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, 1998
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 .
(Continued)
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 19, 1999, the aggregate market value of Common
Stock held by nonaffiliates of the Registrant was $22,710,053
and the number of shares of Common Stock, $.10 par value, of
the Registrant outstanding was 7,356,090.
Documents Incorporated By Reference
Portions of the 1998 Annual Report to Shareholders are
incorporated by reference in Parts I and II. Portions of the
Registrant's Proxy Statement for the 1999 Annual Meeting of
Shareholders are incorporated by reference in Part III.
The Exhibit Index is on pages 25 and 26.
DYNAMICS RESEARCH CORPORATION
Form 10-K
For the Fiscal Year Ended December 31, 1998
Part I Page
Item 1. Business 4
2. Properties 11
3. Legal Proceedings 11
4. Submission of Matters to a Vote of
Security Holders 11
4A. Executive Officers of the Registrant 11
Part II
5. Market for Registrant's Common Equity and
Related Stockholder Matters 12
6. Selected Financial Data 12
7. Management's Discussion and Analysis of
Financial Condition and Results
of Operations 12
8. Financial Statements and Supplementary Data 13
9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure 13
Part III
10. Directors and Executive Officers
of the Registrant 14
11. Executive Compensation 14
12. Security Ownership of Certain
Beneficial Owners and Management 14
13. Certain Relationships and
Related Transactions 14
Part IV
14. Exhibits, Financial Statement
Schedules, and Reports on Form 8-K 15
PART I
Item 1. Business
Dynamics Research Corporation (referred to as DRC or the
Company) was organized in 1955 under the laws of the
Commonwealth of Massachusetts. The Company develops and
operates computer and communication-intensive information
systems, provides engineering, management support and
information technology services, and produces precision
manufactured components for industrial measurement and control.
The Company's Systems and Services segment represents 85% of
revenue from continuing operations for the year ended December
31, 1998. Precision manufactured products represent 15% of
1998 revenue from continuing operations and include encoders
and electroformed parts. The Company was also engaged in the
development and sale of telecommunications fraud control
systems and object-oriented software development technology.
Systems and Services Segment
DRC provides systems analysis, integration, and software design
and development services. The Segment'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 Department of Defense (referred to as DoD)
information systems programs are often referred to as
logistics information systems. These DRC-developed product
management information systems manage data related to inventory
requirements and control, maintenance and repair, warranty
analysis, supply, and distribution of numerous products and parts.
For nearly 30 years, the Company has assisted the U.S. Navy
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.
The Company provides independent analysis and monitoring of
submarine-based, inertial guidance systems and electronic
modules for the U.S. Navy Fleet Ballistic Missile Program
Office. DRC's Inertial Instrument Test Laboratory is equipped
for full-scale performance testing of navigational quality
inertial instruments. The Company designs, constructs,
installs, trains, and supports test equipment used in the U.S.
Navy Trident program.
DRC 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
performs computer-aided, semiconductor circuit analysis for its
Navy customer as well as commercial companies.
The DRC-developed Weapon Systems Management Information System
(WSMIS) assesses the "health" and capability of the U.S. Air
Force weapon systems to meet wartime objectives. 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 necessary to meet aircraft availability requirements.
A major component of the Company's DoD business consists of a
wide variety of engineering, technical assistance and
management support services performed under various indefinite
order, indefinite quantity contracts. Work performed under
these contracts is generally done on a time and materials basis
utilizing 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, missile, aircraft, information,
software, and munitions.
The Company provides support at all stages of a 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. 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.
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 ALC's
located at Warner Robins, GA; Ogden, UT; and San Antonio, TX.
Additional tasking has centered on providing support to Air
Force reengineering and business process improvement
initiatives at these ALC's.
Since 1993, DRC has provided the US Army Aviation and Missile
Command with specialized studies and analyses in
aviation/missile system development, acquisition and
sustainment. Since 1996, the Company has been a prime
contractor on a five-year, $33 million contract under a U.S.
Army program known as Programmatic and Technical Support. DRC
supports a broad range of helicopter and missile systems in
varying life cycle stages. Additionally, DRC supports other
U.S. Army activities with acquisition logistics, systems
engineering and other related program management services from
its office in Huntsville, Alabama.
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. Also,
under contract from the U.S. Army Research Laboratory, DRC
provides 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.
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 with the Naval Air Warfare
Center Training Systems Division (NAWCTSD) and are widely used
throughout the DoD by government and contractor organizations.
The market for DRC's TSRA Tools has expanded beyond the military
to include the Federal Aviation Administration and National Mine
Health and Safety Academy.
As a subcontractor to Lockheed Martin, DRC is supporting the
U.S. Army's Warfighter Simulation 2000, a simulation system
supporting the training of commanders and staff under a wide
variety of battlefield scenarios. DRC services include
providing military subject matter experts, software and human
factors engineering, database development for equipment and
knowledge acquisition, as well as manpower staffing reduction
analysis.
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 playing a similar role as a
subcontractor 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 is in its third 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 civilian and military hospitals.
In March 1998, DRC was awarded a contract under the Air Force
Aeronautical Systems Center Advisory and Assistance Services
(A&AS) Omnibus program. The purpose of this contract is to provide support
for engineering, manufacturing, configuration/data management,
acquisition management and test and evaluation required in
the acquisition, development, production and sustainment of
various equipment and weapons systems. The contract provides DRC
the opportunity to compete against other companies for tasks under
the A&AS Omnibus program over three years.
In recent years, the Company has expanded beyond the DoD
marketplace and won various state and Federal agency contracts.
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's Department of Health and Human
Services. Under ongoing contracts DRC provides additional
functional and technical enhancements to the SACWIS system as
well as other information technology services.
In February 1997, DRC was awarded a contract to design,
deliver, install and maintain a statewide information
technology (IT) infrastructure that supports the Ohio Child
Support Enforcement Tracking System (SETS). The IT
infrastructure the Company is developing automates the work of
more than 4,250 Child Support Enforcement workers throughout
Ohio's 88 counties. In November 1997, the State of Ohio
awarded the Company a 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 that support Ohio's welfare reform
initiatives.
In December 1997, DRC received a 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.
The Company continues to provide the U.S. Department of
Treasury with information technology services for the Internal
Revenue Service and other Treasury departments. Year 2000
software and system certification projects represent the
majority of activity under this contract.
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.
Precision Manufactured Products
The commercial operations of DRC's Precision Products Group
consists of two divisions: Encoder Division and Metrigraphics Division.
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 Encoder Division manufactures an encoder used in engine
fuel pumps for diesel powered sport utility vehicles, pickup
trucks and commercial vans. The encoder is a critical
component of a computer control system that gauges the amount
of fuel injected into the cylinders, optimizing usage and
minimizing the amount of unburned fuel and resultant exhaust
fumes.
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 circuitry used in certain medical
instruments. Metrigraphics' superior ability to design and
manufacture components and maintain 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.
Telecommunications Fraud Control Systems
Since 1996, the Company has been licensed to enhance, market
and maintain a telecommunications fraud control system
developed by Pacific Bell Telephone Company. DRC has made
significant investments in this and related systems and
software technologies to broaden the types of telephone fraud
detected and to position the product for sale to competitive
local exchange carriers and others. The Company's customers
include the regional Bell operating telephone companies. A
number of recent changes in the telecommunications marketplace
have delayed near-term sales goals and increased the estimated
capital required to take advantage of this expanding market.
In December 1998, the Company adopted a plan to exit
this business during 1999.
Software Development Technology
Over a number of years, DRC has invested in the research and
development of VisualMagic, an object-oriented development
environment. This development environment was useful in the design of
Internet applications. During 1998, the Company acquired an interest
in Empresa, Inc. (formerly Electronic Press Services Group, Inc.)
in exchange for an exclusive license to VisualMagic in certain fields,
cash and the assets of the business. Empresa also hired DRC's staff.
DRC does not expect to continue its development of Visual Magic.
Empresa provides e-commerce solutions for small to medium size
merchants, banks, and other customers seeking a competitive
advantage by being on-line. Empresa's solutions include
turnkey on-line storefronts and transaction processing
capabilities highly customized to integrate with a customer's
existing internal systems and with financial institutions.
Sales & Marketing
Contracts with defense, state and other government agency
customers 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 outside sales representatives.
Government Contracts
During 1998, the Company's revenues from contracts with the
DoD, either as prime contractor or subcontractor, accounted for
approximately 59% of the Company's total revenues.
During 1998, the Company's U.S. Government business
consisted of approximately 101 separate contracts on 16
different programs. The Company's contracts with the
Government are generally subject to termination at the
convenience of the Government; however, the Company would be
reimbursed for its allowable costs to the time of termination
and would be paid a proportionate amount of the stipulated
profit attributable to the work actually performed. Although
Government contracts may extend for several years, they are
generally funded on an annual basis and are subject to
reduction or cancellation in the event of changes in Government
requirements or budgetary concerns. If the U.S. Government
curtails expenditures for research, development and consulting
activities, such curtailment might have an adverse impact on
the Company's sales and earnings.
The Company's revenues from contracts with four different states
accounted for approximately 22% of 1998 revenues. Revenues under
various contracts with the State of Ohio accounted for approximately
13.6% of 1998 revenues. The Company's state contracts are generally
either fixed-price or time and material. In certain instances,
funding for these contracts is subject to annual state legislative
approval.
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
government pays an agreed upon price for the Company's services
or products, and the Company bears the risk that increased or
unexpected costs may reduce its profits or cause it to incur a
loss. Conversely, to the extent the Company incurs actual
costs below anticipated costs on these contracts, the Company
could realize greater profits. Under a time and materials
contract, the government pays the Company a fixed hourly rate
intended to cover salary costs and related indirect expenses
plus a profit margin. Under a cost plus fixed-fee contract, the
government reimburses the Company for its allowable direct
expenses and allowable and allocable indirect costs and pays a
negotiated fee. In 1998, approximately 58% of the Company's state
and federal government contract revenue was under fixed-price or time and
material contracts, while approximately 42% of revenue was
under costs plus fixed-fee contracts.
Backlog
At December 31, 1998, the Company's backlog of unfilled
orders was approximately $105.4 million compared with $110.0
million at December 31, 1997. The Company expects that
substantially all of its backlog at December 31, 1998 will be
filled during the year ending December 31, 1999. The Company
has a number of multi-year contracts with agencies of the U.S. and
state governments 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 because various agencies perform
certain types of services which might otherwise be performed by
the Company. The principal competitive factors for systems and
services are price, performance, technical competence and
reliability. In the commercial businesses, the Company competes
with other manufacturers of encoders, electroform vendors and
suppliers of precision measurement scales. The principal
competitive factors affecting the precision components
manufacturing businesses are price, product quality and custom
engineering to meet customers' system requirements.
Research and Development
The Company expended approximately $2.7 million (inclusive
of overhead and other indirect costs) on new product and
service development during the year ended December 31, 1998, as
compared to expenditures of $1.2 million during 1997 and $2.2
million during 1996.
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, 1998, the Company had 1,557 employees.
Proprietary Information
Patents, trademarks and copyrights are not materially
important to the business of the Company. The U.S. 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 333,000 square feet, which are utilized for its
federal and state government 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 1998 was $3.6 million.
The Company believes its properties are adequate for its
present needs.
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. 75 Chairman and Director
Albert Rand 72 President, Chief Executive
Officer and Director
John L. Wilkinson 59 Vice President, Human
Resources and Clerk
Douglas R. Potter 48 Vice President of Finance,
Chief Financial Officer
Chester Ju 49 Vice President, Encoder Division
and Metrigraphics Division
Each of the persons named above has served in the position
indicated for more than five years.
PART II
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 prices for the quarters in 1997 and 1998
are listed below.
1998 1997
High Low High Low
First quarter $11.04 $ 8.75 $ 7.58 $ 6.35
Second quarter 12.25 9.90 7.71 6.44
Third quarter 12.13 6.50 9.38 6.77
Fourth quarter 7.00 4.63 11.88 8.75
The number of holders of record of the Company's common
stock are described in the Company's Annual Report to
Shareholders for 1998 under the caption "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 1998 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 1998 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 1998 is
incorporated herein by reference.
The Company has made and may make statements from time to time
which constitute or contain forward looking information as that
term is defined within the meaning of the Federal securities laws.
These statements may be identified by such forward-looking words or
other forward-looking terminology. Forward-looking statements are not
guarantees of future performance and actual results may differ materially
from those in the forward-looking statements as the results of risks and
uncertainties including those identified in Exhibit 99. The Company
assumes no obligation to update any forward-looking information.
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, 1998, December 31, 1997 and
December 28, 1996
Consolidated Statements of Operations for the three years ended
December 31, 1998
Consolidated Statements of Shareholders' Investment for the three years
ended December 31, 1998
Consolidated Statements of Cash Flows for the three years ended
December 31, 1998
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 1998.)
Report of Independent Public Accountants on Schedules to Consolidated
Financial Statements
Schedule VIII - Valuation and Qualifying Accounts for the three years
ended December 31, 1998
The foregoing report of independent public accountants and schedule
is included as part of Item 14 of this Annual Report on Form 10-K
and are set forth on page F-1 and F-2 filed herewith.
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 17-22, of the
Company's Annual Report to Shareholders for the year 1998, 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 1998 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, 1998, 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
1999 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, 1998.
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 1998 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, 1998.
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 1998.
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 18, 1999. 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 18, 1999
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
In 1998, approximately 59% of the Company's revenue
was with the DoD and its Services. In the past, the Company's
defense business has been adversely affected by significant changes
in defense spending during periods of declining U.S. defense budgets.
Among the effects of this general decline has been increased
competition within a consolidating defense industry. It is not possible
for the Company to predict whether defense budgets will increase or
decline in the future. Further, changing missions and
priorities in the defense budget may have adverse effects on
the Company's business. Funding limitations could result in a
reduction, delay, or cancellation of existing or emerging
programs. The Company anticipates there will continue to be
significant competition when the Company's defense contracts
are rebid as well as 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, will adversely affect
the Company's business, financial condition and results of operations.
