidated and consolidating statements of income and surplus and cash
flows for such year, setting forth in comparative form with respect to
such consolidated financial statements figures for the previous fiscal
year, all in reasonable detail, together with the opinion thereon of
independent public accountants selected by DRC and satisfactory to the
Lenders, which opinion shall be in a form generally recognized as
unqualified and shall state that the financial statements have been
prepared in accordance with generally accepted accounting principles
applied on a basis consistent with that of the preceding fiscal year
(except for changes, if any, which shall be specified and approved in
such opinion) and that the audit by such accountants in connection with
such financial statements has been made in accordance with generally
accepted auditing standards related to reporting; provided, however,
that the Borrowers shall be required to furnish the consolidating
financial statements referred to above only to the extent that the same
are required to be prepared by GAAP or by the Securities and Exchange
Commission or by any other applicable regulatory authority;
(b) Within 45 days after the end of each of the first three
quarterly accounting periods in each fiscal year of DRC, (i) the
unaudited consolidated and consolidating balance sheets of DRC and its
Subsidiaries as at the end of such period, and (ii) the related
unaudited consolidated and consolidating statements of income and
surplus and cash flows for such period and for the period from the
beginning of the current fiscal year to the end of such period, all in
reasonable detail and signed by the chief financial officer or treasurer
of DRC; provided, however, that the Borrowers shall be required to
furnish the consolidating financial statements only to the extent that
the same are required to be prepared by GAAP or by the Securities and
Exchange Commission or by any other applicable regulatory authority;
(c) Together with the financial statements delivered pursuant
to subparagraph (a) above, a statement signed by the accountants who
have reported on the same to the effect that in connection with their
examination of such financial statements they have reviewed the
provisions of this Agreement and have no knowledge of any event or
condition which constitutes an Event of Default or which, after notice
or expiration of any applicable grace period or both, would constitute
such an Event of Default or, if they have such knowledge, specifying the
nature and period of existence thereof; provided, however, that in
issuing such statement, such independent accountants shall not be
required to go beyond normal auditing procedures conducted in connection
with their opinion referred to above;
(d) Together with the financial statements delivered pursuant
to subparagraph (a) above, a detailed list of each Borrower's backlog of
revenue-generating government contracts showing services to be provided
by each Borrower in connection therewith as of the date of such
financial statements;
(e) Together with the financial statements delivered pursuant
to subparagraph (a) above, DRC's Projections for the next succeeding
three (3) fiscal years, year by year, and for the next succeeding fiscal
year, quarter by quarter;
(f) Together with the financial statements delivered pursuant
to subparagraphs (a) and (b) above, a compliance certificate
substantially in the form of Exhibit D attached hereto signed by the
chief financial officer or treasurer of DRC;
(g) Promptly after the same become publicly available, copies
of all periodic and other reports, proxy statements and other materials
filed by DRC with the Securities and Exchange Commission, or any
governmental authority succeeding to any of or all of the functions of
said Commission, or with any national securities exchange, or
distributed to its shareholders generally, as the case may be (with the
exhibits relating thereto to be provided, at DRC's expense, upon the
request of the Agent or any Lender);
(h) Promptly upon their becoming available, copies of any
periodic or special reports filed by any Borrower or any Subsidiary with
any federal, state or local governmental agency or authority, if such
reports indicate any material change in the business, operations,
affairs or condition (financial or otherwise) of the Borrowers and the
Subsidiaries, taken as a whole, or if copies thereof are requested by
any Lender, and copies of any materially adverse notices and
communications from any federal, state or local governmental agency or
authority which specifically relate to a Borrower or any Subsidiary;
(i) Forthwith upon any officer of any Borrower obtaining
knowledge of any condition or event which constitutes an Event of
Default or which, after notice or lapse of time or both, would
constitute an Event of Default, a certificate signed by such officer
specifying in reasonable detail the nature and period of existence
thereof and what action any Borrower has taken or proposes to take with
respect thereto; and
(j) Such other information regarding the business, affairs and
condition of the Borrowers and their respective Subsidiaries as such
Lender may from time to time reasonably request. Each Borrower will
permit each Lender to inspect the books and any of the properties or
assets of such Borrower and its Subsidiaries at such reasonable times as
such Lender may from time to time request. All costs and expenses of
any Lender in connection with or relating to any request made under this
6.2(j) shall, if no Event of Default has occurred and is continuing, be
paid by the Lender making such request and, upon the occurrence and
during the continuance of an Event of Default, be paid by the Borrowers.
6.3 Legal Existence; Compliance with Laws, etc. Except as
otherwise permitted under this Credit Agreement, each Borrower will, and
will cause each Subsidiary to: maintain its corporate existence and
business; maintain all properties which are reasonably necessary for the
conduct of such business, now or hereafter owned, in good repair,
working order and condition; take all actions necessary to maintain and
keep in full force and effect its Licenses; in the case of DRC, take all
steps necessary to maintain its status as a public company and to
maintain its status as a company listed on the NASDAQ National Market or
a national stock exchange; and, except as otherwise provided herein,
comply with all applicable statutes, rules, regulations and orders of,
and all applicable restrictions imposed by, all governmental authorities
in respect of the conduct of its business and the ownership of its
properties; in each case except to the extent that the failure to comply
would not, individually or in the aggregate, have a material adverse
effect on the business, operations, affairs or condition (financial or
otherwise) of the Borrowers and their Subsidiaries, taken as a whole; or
any Subsidiary; provided that neither any Borrower nor any Subsidiary
shall be required by reason of this 6.3 to comply therewith at any time
while such Borrower or such Subsidiary shall be contesting its
obligations to do so in good faith by appropriate proceedings promptly
initiated and diligently conducted, and if it shall have set aside on
its books such reserves, if any, with respect thereto as are required by
GAAP and deemed adequate by such Borrower and its independent public
accountants. Neither any Borrower nor any Subsidiary will, without the
prior written consent of the Lenders, engage in any business other than
the Current Lines of Business.
6.4 Insurance. Each Borrower will maintain or cause to be
maintained on all insurable properties now or hereafter owned by such
Borrower or any Subsidiary insurance against loss or damage by fire or
other casualty to the extent customary with respect to like properties
of companies conducting similar businesses and will maintain or cause to
be maintained public liability and workmen's compensation insurance
insuring such Borrower and its Subsidiaries to the extent customary with
respect to companies conducting similar businesses and, upon request,
will furnish to the Lenders satisfactory evidence of the same.
6.5 Payment of Taxes. Each Borrower will, and will cause
each Subsidiary to, pay and discharge promptly as they become due and
payable all taxes, assessments and other governmental charges or levies
imposed upon it or its income or upon any of its properties or assets,
or upon any part thereof, as well as all lawful claims of any kind
(including claims for labor, materials and supplies) which, if unpaid,
might by law become a lien or a charge upon its property; provided that
neither any Borrower nor any Subsidiary shall be required to pay any
such tax, assessment, charge, levy or claim if the amount, applicability
or validity thereof shall currently be contested in good faith by
appropriate proceedings promptly initiated and diligently conducted and
if such Borrower or such Subsidiary, as the case may be, shall have set
aside on its books such reserves, if any, with respect thereto as are
required by GAAP and deemed appropriate by such Borrower and its
independent public accountants.
6.6 Payment of Other Indebtedness, etc. Except as to matters
being contested in good faith and by appropriate proceedings, each
Borrower will, and will cause each Subsidiary to, pay promptly when due,
or in conformance with customary trade terms, all other Indebtedness and
obligations incident to the conduct of its business.
6.7 Further Assurances. From time to time hereafter, each
Borrower will execute and deliver, or will cause to be executed and
delivered, such additional instruments, certificates or documents, and
will take all such actions, as the Lenders may reasonably request, for
the purposes of implementing or effectuating the provisions of this
Agreement or the other Loan Documents. Upon the exercise by the Lenders
(or the Agent on their behalf) of any power, right, privilege or remedy
pursuant to this Agreement or the other Loan Documents which requires
any consent, approval, registration, qualification or authorization of
any governmental authority or instrumentality, each Borrower will
execute and deliver, or will cause the execution and delivery of, all
applications, certifications, instruments and other documents and papers
that the Lenders may be required to obtain for such governmental
consent, approval, registration, qualification or authorization.
6.8 Depository Account. Each Borrower will maintain its
principal operating accounts with one or more of the Lenders (including
BBH&Co).
6.9 Use of Proceeds. Each Borrower will use the proceeds of
the Loans only for the purposes not prohibited by, and subject to the
terms and conditions of, 5.13 and 5.16.