Government Contracting Risks
The Company has historically derived a substantial portion
of its revenue from contract and subcontracts with the U.S.
Government. In recent years, the Company has entered into significant
information technology services contracts with various state
governments. A significant portion of the Company's federal and state
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. 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 could 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.
A significant portion of the Company's federal and state
government contracts are renewable on an annual basis, or are subject
to the exercise of contractual options. Multi-year contracts often
require funding actions or other appovals by U.S. Government, state
legislature or others on an annual or more frequent basis. As a result,
the Company's business could experience material adverse consequences
should such funding actions or other approvals not be taken.
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 government agencies, from time to time costs are incurred in
advance of contractual funding. In some circumstances, such costs may
not be recovered in whole or in part under subsequent 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 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 U.S. Government
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 U.S.
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 U.S. 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 DoD 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 not achieve the level of success sought by the Company.
The Company has licensed its object-oriented software
technology to a third party and made an investment in that
company. There is no assurance that the investee company's
products and services will meet with market acceptance or that
they will be able to compete in the development and
distribution of such products with competitors that have
significantly greater resources and experience. Failure to
operate profitably or to raise new capital, if required, may
adversely affect the Company's investment.
Concentration of Customers
Within the DoD, individual services and program offices account
for a significant portion of the Company's Government business.
One state customer accounts for a significant portion of the
Company's revenue. 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 any of 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
related 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 both
domestically and in other regions of the world, competition,
technological change and production disruption, 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, either in the U.S. or
elsewhere in the world, could have a material adverse effect on
the rate of orders received by the commercial divisions.
Significantly lower production volumes resulting in under-
utilization of the Company's manufacturing would adversely
affect the Company's business financial condition and results
of operations.
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 continue 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 competitors' 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 or 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, in the future it may need to raise
additional funds through public or private debt or equity
financing. 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 30, 1999
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 30th of March, 1999.
/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, 1998
(in thousands of dollars)
ALLOWANCE FOR DOUBTFUL ACCOUNTS AND SALES RETURNS
Balance, December 30, 1995 $402
Additions charged to expense 54
Write-off of uncollectible accounts, net (116)
Balance, December 28, 1996 $340
Additions charged to expense 86
Write-off of uncollectible accounts, net (209)
Balance, December 31, 1997 $217
Additions charged to expense 149
Write-off of uncollectible accounts, net (50)
Balance, December 31, 1998 $316
ACCRUAL OF LOSS ON DISPOSAL OF DISCONTINUED OPERATIONS
Balance, December 31, 1997 $ -
Additions charged to discontinued
operations expense 4,418
Balance, December 31, 1998 $4,418
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 Certificate of Vote of Directors Establishing Series B Preferred
Stock (Incorporated by reference to the Registrant's Form 8-K
on June 25, 1998).
4.3 Amendment to Certificate of Vote Establishing Series B
Preferred Stock.
4.4 Rights Agreement dated as of February 17, 1998 between the
Company and American Stock Transfer & Trust Company,
as Rights Agent. (Incorporated by reference to the Registrant's
Form 8-K on June 25, 1998)
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 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)
10.3 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)
10.4 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)
10.5 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)
10.6 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)
10.7 Amended 1993 Equity Incentive Plan.
10.8 Amended 1995 Stock Option Plan for Non-Employee Directors.
10.9 Amended and Restated Revolving Credit Agreement dated as of December
31,1998 between Dynamics Research Corporation and a syndicate of banks
and financial institutions, with Brown Brothers Harriman and Company
as the agent.
10.10 First Amendment to Amended and Restated Revolving Credit Agreement
dated as of December 31, 1998 between Dynamics Research Corporation
and a syndicate of banks and financial institutions, with Brown
Brothers Harriman and Company as the agent.
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, 1998 filed herewith with the exception of the
information incorporated by reference in parts I, II and IV of this
Form 10-K is not deemed to be filed as part of this report.
23.0 Consents of experts and counsel
23.1 Consent of Independent Accountants (Arthur Andersen LLP) dated
March 26, 1999 filed herewith.
99.0 Important Factors Regarding Forward-Looking Statements.
All documents incorporated by reference may be found at Commission
file number 1-7348.
Dynamics Research Corporation
1998 Annual Report
Dynamics Research Corporation provides information technology
services for government and private-sector clients. The Company
develops and operates complex computer systems and communications
networks, and provides engineering and management consulting
services. It also designs and manufactures high-precision
components for industrial measurement and control. Dynamics
Research Corporation is traded on the Nasdaq National Market under
the symbol DRCO.
Financial Highlights**
1998 1997 1996
(In thousands of dollars, except per
share and employee data)
Revenue $ 182,344 $ 156,733 $ 129,997
Income from continuing operations 491 5,177 2,311
Net (loss) income (5,971) 4,129 1,729
Income from continuing operations
per share - basic* .07 .69 .31
Income from continuing operations
per share - diluted* .06 .66 .30
Net (loss) income per share - basic* (.80) .55 .23
Net (loss) income per share - diluted* (.77) .53 .22
Backlog 105,427 110,001 73,200
Number of employees 1,557 1,455 1,349
Number of shares outstanding* 7,369,190 7,546,646 7,515,630
* Restated for the May 1998 20% stock dividend.
** As discussed further in Management's Discussion and
Analysis, in the fourth quarter of 1998, the Company decided
to discontinue operations of its Telecommunications business.
Accordingly, the results of operations of this segment have
been excluded from revenue, operating income and income from
continuing operations in this schedule.
To Our Shareholders
While we recorded a 16 percent increase in revenues and achieved
healthy growth in most business areas during 1998, it was a
challenging year for Dynamics Research Corporation (DRC).
Investments in certain new businesses created a drain on
operations, leading to an interruption in the growth in net income
achieved over the past four years. We have moved expeditiously to
eliminate unprofitable business initiatives and are fully focused
on resuming our track record of earnings growth in 1999.
Financial Results
Revenues from continuing operations for the year ended December 31,
1998 increased to $182,344,000 from $156,733,000 in 1997. Income
from continuing operations was $491,000, or $.06 per diluted share,
versus $5,177,000, or $.66 per diluted share, last year.
At the end of 1998, we decided to exit the telecommunications
business. As a result, we incurred an after-tax charge of
$2,572,000 to provide for the estimated loss on the disposal of
this business area during 1999. Results for 1997 and 1996 have been
restated to reflect continuing operations. Included in 1997 results
is a one-time net income benefit of $1,000,000, or $.16 per share,
related to a research and development tax credit. Including results
from discontinued operations, DRC recorded a net loss for 1998 of
$5,971,000, or $.77 per diluted share.
Sales for the Systems and Test Equipment divisions totaled
$154,336,000, representing 85 percent of revenues, while sales for
the Precision Manufactured Products divisions equaled $28,008,000.
One of DRC's long-stated objectives is to diversify its revenue
base toward a 50/50 balance between defense and non-defense
business. In 1998, non-defense projects accounted for approximately
41 percent of sales-up from 34 percent last year.
New Business Initiatives
One of DRC's strengths is its ability to successfully incubate new
business initiatives. Outstanding examples include the extension of
our logistics expertise into new Air Force programs, the rapid
growth of information technology services for state government
agencies, and high volume production contracts for our precision
manufactured devices.
One of the more exciting technologies we have developed is a
highly advanced object-oriented software development environment
for Internet applications, known internally as VisualMagic.
Recognizing that we needed Internet commerce and marketing
expertise to realize the full commercial potential of this powerful
tool, at year-end we acquired an interest in Empresa, Inc.
(formerly Electronic Press Services Group, Inc.) and transferred
our VisualMagic development staff to the company.
Based in Cambridge, Massachusetts, Empresa is a privately
held developer of electronic storefronts and the infrastructure
behind Internet transactions for the financial services and
publishing industries. We believe this is an excellent opportunity
to participate in the growth of Internet commerce and look forward
to reaping the benefits of this transaction in years to come.
DRC's ethic of enabling new ideas to come to the fore has
produced outstanding results. It is inevitable, however, that some
initiatives won't succeed, or will require a level of investment
beyond our means. Recently, we announced plans to exit our
telecommunications fraud control systems business. We arrived at
this decision after encountering changes in the telecommunications
marketplace that delayed near-term sales and increased the amount
of capital required for taking full advantage of this market
opportunity.
We will continue to support new concepts and technologies
that have a significant potential for profitable growth, and move
swiftly to attach ourselves to new markets and technologies where
there are clear needs for our products and services. We are,
however, instituting a more rigorous internal screening system for
scrutinizing and qualifying the payback potential of future growth
initiatives.
1998 Growth Drivers
State Health & Human Services
Providing information technology services for state government
agencies was one of our primary sources of growth in 1998. We
doubled sales in this area during the year, winning and fulfilling
major contracts for Colorado's child protection and juvenile
justice agencies and for a variety of agencies in Ohio. We expect
to record significant revenues from Colorado and Ohio in 1999 as
well. In addition to expanding programs within the states we
currently serve, we are focused on establishing relationships with
other states. Recently, we won a $1,400,000 contract to support
Arkansas' child welfare information system, and are bidding on
projects in additional states.
Defense Capabilities
Our defense business increased 4 percent in 1998, due to the
expansion of our field offices. One of our most important wins this
year was an omnibus contract with the U.S. Air Force Aeronautical
Systems Center at the Wright-Patterson base in Dayton. During the
year we booked $8,000,000 in new orders under this contract. This
program is similar to the work we have performed for the Air Force
Electronics System Center, and is a significant example of our
ability to expand relationships with existing customers.
Similar to our growing business with the U.S. Air Force Air
Logistics Centers, we are increasing engineering and logistics
support for the U.S. Army Aviation and Missile Command. Conducted
primarily out of our Huntsville office, much of our work for the
Army involves providing engineering and logistics support for the
Black Hawk and Comanche helicopters, as well as sophisticated
electronics and communications systems.
Our Test Equipment Division was awarded a $1,000,000 contract
from Lockheed Martin for tactical communications processing
software for a system they are developing for the Australian
Defense Forces. This contract is a validation of the international
market for our workstation for testing devices that receive and
synthesize tactical data and positioning information from diverse
military sources. The systems and test work we perform for the Navy
on navigation systems for Trident missiles remains a major program
at DRC.
Commercial Sector Systems & Support Opportunities
Building business in the systems and services area for commercial
customers has been a long-stated goal, and DRC continues to make
inroads into this sector. Work for commercial clients includes year
2000 computer system date change test and validation programs for a
division of the General Electric Company and a New England bank, as
well as re-engineering work for the manufacturing operations of a
commercial aircraft equipment company. We have proposals out on
several similar projects and hope to make good progress on
expanding our systems business in the commercial arena in 1999.
Precision Manufactured Products
Results for the Precision Manufactured Products divisions were
impacted by the Asian financial crisis and a related downturn in
customer spending on encoder sensor devices for semiconductor and
other capital equipment. However, we are teaming with product
development engineers at prospective customer organizations in the
automotive, medical, high technology and telecommunications sectors
to create new applications for our encoder and precision
electroformed devices. We expect to go into mass production with
several of these devices over the next two years.
Acquisition Opportunities
Much of our growth over the past five years has been generated
internally. We are also seeking to expand through acquisitions of
profitable organizations. Criteria for potential acquisition
targets are that they should offer DRC entree into a new market,
specific expertise or key people that complement or extend our
existing business.
1999 Objectives and Outlook
Our primary objective for 1999 is to resume the earnings growth
trend of the previous four years. We will accomplish this by
continuing the expansion of our systems and support services into
U.S. defense agencies, state health and human services divisions
and the commercial sector. We are looking to increase Metrigraphics
and Encoder divisions' sales with new high volume products.
The defense budget has a $12 billion proposed increase in military
spending for the next fiscal year and $110 billion over six years,
initiatives that may well contribute to the growth of our defense
business. Regardless of the outcome of these proposals, there will
always be a mandate for our armed forces to control costs and
operate more efficiently. DRC has key capabilities for enabling the
military to maintain and manage its resources at lower costs, and
we provide an invaluable repository of knowledge of the evolution
and operations of large, sophisticated systems.
As always, we have been buoyed along this year by the initiative,
dedication and creativity of our employees. We thank them, and our
shareholders, for their support.
Sincerely,
Albert Rand
President and
Chief Executive Officer
John S. Anderegg, Jr.
Chairman
Transferring Core Competencies into New Markets
Doing superlative work and winning new contracts from existing
customers is a fundamental aspect of top-line growth at Dynamics
Research Corporation (DRC). But aggressive growth targets call for
identifying and branching out into new markets and establishing
relationships with new customers.
A hallmark of DRC's success has been its ability to transfer
core ompetencies-disciplines in which it has proven expertise and a
strong record of success-into entirely new markets or types of
customers. Core competencies at DRC include providing information
technology, logistics, engineering, simulation and training
services for government and commercial customers, and high-
precision device manufacturing for a broad variety of applications.
This strategy of extending core competencies has enabled the
Company to achieve an annual revenue growth rate of more than 20
percent over the past four years, and has resulted in greater
diversification. In 1998, revenues derived from non-defense
sources represented 41 percent of total revenues, versus 34 percent
in 1997. In the pages that follow, we focus on only a few of the
many ways DRC is extending its core competencies into new markets
and new customers.
Extending Expertise into Army Aviation
Core Competency Case Study #1
Logistics and Support
DRC has longstanding expertise in providing logistics and
engineering services to support the maintenance and combat
readiness of U.S. Air Force aircraft and Navy weapons systems. In
1996, DRC broke into a new market as a prime contractor on a five-
year, $33 million contract under a U.S. Army program known as
Programmatic and Technical Support (PATS). Conducted primarily out
of Huntsville and Daleville, Alabama, and St. Louis, Missouri
offices, DRC's work focuses on sustaining the readiness of
helicopters and fixed-wing aircraft for the U.S. Army Aviation &
Missile Command headquartered at nearby Redstone Arsenal.
One of the main systems the Company supports is the UH-60
Black Hawk Helicopter, as well as Comanche and Apache Attack
helicopters. DRC engineers and managers, half of whom are former
Army helicopter pilots, assess readiness issues, conduct operating
cost analyses and risk assessments, and provide acquisition
support. In addition, they analyze design flaws, forecast parts
availability and determine ways to integrate variant aircraft into
the fleet to minimize repair and maintenance costs. Because of
their experience as pilots, DRC engineers are well versed in how
equipment additions or modifications may affect performance and
flight characteristics.
DRC also supports the Army Airborne Command and Control
System, a suite of highly sophisticated electronics and
communications gear installed on some Black Hawks, as well as the
Tactical Airspace Integration System that helps field commanders
manage a highly complex battlefield environment. Revenue under the
PATS contract was approximately $8.5 million in 1998, up from $6.5
million in 1997. Recently, DRC won an additional subcontract to
provide logistics and engineering support for the Army Tank,
Automotive and Armaments Command (TACOM) in Warren, Michigan.
Broadening Health and Human Service Markets
Core Competency Case Study #2
Information Technology
DRC first targeted the burgeoning market for non-defense government
information technology (IT) services in 1995. Since then, propelled
by federal legislation that mandates computerized tracking and
management capabilities at state health and human service agencies,
DRC's IT business for state governments has grown from $4.5 million
in revenues in 1996 to more than $40 million in 1998. One of DRC's
primary growth strategies is expanding its market penetration both
vertically and horizontally within current customer agencies, into
other agencies and departments, as well as into new states.
DRC's work for the State of Ohio is an excellent case in
point. Starting initially with a contract to provide computer
hardware and networks for Ohio's Support Enhancement Tracking
System, a program that keeps tabs on "deadbeat parents," DRC has
expanded its work into a variety of departments. These include Ohio
Works First, a training program for Welfare recipients, the Human
Resources Management System, which tracks payroll for all state
employees, and the Division of Acquisition Services. DRC has also
introduced its logistics and supply chain management capabilities
into the State government, by providing warehouse and inventory
management for the Division of Health and Human Services' computer
equipment and peripherals.
Colorado's Department of Human Services represented a major
portion of DRC's state IT work in 1998. Last June, the Company won
a contract to assist the State of Arkansas with enhancement of its
child welfare information system. Proposals are on the table for
other major contracts with Colorado and Ohio, as well as additional
states.
Providing Improved Decision Analysis Tools
Core Competency Case Study #3
Simulation and Modeling
Warfare in the Information Age demands that leaders make crucial,
high-risk decisions consistently and rapidly. An important new
training tool being developed for the U.S. Army is the Warfighters'
Simulation 2000, also known as WARSIM 2000. This simulation system
will support the training of commanders and staff from battalion
through theater-level.
WARSIM 2000 will provide land warfare information for a joint
services initiative intended to create a common, seamless training
environment. The system will create a wide variety of battlefield
scenarios across the spectrum of operations.
Working as a subcontractor to Lockheed Martin, DRC subject
matter experts, engineers and managers comprise more than 17
percent of WARSIM 2000 development staff, providing leadership and
expertise in crucial areas.These include software and human factors
engineering, database development for equipment and knowledge
acquisition, as well as manpower staffing reduction analysis.
In addition to its work on WARSIM, DRC is carving out a niche
for itself in developing computer simulation models for re-
engineering plant layout for large aircraft equipment repair shops
for both military and commercial operations. DRC's work in this
area began by designing computer models that analyze and improve
the workflow for landing gear repair shops. The Company is
currently re-engineering a plant layout for an equipment
manufacturer of commercial and military aircraft, and has proposals
for similar projects before several other commercial aircraft
repair facilities.
Developing New Applications
Core Competency Case Study #4
Precision Products
When Motorola-backed Iridium LLC launched the world's first
satellite-based global wireless telephone and messaging system, it
tapped DRC's Encoder Division to develop devices that help control
antenna position for satellite-to-satellite and satellite-to-ground
station communications. Collaborating closely with Iridium
engineers, DRC custom designed and assembled devices that precisely
calibrate and control antenna motion. Today, each of Iridium's 66
low-orbiting satellites carries 15 DRC encoders. The satellite
development community looks to suppliers with proven expertise, and
there are many potential applications for encoder devices. DRC is
now working on several new satellite antenna-positioning
applications for its encoder products.
DRC's Encoder Division produces customized electro-mechanical
devices that measure position in a wide range of high technology
capital equipment requiring high-precision motion control. Today,
DRC encoders are used in a variety of applications from
semiconductor manufacturing equipment to automotive diesel fuel
injection pumps.
This tradition of developing devices in collaboration with
customer teams carries over to DRC's Metrigraphics Division, which
designs and manufactures high-precision miniature components.
Metrigraphics' products are created through a process known as
electroforming, whereby a thin, flexible metal film is deposited on
glass, metal or other substrates. These devices are incorporated in
electronic circuitry for heart catheters and ink deposition nozzles
for consumer and commercial grade ink-jet printers. Currently, a
variety of new applications are under development, including
flexible miniature circuits for medical uses, advanced
semiconductor devices and high-density disk drive components for
personal computers.
Supporting the Air Force Materiel Command
Core Competency Case Study #5
Technical and Engineering Services
Last spring, DRC won its third major contract with the U.S. Air
Force Materiel Command, whose mission is to develop, deliver and
maintain all Air Force systems and equipment. Under this latest
contract, DRC is providing technical, engineering and
administrative support for the Aeronautical Systems Center at
Wright-Patterson Air Force Base in Dayton, Ohio.
One of the factors contributing to DRC winning the contract
was the work it performs for the Electronic Systems Center at
Hanscom Air Force Base in Massachusetts and for the Air Logistics
Centers' five U.S. maintenance depots. Under these earlier
contracts, DRC supervises the acquisition of advanced radar,
communications and computer equipment, and the logistics for
locating and moving repair parts to and among the five depots.
The Aeronautical Systems Center is responsible for research,
development, test, evaluation and initial acquisition of
aeronautical systems and related equipment for the Air Force. Its
major active programs are the B-2 and B-1B bombers, C-17 airlifter,
F-15, F-16 and F-22 fighters, training systems, aircraft engines,
special operations forces and litigation support.
Two of the programs DRC supports at Wright-Patterson are the
Joint Airborne Signal Intelligence (SIGINT) and Reconnaissance
Mission Area Group. DRC's team provides systems engineering,
security management, test and evaluation, acquisition management,
configuration and data management, and administrative support for
these programs. Projects include providing hardware and software
support for SIGINT computer platforms, communications acquisition
support for encrypted data transfer, and the development of
electro-optical multi-spectral imagery road maps.
Five Year Summary of Selected Financial Data**
1998 1997 1996 1995 1994
(in thousands of dollars,
except per share, share
and employee data)
Revenue $ 182,344 $ 156,733 $ 129,997 $ 103,941 $ 102,964
Operating income 2,459 7,807 4,283 1,018 632
Income from
continuing operations 491 5,177 2,311 1,018 632
Net (loss) income (5,971) 4,129 1,729 559 224
Income from continuing
operations per common
share - basic* .07 .69 .31 .08 .03
Income from continuing
operations per common
share - diluted* .06 .66 .30 .07 .03
Net (loss) income per
common share - basic* (.80) .55 .23 .08 .03
Net (loss) income per
common share - diluted* (.77) .53 .22 .07 .03
Total assets 88,067 77,629 70,950 53,946 53,977
Long-term debt
(excluding current
portion) 26,800 10,000 300 1,500 2,717
Shareholders'
investment 31,246 39,147 35,239 33,206 32,713
Shareholders'
investment per share* 4.24 5.19 4.69 4.47 4.40
Return on shareholders'
investment(%) (19.1) 10.6 4.9 1.7 .7
Backlog 105,427 110,001 73,200 61,284 43,679
Cash flow from
operations (11,406) 7,980 1,035 7,499 5,721
Research and
development expense 2,739 1,249 2,189 1,611 224
Capital expenditures 3,171 5,104 9,266 4,441 2,444
Number of shares
outstanding at end
of year* 7,369,190 7,546,646 7,515,630 7,422,059 7,433,512
Number of employees 1,557 1,455 1,349 1,249 1,130
Quarterly Data**
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr***
(in thousands of dollars,
except per share data)
unaudited
1998
Revenue $ 41,988 $ 48,317 $ 44,379 $ 47,660
Operating income (loss) 2,408 2,056 1,419 (3,424)
Income (loss) from
continuing operations 1,203 955 579 (2,246)
Net income (loss) 637 (344) (505) (5,759)
Income (loss) from
continuing operations
per common share - basic* .16 .13 .08 (.30)
Income (loss) from continuing
operations per common
share - diluted* .15 .12 .07 (.30)
Net income (loss) per common
share - basic* .08 (.05) (.07) (.78)
Net income (loss) per common
share - diluted* .08 (.05) (.07) (.77)
1997
Revenue $ 32,514 $ 39,651 $ 42,649 $ 41,919
Operating income 1,144 2,061 1,938 2,664
Income from continuing
operations 548 1,088 2,138 1,403
Net income 326 824 1,723 1,256
Income from continuing
operations per common
share - basic* .07 .14 .28 .19
Income from continuing
operations per common
share - diluted* .07 .14 .27 .18
Net income per common
share - basic* .04 .11 .23 .17
Net income per common
share - diluted* .04 .11 .22 .16
* Restated for the May 1998 20% stock dividend.
** As discussed further in Management's Discussion and
Analysis, in the fourth quarter of 1998, the Company decided
to discontinue operations of its Telecommunications business.
Accordingly, the results of operations of this segment have
been excluded from revenue, operating income and income from
continuing operations in these schedules.
*** Fourth quarter 1998 operating income includes $4.3
million of pre-tax charges. See Management's Discussion and
Analysis of Financial Condition and Operating Results for
further discussion.
Management's Discussion and Analysis
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:
1998 1997 1996
Revenue:
Contract revenue 84.6% 82.4% 77.5%
Product sales 15.4 17.6 22.5
Total revenue 100.0 100.0 100.0
Cost of contract revenue* 91.1 88.7 90.8
Cost of goods* 78.7 75.0 69.9
Total cost of sales 89.2 86.3 86.1
Selling, engineering and
administrative expenses 9.4 8.7 10.6
Total operating costs 98.6 95.0 96.7
Operating income 1.4 5.0 3.3
Interest expense, net 0.9 0.1 0.4
Income from continuing operations
before provision for income taxes 0.5% 4.9% 2.9%
*These amounts represent a percentage of contract revenue and product
sales, respectively.
The following comments should be read in conjunction with the
foregoing table:
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Total revenues from continuing operations increased 16.3% to
$182,344,000 for the year ended December 31, 1998 compared with
$156,733,000 for the year ended December 31, 1997. Contract revenue
for the systems and service segment increased by 19.5% or
$25,201,000 in 1998 over 1997. Growth in the systems and services
segment was principally attributable to performance on two major
state contracts as well as broad based growth in the Company's
defense business. The Company is providing the State of Ohio's
Department of Health and Human Services with statewide computer
network infrastructure. DRC is providing similar infrastructure, as
well as software implementation services to the State of Colorado's
child protection and juvenile justice agencies. Much of the
Company's revenue relates to the development and operation of
computer-based management information and logistics support
systems, as well as other information technology services.
Product sales increased 1.5% or $410,000 in 1998 as compared
with 1997. In 1998, the Company achieved higher sales of
electroformed components to several customers, including the
Company's primary customer in the inkjet printer market, and
increased sales to a customer in the automotive industry. This
growth was substantially offset by reduced sales of encoders which
were adversely affected by the Asian financial and economic crisis
during 1998.
Cost of contract revenue as a percentage of contract revenue
increased to 91.1% in 1998 from 88.7% in 1997. In the fourth
quarter of 1998, after a thorough evaluation of program performance
and negotiations with the customer, the Company recorded a charge
of $2,600,000 that relates to an estimated overrun on a state
contract. Also included in the fourth quarter is a charge of
$1,700,000 to cover certain defense contract overruns and other
expenses. These charges are all reflected in the systems and
services segment.
Cost of goods as a percentage of product sales increased from
75.0% in 1997 to 78.7% in 1998. This increase is the result of an
increase in per unit depreciation expense of certain equipment,
costs related to the installation of new manufacturing software and
reductions in encoder sales, offset somewhat by higher sales of
electroformed components. During 1997, a large customer reduced its
estimated purchases from DRC. As a result of the reduction in this
estimate, beginning in the fourth quarter of 1997, management
increased the per unit depreciation of equipment used to
manufacture this product. The effect of this change was to increase
depreciation expense $1,163,000 in 1998 and $219,000 in 1997.
Included in cost of goods is $887,000 and $979,000 in 1998 and
1997, respectively, related to effort on the Company's VisualMagic
software development environment product.
At the end of 1998, the Company adopted a plan to sell the
telecommunications fraud control business unit as the result of
changes in the telecommunications marketplace that delayed near-
term sales goals and increased the Company's estimate of the
capital required to take advantage of this market. Accordingly,
results from the telecommunications business are shown as
discontinued operations and prior years have been restated to
conform to this presentation. The total loss from discontinued
operations includes operating losses incurred through the date on
which the discontinuance plan was adopted, estimated future
operating losses through September 1999, as well as other estimated
costs associated with the disposal of the business. Estimated
operating losses of $3,487,000 for the period subsequent to the
adoption of the exit plan through the anticipated date of sale are
included in the loss on disposal. The results of discontinued
operations do not reflect any interest expense or any allocation of
corporate management expense. Revenues of the telecommunications
business were $2,775,000, $2,644,000 and $166,000 for the years
ended December 31, 1998, 1997 and December 28, 1996, respectively.
Net operating losses of the telecommunications business were
$5,879,000, $1,562,000 and $938,000 for the years ended December
31, 1998, 1997 and December 28, 1996, respectively. These amounts
are not included in sales or operating income as reported in the
Consolidated Statements of Income.