6.10 No Further Negative Pledges. Each Borrower hereby
covenants and agrees, at all times while any Loans remain outstanding or
while there is any Available Total Commitment, not to enter into any
agreement prohibiting the creation or assumption of any mortgage, deed
of trust, lien, pledge, hypothecation, encumbrance, charge or security
interest in favor of the Lenders in assets or properties owned by any
Borrower, except for purchase money agreements which contain such
provisions, provided that (i) such provisions relate only to the assets
being purchased thereunder and (ii) such agreements are entered into by
any Borrower in the ordinary course of its business.
6.11 Regulation U. If requested by any Lender, each Borrower
will promptly furnish such Lender with a statement in conformity with
the requirements of Federal Reserve Form U-1 referred to in said
Regulation U.
7. CERTAIN NEGATIVE COVENANTS OF THE BORROWERS. Each Borrower
covenants and agrees that, so long as any Loan or Note is outstanding or
the Lenders have any Available Total Commitment:
7.1 Indebtedness. None of the Borrowers will, nor will any
Borrower permit any Subsidiary to, create, incur, assume or become or
remain liable in respect of any Indebtedness, except:
(a) Indebtedness to the Lenders hereunder;
(b) Indebtedness of any wholly-owned Subsidiary to a Borrower
or any other wholly-owned Subsidiary and of a Borrower to any wholly-
owned Subsidiary; provided, however, that (i) all moneys due from a
Borrower to any Subsidiary which is not a Borrower will be expressly
constituted as Subordinated Debt and (ii) no Borrower shall repay any
such moneys due to any Subsidiary at any time unless no Event of Default
exists and no event which, with the giving of notice or lapse of time or
both, would constitute an Event of Default exists or will exist after
such repayment;
(c) Current liabilities of a Borrower or any Subsidiary (other
than for borrowed money) incurred in the ordinary course of its business
and in accordance with customary trade practices;
(d) Existing Indebtedness of a Borrower or any Subsidiary
referred to in Schedule 5.8 attached hereto, and renewals and extensions
thereof, provided that (i) the aggregate principal amount of such
Indebtedness is not at any time increased, (ii) no material terms
applicable to such Indebtedness shall be more favorable to the renewal
or extension lenders than the terms that are applicable to the holders
of such Indebtedness on the date hereof and (iii) the interest rate
applicable to such Indebtedness shall be a market interest rate as of
the time of such renewal or extension;
(e) Indebtedness of a Borrower or any Subsidiary secured by
Permitted Liens;
(f) Indebtedness of a Borrower or any Subsidiary in respect of
guarantees to the extent the underlying Indebtedness is permitted by
this 7.1; and
(g) Subordinated Debt;
(h) Unfunded Benefit Liabilities so long as each Borrower is in
compliance with 7.9, provided that the aggregate amount thereof at any
one time shall not exceed $5,000,000;
(i) To the extent payment thereof shall not at the time be
required by 6.5, Indebtedness in respect of taxes, assessments,
governmental changes and claims for labor, material and supplies;
(j) Indebtedness in respect of judgments or awards (i) which
have been in force for less than the applicable appeal period or (ii) in
respect to which any Borrower or any Subsidiary shall at the time in
good faith be prosecuting an appeal or proceedings for review, and in
each case such Borrower or such Subsidiary shall have taken appropriate
reserves therefor in accordance with GAAP;
(k) Indebtedness in respect of deferred taxes arising in the
ordinary course of business; and
(l) Indebtedness of the Borrowers and their respective
Subsidiaries (other than for borrowed money) in addition to the
foregoing; provided, however, that the aggregate amount of all such
Indebtedness at any one time outstanding shall not exceed $750,000.
7.2 Mortgages, Liens, etc. None of the Borrowers will, nor will
any Borrower permit any Subsidiary to, directly or indirectly, create,
incur, assume or suffer to exist, any mortgage, lien, charge or
encumbrance on, or security interest in, or pledge of, or conditional
sale or other title retention agreement (including any Capitalized
Lease) with respect to, any property or asset now owned or hereafter
acquired by any Borrower or any Subsidiary, except for the following
(collectively, "Permitted Liens"):
(a) Subject to 7.1(b), any lien on property of (i) a
Subsidiary securing Indebtedness of such Subsidiary to a Borrower and
(ii) a Borrower securing Indebtedness to any other Borrower;
(b) The existing mortgages and security interests referred to
in Schedule 7.2 attached hereto, or any renewal, extension or refunding
of any such mortgage or security interest in an amount not exceeding the
amount thereof remaining unpaid immediately prior to such renewal,
extension or refunding;
(c) Purchase money mortgages, liens and other security
interests, including Capitalized Leases, created in respect of property
acquired by a Borrower or any Subsidiary after the date hereof or
existing in respect of property so acquired at the time of acquisition
thereof, provided that (i) each such lien shall at all times be confined
solely to the item or items of property so acquired, and (ii) the
aggregate principal amount of Indebtedness secured by all such liens
shall at no time exceed $500,000;
(d) Liens for taxes and other amounts not yet delinquent or
being contested in good faith as provided in 6.5; liens in connection
with workmen's compensation, unemployment insurance or other social
security obligations; liens securing the performance of bids, tenders,
contracts, leases, statutory obligations, surety and appeal bonds, liens
to secure progress or partial payments and other liens of like nature
arising in the ordinary course of business; mechanics', workmen's,
materialmen's or other like liens arising in the ordinary course of
business in respect of obligations which are not yet due or which are
being contested in good faith; and other liens or encumbrances
incidental to the conduct of the business of any Borrower or any
Subsidiary or to the ownership of their respective properties or assets,
which were not incurred in connection with the borrowing of money or the
obtaining of credit and which do not, individually or in the aggregate,
materially detract from the value of the properties or assets of the
Borrowers and their Subsidiaries or materially affect the use thereof in
the operation of their business;
(e) Encumbrances in the nature of (i) zoning restrictions, (ii)
easements, (iii) restrictions of record on the use of real property,
(iv) landlords' and lessors' Liens on rented premises and (v)
restrictions on transfers or assignments of leases, which in each case
do not, individually or in the aggregate, materially detract from the
value of the encumbered property or impair the use thereof in the
business of any Borrower or any Subsidiary;
(f) Liens in respect of judgments or awards, to the extent that
such judgments or awards are permitted by 7.1(j);
(g) Restrictions under federal and state securities laws on the
transfer of securities; and
(h) Restrictions under foreign trade regulations on the
transfer or licensing of certain assets of the Borrowers and their
Subsidiaries.
7.3 Loans, Guarantees and Investments. None of the Borrowers
will, nor will any Borrower permit any Subsidiary to, make or permit to
remain outstanding any loan or advance to, or guarantee or endorse
(except as a result of endorsing negotiable instruments for deposit or
collection in the ordinary course of business) or otherwise assume or
remain liable with respect to any obligation of, or make or own any
investment in, or acquire (except in the ordinary course of business)
the properties or assets of, any Person, except:
(a) Extensions of credit by a Borrower or any Subsidiary in the
ordinary course of business in accordance with customary trade
practices;
(b) The presently outstanding investments, loans and advances,
if any, and the presently existing guarantees, if any, of any Borrower
and its Subsidiaries all to the extent set forth on Schedule 5.8
attached hereto and any renewal, extension or refunding thereof,
provided that (i) the aggregate principal amount thereof is not at any
time increased, (ii) no material terms applicable thereto shall be more
favorable to the renewal or extension borrower or recipient, as the case
may be, than the terms that are applicable to the borrower or
recipient, as the case may be, on the date hereof and (iii) the interest
rate (if any) applicable thereto shall be a market interest rate as of
the time of such renewal or extension;
(c) Direct obligations of the United States of America or any
department or agency thereof maturing not more than one year from the
date of acquisition thereof;
(d) Certificates of deposit, repurchase agreements, time
deposits (including sweep accounts), demand deposits, bankers'
acceptances, money market deposits or other similar types of investments
maturing not more than one year from the date of acquisition thereof and
evidencing direct obligations of any Lender or any lender within the
United States of America having capital surplus and undivided profits in
excess of $50,000,000;
(e) Investments in commercial paper maturing within ninety (90)
days from the date of acquisition thereof and having, at such date of
acquisition, the highest credit rating obtainable from Moody's or S&P;
(f) Any mutual fund or other pooled investment vehicle which
invests principally in obligations described in subparagraphs (c), (d)
or (e) above and having, at the date of investment in such fund or
vehicle, one of the two highest credit ratings from Moody's or S&P;
(g) Equity investments by any Borrower's wholly-owned
Subsidiaries in any other wholly-owned Subsidiary and of a Borrower in
any of its wholly-owned Subsidiaries;
(h) Loans to the extent permitted by 7.1(b);
(i) Acquisitions by a Borrower and its Subsidiaries of all or
substantially all of the capital stock or assets of other Persons,
provided that without the consent of the Required Lenders (i) the
aggregate amount of cash consideration paid by the Borrower and the
Subsidiaries in such acquisitions shall not exceed $15,000,000 and
(ii) the proceeds of any Loans used in connection with each such
acquisition are used as provided in 5.16;
(j) Guarantees by a Borrower of Indebtedness and other
obligations incurred by Subsidiaries to the extent permitted by 7.1;
and
(k) Capital Expenditures to the extent permitted by 7.7.