Selling, engineering and administrative expenses increased by
26.3% or $3,580,000 in 1998 from 1997. This increase is the result
of a number of factors. The increase in revenues generated overall
growth in corporate, accounting and financial salaries, wages and
expenses to support the resultant increase in transaction
processing. During 1998, and to a lesser extent in 1997, the
Company realized an increase in consulting expenses and temporary
labor related to accounting system changes. During 1998, the
systems and services segment expended a significant amount of
effort on developing a new software product for sale to the U.S.
Air Force and other defense contractors. Included in selling,
engineering and administrative expenses is $972,000 and $1,029,000
in 1998 and 1997, respectively, related to the VisualMagic selling
effort.
In the fourth quarter of 1998, the Company entered into an
agreement with Empresa, Inc. (Empresa), formerly Electronic Press
Services Group, Inc., to acquire an interest in Empresa in exchange
for a perpetual license to VisualMagic, cash and the assets of the
business. The terms of the agreement provide for the Company to
make three cash investments: one at the closing December 23, 1998,
the second in February 1999 and the last in May 1999.
Interest expense, net, increased to $1,612,000 in 1998 from
$108,000 in 1997 as a result of the Company's higher average
borrowing in 1998. Interest expense in 1997 benefited from an
interest credit of $740,000 related to a refund of federal taxes.
Substantial revenue growth and delays in billing certain state
customers in 1998 were the principal factors requiring higher
working capital that was funded with additional borrowing. Capital
expenditures in 1998 of $3,171,000 consist mainly of spending on
information technology equipment, office facilities and
manufacturing equipment.
The provision for income taxes was 42.0% of income from
continuing operations before taxes in 1998, compared to 32.8% in
1997. The Company's 1997 tax provision reflects a one-time benefit
of $747,000 resulting from a refund of income taxes relating to
prior years' research and development expenses.
The Company's backlog of unfilled orders at the end of 1998
decreased 4.2% to $105,427,000 compared to $110,001,000 at the end
of 1997. The 1997 balance included a $28,300,000 state contract
award with a 2 1/2 year period of performance. 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.
Year Ended December 31, 1997 Compared to Year Ended December 28,1996
Total revenues from continuing operations increased 20.6% to
$156,733,000 for the year ended December 31, 1997 compared to
$129,997,000 for the year ended December 28, 1996. Approximately
60% of the increase in the systems and services segment contract
revenue is attributable to the major contracts with the states of
Ohio and Colorado, discussed above. The remainder of the increase
was broad-based with growth contributions from additional work
received under the Company's long running core 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.
Product sales decreased 5.8% to $27,598,000 for the year
ended December 31, 1997 compared to $29,285,000 for the year ended
December 28, 1996. The decrease is principally the result of
decreased sales of electroformed components, partially offset by
increased sales of custom encoders.
Cost of contract revenue as a percentage of contract revenue
decreased to 88.7% in 1997 from 90.8% in 1996. In the fourth
quarter of 1996, the Company incurred a pre-tax charge of
$1,800,000 for unrecoverable costs associated with an Air Force
contract.
Cost of goods as a percentage of product sales increased from
69.9% in 1996 to 75.0% in 1997. The decreased gross margin
percentage is primarily the result of lower sales of electroformed
components. Included in cost of goods is $979,000 and $2,095,000 in
1997 and 1996, respectively, related to effort on the Company's
VisualMagic software development environment product.
Selling, engineering and administrative expenses as a
percentage of revenues decreased from 10.6% in 1996 to 8.7% in
1997, reflecting a minimal decrease in overall expenditures while
revenues grew 20.6%. Included in selling, engineering and
administrative expenses is $1,029,000 and $0 in 1997 and 1996,
respectively, related to the VisualMagic selling effort.
Interest expense, net, decreased 80.3% to $108,000 in 1997
from $547,000 in 1996. Included in 1997 net interest expense is
interest income of $740,000 related to an income tax credit
received during the year, partially offset by increased interest
expense resulting from an increase in the Company's average
borrowing level. Capital expenditures decreased to $5,104,000 in
1997 compared to $9,266,000 in 1996. Included in 1996 capital
expenditures are approximately $4,900,000 to increase
electroforming manufacturing capacity. In January 1996, the Company
acquired the local operations of a defense services business for
$2,000,000.
The Company's effective tax rate for 1997 was 32.8% compared
to 38.2% for 1996. As discussed previously, the Company's 1997 tax
provision reflects a one-time benefit of $747,000 resulting from a
refund of income taxes related to prior years' research and
development credits.
The Company's backlog at the end of 1997 was $110,001,000
compared with $73,200,000 at the end of 1996 reflecting the
December 1997 award of a $28,300,000 contract with the State of
Colorado.
Liquidity and Capital Resources
During 1998, the Company's primary source of liquidity has been its
revolving credit facility. Working capital requirements, primarily
related to the substantial increase in sales and delays in billing
certain government customers, have been funded with additional
borrowings under the Company's credit facility. Working capital
increased to $39,223,000 at December 31, 1998 from $27,394,000 at
December 31, 1997. This increase was primarily attributable to
increases in receivables. Debt increased $16,800,000 to $26,800,000
to support the increase in working capital. The Company spent
$2,272,000 during 1998 for the purchase of treasury shares compared
with $768,000 during 1997.
At December 31, 1998, $13,200,000 was available for working
capital purposes under the Company's revolving credit facility.
The Company believes that its current assets, cash flow from
operations and available bank lines of credit will be sufficient to
support its normal operating and capital requirements for 1999. The
Company did not have any significant capital commitments at
December 31, 1998 outside the ordinary course of business.
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 59% of the Company's revenues in 1998,
are generally for one year and include salary increase factors for
future years, thus reducing the potential impact of inflation on
the Company.
Year 2000 Disclosure
Many existing computer programs use only two digits, rather than
four, to represent a year. Date-sensitive software or hardware
written or developed in this fashion may not be able to distinguish
between 1900 and 2000, and programs written in this manner that
perform arithmetic operations, comparisons or sorting of date
fields may yield incorrect results when processing a Year 2000
date. This Year 2000 problem could potentially cause system
failures or miscalculations that could disrupt operations.
The Company's State of Readiness
The Company is in the process of identifying and remediating Year
2000 issues in four areas: (i) information technology ("IT") and
financial systems, (ii) non-IT systems, (iii) third-party vendors
and suppliers and (iv) systems it has implemented and maintains for
various customers. The Company believes its IT and non-IT systems
will be Year 2000 compliant by the end of 1999.
The Company has completed a review of its financial and other
significant IT systems and is in the process of remediating
identified material Year 2000 problems. The primary required
hardware and operating system platform upgrade was completed in
February 1999. Necessary application upgrades or remediation and
testing are expected to be completed by mid-1999. The Company also
conducted a review of all its other computers earlier in 1998
(including desktops, servers and mainframes) and has addressed all
material Year 2000 problems. The Company's computer and equipment
vendors have been contacted to verify Year 2000 compliance. Based
on their responses, products requiring replacement or upgrade are
expected to be Year 2000 compliant by mid-1999. In the case of
third party licensed commercial off-the-shelf products, the Company
has determined that they are either Year 2000 compliant or the
licensor has released a compliant version that the Company will
migrate to by mid-1999. While the Company expects that all
financial and significant IT-related systems will be Year 2000
compliant by mid-1999, there can be no assurance that corrective
actions will be completed in a timely manner.
The Company has completed a full review of all process
control components, including safety equipment, in manufacturing
and production facilities. Currently, the Company is in the process
of upgrading or replacing certain components of the phone,
security, building access, HVAC and lighting systems, which is
expected to be completed by mid-1999. The Company anticipates that
all other process control components will be Year 2000 compliant by
mid-1999. However, there can be no assurance that such upgrades and
replacements will occur in a timely manner.
The Company requested Year 2000 compliance information from
its employee benefit service suppliers and received responses from
all suppliers in early 1999. The Company is currently aware of one
supplier that has a Year 2000 compliance issue and is working
toward a resolution of such issue by mid-1999. The Company is also
in the process of developing Year 2000 questionnaires to be sent to
its major power, energy and communications service suppliers
beginning in early 1999. The Company expects to have addressed all
Year 2000 issues with third party suppliers by mid-year 1999. The
Company has contacted its suppliers of financial services regarding
computer interface changes and has requested the status of their
Year 2000 programs, if this information is not readily available on
their web-sites. Any necessary interface upgrades are expected to
be completed by mid-1999, although the completion of such upgrades
in a timely manner depends upon the readiness and willingness of
suppliers to cooperate and provide this information in a timely
manner, and cannot be assured. However, the Company intends to
identify and prioritize critical suppliers and communicate with
them regarding their plans and progress in addressing Year 2000
issues.
The Company is in the process of completing its Year 2000
remediation, validation testing and implementation activities for
systems it had previously implemented and has continued to maintain
for various customers. This process was completed and tested in
early 1999. The Company previously developed and marketed
commercial off-the-shelf products which are currently Year 2000
compliant.
The Company's Year 2000 Risk
Based on the efforts described above, the Company currently
believes that its systems will be Year 2000 compliant in a timely
manner. The Company has completed the process of identifying Year
2000 issues in its IT and non-IT systems and expects to complete
any remediation efforts by mid-1999. However, there can be no
assurance that all Year 2000 problems will be successfully
identified, or that the necessary corrective actions will be
completed in a timely manner. Failure to successfully identify and
remediate Year 2000 problems in critical systems in a timely manner
could have a material adverse effect on the Company's results of
operations, financial position or cash flow.
In addition, the Company believes that there is risk relating
to significant service suppliers' failure to remediate their Year
2000 issues in a timely manner. Although the Company is
communicating with its suppliers regarding the Year 2000 problem,
the Company does not know whether these suppliers' systems will be
Year 2000 compliant in a timely manner. If one or more significant
suppliers are not Year 2000 compliant, this could have a material
adverse effect on the Company's results of operations, financial
position or cash flow.
The Company's Contingency Plans
The Company intends by mid-year 1999 to develop contingency plans
to be implemented in the event planned solutions prove ineffective
in solving Year 2000 compliance. If it were to become necessary for
the Company to implement a contingency plan, it is uncertain
whether such plan would succeed in avoiding a Year 2000 issue which
may otherwise have a material adverse effect on the Company's
results of operations, financial position or cash flow.
The Company's Costs of Year 2000 Remediation
The Company anticipates the total identified cost of its Year 2000
effort will be between $380,000 and $475,000, of which it has
expensed approximately $148,000 as of December 31, 1998. The
estimate excludes labor costs which predated the formal corporate
Year 2000 effort and certain current labor costs at the divisional
level which would be difficult to track. The total cost estimate
includes estimated and actual amounts to remediate or replace
certain software, routers, security chips, the phone system and any
other items or systems identified in the Year 2000 effort,
consulting fees for a Year 2000 review, and approximately $200,000
of redeployed labor expense. The total estimated cost of redeployed
labor within the corporate information systems department is equal
to approximately 9% of that department's total maintenance labor
budget through the end of the Year 2000 effort. There can be no
assurance that the costs associated with the Year 2000 problem will
not be greater than anticipated. The Company has deferred a
financial and project accounting system upgrade due to its Year
2000 efforts, but does not believe such deferral will have a
material adverse effect on the Company's business.
Forward-Looking Information
This report includes certain forward-looking statements about the
Company's business including the effect of the federal budget on
the Company's sales, response to the Company's product and services
offerings, growth in revenues, expected performance under certain
contracts, 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, 1998,
include possible reductions in federal and state 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 obtaining of new
contracts, high levels of competition and difficulties of entering
new markets, government contracting issues including audit
adjustments and costs of completing fixed price contracts, supply
difficulties, warranty claims, and factors affecting the business
segments in which the Company operates and the economy generally.
Consolidated Balance Sheets
At December 31, l998, December 31, 1997 and December 28, 1996
1998 1997 1996
(in thousands of dollars,
except share data)
Assets
Current assets:
Cash and cash equivalents $ 97 $ 542 $ 234
Receivables, less allowances
of $316, $217 and $340 33,016 17,100 19,436
Unbilled expenditures and fees
on contracts in process 32,169 32,297 22,690
Inventories 2,647 3,377 3,211
Refundable income taxes 9 878 1,436
Prepaid expenses and
other current assets 958 1,657 1,236
Total current assets 68,896 55,851 48,243
Property, plant and equipment, at cost:
Land 1,126 1,126 1,126
Building 7,774 7,774 7,774
Machinery and equipment 39,790 37,933 38,703
Leasehold improvements 2,481 2,296 2,109
Total property, plant and
equipment, at cost 51,171 49,129 49,712
Less-accumulated depreciation
and amortization 32,742 27,945 28,249
Net property, plant and equipment 18,429 21,184 21,463
Other non-current assets 742 594 1,244
Total assets $ 88,067 $ 77,629 $ 70,950
Liabilities and Shareholders' Investment
Current liabilities:
Notes payable $ - $ - $ 10,600
Accounts and drafts payable 10,300 8,355 8,925
Accrued payroll and employee benefits 7,782 7,981 6,991
Other accrued expenses 2,630 4,251 894
Current deferred income taxes 7,189 9,048 6,091
Net liabilities (assets) of
discontinued operations 1,772 (1,178) (139)
Current portion of long-term debt - - 1,201
Total current liabilities 29,673 28,457 34,563
Long-term debt, less current portion 26,800 10,000 300
Deferred income taxes 348 25 848
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 - 30,000,000 shares Issued -
8,733,016 shares at December 31, 1998,
7,366,484 shares at December 31, 1997
and 6,689,767 shares at
December 28, 1996 873 737 669
Less: Treasury stock - 1,363,826 shares
at December 31, 1998, 1,077,612 shares
at December 31, 1997 and 996,108 shares
at December 28, 1996, at par value (136) (108) (100)
Capital in excess of par value 27,474 14,506 9,516
Retained earnings 3,035 24,012 25,154
Total shareholders' investment 31,246 39,147 35,239
Total liabilities and shareholders'
investment $ 88,067 $ 77,629 $ 70,950
The accompanying notes are an integral part of these consolidated
financial statements.