7.4 Leases. None of the Borrowers will, nor will any Borrower
permit any Subsidiary to, enter into any Capitalized Lease, except as
otherwise permitted under 7.1 and 7.2. Each Borrower will not, and
will not permit any Subsidiary to, enter into any lease (other than
Capitalized Leases) as lessee if, immediately after giving effect
thereto, the aggregate rental obligations (excluding payments required
to be made by the lessee in respect of taxes and insurance whether or
not denominated as rent) of all of the Borrowers and their respective
Subsidiaries for any succeeding 12-month period under all such leases
then in effect shall exceed $3,500,000 in the aggregate.
7.5 Mergers and Consolidations. None of the Borrowers will,
nor will any Borrower permit any Subsidiary to, enter into any merger
or consolidation, except the following:
(a) Any wholly-owned Subsidiary of a Borrower may merge or be
liquidated into a Borrower or any other wholly-owned Subsidiary of a
Borrower so long as after giving effect to any such merger to which a
Borrower is a party such Borrower shall be the surviving or resulting
Person; and
(b) Mergers constituting investments permitted by 7.3(i) so
long as after giving effect to any such merger to which a Borrower is a
party such Borrower shall be the surviving or resulting Person;.
7.6 Sale of Assets. None of the Borrowers will, nor will any
Borrower permit any Subsidiary to, sell, lease or otherwise dispose of
all or any substantial part of its properties or assets, except the
following:
(a) Each Borrower and its Subsidiaries may sell or otherwise
dispose of (i) inventory in the ordinary course of business, (ii) assets
that are no longer used or useful in the Business of the applicable
Borrower or Subsidiary, (iii) the properties and assets constituting the
Visual Magic software business, (iv) the properties and assets
constituting the telephone fraud detection and control business and (v)
capital stock of Software and Telecom provided, however, that, in the
case of the foregoing clauses (iii), (iv) and (v), immediately before
and after giving effect thereto no Event of Default exists and no event
exists which, with the giving of notice or passage of time or both,
would constitue an Event of Default;
(b) DRC may sell, lease or otherwise transfer any of its
properties or assets to any other Borrower, provided that (i) the
Borrowers provide a notice thereof to the Agent prior to each such
transfer (which notice shall include a description and a good faith
estimate of the fair market value of the property or assets being so
transferred and, to the extent applicable, the revenues that were
generated by such property or assets in the immediately preceding fiscal
year of DRC, (ii) such transfers relate solely to a transfer by DRC of
its encoder line of business to Encoder, its metrigraphics line of
business to Metrigraphics, its Visual Magic software line of business to
Software and/or its telephone fraud control line of business to Telecom
and (iii) immediately before and after giving effect thereto no Event of
Default exists;
(c) Each Borrower and its Subsidiaries may license products and
intangible assets for fair market value in the ordinary course of
business; and
(d) In addition to the foregoing, so long as immediately before
and after giving effect thereto no Event of Default and no event exists
which, with the giving of notice or passage of time or both, would
constitute an Event of Default, each Borrower and its Subsidiaries may
sell assets (other than inventory) having a fair market value not
exceeding, and yielding an aggregate amount of sale proceeds not
exceeding, $250,000 in any fiscal year of DRC.
7.7 Capital Expenditures. None of the Borrowers will, nor
will any Borrower permit any Subsidiary to, make any Capital
Expenditures during any fiscal year of DRC unless the aggregate amount
of all Capital Expenditures made by all Borrowers and their respective
Subsidiaries in such fiscal year does not exceed $6,250,000; provided,
however, that the amount of permitted Capital Expenditures in respect of
any fiscal year shall be increased by 50% of the unused permitted
Capital Expenditures for the immediately preceding fiscal year (less an
amount equal to any unused Capital Expenditures carried forward to such
preceding fiscal year).
7.8 Distributions. DRC will not make any distribution or
declare or pay any cash dividends on, or purchase, acquire or redeem or
retire any of its capital stock, of any class, whether now or hereafter
outstanding, except that so long as immediately before and after giving
effect thereto no Event of Default exists, DRC may make cash
distributions to its stockholders and repurchase shares of its common
stock at a price not to exceed the then-current market value for such
stock, in an aggregate amount which shall not exceed in any fiscal year
of DRC fifty percent (50%) of the Consolidated Net Income of DRC and its
Subsidiaries (if positive) for the immediately preceding fiscal year of
DRC, provided that such amount shall not include shares of capital stock
surrendered upon the exercise of any stock options or other convertible
securities.
7.9 Compliance with ERISA. Each Borrower will make, and will
cause all ERISA Affiliates to make, all payments or contributions to
Employee Benefit Plans and Multiemployer Plans required under the terms
thereof and in accordance with applicable minimum funding requirements
of ERISA and the Code and applicable collective bargaining agreements.
Each Borrower will cause all Employee Benefit Plans sponsored by it or
any ERISA Affiliates to be maintained in material compliance with ERISA
and the Code. None of the Borrowers will engage, and will not permit or
suffer any ERISA Affiliate or any Person entitled to indemnification or
reimbursement from a Borrower or any ERISA Affiliate to engage, in any
prohibited transaction under ERISA or the Code for which an exemption is
not available. No Borrower or ERISA Affiliate will terminate, or permit
the PBGC to terminate, any Employee Benefit Plan or withdraw from any
Multiemployer Plan, in any manner which could result in material
liability of a Borrower or any ERISA Affiliate.
7.10 Transactions with Affiliates. No Borrower will, nor will
any Borrower permit any Subsidiary to, directly or indirectly, enter
into any lease or other transaction with any Affiliate of such Borrower
or such Subsidiary (other than any other Borrower) on terms that are
less favorable to such Borrower or such Subsidiary than those which
could reasonably be obtained at the time from a non-Affiliate.
7.11 Observance of Subordination Provisions, etc. No Borrower
will make, nor will any Borrower cause or permit to be made, any
payments in respect of any Subordinated Debt, in contravention of the
subordination provisions contained in the evidence of such Subordinated
Debt or in contravention of any written agreement pertaining thereto,
nor will any Borrower (a) amend, modify or change in any manner any of
such subordination provisions or (b) amend, modify or change in any
manner adverse to the interests of the Lenders any of the other
provisions set forth in the agreements under which such Subordinated
Debt is outstanding or contained in the evidence of such Subordinated
Debt.
7.12 Environmental Liabilities. No Borrower will, nor will
any Borrower permit any Subsidiary to, violate any requirement of any
material law, rule or regulation regarding Hazardous Materials; and,
without limiting the foregoing, no Borrower will, nor will any Borrower
permit any Subsidiary or any other Person to, dispose of any Hazardous
Material into or onto, or (except in accordance with applicable law)
from, any real property owned, leased or operated by any Borrower or any
Subsidiary or in which any Borrower or any Subsidiary holds, directly or
indirectly, any legal or beneficial interest or estate, nor allow any
lien imposed pursuant to any law, regulation or order relating to
Hazardous Materials or the disposal thereof to be imposed or to remain
on such real property, except for liens being contested in good faith by
appropriate proceedings and for which adequate reserves have been
established and are being maintained on the books of a Borrower and its
Subsidiaries.
7.13 Subsidiaries. No Borrower will create any new
Subsidiaries.
7.14 Material Adverse Change. None of the Borrowers will take
nor fail to take any action that could reasonably be expected to result
in a material adverse change in a Borrower's business, assets or
condition (financial or otherwise).
8. FINANCIAL COVENANTS. Each Borrower covenants and agrees that,
so long as any Loan or Note is outstanding or the Lenders have any
Available Total Commitment, DRC and its Subsidiaries shall maintain at
all times, on a Consolidated basis, each of the following:
(a) Tangible Net Worth. Tangible Net Worth, measured on a
fiscal quarter-end basis, of (i) for the fiscal quarter in which the
Closing Date occurs, $25,000,000 and (ii) for each fiscal quarter
thereafter, the sum of (x) $25,000,000 plus (y) fifty percent (50%) of
the Net Income of DRC and its Subsidiaries (if positive) for each fiscal
quarter from and including the first full fiscal quarter following the
Closing Date to and including the most recent fiscal quarter-end;
(b) Maximum Leverage. A ratio of Indebtedness of DRC and its
Subsidiaries to Capitalization of DRC and its Subsidiaries of less than
or equal to one to two (1.0:2.0), measured on a fiscal quarter-end
basis;
(c) Debt Coverage. A ratio of Senior Debt of DRC and its
Subsidiaries to EBITDA of DRC and its Subsidiaries not to exceed three
to one (3.0:1.0), measured on a fiscal quarter-end basis, but with
EBITDA of DRC and its Subsidiaries for the period of four (4)
consecutive fiscal quarters ending on such fiscal quarter-end; and
(d) Cash Flow Coverage. A ratio of (i) EBITDA of DRC and its
Subsidiaries less Capital Expenditures of DRC and its Subsidiaries not
funded by Indebtedness for borrowed money less taxes on income and
profits paid in cash by DRC and its Subsidiaries to (ii) required
interest and principal payments made by DRC and its Subsidiaries on all
Indebtedness of at least two and one-half to one (2.5:1.0), measured at
the end of each fiscal quarter, with each such measurement based on the
period of four (4) consecutive fiscal quarters ending on such fiscal
quarter-end, provided that the cash flow coverage measurement on
December 31, 1997, March 31, 1998 and June 30, 1998 will exclude all
payments of principal made under the $6,000,000 promissory note, dated
February 5, 1993, issued by DRC to ABN AMRO Bank, N.Y., Boston Branch
(the "ABN AMRO Loan") during DRC's 1997 fiscal year.