Consolidated Statements of Operations
For the three years
ended December 31, 1998 1998 1997 1996
(in thousands of dollars, except
per share and share data)
Revenue:
Contract revenue $154,336 $129,135 $100,712
Product sales 28,008 27,598 29,285
Total revenue 182,344 156,733 129,997
Costs and expenses:
Cost of contract revenue 140,653 114,603 91,408
Cost of goods 22,029 20,700 20,476
Selling, engineering and
administrative expenses 17,203 13,623 13,830
Total operating costs and expenses 179,885 148,926 125,714
Operating income 2,459 7,807 4,283
Interest expense, net 1,612 108 547
Income from continuing
operations before provision
for income taxes 847 7,699 3,736
Provision for income taxes 356 2,522 1,425
Income from continuing operations 491 5,177 2,311
Loss from discontinued operations,
net of applicable tax benefit of
$1,989, $514 and $356 in 1998,
1997 and 1996, respectively (3,890) (1,048) (582)
Loss on disposal of
discontinued operations, net of
applicable benefit for income
taxes of $1,576 in 1998 (2,572) - -
Loss from discontinued operations (6,462) (1,048) (582)
Net income (loss) $ (5,971) $ 4,129 $ 1,729
Per share data
Per common share - basic
Income from continuing operations* $ .07 $ .69 $ .31
Net income (loss)* $ (.80) $ .55 $ .23
Per common share - diluted
Income from continuing operations* $ .06 $ .66 $ .30
Net income (loss)* $ (.77) $ .53 $ .22
Weighted average shares
Basic* 7,501,604 7,530,546 7,491,804
Diluted* 7,771,315 7,807,216 7,760,209
* Restated for the May 1998 20% stock dividend.
The accompanying notes are an integral part of these consolidated
financial statements.
Consolidated Statements of Shareholders' Investment
For the three years ended December 31, 1998
Common Stock Capital in
Issued Treasury Stock Excess of Retained
Shares Par Value Shares Par Value Par Value Earnings
(in thousands)
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
acquired - - (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
Year 1998
Stock options
exercised 103 10 - - 581 -
Treasury stock
acquired - - (286) (28) (2,489) -
20 % Stock
dividend 1,264 126 - - 14,876 (15,006)
Net loss - - - - - (5,971)
Balance at
December 31,
1998 8,733 $ 873 (1,364) $ (136) $ 27,474 $ 3,035
The accompanying notes are an integral part of these consolidated
financial statements.
Consolidated Statements of Cash Flows
For the three years ended
December 31, 1998 1998 1997 1996
(in thousands of dollars)
Cash provided by operations:
Net (loss) income $ (5,971) $ 4,129 $ 1,729
Adjustments to reconcile
net income to cash provided by
operating activities:
Loss from discontinued operations 6,462 1,048 582
Depreciation and amortization 6,219 5,240 4,910
Increase (decrease) in deferred
income taxes 323 (823) (128)
Provision for receivable reserves 99 (123) (62)
7,132 9,471 7,031
Cash provided by (used for)
working capital:
Receivables (16,015) 2,459 (3,279)
Unbilled expenditures and fees
on contracts in process 128 (9,607) (6,307)
Inventories 730 (166) (599)
Refundable income taxes 869 558 (1,150)
Prepaid expenses and other
current assets 699 (421) 48
Accounts and drafts payable 1,945 (570) 5,375
Accrued payroll and employee benefits (199) 990 575
Other accrued expenses (1,621) 3,357 (1,780)
Current deferred income taxes (1,859) 2,957 1,684
(15,323) (443) (5,433)
Net cash (used for) provided by
continuing operations (8,191) 9,028 1,598
Net cash used for discontinued
operations (3,215) (1,048) (563)
Cash (used for) provided by
operating activities (11,406) 7,980 1,035
Cash used for investing activities:
Additions to property and equipment
related to continuing operations, net (2,874) (4,065) (9,108)
Additions to property and equipment
related to discontinued operations, net (297) (1,039) (158)
Investments and acquisitions (742) (250) (2,000)
Net cash used for investing activities (3,913) (5,354) (11,266)
Cash provided by (used for)
financing activities:
Net borrowings (repayments) under line
of credit agreements 16,800 (10,600) 10,600
Principal payment under
long-term borrowings - 8,499 (1,216)
Proceeds from exercise of stock options 346 551 304
Purchase of treasury shares (2,272) (768) -
Net cash provided by (used for)
financing activities 14,874 (2,318) 9,688
Net increase (decrease) in cash
and cash equivalents (445) 308 (543)
Cash and cash equivalents at the
beginning of the year 542 234 777
Cash and cash equivalents at the
end of the year $ 97 $ 542 $ 234
Supplemental disclosures of cash flow information and non-cash items:
Cash paid during the year for:
Interest $ 1,640 $ 792 $ 635
Income taxes $ 150 $ 430 $ 1,237
Cashless option exercise $ 245 $ - $ -
The accompanying notes are an integral part of these consolidated
financial statements.
Notes to Consolidated Financial Statements
1. Nature of the Business and Summary of Significant Accounting Policies
Nature of the Business
Founded in 1955, Dynamics Research Corporation ("the Company" or
"DRC") develops and operates computer and communications-
intensive information systems, provides engineering, management
support and information technology services, and produces precision
manufactured components for industrial measurement and control.
Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of Dynamics Research Corporation and its wholly-owned
subsidiaries. All material intercompany transactions and balances
have been eliminated in consolidation.
Revenue Recognition and Unbilled Expenditures and Fees on Contracts in Process
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. Unbilled expenditures and fees on contracts
in process represent the recoverable amounts of contract revenue
under contracts in process which were not billable at the balance
sheet date. Such amounts generally become billable upon completion
of a specific phase of the contract, negotiation of contract
modifications, completion of government audit or upon acceptance by
the government. Unbilled expenditures and fees on contracts in
process with the U.S. Government at December 31, 1998 were
$18,230,000 compared to $26,083,000 at December 31, 1997, and
$16,904,000 at December 28, 1996. Unbilled expenditures and fees on
contracts in process with state governments were $12,833,000,
$2,839,000 and $469,000 at December 31, 1998 and 1997 and December
28, 1996, respectively. Costs related to certain contracts,
including applicable indirect costs, 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. Overhead and
general and administrative costs charged to U.S. Government
contracts are subject to audit for years after 1996.
Revenue from sales of precision products is recorded at the
time the goods are shipped or when title passes.
Income Taxes
The Company accounts for income taxes using the liability method as
set forth in Statement of Financial Accounting Standards No. 109
(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 the deferred tax asset/liability
balance.
Cash and Cash Equivalents
The Company considers all cash investments with original maturities
of three months or less to be cash equivalents.
U.S. Government Contracts
The approximate number of U.S. Government contracts has varied
between 100 and 150 during the past five years, with 101 contracts
open at December 31, 1998. Receivables under U.S. Government
contracts at December 31, 1998 were $18,508,000 compared to
$8,808,000 at December 31, 1997, and $14,363,000 at December 28,
1996.
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.
1998 1997 1996
(in thousands of dollars)
Work in process $ 475 $ 1,364 $ 1,411
Raw materials and
subassemblies 2,172 2,013 1,800
Total $ 2,647 $ 3,377 $ 3,211
Property, Plant & 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 their estimated useful lives using
principally the straight-line method for plant and equipment.
Certain manufacturing equipment is depreciated under a units of
production method. Late in 1997, based on a reduced estimate of
future purchases by certain customers, management increased the per
unit depreciation charge accordingly. The result of this change in
estimate was to increase depreciation expense by approximately
$1,163,000 during 1998. The effect upon 1997 depreciation expense
was to increase depreciation expense $219,000. Leasehold
improvements are amortized over the remaining term of the lease or
the life of the related asset, whichever is shorter.
Fair Value of Financial Instruments
SFAS No. 107, "Disclosure About Fair Value of Financial
Instruments," requires certain disclosures regarding the fair
value of financial instruments. Cash and cash equivalents, accounts
receivable, unbilled expenditures and fees on contracts in process,
accounts payable and accrued liabilities are reflected in the
consolidated financial statements at fair value because of the
short-term maturity of these instruments. The fair value of long-
term debt approximates carrying value as the debt bears interest at
a variable market rate.
New Accounting Pronouncements
The Company adopted SFAS No. 130, "Reporting Comprehensive
Income," in the first quarter of 1998. SFAS No. 130 requires the
reporting and presentation of comprehensive income. The adoption of
SFAS No. 130 did not have a material effect on the Company's
financial statements.
DRC adopted SFAS No. 132, "Employers' Disclosures about Pensions
and Other Postretirement Benefits" during 1998. Note 4, Employee
Benefit Plans, includes the disclosures required under
SFAS No. 132.
Reclassifications
Certain prior period amounts have been reclassified to conform to
the current year presentation.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates 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
The Company accounts for its stock-based compensation plans under
Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees." SFAS No. 123, "Accounting for Stock-Based
Compensation" establishes a fair value based method of accounting
for stock-based compensation plans. The Company adopted the
disclosure alternative under SFAS No. 123, which requires the
presentation of the pro forma effects on earnings and earnings per
share as if SFAS No. 123 had been adopted, as well as the
disclosure of certain other information. See Note 6, Stock Option
Plans, for required disclosures.
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 exercise
of stock options using the treasury stock method.
Year Ended December 1998 1997 1996
(in thousands of dollars,
except per share data)
Income from continuing operations $ 491 $ 5,177 $ 2,311
Net (loss) Income (5,971) 4,129 1,729
Weighted-average shares* 7,502 7,531 7,492
Dilutive effect of options* 269 276 268
Adjusted weighted-average shares 7,771 7,807 7,760
Income from continuing operations
per share - basic* $ .07 $ .69 $ .31
Net (loss) income per share - basic* $ (.80) $ .55 $ .23
Income from continuing operations
per share - diluted* $ .06 $ .66 $ .30
Net (loss) income per share - diluted* $ (.77) $ .53 $ .22
*Restated for the May 1998 20% stock dividend.
2. Discontinued Operations
Since 1996, the Company has been licensed to enhance, market and
maintain a telecommunications fraud control system developed by
Pacific Bell Telephone Company. DRC has made significant
investments in this and related systems and software technologies
to broaden the types of telephone fraud detected and to position
the product for sale to competitive local exchange carriers and
others. The Company's customers include the regional Bell operating
telephone companies. A number of recent changes in the
telecommunications marketplace have delayed near-term sales goals
and increased the estimated capital required to take advantage of
this expanding market. After careful analysis, management proposed
to the Board of Directors that the Company exit the
Telecommunications business. In December 1998, with the Board's
approval, the Company adopted an overall plan of disposal. The plan
of disposal includes estimated operating losses through September
1999, and proceeds from the sale of the business. Accordingly,
results from the Telecommunications business are shown as
discontinued operations and prior years are restated to conform to
this presentation. Estimated operating losses of $3,487,000 for the
period subsequent to the adoption of the exit plan through the
anticipated date of sale are included in the loss on disposal. The
results of discontinued operations do not reflect any interest
expense or any allocation of corporate management expense. Revenues
of the Telecommunications business were $2,775,000, $2,644,000 and
$166,000 for the years ended December 31, 1998, 1997 and December
28, 1996, respectively. Net operating losses of the
Telecommunications business were $5,879,000, $1,562,000 and
$938,000 for the years ended December 31, 1998, 1997 and December
28, 1996, respectively. The consolidated financial statements of
DRC have been restated to reflect the discontinuation of the
Telecommunications business. Accordingly, the revenues, costs and
expenses, assets and liabilities and cash flows of the
Telecommunications business have been excluded from the respective
captions in the Consolidated Statements of Operations, Consolidated
Balance Sheets and Consolidated Statements of Cash Flows, and have
been reported as "Loss from discontinued operations," net of
applicable income taxes; as "Net liabilities (assets) of
discontinued operations," and as "Net cash used for discontinued
operations" for all periods presented.
3. Income Taxes
The components of the provisions (benefit) for federal and state
income taxes are as follows:
1998 1997 1996
(in thousands of dollars)
Currently payable (refundable)
Federal $ 1,301 $ (747) $ (189)
State 402 - (101)
Total 1,703 (747) (290)
Deferred
Federal (1,073) 2,881 1,286
State (274) 388 429
Total (1,347) 3,269 1,715
Total provision $ 356 $ 2,522 $ 1,425
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:
1998 1997 1996
(in thousands of dollars)
Provision on income from continuing
operations at statutory rate $ 288 $ 2,618 $ 1,270
State income tax, net of
federal tax benefit 50 457 222
Tax credit refund - (747) -
Other, net 18 194 (67)
Provision for income taxes $ 356 $ 2,522 $ 1,425
The tax effects of significant temporary differences that
comprise the deferred tax assets and liabilities as of December 31,
1998 and 1997 and December 28, 1996 are as follows:
1998 1997 1996
(in thousands of dollars)
Unbilled costs and fees and
deferred contract revenue, net $ (10,279) $ (11,123) $ (8,730)
Accrued expenses 2,422 1,961 2,044
Receivable reserves 127 88 130
Inventory reserves 608 16 239
Other (67) 10 226
Current deferred tax liabilities, net (7,189) (9,048) (6,091)
Accelerated tax depreciation (319) 54 (279)
State net operating loss carryforwards 392 213 -
Other (421) (292) (569)
Non-current deferred tax liabilities (348) (25) (848)
Total deferred tax liabilities, net $ (7,537) $ (9,073) $ (6,939)
Total deferred tax assets and total deferred tax liabilities
were $6,592,000 and $14,129,000, respectively at December 31, 1998
compared with $4,934,000 and $14,007,000, and $2,639,000 and
$9,578,000 respectively at December 31, 1997 and December 28, 1996.