9. DEFAULTS; REMEDIES.
9.1 Events of Default; Acceleration. If any of the following
events (each an "Event of Default") shall occur:
(a) Any Borrower shall default in the payment of principal of
or interest on any Note or any other fee due hereunder, whether at
maturity or at a date fixed for the payment of any installment or
prepayment thereof or otherwise, and in the case of any such fee payment
default, such default shall continue for a period of three (3) Business
Days following the date of such default; or
(b) Any Borrower shall default in the performance of or
compliance with any term contained in 6.2(g), 6.2(h), 6.2(i), 6.3,
6.9, 6.10 and 7.1 to and including 7.14, and 8; or
(c) Any Borrower shall default in the performance of or
compliance with any term, condition, covenant or agreement (other than
those listed in 9.1(b)) to be performed or observed by it under this
Credit Agreement or under any other Loan Document and such default shall
continue for a period of thirty (30) days or more; or
(d) Any representation or warranty made by any Borrower herein
or pursuant hereto shall prove to have been false or incorrect in any
material respect when made or when deemed to have been made; or
(e) Any Borrower or any Subsidiary shall default in (i) the
payment of any Indebtedness in respect of borrowed money (other than the
Loans), any Capitalized Lease or the deferred purchase price of any
property and such default (A) shall continue after giving effect to any
applicable grace periods and (B) shall be in respect of an aggregate
amount of principal (whether or not due) and accrued interest exceeding
$250,000; or (ii) the performance or compliance with any term of any
agreement or instrument relating to such Indebtedness and such default
(A) shall continue, without having been duly cured, waived or consented
to, beyond the period of grace, if any, specified in such agreement or
instrument, and (B) shall permit the acceleration of such Indebtedness
prior to its stated maturity; or
(f) Except as permitted by 7.5, any Borrower or any Subsidiary
shall discontinue its business or shall make an assignment for the
benefit of creditors, or shall fail generally to pay its debts as such
debts become due, or shall apply for or consent to the appointment of or
taking possession by a trustee, receiver or liquidator (or other similar
official) of any Borrower or such Subsidiary or any substantial part of
the property of any Borrower or such Subsidiary, or shall commence a
case or have an order for relief entered against it under the federal
bankruptcy laws, as now or hereafter constituted, or any other
applicable federal or state bankruptcy, insolvency or other similar law,
or if any Borrower or any Subsidiary shall take any action to dissolve
or liquidate any Borrower or such Subsidiary; or
(g) If, within sixty (60) days after the commencement against
any Borrower or any Subsidiary of a case under the federal bankruptcy
laws, as now or hereafter constituted, or any other applicable federal
or state bankruptcy, insolvency or other similar law, such case shall
have been consented to or shall not have been dismissed or all orders or
proceedings thereunder affecting the operations or the business of any
Borrower and such Subsidiary stayed, or if the stay of any such order or
proceeding shall thereafter be set aside, or if within sixty (60) days
after the entry of a decree appointing a trustee, receiver or liquidator
(or other similar official) of any Borrower or any Subsidiary or any
substantial part of the property of any Borrower or such Subsidiary,
such appointment shall not have been vacated; or
(h) A final judgment which, with other outstanding final
judgments against any or all of the Borrowers and its Subsidiaries,
exceeds an aggregate of $250,000 shall be rendered against any Borrower
or any Subsidiary and if, within sixty (60) days after entry thereof,
such judgment shall not have been discharged or execution thereof stayed
pending appeal, or if, within sixty (60) days after the expiration of
any such stay, such judgment shall not have been discharged, or if any
such judgment shall not be discharged forthwith upon the commencement of
proceedings to foreclose any lien, attachment or charge which may attach
as security therefor and before any of the property or assets of any
Borrower or any Subsidiary shall have been seized in satisfaction
thereof; or
(i) Any Borrower or any Subsidiary loses, fails to keep in
force, suffers the termination or revocation of or terminates, forfeits
or suffers an amendment to any License which would have a material
adverse effect on the operations of such Borrower or such Subsidiary; or
(j) There shall have occurred a Change in Control; or
(k) If with respect to any Employee Benefit Plans or
Multiemployer Plans, there shall occur any of the following which could
reasonably be expected to have a material adverse effect on the
financial condition of any Borrower: (i) the violation of any of the
provisions of ERISA; (ii) the loss by such a plan intended to be a
Qualified Plan of its qualification under Section 401(a) of the Code;
(iii) the incurrence of liability under Title IV of ERISA; (iv) a
failure to make full payment when due of all amounts which, under the
provisions of any such plan or applicable law, any Borrower or any ERISA
Affiliate is required to make; (v) the filing of a notice of intent to
terminate such a plan under Sections 4041 or 4041A of ERISA; (vi) a
complete or partial withdrawal of a Borrower or an ERISA Affiliate from
any such plan; (vii) the receipt of a notice by the plan administrator
of such a plan that the PBGC has instituted proceedings to terminate
such plan or appoint a trustee to administer such plan; (viii) a
commencement or increase of contributions to, or the adoption of or the
amendment of, such a plan; and (ix) the assessment against a Borrower or
any ERISA Affiliate of a tax under Section 4980B of the Code;
then, and in any such event, and at any time thereafter, if any Event of
Default (other than an event described in 9(f) or 9(g) shall then be
continuing, the Required Lenders may direct the Agent to, by written
notice to any Borrower, (i) declare the principal of and accrued
interest in respect of the Notes to be forthwith due and payable,
whereupon the principal of and accrued interest in respect of the Notes,
and all other amounts then due hereunder, shall become forthwith due and
payable without presentment, demand, protest or other notice of any
kind, all of which are hereby expressly waived by each Borrower, and/or
(ii) terminate the Total Commitment, whereupon the Total Commitment of
the Lenders (and the Commitment of each individual Lender) to make Loans
hereunder shall forthwith terminate without any other notice of any
kind; and with respect to any event described in 9(f) or 9(g) above,
the Commitments shall automatically terminate and the principal of the
Notes then outstanding, together with accrued interest thereon and all
other amounts then due hereunder, shall automatically become due and
payable, without presentment, demand, protest or any other notice of any
kind, all of which are hereby expressly waived by each of the Borrowers,
anything contained herein or in any other Loan Document to the contrary
notwithstanding.
9.2 Remedies on Default, etc. In case any one or more Events
of Default shall occur and be continuing, the Lenders may proceed to
protect and enforce their rights by an action at law, suit in equity or
other appropriate proceeding, whether for the specific performance of
any agreement contained herein or in any other Loan Document, or for an
injunction against a violation of any of the terms hereof or thereof, or
in aid of the exercise of any power granted hereby or thereby or by law.
In case of a default in the payment of any principal of or interest on
any Note, or in the payment of any fee due hereunder, each Borrower will
pay to the Lenders such further amount as shall be sufficient to cover
the cost and expense of collection, including the Lenders' attorneys'
fees, expenses and disbursements. No course of dealing and no delay on
the part of the Lenders in exercising any right shall operate as a
waiver thereof or otherwise prejudice the Lenders' rights. No right
conferred hereby or by any other Loan Document upon the Lenders shall be
exclusive of any other right referred to herein or therein or now or
hereafter available at law, in equity, by statute or otherwise.
10. CLOSING CONDITIONS. The obligations of the Lenders to make
the initial Loans shall be subject to the satisfaction of the following
conditions precedent:
10.1. Loan Documents, etc. Each of the Loan Documents shall have
been duly executed and delivered by each of the Borrowers, shall be in
full force and effect and shall be in form and substance reasonably
satisfactory to the Lenders. The Agent and each Lender shall have
received a fully executed copy of each such document.
10.2. Corporate Action. All corporate action necessary for the
valid execution, delivery and performance by each Borrower of this
Credit Agreement and the other Loan Documents shall have been duly and
effectively taken, and evidence thereof reasonably satisfactory to the
Agent shall have been provided to the Agent.