4. 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
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 periodic pension cost included the following components:
1998 1997 1996
(in thousands of dollars)
Service cost - benefits earned during
the period $ 1,933 $ 1,555 $ 1,380
Interest cost on projected
benefit obligation 2,499 2,235 2,031
Expected return on plan assets (2,723) (2,304) (2,079)
Amortization of prior service cost 220 220 220
Amortization of transition obligation 35 35 35
Net periodic pension cost $ 1,964 $ 1,741 $ 1,587
The following table sets forth the changes in the plan's funded status and
the amounts recognized in the Company's consolidated balance sheet at
December 31, 1998 and 1997 and December 28, 1996:
1998 1997 1996
(in thousands of dollars)
Actuarial present value of benefit obligations:
Accumulated benefit obligations $ 35,461 $ 30,226 $ 27,098
Projected benefit obligations
at beginning of year $ 35,693 $ 30,832 $ 28,013
Service cost-benefits earned
during the period 1,933 1,555 1,380
Interest cost on projected
benefit obligation 2,499 2,235 2,031
Benefits paid (934) (760) (642)
Actuarial loss 2,881 1,831 50
Projected benefit obligations
at end of year 42,072 35,693 30,832
Fair value of plan assets at
beginning of year 30,256 25,609 23,104
Actual return on plan assets 2,998 3,486 1,599
Employer contributions 2,276 1,921 1,548
Benefits paid (934) (760) (642)
Fair value of plan assets
at end of year 34,596 30,256 25,609
Plan assets less than projected
benefit obligation 7,476 5,437 5,223
Unrecognized net transition asset (105) (140) (175)
Unrecognized prior service costs (1,479) (1,699) (1,919)
Unrecognized net actuarial loss (3,983) (1,377) (727)
Accrued pension liability 1,909 2,221 2,402
Weighted average assumptions:
Discount rate 6.5% 7.0% 7.3%
Rate of compensation increase 4.0% 4.0% 3.5%
Expected rate of return on assets 9.0% 9.0% 9.0%
Plan assets consist primarily of equity and fixed income
securities. Fluctuations in the fair market value of plan assets
will affect pension expense in future years.
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.
Expense related to this plan was $0 and $203,000 for the years
ended December 31, 1998 and 1997, respectively.
The Company 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 $882,481 to the plan for 1998, $719,099 for 1997 and
$634,462 for 1996. 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.
5. Lines of Credit and Long-Term Debt
Long-term debt at December 31, 1998 and 1997 and December 28, 1996
consists of the following:
1998 1997 1996
(in thousands of dollars)
Long-term credit facility $ 26,800 $ 10,000 $ -
Mortgage note payable - - 1,500
Other - - 1
Less - current portion - - (1,201)
$ 26,800 $ 10,000 $ 300
The Company amended its existing long-term credit agreement
with a syndicate of banks and financial institutions during 1998.
The amended agreement provides an unsecured working capital loan of
up to $40 million. The agreement expires in October 2000 and is
renewable annually. Interest on outstanding balances is at the
prime rate plus an applicable margin or, at the Company's option,
LIBOR rate plus an applicable margin based upon the Company's debt
coverage ratio. A fee of 0.375% is assessed upon any unused portion
of the credit line. The agreement subjects the Company to various
financial covenants, including maintaining a minimum tangible net
worth as well as cash flow and debt coverage ratios.
The mortgage note payable to a bank was secured by certain
land and buildings and was paid in full in May 1997. The mortgage
bore interest at LIBOR plus 1%, adjusted quarterly, and was due in
quarterly payments of $300,000.
The Company had unsecured lines of credit at December 28,
1996, with various banks that provided for maximum borrowings of
$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 31, 1998 and 1997 and December 28, 1996 was 8.0%, 6.4%
and 6.3%, respectively.
6. Stock Option Plans
The Compensation Committee of the Board of Directors administers
the Company's stock option plans and determines the employees who
will receive options as well as the number and exercise price of
each such option.
The 1993 Equity Incentive Plan permits the Company to grant
stock options, stock appreciation rights, 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, which terminated in 1993. Options granted under
both plans may be either incentive stock options or non-qualified
stock options. The option price may not be less than the fair
market value at the date of grant in the case of incentive stock
options, and the option period may not exceed 10 years from the
date of grant. Options granted under the plans are generally
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 exercise
price of such options is equal to 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
132,000 shares has been reserved for issuance of which 89,040
shares remained available at December 31, 1998.
Transactions involving the plans are summarized as follows:*
1998 1997 1996
Weighted Weighted Weighted
Number Average Number Average Number Average
of shares Price of shares Price of shares Price
Outstanding at
beginning of year 687,163 $ 4.93 746,841 $ 4.53 659,348 $ 3.93
Granted 99,800 8.66 71,220 7.54 183,480 6.04
Exercised (118,413) 3.69 (130,898) 4.14 (93,571) 3.23
Canceled (40,920) 7.78 - - (2,416) 4.39
Outstanding at
end of year 627,630 $ 5.32 687,163 $ 4.93 746,841 $ 4.53
Exercisable at
end of year 441,190 415,744 401,002
*Restated for the May 1998 20% stock dividend.
Under the 1993 Plan, 1,200,000 shares have been reserved, of which
654,820 shares were available for future grants at December 31,
l998.
The Company has computed the pro forma disclosures required
under SFAS No. 123 for options granted subsequent to December 31,
1994 using the Black-Scholes option pricing model prescribed by
SFAS No. 123.
Assumptions used in Black-Scholes option pricing model:
1998 1997 1996
Risk free interest rate 6% 6% 6%
Expected option life 8.8 years 9.2 years 9.5 years
Stock volatility 71.01% 69.70% 71.00%
Options to purchase 99,800 shares were granted in 1998 with a
weighted average fair value of $6.75 and options to purchase 71,220
shares were granted in 1997 with a weighted average fair value of
$5.92. Options to purchase 183,480 shares were granted in 1996 with
a weighted average fair value of $4.71.
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 (loss) income and
net (loss) income per share would have been reduced to the
following pro forma amounts:
1998 1997 1996
(in thousands of dollars, except per share data)
Income (loss) from continuing
operations
As reported $ 491 $ 5,177 $ 2,311
Pro forma (222) 4,522 1,893
Income (loss) from continuing
operations per share - basic
As reported* .07 .69 .31
Pro forma* (.03) .60 .25
Income (loss) from continuing
operations per share - diluted
As reported* .06 .66 .30
Pro forma* (.03) .56 .24
Net (loss) income
As reported (5,971) 4,129 1,729
Pro forma (6,684) 3,474 1,311
Net (loss) income per share - basic
As reported* (.80) .55 .23
Pro forma* (.89) .46 .18
Net (loss) income per share - diluted
As reported* (.77) .53 .22
Pro forma* (.84) .43 .16
* Restated for the May 1998 20% stock dividend.
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.
7. Commitments and Contingencies
The Company conducts certain of its operations in facilities which
are under long-term operating leases expiring at various dates
through 2004, with various options to renew through 2005. It is
expected that in the normal course of business, leases that expire
will be renewed or replaced. Rent expense under these leases
(exclusive of real estate taxes, and insurance) was approximately
$3,589,000 in 1998, $2,524,000 in 1997, and $2,130,000 in 1996. The
aggregate minimum lease commitment for the Company's facilities on
December 31, 1998 was $9,964,000, payable as follows: $3,445,000 in
1999, $2,719,000 in 2000, $1,508,000 in 2001, $1,207,000 in 2002,
$848,000 in 2003 and $237,000 in 2004.
8. Preferred Stock Purchase Rights
During 1998, the Company renewed its Shareholder Rights Plan, which
expired July 27, 1998. Pursuant to this renewal, on February 17,
1998, the Company declared a dividend distribution of one preferred
stock purchase right (Right) for every outstanding share of common
stock, effective July 27, 1998. The Rights attach to all
outstanding shares of common stock, and no separate Rights
certificates will be issued. The Rights will become exercisable
upon the tenth business day following the earlier of (i) the date
of a public announcement that a person or 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 of the Company, or (ii) the commencement or
announcement of an intention to make a tender offer or exchange
offer that would result in a person or group owning 15% or more of
the outstanding common stock of the Company.
When exercisable, each Right entitles the registered holder
to purchase from the Company one twelfth of a share of its Series B
Participating Preferred Stock, $.10 par value, at a price of $54.17
per each one twelfth 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. Under certain circumstances, each
share of the Series B Participating Preferred Stock would be
convertible into a number of shares of the Company's common stock
having a value equal to twice the exercise price of the preferred
stock purchase right. The Rights may be redeemed by the Company at
the discretion of the Board of Directors, at a price of $.0083 per
Right. The Rights expire on July 27, 2008. The terms of the current
Shareholder Rights Plan are substantially the same as those of the
former plan, with the exception that under the former plan, a right
entitled the registered holder to acquire one-tenth of a share of
Series A Participating Preferred Stock, $.10 par value, at a price
of $40.00 per each one-tenth share.
9. 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 made additional payments of $250,000 to
SSAI based upon the achievement of certain thresholds as provided
in the acquisition agreement. The acquisition was accounted for as
a purchase. The excess of the purchase price over the fair market
value of the net assets acquired was amortized over 30 months, and
was fully amortized at December 31, 1998.
10. Business Segments
The Company adopted SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," during the fourth quarter
of 1998. SFAS No. 131 establishes standards for reporting
information about operating segments in annual financial statements
and requires selected information about operating segments in
interim financial reports issued to stockholders. It also
establishes standards for related disclosure about products and
services, and geographic areas. The Company has five reportable
segments: Systems and Services, Metrigraphics, Encoder, Visual
Magic and Telecommunications. Each of the segments represents a
separate product line, has different customer requirements and
production processes and they operate in different industries. The
Systems and Services segment is the aggregation of two divisions
that provide similar services to the Department of Defense and
operate in the same regulatory environment.
The segments follow the same accounting policies described in
Note 1, Summary of Significant Accounting Policies. Certain general
and administrative expenses, including provisions for doubtful
accounts and legal expenses, are recorded as corporate expenses
when recognized and are only included in segment profit or loss
when amounts are written off or paid. The Company evaluates
performance based upon profit or loss before interest and taxes.
Intersegment sales represent less than 1% of total revenues and are
accounted for at cost. Revenues are attributed to geographic areas
based upon the customer's location. The Company does not have
locations outside the United States, but does contract with sales
representatives located in foreign countries and DRC employees and
subcontractors provide services at customer locations outside the
U.S. Domestic revenues represent 91.1%, 91.1% and 98.8% of revenue
from continuing operations in 1998, 1997 and 1996, respectively.
Systems and Services
The Systems and Services segment provides specialized technical
services to the Department of Defense, federal agencies, state
governments and other customers and produced approximately 83% of
total Company revenues in 1998. These services include engineering
services, development and operation of computer-based management
systems and other management services. The Systems and Services
segment provides network infrastructure for state human services
systems as well as software system implementation services.
Metrigraphics
The Metrigraphics Division uses photolithographic and material
deposition processes to manufacture optical discs, scales and
reticles that are used for precision measurement. Metrigraphics
produces a variety of precision components including printheads and
orifice plates used in electronic printers and fine line circuits
used in certain medical instruments.
Encoder
The 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 systems, engine fuel-control systems, packaging equipment
and other capital equipment. Encoder's digital encoding devices are
essential elements of today's electronically controlled systems and
equipment.
Telecommunications
Since 1996, the Company has operated under an exclusive license to
enhance, develop and market a telephone fraud-detection control
system. Telecommunications customers include five regional Bell
operating companies. As discussed further in Note 2, Discontinued
Operations, during 1998 the Company adopted a plan to exit the
Telecommunications business.
VisualMagic
Over a number of years, DRC has invested in the research and
development of VisualMagic, an object-oriented development
environment. This development environment has proven to be
especially useful in the design of Internet applications. As
discussed further in Note 11, during 1998, the Company acquired an
interest in Empresa, Inc., formerly Electronic Press Services
Group, Inc., in exchange for a license to VisualMagic, cash and the
assets of the segment. Empresa also hired most of the segment's
employees.
Identifiable assets by business segment include both assets
directly identified with those operations and an allocable share of
jointly used assets.
Summarized financial information by business segment for 1998, 1997
and 1996 are as follows:
Identifiable
Systems Continuing Telecom- Identifi-
and Metri- Visual Operations munica- able
Services Encoder graphics Magic Total tions1 Total
(in thousands
of dollars)
1998
Net
sales2 $154,336 $ 16,842 $ 11,166 $ - $182,344 $ 2,775 $185,119
Operating
profit
(loss) 1,077 254 3,160 (1,859) 2,632 (5,879) (3,247)
Identifiable
assets at
year end 67,030 5,892 4,680 - 77,602 1,425 79,027
Depreciation and
amortization
expense 2,411 681 2,323 103 5,518 272 5,790
Capital
expenditures 2,172 261 277 54 2,764 296 3,060
1997
Net sales2 $129,135 $ 18,226 $ 9,344 $ 28 $156,733 $ 2,644 $159,377
Operating
profit
(loss) 5,329 1,316 3,142 (1,980) 7,807 (1,562) 6,245
Identifiable
assets at
year end 51,055 7,435 6,898 239 65,627 1,230 66,857
Depreciation and
amortization
expense 2,831 693 1,147 108 4,779 136 4,915
Capital
expenditures 2,204 518 547 42 3,311 1,040 4,351
1996
Net sales2 $100,712 $ 18,025 $ 11,260 $ - $129,997 $ 166 $130,163
Operating
profit
(loss) 771 1,320 4,288 (2,096) 4,283 (938) 3,345
Identifiable
assets at
year end 44,141 8,462 7,094 304 60,001 151 60,152
Depreciation and
amortization
expense 2,832 566 1,074 110 4,582 16 4,598
Capital
expenditures 2,445 953 5,046 190 8,634 148 8,782
1 As discussed in Note 2, Discontinued Operations, in 1998
the Company adopted a plan to sell the Telecommunications
business during 1999. Accordingly, the results of the
Telecommunications unit are presented as discontinued
operations in the consolidated statement of operations. Total
1998 Telecommunications results exclude the estimated loss on
the disposal of the business.
2 Net sales and operating profit are presented after the
elimination of intersegment transactions.