10.3. Incumbency Certificate. The Agent shall have received from
each Borrower an incumbency certificate, dated as of the Closing Date,
signed by a duly authorized officer of such Borrower and giving the name
and bearing a specimen signature of each individual who shall be
authorized in the name and on behalf of such Borrower, (a) to sign each
of the Loan Documents; (b) to make Loan Requests; and (c) to give
notices and to take other action under the Loan Documents.
10.4. Opinions of Counsel. The Agent shall have received a
favorable opinion addressed to the Lenders, dated as of the Closing
Date, in the form of Exhibit E attached hereto, from Ropes & Gray as
counsel for the Borrowers.
10.5. Payment of Fees. The Borrowers shall have paid to the
Agent (i) the fees and expenses of the Agent's counsel in connection
with the documentation of the transactions described in this Credit
Agreement and (ii) all fees then due and payable pursuant to 2.2(c).
10.6. Real Estate Mortgage. The Agent shall have received
evidence satisfactory to the Agent that, as to the ABN AMRO Loan, (i) no
indebtedness or other obligations are owed thereunder by Borrower and
(ii) such agreement and all mortgages, liens and encumbrances relating
thereto have been terminated in full.
11. CONDITIONS TO ALL LOANS. The obligations of the Lenders to
make any Loan whether on or after the Closing Date, shall also be
subject to the satisfaction of the following conditions precedent:
11.1. Accuracy of Representations; No Event of Default. After
giving effect to the Loans proposed to be made on such Drawdown Date,
(i) all representations and warranties of each Borrower contained in
this Credit Agreement, the other Loan Documents or in any document or
instrument delivered pursuant to or in connection with this Credit
Agreement shall be true and correct as of the date as of which they were
made and shall also be true and correct at and as of the time of the
making of such Loan, with the same effect as if made at and as of that
time (except to the extent of changes resulting from transactions
contemplated or permitted by this Credit Agreement and the other Loan
Documents, or to the extent that such representations and warranties
relate expressly to an earlier date) and (ii) no Event of Default or
other event which, with the giving of notice or passage of time, would
constitute an Event of Default shall have occurred and be continuing.
On or before the date of the Loans, the Agent, on behalf of the Lenders,
shall have received a certificate of DRC signed by the chief financial
officer or treasurer of DRC to such effect.
11.2. No Legal Impediment. No change shall have occurred in any
law or regulations thereunder or interpretations thereof that in the
reasonable opinion of any Lender would make it illegal for such Lender
to make such Loan.
11.3. Additional Conditions to Facility B Loans. The
following conditions are applicable to all Revolving Credit Loans made
under Facility B:
(a) if all or any part of the proceeds of such Revolving Credit
Loans are to be used for any of the purposes set forth in clause (ii) of
5.16, then the chief executive officer, chief financial officer or
president of DRC shall deliver a certificate to the Agent and the
Lenders certifying (i) each target Person involved in such acquisition
has a positive EBITDA for the year ending on the immediately preceding
fiscal quarter-end of such Person, and (ii) the Borrowers will, after
giving effect to such transaction, be in compliance with the terms and
obligations of this Agreement and no Event of Default would be triggered
thereby; and
(b) if the aggregate outstanding principal under Facility B is
(or, after giving effect to any Loan Request(s), would be) more than
$10,000,000, then no Lender shall be required to make any Revolving
Credit Loan under Facility B unless and until the Required Lenders have
consented thereto.
12. THE AGENT.
12.1. Appointment, Powers and Immunities. Each Lender hereby
irrevocably appoints and authorizes the Agent to act as its agent
hereunder and under each of the Loan Documents with such powers as are
specifically delegated to the Agent by the terms of this Credit
Agreement and the Loan Documents, together with such other powers as are
reasonably incidental thereto. The Agent (which term as used in this
sentence and in 12.5 and the first sentence of 12.6 shall include
reference to its Affiliates and the respective officers, directors,
employees and agents of the Agent and its Affiliates): (a) shall have
no duties or responsibilities except those expressly set forth in this
Credit Agreement to be a trustee for any Lender; (b) shall not be
responsible to the Lenders for any recitals, statements, representations
or warranties contained in this Credit Agreement, or in any certificate
or other document referred to or provided for in, or received by any of
them under, this Credit Agreement, or for the value, validity,
effectiveness, genuineness, enforceability, perfection or sufficiency of
this Credit Agreement, any Note or any other document referred to or
provided for herein or for any failure by any Borrower or any other
Person to perform any of its obligations hereunder or thereunder; (c)
shall not be required to initiate or conduct any litigation or
collection proceedings hereunder except to the extent requested by or
consented to by the Required Lenders; and (d) shall not be responsible
for any action taken or omitted to be taken by it hereunder or under any
other document or instrument referred to or provided for herein or in
connection herewith, except for its own gross negligence or willful
misconduct. The Agent may employ agents and attorneys-in-fact and shall
not be responsible for the negligence or misconduct of any such agents
or attorneys-in-fact selected by it with reasonable care. Subject to
the foregoing, the Agent shall, on behalf of the Lenders, exercise any
and all rights, powers and remedies of the Lenders under this Credit
Agreement and any other Loan Documents, including the giving of any
consent or waiver or the entering into of any amendment, subject to the
provisions of 25.
12.2. Reliance by Agent. The Agent shall be entitled to rely
upon any certifications, notices or communications (including any
communications by telephone, telex, telegram or cable) believed by it to
be genuine and correct and to have been signed or sent by or on behalf
of the proper Person or Persons, and upon advice and statements of legal
counsel, independent accountants and other experts selected by the
Agent. As to any matters not expressly provided for by this Credit
Agreement, the Agent shall in all cases be fully protected in acting, or
in refraining from acting, hereunder in accordance with the instructions
of the Lenders, and any action taken or failure to act pursuant thereto
shall be binding on all of the Lenders.
12.3. Defaults. The Agent shall not be deemed to have knowledge
of the occurrence of an Event of Default (other than the nonpayment of
principal of or interest on the Notes) unless the Agent has received
written notice from a Lender a Borrower specifying such Event of
Default. In the event that the Agent receives such a notice of the
occurrence of an Event of Default, the Agent shall give notice thereof
to the Lenders (and shall give each Lender prompt notice of each such
nonpayment). The Agent shall (subject to the provisions of 24 and
12.7) take such action with respect to such Event of Default as shall be
directed by the Lenders, provided that, unless and until the Agent shall
have received such directions, the Agent may (but shall not be obligated
to) take such action, or refrain from taking such action, with respect
to such Event of Default as it shall deem advisable and in the best
interests of the Required Lenders.
12.4. Rights as a Lender. With respect to its Percentage of the
Total Commitment and the Loans made by it, BBH&Co, in its capacity as a
Lender hereunder shall have the same rights and powers hereunder as any
other Lender and may exercise the same as though it were not acting as
the Agent, and the term "Lender" or "Lenders" shall, unless the context
otherwise indicates, include the Agent in its individual capacity. The
Agent and its Affiliates may (without having to account therefor to any
Lender) accept deposits from, lend money to and generally engage in any
kind of banking, trust or other business with any Borrower or any of its
Affiliates, as if the Agent were not acting as the agent hereunder, and
the Agent may accept fees and other consideration from any of such
Persons for services as the Agent or otherwise without having to account
for the same to the Lenders.
12.5. Indemnification. The Lenders agree to indemnify the Agent
ratably in accordance with the aggregate principal amount of the Notes
held by the Lenders (or, if no such principal is at the time
outstanding, ratably in accordance with their respective Percentages),
for any and all liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs, expenses or disbursements of any kind
and nature whatsoever which may be imposed on, incurred by or asserted
against the Agent in any way relating to or arising out of this Credit
Agreement or referred to herein or the transactions contemplated by or
referred to herein or therein (including the costs and expenses which
any Borrower is obligated to pay but excluding, unless an Event of
Default has occurred and is continuing, normal administrative costs and
expenses incident to the performance of its agency duties hereunder) or
the enforcement of any of the terms of this Credit Agreement or of any
such other documents, provided that no Lender shall be liable for any of
the foregoing to the extent they arise from the gross negligence or
willful misconduct of the Agent.
12.6. Non-Reliance on Agent and Other Lenders. Each Lender
agrees that it has, independently and without reliance on the Agent or
any other Lender, and based on such documents and information as it has
deemed appropriate, made its own credit analysis of the Borrowers and
its own decision to enter into this Credit Agreement and that it will,
independently and without reliance upon the Agent or any other Lender,
and based on such documents and information as it shall deem appropriate
at the time, continue to make its own analysis and decisions in taking
or not taking action under this Credit Agreement. The Agent shall not
be required to keep itself informed as to the performance or observance
by the Borrowers of this Credit Agreement or any other document referred
to or provided for herein or to inspect the properties or books of the
Borrowers. Except for notices, reports and other documents and
information expressly required to be furnished to the Lenders by the
Agent hereunder, the Agent shall not have any duty or responsibility to
provide any Lender with any credit or other information concerning the
affairs, financial condition or business of the Borrowers which may come
into the possession of the Agent or any of its Affiliates.