Reconciliations of amounts related to indentifiable continuing operations
to amounts included in the Consolidated Balance Sheets, Consolidated
Statements of Operations and Consolidated Statements of Cash Flows follow:
As of and for the years ended
December 31, 1998, December 31, 1997 and December 28, 1996
1998 1997 1996
(in thousands of dollars)
Identifiable operating profit $ 2,632 $ 7,807 $ 4,283
Other corporate income and expense (173) - -
Income from continuing operations
Before interest and income taxes $ 2,459 $ 7,807 $ 4,283
Identifiable assets $ 77,602 $ 65,627 $ 60,001
Corporate assets 10,465 12,002 10,949
Total assets $ 88,067 $ 77,629 $ 70,950
Identifiable depreciation
and amortization $ 5,518 $ 4,779 $ 4,582
Corporate depreciation
and amortization 701 461 328
Total depreciation and amortization $ 6,219 $ 5,240 $ 4,910
Identifiable capital expenditures $ 2,764 $ 3,311 $ 8,634
Corporate capital expenditures 111 754 474
Total capital expenditures $ 2,874 $ 4,065 $ 9,108
General corporate assets consist primarily of cash and the
Company's Andover, MA corporate headquarters.
One customer accounted for 13.6%, 11.3% and 0% of total
revenue from continuing operations in 1998, 1997 and 1996,
respectively. During 1998, 1997 and 1996, revenues from Department
of Defense (DoD) customers represent approximately 59%, 66% and 74%
of total revenues from continuing operations, respectively.
Revenues earned from one significant DoD contract represent 13.6%,
17.7% and 21.4% of revenues from continuing operations in 1998,
1997 and 1996, respectively.
11. Investment in Empresa, Inc.
On December 23, 1998, the Company agreed to make an investment in
Empresa, Inc., a privately held company based in Cambridge,
Massachusetts, engaged in electronic commerce services. DRC
contributed a perpetual license to the VisualMagic development
environment, the assets of the VisualMagic segment and cash. The
cash contributions were made in December 1998 and February 1999 and
a third payment will be required in May 1999, subject to
achievement of certain performance requirements. DRC's VisualMagic
development staff transferred to Empresa. At December 31, 1998, the
Company held non-voting preferred shares of Empresa.
An executive officer agreed to acquire an investment in
Empresa. Empresa's Amended and Restated Articles of Incorporation
limit the voting rights of DRC and its executive officers to less
than 20% of the outstanding voting stock. Accordingly, the Company
is accounting for this transaction as a cost-based investment.
12. Risks and Uncertainties
In 1998, 62% of the Company's sales were to U.S. Government
agencies, primarily the DoD. All of DRC's government contracts are
subject to termination for convenience in accordance with
government regulations. Costs incurred under cost-reimbursable
contracts are subject to audit by the government. The results of
prior audits, completed through 1996 have not had a material effect
on the Company.
In 1998, 22% of the Company's sales were to agencies of state
governments. The cost-reimbursable and fixed-price contracts the
Company has won are generally multi-year efforts. In accordance
with state laws, funding must be approved annually by the states'
legislatures.
During the second half of 1998 the economic and financial crisis in
Asia adversely impacted Encoder Division sales and profits.
Management has addressed these issues by reducing certain costs and
does not anticipate that there will be a material impact on future
operations.
Management's Responsibility for Financial Statements
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
President, Chief Executive Officer
Douglas R. Potter
Vice President of Finance,
Chief Financial Officer
Report of Independent Public Accountants
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, 1998, 1997 and December 28, 1996,
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,
1998, 1997 and December 28, 1996, and the results of their
operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
Boston, Massachusetts,
February 18, 1999
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 Gillette 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 Committee
Officers
John S. Anderegg, Jr.
Chairman
Albert Rand
President, Chief Executive Officer
Richard Basque
Vice President, Logistics Operations,
Systems Division
Arthur Brown
Vice President, Contracts, Systems Division
William G. Clautice
Vice President, Strategic Programs,
Test Equipment Division
Victor 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
Sharin Luti
Vice President, Information Technology,
Systems Division
John M. Nauseef
Vice President, Dayton Operations,
Systems Division
Michael Perro
Vice President, Washington 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
Robert Smith
Vice President, Huntsville Operations,
Systems Division
Corporate Information
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*
1998 1997
High Low High Low
First quarter $ 10.02 $ 9.72 $ 8.44 $ 6.88
Second quarter 11.47 11.18 9.82 6.46
Third quarter 9.43 9.06 9.58 6.78
Fourth quarter 6.00 5.52 11.88 8.13
*Restated for the May 1998 20% stock dividend.
The bid and asked prices of the Company's common stock on March 18,
1999 were $3.625 and $3.6875, 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 March 18, 1999
was 869. As of March 18, 1999 there were 7,356,090 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 1999 Annual Meeting of Shareholders will be held at 3:30 PM on
April 27, 1999 at the State Street Bank and Trust Building, 33rd
floor, 225 Franklin Street, Boston, Massachusetts 02110.
Dynamics Research Corporation
60 Frontage Road
Andover, Massachusetts 01810-5498
(978) 475-9090
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Amended as of
February 17, 1998
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 April 27, 2003, 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.
Amended as of
February 17, 1998
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 Sec-
tion 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 immediately prior to any
such merger, consolidation sale, dissolution, or liquidation, all
options outstanding hereunder that are not otherwise exercisable
shall become 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 assume such options or to grant each
holder of an option hereunder outstanding at the time of the
transaction replacement options on substantially equivalent terms,
in each case without a requirement that such director continue to
serve as a director of the surviving or acquiring corporation or an
affiliate thereof.
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.
AMENDED AND RESTATED
REVOLVING CREDIT AGREEMENT
Dated as of December 31, 1998
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 13
2.3. Reduction of Commitments 14
2.4. Revolving Credit Note 14
2.5. Swing Line Note 14
2.6. Interest on Loans 15
2.7. Requests for Loans 16
2.8. Conversion and Continuation 16
2.9. Funds for Loans 18
3. PREPAYMENT OF THE LOANS; RESERVES 18
3.1. Voluntary Prepayments 18
3.2. Mandatory Prepayments 18
4. CERTAIN GENERAL PROVISIONS 18
4.1. Funds for Payments 18
4.2. Computations 19
4.3. Inability to Determine Adjusted LIBOR 19
4.4. Illegality 20
4.5. Additional Costs, Etc 20
4.6. Capital Adequacy 21
4.7. Certificate 22
4.8. Indemnity 22
4.9. Interest on Overdue Amounts 22
4.10. Mitigation 22
4.11. Joint and Several Obligations 22
5. REPRESENTATIONS AND WARRANTIES 23
5.1 Organization, Standing, etc. of the Borrowers 23
5.2 Subsidiaries 23
5.3 Qualification 23
5.4 Financial Information; Disclosure, etc. 23
5.5 Licenses, etc. 24
5.6 Material Agreements 24
5.7 Tax Returns and Payments 24
5.8 Indebtedness, Liens and Investments, etc. 24
5.9 Title to Properties; Liens 25
5.10 Litigation, etc. 25
5.11 Authorization; Compliance with Other Instruments 25
5.12 Governmental Consent 25
5.13 Regulation U, etc 26
5.14 Employee Retirement Income Security Act of 1974 26
5.15 Environmental Matters 26
5.16 Use of Proceeds 27
5.17 Investment Company Act; Public Utility Holding Company Act 27
6. AFFIRMATIVE COVENANTS OF THE BORROWERS 27
6.1 Records and Accounts 27
6.2 Financial Statements, Certificates and Information 27
6.3 Legal Existence; Compliance with Laws, etc. 29
6.4 Insurance 29
6.5 Payment of Taxes 30
6.6 Payment of Other Indebtedness, etc. 30
6.7 Further Assurances 30
6.8 Depository Account 30
6.9 Use of Proceeds 30
6.10 No Further Negative Pledges 30
6.11 Regulation U 31
7. CERTAIN NEGATIVE COVENANTS OF THE BORROWERS 31
7.1 Indebtedness 31
7.2 Mortgages, Liens, etc. 32
7.3 Loans, Guarantees and Investments 33
7.4 Leases 34
7.5 Mergers and Consolidations 35
7.6 Sale of Assets 35
7.7 Capital Expenditures 36
7.8 Distributions 36
7.9 Compliance with ERISA 36
7.10 Transactions with Affiliates 37
7.11 Observance of Subordination Provisions, etc. 37
7.12 Environmental Liabilities 37
7.13 Subsidiaries 37
7.14 Material Adverse Change 37
8. FINANCIAL COVENANTS 37
9. DEFAULTS; REMEDIES 38
9.1 Events of Default; Acceleration 38
9.2 Remedies on Default, etc. 40
10. CLOSING CONDITIONS 41
10.1. Loan Documents, etc 41
10.2. Corporate Action 41
10.3. Incumbency Certificate 41
10.4. Opinions of Counsel 41
10.5. Payment of Fees 41
11. CONDITIONS TO ALL LOANS 41
11.1. Accuracy of Representations; No Event of Default 41
11.2. No Legal Impediment 42
12 THE AGENT 42
12.1 Appointment, Powers and Immunities 42
12.2 Reliance by Agent 42
12.3 Defaults 43
12.4 Rights as a Lender 43
12.5 Indemnification 43
12.6 Non-Reliance on Agent and Other Lenders 43
12.7 Failure to Act 44
12.8 Resignation of Agent 44
12.9 Cooperation of Lenders 44
12.10 Amendment of 12 45
12.11 Reliance 45
13. SETOFF, ETC 45
14. EXPENSES 45
15. INDEMNIFICATION 46
16. SURVIVAL OF COVENANTS, ETC 46
17. ASSIGNMENT AND PARTICIPATION 47
17.1. Assignment by the Lenders 47
17.2. Assignment by Borrowers 47
17.3 Participations by the Lenders 47
17.4 Replacement of Lender 47
18. FOREIGN LENDER 48
19. NOTICES, ETC 49
20. GOVERNING LAW 50
21. HEADINGS 51
22. COUNTERPARTS 51
23. ENTIRE AGREEMENT, ETC 51
24. WAIVER OF JURY TRIAL 51
25. CONSENTS, AMENDMENTS, WAIVERS, ETC 52
26. CONFIDENTIALITY 52
27. SEVERABILITY 53
28. NATURE OF LENDER'S OBLIGATIONS 53
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 Revolving Credit Note
Exhibit B-2 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
AMENDED AND RESTATED
REVOLVING CREDIT AGREEMENT
This AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT is made as of the 31st
day of December, 1998, 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:
Additional Extraordinary Charges. Extraordinary charges by the
Borrowers in an aggregate amount of up to $4,500,000 resulting from (i)
extraordinary charges by the Borrowers on account of the discontinuance of
the telephone fraud detection and control business, (ii) any write-up or
write-down of any capital stock of Electronic Press owned by DRC, and (iii)
any write-up or write-down of any capital stock of Telica owned by DRC, but
only to the extent that all such extraordinary charges are taken on or prior
to June 30, 1999; provided, however, that the aggregate amount of such
extraordinary charges shall be calculated on a cumulative basis and shall be
net of all credits and gains resulting from such events.
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 Total Commitment. The Total Commitment less the sum of (i)
the outstanding principal amounts advanced as Revolving Credit Loans
and (ii) the outstanding principal amounts advanced as Swing Line Loans.
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 2.6(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(a)
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.
Credit Agreement. This Amended and Restated 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 2.6(a)
Debt Coverage Ratio. The meaning specified in 2.6(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
2.8.
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.
Electronic Press. Electronic Press Services Group, Inc., a Delaware
corporation.
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.
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 Commitment, 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 2.6(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 2.7.
Loans. The Swing Line Loans and the Revolving Credit Loans.
Maturity Date. October 1, 2000, subject to extension pursuant to 2.4.
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 (a) 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 and (b) shall not include Additional Extraordinary Charges,
without duplication with extraordinary items permitted to be excluded from
the calculation of income (or loss) in accordance with GAAP as set forth
above.
Notes. The Swing Line Note and the Revolving Credit Note.
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 and statements of
income and surplus and cash flow, 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 the 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 Note.
Refunded Swing Line Loan. The meaning specified in 2.1(c).
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 hereunder,
of the Percentages of the Total Commitment.
Revolving Credit Loan. Any revolving credit loan made pursuant to
2.1(b).
Revolving Credit Note. 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(c).
Swing Line Lender. BBH&Co.
Swing Line Loan. The meaning specified in 2.1(c).
Swing Line Note. The meaning specified in 2.5.
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. For purposes hereof,
Consolidated Net Worth shall be increased by the amount of Additional
Extraordinary Charges, without duplication with other extraordinary items
determined in accordance with GAAP.
Telica. Telica, Inc., a Massachusetts corporation.
Total Commitment. The meaning specified in 2.1(a).
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 section 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 a revolving
credit facility with the Lenders in an aggregate principal amount at any
one time outstanding not in excess of $40,000,000 (as such amount may be
reduced from time to time pursuant to 2.3) (the "Total Commitment").
Each Lender is severally willing to establish such revolving 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 hereunder (hereinafter referred to as such
Lender's "Percentage"):
Lender Commitment Percentage
of Total Commitment
BBH&Co $10,668,000 26.67%
BankBoston $8,000,000 20.00%
Chase $8,000,000 20.00%
State Street $8,000,000 20.00%
Citizens $5,332,000 13.33%
TOTAL $40,000,000 100.00%
(b) Revolving Loans. Subject to the terms and conditions set
forth in this Credit Agreement, each Lender hereby severally establishes a
revolving credit facility in favor of the Borrowers in the individual
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 reborrow from time to time between the Closing Date and the Maturity
Date, upon notice by any Borrower to the Agent given in accordance with
2.7, 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 hereunder shall be used solely for the purposes described
in 5.16. All Revolving Credit Loans shall be made as LIBOR Loans or Base
Rate Loans, at a Borrower's option. Base Rate Loans may be converted to
LIBOR Loans; and LIBOR Loans may be continued or converted to Base Rate
Loans under the circumstances, and subject to the conditions, specified in
2.8. 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) Swing Line Loans.