Notwithstanding the foregoing, the Agent will use its best efforts to
provide to the Lenders any and all information reasonably requested by
them and reasonably available to the Agent promptly upon such request.
12.7. Failure to Act. Except for action expressly required of
the Agent hereunder, the Agent shall in all cases be fully justified in
failing or refusing to act hereunder unless it shall be indemnified to
its satisfaction by the Lenders against any and all liability and
expense which may be incurred by it by reason of taking or continuing to
take any such action.
12.8. Resignation of Agent. Subject to the appointment and
acceptance of a successor Agent as provided below, the Agent may resign
at any time by giving notice thereof to the Lenders and DRC. Upon any
such resignation, the Lenders shall appoint a successor Agent which
shall be reasonably satisfactory to DRC. If no successor Agent shall
have been so appointed by the Lenders and shall have accepted such
appointment within 30 days after the retiring Agent's giving of notice
of resignation, then the retiring Agent may, on behalf of the Lenders,
appoint a successor Agent which shall be a Lender which has a combined
capital and surplus of at least $500,000,000 and which shall be
reasonably satisfactory to DRC. Upon the acceptance of any appointment
as Agent hereunder by a successor Agent, such successor Agent shall
thereupon succeed to and become vested with all the rights, powers,
privileges and duties of the retiring Agent, and the retiring Agent
shall be discharged from its duties and obligations hereunder. After
the retiring Agent's resignation hereunder as Agent, the provisions of
this 12 shall continue in effect for its benefit in respect of any
actions taken or omitted to be taken by it while it was acting as the
Agent.
12.9. Cooperation of Lenders. Each Lender shall (a) endeavor to
and shall not be liable for any failure to promptly notify the other
Lenders and the Agent of any Events of Default known to such Lender
under this Credit Agreement and not reasonably believed to have been
previously disclosed to the other Lenders; and (b) provide the other
Lenders and the Agent with such information and documentation as such
other Lender or the Agent shall reasonably request in the performance of
their respective duties hereunder, including all information relative to
the outstanding balance of principal, interest and other sums owed to
such Lender.
12.10. Amendment of 12. Each Borrower hereby agrees that the
provisions of this 12 (other than 12.8 and 12.11) generally
constitute an agreement among the Agent and the Lenders and that any and
all of the provisions of this 12 (other than 12.8 and 12.11) may be
amended at any time by the Lenders without the consent or approval of,
or notice to, any Borrower (other than the requirement of notice to DRC
of the resignation of the Agent and other than any provision in addition
to 12.8 and 12.11 which directly affects the Borrowers).
12.11. Reliance. As to any consent that is granted or any other
action that is taken by the Agent hereunder, or under the Loan
Documents, the Borrowers shall be entitled to rely upon any of the
foregoing granted, delivered or taken by the Agent and the Lenders shall
be bound thereby, without the necessity of inquiring or confirming the
Agent's authority.
13. SETOFF, ETC. Regardless of the adequacy of any collateral,
during the continuance of any Event of Default, any deposits or other
sums credited by or due from any Lender to any Borrower and any
securities or other property of any Borrower in the possession of any
Lender may be applied to or set off against the pro rata payment of
Obligations and any and all other liabilities, direct, or indirect,
absolute or contingent, due or to become due, now existing or hereafter
arising, of the Borrowers to the Lenders. The Lenders agree among
themselves that, with respect to all sums received by the Lenders
applicable to the payment of principal of or interest on the Notes,
equitable adjustment will be made among the Lenders so that, in effect,
all such sums shall be shared ratably by each of the Lenders whether
received by voluntary payment, by the exercise of the right of setoff or
banker's lien, by counterclaim or crossclaim or by the enforcement of
any or all of the Notes. If any Lender receives any payment on its
Notes of a sum or sums in excess of its pro rata portion, then such
Lender receiving such excess payment shall purchase for cash from the
other Lenders an interest in their Notes in such amounts as shall result
in a ratable participation by each of the Lenders in the aggregate
unpaid amount of the Notes then outstanding; provided, however, that if
all or any portion of such excess payment is thereafter recovered from
such Lender, the purchase shall be rescinded and the purchase price
restored to the extent of such recovery, but without interest.
14. EXPENSES. Whether or not the transactions contemplated
hereby shall be consummated, each Borrower agrees to pay (a) the
reasonable direct, out-of-pocket costs of reproducing this Credit
Agreement, the other Loan Documents and the other agreements at and
instruments mentioned herein, (b) any taxes (including any interest and
penalties in respect thereto) payable by the Lenders (other than taxes
based upon the Lender's net income) on or with respect to the
transactions contemplated by this Credit Agreement (the Borrowers hereby
agreeing to indemnify the Lenders with respect thereto), (c) the fees,
expenses and disbursements of the Agent's counsel incurred in connection
with the preparation of the Loan Documents and other instruments
mentioned herein and the reasonable fees, expenses and disbursements of
the Agent's counsel and any local counsel to the Lenders in connection
with any amendments, modifications, approvals, consents, waivers or
Replacement Lenders hereto or hereunder and (d) all reasonable
out-of-pocket expenses (including attorney fees and costs for external
counsel to the Lenders and the allocated costs and disbursements of
internal counsel of the Lenders) incurred by the Lenders in connection
with (i) the enforcement of or preservation of rights under any of the
Loan Documents against the Borrowers or the administration thereof after
the occurrence of an Event of Default or any event which, with the
giving of notice or passage of time or both, would constitute an Event
of Default, (ii) any replacement of a Lender pursuant to 17.4 and (iii)
any litigation, proceeding or dispute arising hereunder; provided,
however, that the Borrowers shall have no obligation to pay for the
expenses of the Agent or the Lenders to the extent such expenses result
from the Agent's or any Lender's gross negligence, fraud or willful
misconduct.
15. INDEMNIFICATION. Each Borrower agrees to indemnify and hold
harmless each Lender from and against any and all claims, actions and
suits whether groundless or otherwise, and from and against any and all
liabilities, losses, damages and expenses of every nature and character
arising out of this Credit Agreement or any of the other Loan Documents
or the transactions contemplated hereby or thereby, including (a) any
actual or proposed use by any Borrower of the proceeds of any of the
Loans, (b) any Borrower entering into or performing this Credit
Agreement or any of the other Loan Documents or (c) with respect to any
Borrower and its properties and assets, the violation of any
Environmental Law, the presence, disposal, escape, seepage, leakage,
spillage, discharge, emission, release or threatened release of any
Hazardous Substances or any action, suit, proceeding or investigation
brought or threatened with respect to any Hazardous Substances
(including, but not limited to claims with respect to wrongful death,
personal injury or damage to property), in each case including the
reasonable fees and disbursements of counsel for the Agent, incurred in
connection with any such investigation, litigation or other proceeding;
provided, however, that no Borrower shall have any obligation to
indemnify the Agent or the Lenders for any liabilities, losses, damages
or other expenses (I) incurred in connection with any litigation
commenced by any Borrower against the Agent or any Lender, or by the
Agent or any Lender against any Borrower, which seeks enforcement of any
rights hereunder or under any other Loan Document and is determined
adversely to the Agent or the Lenders in a final nonappealable judgment
or (II) to the extent such liabilities, losses, damages or other
expenses result from the Agent's or any Lender's gross negligence, fraud
or willful misconduct. If, and to the extent that the obligations of
any Borrower under this 15 are unenforceable for any reason, each
Borrower hereby agrees to make the maximum contribution to the payment
in satisfaction of such obligations which is permissible under
applicable law.
16. SURVIVAL OF COVENANTS, ETC. All covenants, agreements,
representations and warranties made herein in any of the other Loan
Documents or in any documents or other papers delivered by or on behalf
of each Borrower pursuant hereto shall be deemed to have been relied
upon by each Lender, notwithstanding any investigation heretofore or
hereafter made by it, and shall survive the making by the Lenders of the
Loans, as herein contemplated, and shall continue in full force and
effect so long as any amount due under this Credit Agreement or any of
the other Loan Documents remains outstanding or the Lenders have any
obligation to make any Loans. All statements contained in any
certificate or other paper delivered to the Lenders at any time by or on
behalf of any Borrower pursuant hereto shall constitute representations
and warranties as of the date thereof by the Borrowers hereunder.
17. ASSIGNMENT AND PARTICIPATION.
17.1. Assignment by the Lenders. No Lender shall assign or
transfer any of its rights or obligations under any of the Loan
Documents (i) without the prior written consent of DRC, which shall not
be unreasonably withheld or delayed, and (ii) in amounts of less than
$5,000,000 unless such Lender assigns its entire remaining interest
under the Loan Documents; provided, however, that any Lender may, at any
time and from time to time, sell, transfer, assign or otherwise grant an
interest in any Loan to a Subsidiary or any Affiliate of such Lender or
to a Federal Reserve Bank of the United States; and provided, further,
that upon the occurrence and during the continuance of an Event of
Default, no consent of DRC shall be required to any assignment.
17.2. Assignment by Borrowers. No Borrower shall assign or
transfer any of its rights or obligations under any of the Loan
Documents without the prior written consent of the Lenders.
17.3 Participations by the Lenders. Any Lender may, without
the consent of any Borrower, the Agent or any other Lender, sell
participations to one or more banks or other entities (each a
"Participant") in all or a portion of such Lender's rights and
obligations under this Credit Agreement (including all or a portion of
its Commitment and the Loans owing to it); provided that (i) such
Lender's obligations under this Credit Agreement shall remain unchanged,
(ii) such Lender shall remain solely responsible to the other parties
hereto for the performance of such obligations, (iii) each Borrower, the
Agent, and the other Lenders shall continue to deal solely and directly
with such Lender in connection with such Lender's rights and obligations
under this Credit Agreement and (iv) such participation shall be in an
amount of not less than $5,000,000. Any agreement or instrument
pursuant to which a Lender sells such a participation shall provide that
such Lender shall retain the sole right to enforce this Credit Agreement
and to approve any amendment, modification or waiver of any provision of
this Credit Agreement. Each Borrower agrees that each Participant shall
be entitled to the benefits of 4.5 to the same extent as if it were a
Lender and had acquired its interest by assignment pursuant to 17.1.
17.4 Replacement of Lender. In the event that any Lender (other
than the Agent in its capacity as a Lender) or, to the extent
applicable, any Participant (the "Affected Lender"):
(a) fails to perform its obligations to fund any portion
of any Loan on or after the Closing Date when required to do so by
the terms of this Credit Agreement, or fails to provide its portion
of any LIBOR Loan pursuant to 2 or on account of any legal
requirement as contemplated by 4.4;
(b) refuses to consent to a proposed extension of the
Maturity Date that is consented to by all of the other Lenders; or
(c) refuses to consent to a proposed amendment,
modification, waiver or other action requiring consent of all of
the Lenders under 25 that is consented to by Lenders owning at
least 75% of the Percentages of the Total Commitment;
then, so long as no Event of Default exists, DRC shall have the right to
seek, at its own cost and expense, a replacement lender which is
reasonably satisfactory to the Agent and the Required Lenders (the
"Replacement Lender"). The Replacement Lender shall purchase the
interests of the Affected Lender in the Loans and its Commitment and
shall assume the obligations of the Affected Lender hereunder and under
the other Loan Documents upon execution by the Replacement Lender of an
assignment agreement in form and substance reasonably satisfactory to
the Replacement Lender and Affected Lender, and the tender by the
Replacement Lender to the Affected Lender of a purchase price agreed
between the Replacement Lender and the Affected Lender. Such assignment
by any Affected Lender who has performed its obligations hereunder shall
be deemed an early termination of any Loans to the extent of such
Affected Lender's portion thereof, and the Borrowers will pay to such
Affected Lender any resulting amounts due under 4.8. Upon consummation
of such assignment, (i) the Replacement Lender shall become party to
this Credit Agreement as a signatory hereto and shall have all the
rights and obligations of the Affected Lender under this Credit
Agreement and the other Loan Documents with a Percentage equal to the
Percentage of the Affected Lender, (ii) the Affected Lender shall be
released from its obligations hereunder and under the other Loan
Documents and (iii) no further consent or action by any party shall be
required. The Borrowers shall sign such documents and take such other
actions reasonably requested by the Replacement Lender to enable it to
share in the benefits of the rights created by the Loan Documents.
Until the consummation of an assignment in accordance with the foregoing
provisions of this 17.4, the Borrowers shall continue to pay to the
Affected Lender any Obligations as they become due and payable.
18. FOREIGN LENDER. If any Lender is not incorporated or
organized under the laws of the United States of America or a state
thereof, such Lender shall deliver to DRC and the Agent the following:
(a) Two duly completed copies of United States Internal
Revenue Service Form 1001 or 4224 or successor form, as the case
may be, certifying in each case that such Lender is entitled to
receive payments under this Credit Agreement and the Notes without
deduction or withholding of any United States federal income taxes;
provided, however, that if such Lender is not a "bank" within the
meaning of Section 881(c)(3)(A) of the Code and cannot deliver Form
1001 or 4224, such Lender shall deliver to DRC and the Agent a
certificate to such effect; and
(b) A duly completed Internal Revenue Service Form W-8 or
W-9 or successor form, as the case may be, to establish an
exemption from United States backup withholding tax.
Each such Lender that delivers to DRC and the Agent a Form 1001 or
4224 and Form W-8 or W-9 pursuant to this 18 further undertakes to
deliver to DRC and the Agent two further copies of Form 1001 or 4224 and
Form W-8 or W-9, or successor applicable form, or other manner of
certification, as the case may be, on or before the date that any such
form expires or becomes obsolete or after the occurrence of any event
requiring a change in the most recent form previously delivered by it to
DRC and the Agent. Such Forms 1001 or 4224 shall certify that such
Lender is entitled to receive payments under this Credit Agreement
without deduction or withholding of any United States federal income
taxes. The foregoing documents need not be delivered in the event any
change in treaty, law or regulation or official interpretation thereof
has occurred which renders all such forms inapplicable or which would
prevent such Lender from delivering any such form with respect to it, or
such Lender advises DRC that it is not capable of receiving payments
without any deduction or withholding of United States federal income tax
and, in the case of a Form W-8 or W-9, establishing an exemption from
United States backup withholding tax. Until such time as DRC and the
Agent have received such forms indicating that payments hereunder are
not subject to United States withholding tax or are subject to such tax
at a rate reduced by an applicable tax treaty, the Borrowers shall
withhold taxes from such payments at the applicable statutory rate
without regard to 4.1(b).
19. NOTICES, ETC. Except as otherwise expressly provided in this
Credit Agreement, all notices and other communications made or required
to be given pursuant to this Credit Agreement or the other Loan
Documents shall be in writing and shall be delivered in hand, mailed by
United States registered or certified first class mail, postage prepaid,
sent by overnight courier, or sent by telecopy, and confirmed by
delivery via courier or registered or certified first class mail,
postage prepaid, addressed as follows:
(a) if to any Borrower, to such Borrower c/o Dynamics
Research Corporation, 60 Frontage Road, Andover, MA 01810, Attention:
Chief Financial Officer (Telecopy No. (978) 475-8205), or at such other
address for notice as such Borrower shall last have furnished in writing
to the Person giving the notice;
with a copy to:
Ropes & Gray
One International Place
Boston, MA 02110
Telecopy No. (617) 951-7050
Attention: Mary E. Weber, Esq.
(b) if to the Agent or BBH&Co in its capacity as a Lender,
at Brown Brothers Harriman & Co., 40 Water Street, Boston, MA 02109,
Attention: Timothy T. Telman, Deputy Manager (Telecopy No. (617) 589-
3178) or such other address for notice as BBH&Co shall last have
furnished in writing to the Person giving the notice;
with a copy to:
Choate, Hall & Stewart
Exchange Place
53 State Street
Boston, MA 02109
Telecopy No. (617) 248-4000
Attention: Lyman G. Bullard, Jr., Esq.
(c) if to BankBoston, at BankBoston, N.A., 100 Federal
Street, Boston, MA 02110, Attention: Daniel R. Gillette, Vice President
(Mail Stop: MA BOS 01-07-04) (Telecopy No. (617) 434-5825), or such
other address for notice as BankBoston shall last have furnished in
writing to the Person giving the notice;
(d) if to State Street, at State Street Bank and Trust
Company, High Technology Group, 225 Franklin Street, Boston, MA 02110,
Attention: Mark Trachy, Vice President (Telecopy No. (617) 664-4971), or
such other address as State Street shall last have furnished in writing
to the Person giving the notice;
(e) if to Chase, at The Chase Manhattan Bank, 999 Broad
Street, Bridgeport, CT 06604, Attention: A. Neil Sweeny, Vice President
(Telecopy No. (203) 382-6573), or such other address as Chase shall last
have furnished in writing to the Person giving the notice; and
(f) if to Citizens, at Citizens Bank of Massachusetts,
Edgewater Office Park, 401 Edgewater Place, Suite 105, Wakefield, MA
01880, Attention: R.E. James Hunter, Vice President (Telecopy No. (781)
224-2435), or such other address as Citizens shall last have furnished
in writing to the Person giving the notice.
Any such notice or demand shall be deemed to have been duly given
or made and to have become effective (i) if delivered by hand, overnight
courier or facsimile (so long as a confirmation receipt is received) to
a responsible officer of the party to which it is directed, at the time
of the receipt thereof by such officer or the sending of such facsimile
and (ii) if sent by registered or certified first-class mail, postage
prepaid, on the third Business Day following the mailing thereof.
20. GOVERNING LAW. THIS CREDIT AGREEMENT AND EACH OF THE OTHER
LOAN DOCUMENTS ARE CONTRACTS UNDER THE LAWS OF THE COMMONWEALTH OF
MASSACHUSETTS AND SHALL FOR ALL PURPOSES BE CONSTRUED IN ACCORDANCE WITH
AND GOVERNED BY THE LAWS OF SAID COMMONWEALTH OF MASSACHUSETTS
(EXCLUDING THE LAWS APPLICABLE TO CONFLICTS OR CHOICE OF LAW). EACH OF
THE BORROWERS, THE AGENT AND THE LENDERS AGREES THAT ANY SUIT FOR THE
ENFORCEMENT OF THIS CREDIT AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS
MAY BE BROUGHT IN THE COURTS OF THE COMMONWEALTH OF MASSACHUSETTS OR ANY
FEDERAL COURT SITTING THEREIN AND CONSENTS TO THE NONEXCLUSIVE
JURISDICTION OF SUCH COURTS AND THE SERVICE OF PROCESS IN ANY SUCH SUIT
BEING MADE UPON SUCH PERSON BY MAIL AT ITS ADDRESS SPECIFIED IN 19.
EACH OF THE BORROWERS, THE AGENT AND THE LENDERS HEREBY WAIVES ANY
OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH
SUIT OR ANY SUCH COURT OR THAT SUCH SUIT IS BROUGHT IN AN INCONVENIENT
COURT.
21. HEADINGS. The captions in this Credit Agreement are for
convenience of reference only and shall not define or limit the
provisions hereof.
22. COUNTERPARTS. This Credit Agreement and any amendment hereof
may be executed in several counterparts and by each party on a separate
counterpart, each of which when so executed and delivered shall be an
original, and all of which together shall constitute one instrument. In
proving this Credit Agreement it shall not be necessary to produce or
account for more than one such counterpart signed by the party against
whom enforcement is sought.
23. ENTIRE AGREEMENT, ETC. The Loan Documents and any other
documents executed in connection herewith or therewith express the
entire understanding of the parties with respect to the transactions
contemplated hereby and thereby. Neither this Credit Agreement nor any
term hereof may be changed, waived, discharged or terminated, except as
provided in 25.
24. WAIVER OF JURY TRIAL. EACH OF THE BORROWERS, THE AGENT AND
THE LENDERS HEREBY WAIVES ITS RIGHT TO A JURY TRIAL WITH RESPECT TO ANY
ACTION OR CLAIM ARISING OUT OF ANY DISPUTE IN CONNECTION WITH THIS
CREDIT AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS, ANY RIGHTS OR
OBLIGATIONS HEREUNDER OR THEREUNDER OR THE PERFORMANCE OF SUCH RIGHTS
AND OBLIGATIONS. EXCEPT AS PROHIBITED BY LAW, AND, EXCEPT IN THE CASE
OF THE GROSS NEGLIGENCE, FRAUD, BAD FAITH OR WILLFUL MISCONDUCT OF THE
AGENT OR ANY LENDER. EACH BORROWER HEREBY WAIVES ANY RIGHT IT MAY HAVE
TO CLAIM OR RECOVER IN ANY LITIGATION REFERRED TO IN THE PRECEDING
SENTENCE ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES OR
ANY DAMAGES OTHER THAN, OR IN ADDITION TO, ACTUAL DAMAGES. EACH
BORROWER (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF THE
AGENT OR THE LENDERS HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT EACH
OF THE AGENT AND THE LENDERS WOULD NOT, IN THE EVENT OF LITIGATION, SEEK
TO ENFORCE THE FOREGOING WAIVERS AND (B) ACKNOWLEDGES THAT EACH OF THE
LENDERS HAVE BEEN INDUCED TO ENTER INTO THIS CREDIT AGREEMENT AND THE
OTHER LOAN DOCUMENTS TO WHICH IT IS A PARTY BY, AMONG OTHER THINGS, THE
WAIVERS AND CERTIFICATIONS CONTAINED HEREIN.
25. CONSENTS, AMENDMENTS, WAIVERS, ETC. Except as otherwise
expressly provided in this Credit Agreement, any consent or approval
required or permitted by this Credit Agreement to be given by the
Lenders or the Agent may be given, and any term of this Credit Agreement
or of any other instrument related hereto or mentioned herein may be
amended, and the performance or observance by any Borrower of any terms
of this Credit Agreement or such other instrument or the continuance of
any Default or Event of Default may be waived (either generally or in a
particular instance and either retroactively or prospectively) with, but
only with, the written consent of DRC and the written consent of the
Required Lenders. Notwithstanding the foregoing, no amendment or waiver
shall, without the prior written consent of the Agent and all of the
Lenders, (a) extend the fixed maturity or reduce the principal amount
of, or reduce the rate or extend the time of payment of interest on, or
reduce the amount or extend the time of payment of any principal or
interest of, any Note (including any extensions of the Facility A
Revolving Credit Note pursuant to 2.4); (b) change or waive the Total
Commitment or any Commitment (other than reductions in Commitments
pursuant to 2.3) or Percentage; (c) amend or waive this 25 or amend or
waive the definition of Required Lenders; (d) change or waive the amount
or payment terms of any fees due hereunder; or (e) amend or waive 8(c)
or 9.1(a), (f) or (g) or 11. No waiver shall extend to or affect any
obligation not expressly waived nor impair any right consequent thereon.
No course of dealing or delay or omission on the part of the Lenders in
exercising any right shall operate as a waiver thereof or otherwise be
prejudicial thereto. No notice to or demand upon a Borrower shall
entitle a Borrower to other or further notice or demand in similar or
other circumstances.
26. CONFIDENTIALITY. No Lender will make any disclosure of
confidential information furnished to it any Borrower or any of its
Subsidiaries unless such information shall have become public, except:
(a) in connection with operations under or the enforcement
of or the protection of a Lender's interest in this Credit
Agreement or any other Loan Document to Persons who have a
reasonable need to be furnished such information;
(b) pursuant to any law, rule or statutory or regulatory
requirement or any court order, subpoena or other legal process;
(c) to any parent or corporate Affiliate of such Lender or
to any Participant, proposed Participant, assignee, proposed
assignee, Replacement Lender or proposed Replacement Lender;
provided, however, that any such Person shall agree to comply with
the restrictions set forth in this 26 with respect to such
information;
(d) to its directors, officers, employees, agents,
independent counsel, auditors and other professional advisors and
consultants with an instruction to such Person to keep such
information confidential;
(e) to any other Lender and to the Agent and any successor
Agent or prospective successor Agent; and
(f) with the prior written consent of the Borrower, to any
other Person.
27. SEVERABILITY. The provisions of this Credit Agreement are
severable and if any one clause or provision hereof shall be held
invalid or unenforceable in whole or in part in any jurisdiction, then
such invalidity or unenforceability shall affect only such clause or
provision, or part thereof, in such jurisdiction, and shall not in any
manner affect such clause or provision in any other jurisdiction, or any
other clause or provision of this Credit Agreement in any jurisdiction.
28. NATURE OF LENDER'S OBLIGATIONS. The Lenders obligations to
make their respective Loans are several and not joint or joint and
several. Any Lender which is not in default in the performance of its
obligations may, in its discretion, assume the obligations of any other
Lender which is in default.
IN WITNESS WHEREOF, the undersigned have duly executed this Credit
Agreement as a sealed instrument as of the date first set forth above.
DYNAMICS RESEARCH CORPORATION
By:
Name: Douglas R. Potter
Title: Vice President of Finance
and Chief Financial Officer
DRC ENCODER, INC.
By:
Name:
Title:
DRC METRIGRAPHICS, INC.
By:
Name:
Title:
DRC SOFTWARE, INC.
By:
Name:
Title:
DRC TELECOM, INC.
By:
Name:
Title:
per pro BROWN BROTHERS
HARRIMAN & CO.
By:
Name: Mark W. Johnson
Title: Manager
BANKBOSTON, N.A.
By:
Name: Daniel R. Gillette
Title: Vice President
THE CHASE MANHATTAN BANK
By:
Name: A. Neil Sweeny
Title: Vice President
STATE STREET BANK AND TRUST COMPANY
By:
Name: Mark Trachy
Title: Vice President
CITIZENS BANK OF MASSACHUSETTS
By:
Name: R. E. James Hunter
Title: Vice President