(i) On any date prior to the Maturity Date on which the Agent
receives any Loan Request in respect of the Available Total Commitment
pursuant to 2.7, 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 Total Commitment ("Swing Line Availability"). Until the
Maturity Date, any Borrower may from time to time borrow, repay and reborrow
under this 2.1(c). Each Swing Line Loan shall be made pursuant to a Loan
Request in respect of the Available Total Commitment pursuant to 2.7. 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 constitute 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 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 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(c)(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(c)(ii), one of the events described in 9.1(f) or 9.1(g) shall have
occurred, then, subject to the provisions of 2.1(c)(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
topurchase participating interests in accordance with this 2.1(c) 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(c)
(ii) or 2.1(c)(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) 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 2.6(a) and on the Maturity
Date, a commitment fee (the "Commitment Fee") calculated at a rate per annum
of 0.375% on the daily average unused portion of such Lender's portion of
the Available Total Commitment during the immediately preceding fiscal
quarter of DRC (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). 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.
(b) 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.
(c) Amendment Fee. The Borrowers agree to pay to the Agent, for
the pro rata benefit of the Lenders, an amendment fee in the amount of
$100,000.
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 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 Total Commitment, pro rata in accordance with
each Lender's Percentage, whereupon the Total Commitment 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(a) then accrued on the amount of the reduction.
No reduction of the Total Commitment may be reinstated.
2.4. Revolving Credit Note. The Revolving Credit Loans made by the
Lenders hereunder shall be evidenced by a single promissory note of the
Borrowers in substantially the form of Exhibit B-1 attached hereto (the
"Revolving Credit Note"), dated as of the Closing Date and completed with
appropriate insertions. The Revolving Credit Note shall be payable to the
order of the Agent for the ratable account of each Lender in principal
amounts equal to the Total Commitment, or, if less, the aggregate
outstanding amount of all Revolving Credit Loans made by the Lenders
hereunder, 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 Loan or at the time of
receipt of any payment of principal or interest on the Revolving Credit
Note, an appropriate notation on its Record reflecting the making of such
Revolving Credit Loan 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 Note to make payments of principal of or interest on the
Revolving Credit Note when due. The Revolving Credit Note shall be due and
payable on the Maturity Date, provided that the 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 Maturity Date.
2.5. Swing Line Note. The Swing Line Loans shall be evidenced by
a single promissory note in the form attached hereto as Exhibit B-2
(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.
2.6. 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 Coverage Ratio Base Rate Margin LIBOR Margin
< 1.5 0.0% 2.00%
> 1.5 to < 2.0 0.0% 2.25%
> 2.0 to < 2.5 0.25% 2.50%
> 2.5 0.50% 3.00%
; provided, however; that if the Net Income set forth on the Consolidated
income statement delivered pursuant to clause (ii) of Section 6.2(a) for
the fiscal year ending December 31, 1999 is equal to or more than eighty
percent (80%) of the Net Income set forth on the Projections for such
fiscal year delivered by the Borrowers to the Lenders on November 2, 1998,
pursuant to Section 6.2(e), then from and after April 1, 2000, the foregoing
LIBOR Margin based on the Debt Coverage Ratio shall be replaced in its
entirety by the following:
Debt Coverage Ratio LIBOR Margin
< 1.5 1.50%
> 1.5 to < 2.0 1.75%
> 2.0 to < 2.5 2.00%
> 2.5 2.50%
(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 one-half percent (0.50%) and the applicable margin over the Adjusted
LIBOR shall be three percent (3.00%).
(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.
2.7. 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 Revolving Credit Loans or Swing Line
Loans (and in any event 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) the proposed Drawdown Date of such Loans, (iv) in
the case of LIBOR Loans, the Interest Period for such Loans, (v) the purpose
or purposes to which the proceeds of such Loans shall be applied, and (vi)
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.
2.8. 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 2.7
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 2.8(a).
Each notice pursuant to this 2.8 shall be irrevocable and shall
refer to this Agreement and specify (i) the identity 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 2.8 and of each Lender's portion of any converted or continued
Loans. If the Borrower shall not have given notice in accordance with this
2.8 to continue any LIBOR Loans into a subsequent Interest Period (and shall
not otherwise have given notice in accordance with this 2.8 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.
2.9. Funds for Loans. Subject to the satisfaction of the other
conditions set forth herein, to the extent applicable (including 2.7), 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. 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.
3.2. Mandatory Prepayments. If at any time the outstanding
principal amount of all Loans exceeds (or, in the case of any notice of
reduction of the Total Commitment pursuant to 2.3, would exceed) the Total
Commitment, 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 not to exceed the Total Commitment.
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 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 2.7 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 2.6 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.
Each of this Agreement and the other Loan Documents is the legal, valid and
binding obligation of each Borrower enforceable against such Borrower in
accordance with its terms.
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 which were or are 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 working capital and other general corporate purposes of the
Borrowers.
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 flow 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 (a) for
the dissolution of Dynamics Research Investment Corporation, a Massachusetts
corporation and wholly-owned Subsidiary, and (b) 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 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 (including the licenses to the Visual Magic software),
(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 constitute 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 (i) in the fiscal year ending December
31, 1998, the sum of (x) fifty percent (50%) of the Consolidated Net Income
of DRC and its Subsidiaries (if positive) for the immediately preceding
fiscal year and (y) $210,000, and (ii) in the fiscal year ending December
31, 1999 and each fiscal year thereafter, fifty percent (50%) of the
Consolidated Net Income of DRC and its Subsidiaries (if positive) for the
immediately preceding fiscal year; provided that such amount shall not
include shares of capital stock surrendered upon the exercise of any stock
options or other convertible securities; and further provided that in the
fiscal year ending December 31, 1999, if fifty percent (50%) of the
Consolidated Net Income of DRC and its Subsidiaries (if positive) for the
fiscal year ending December 31, 1998 is less than $250,000, then DRC may
repurchase shares of its common stock as aforesaid in an aggregate amount
which shall not exceed $250,000.
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 the sum of (x) $34,505,000 plus (y) fifty percent
(50%) of the Net Income of DRC and its Subsidiaries (if positive) for each
fiscal quarter, including the fiscal quarter in which the Closing Date
occurs;
(b) Maximum Leverage. A ratio of Indebtedness for borrowed money
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 (i) for
each fiscal quarter ending on or before December 31, 1999, three and
one-quarter to one (3.25:1.0) and (ii) for each fiscal quarter ending
after December 31, 1999, three to one (3.0:1.0), with each such ratio
measured on a fiscal quarter-end basis and with EBITDA of DRC and its
Subsidiaries based on the period of four (4) consecutive fiscal quarters
ending on such fiscal quarter-end;
(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 (x) for each fiscal quarter ending on or before December 31,
1999, two to one (2.0:1.0) and (y) for each fiscal quarter ending after
December 31, 1999, two and one-quarter to one (2.25:1.0), with each such
ratio measured on a fiscal quarter-end basis and based on the period of
four (4) consecutive fiscal quarters ending on such fiscal quarter-end; and
(e) Net Income. Consolidated Net Income must equal at least $1,
for each fiscal quarter that commences on or after January 1, 1999,
measured on a fiscal quarter-end basis.
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 6.3(a) or 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(b) and 2.2(c).
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.
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 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, however, 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) 772-1138) 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, 28 State
Street, Boston, MA 02109, Attention: R.E. James Hunter, Vice President
(Telecopy No. (617) 725-5790), 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 Maturity Date pursuant to 2.4); (b) change or waive the
Total Commitment (other than reductions in the Total 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: Timothy T. Telman
Title: Deputy 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
FIRST AMENDMENT
TO
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
Reference is hereby made to the Amended and Restated Revolving Credit
Agreement, dated as of December 31, 1998 (the "Credit Agreement"), by and
among Dynamics Research Corporation, a Massachusetts corporation ("DRC"),
DRC Encoder, Inc., a Massachusetts corporation, DRC Metrigraphics, Inc., a
Massachusetts corporation, DRC Software, Inc., a Massachusetts corporation,
DRC Telecom, Inc., a Massachusetts corporation, and Brown Brothers Harriman
& Co., a New York limited partnership, as a Lender, as Agent for itself
and the other Lenders, and as Swing Line Lender, BankBoston, N.A., a
national banking association, The Chase Manhattan Bank, a New York banking
corporation, State Street Bank and Trust Company, a Massachusetts trust
company, Citizens Bank of Massachusetts, a Massachusetts financial
institution, and the other Lenders from time to time party thereto. The
parties to the Credit Agreement now desire to amend the Credit Agreement,
pursuant to 25 thereof, as set forth in this First Amendment, dated as of
December 31, 1998 (the "Amendment"), and hereby agree as follows:
1. EFFECTIVE DATE, DEFINITIONS.
This Amendment shall be effective as of December 31, 1998 (the "Effective
Date"). Capitalized terms used herein but not defined herein shall have the
meanings assigned thereto in the Credit Agreement, as amended hereby.
II. AMENDMENTS.
(A) Amendment to Definition of "Net Income". The definition of "Net
Income" set forth in 1.1 of the Credit Agreement is hereby amended by
adding the following text at the beginning of clause (b) of such definition:
"with respect to calculations of Net Income for periods ending on or before
December 31, 1998 and thereafter for purposes only of calculating the Debt
Coverage Ratio pursuant to 2.6(a) (but not for purposes of 8),".
(B) Amendment to Definition of "Tangible Net Worth". The definition of
"Tangible Net Worth" set forth in 1.1 of the Credit Agreement is hereby
amended by deleting the last sentence of such definition in its entirety.
(C) Amendment to 7.8 of the Credit Agreement. The text of 7.8 of the
Credit Agreement is hereby amended by deleting the same and replacing it
with the following:
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:
(i) in the fiscal year ending December 31, 1998, the sum of (x) fifty
percent (50%) of the Consolidated Net Income of DRC and its Subsidiaries
(if positive) for the immediately preceding fiscal year and (y) $2 10,000;
(ii) in the fiscal year ending December 31, 1999, (x) (1) fifty percent
(50%) of the Consolidated Net Income of DRC and its Subsidiaries (if positive)
for the period commencing on January 1, 1999 and ending on the last day of
the most recently completed fiscal quarter ending on or prior to December
31, 1999, minus (II) the portion of such Consolidated Net Income of DRC and
its Subsidiaries which provided the basis for any prior distribution or
repurchase during the fiscal year ending December 31, 1999, plus (y)
$250,000; provided that the total amount of cash distributions and
repurchases of shares by DRC during the fiscal year ending December 31,
1999 shall not exceed $750,000; and
(iii) in each fiscal year ending after December 31, 1999, fifty percent
(50%) of the Consolidated Net Income of DRC and its Subsidiaries
(if positive) for the immediately preceding fiscal year;
and further provided that, for purposes of clauses (i), (ii) and (iii) above,
such amount shall not include shares of capital stock surrendered upon the
exercise of any stock options or other convertible securities.
(D) Amendment to 8(a) of the Credit Agreement. The text of 8(a) of the
Credit Agreement is hereby amended by deleting the same and replacing it
with the following:
Tangible Net Worth, measured on a fiscal quarter-end basis, for (i) the
fiscal quarter ending December 31, 1998, of $31,200,000 and (ii) each fiscal
quarter ending after December 31, 1998, of (x) fifty percent (50%) of the
cumulative Net Income of DRC and its Subsidiaries (if positive) for each
fiscal quarter ending after December 31, 1998, plus (y) $31,200,000.
(E) Amendment to 8(c) of the Credit Agreement. The text of 8(c) of the
Credit Agreement is hereby amended by deleting the same and replacing it
with the following:
A ratio of Senior Debt of DRC and its Subsidiaries to EBITDA of DRC and its
Subsidiaries not to exceed: (i) for the fiscal quarter ending on December
31, 1998, seven and eighty-six one-hundredths to one (7.86:1.00); (ii) for
the fiscal quarter ending on March 31, 1999, two and three-quarters to one
(2.75:1.00); (iii) for the fiscal quarters ending on June 30, 1999 and
September 30, 1999, two and one-half to one (2.50:1.00); and (iv) for each
fiscal quarter ending after September 30, 1999, two and one-quarter to one
(2.25:1.00); with each such ratio measured on a fiscal quarter-end basis, and
with EBITDA of DRC and its Subsidiaries based on (I) for the fiscal quarter
ending on December 31, 1998, the period of four (4) consecutive fiscal
quarters ending on December 31, 1998; (II) for the fiscal quarter ending on
March 31, 1999, EBITDA for such quarter multiplied by four (4); (III) for
the fiscal quarter ending on June 30, 1999, EBITDA for the period of two (2)
consecutive fiscal quarters ending on June 30, 1999, multiplied
by two (2); (IV) for the fiscal quarter ending on September 30, 1999, EBITDA
for the period of three (3) consecutive fiscal quarters ending on September
30, 1999, multiplied by four-thirds (4/3); and (V) for each fiscal quarter
ending after September 30, 1999, the period of four (4) consecutive fiscal
quarters ending on such fiscal quarter-end.
(F) Amendment to 8(d) of the Credit Agreement. The text of 8(d) of the
Credit Agreement is hereby amended by deleting the same and replacing it
with the following:
A ratio, measured on fiscal quarter-end basis, of (x) 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 ("Cash Flow") to (y) required interest and
principal payments made by DRC and its Subsidiaries on all Indebtedness
("Required Payments") of at least:
(i) for the fiscal quarter ending December 31, 1998, one-twentieth to one
(0.05:1.00), based on Cash Flow and Required Payments for the period of
four (4) consecutive fiscal quarters ending December 31, 1998;
(ii) for each fiscal quarter ending after December 31, 1998 but on or
before December 31, 1999, two to one (2.00:1.00), based on (I)(A) for the
fiscal quarter ending March 31, 1999, Cash Flow for such quarter multiplied
by four (4), (B) for the fiscal quarter ending June 30, 1999, Cash Flow for
the period of two (2) consecutive fiscal quarters then ending multiplied by
two (2), (C) for the fiscal quarter ending September 30, 1999, Cash Flow for
the period of three (3) consecutive fiscal quarters then ending multiplied
by four-thirds (4/3) and (D) for the fiscal quarter ending December 31,
1999, Cash Flow for the period of four (4) consecutive fiscal quarters then
ending and (II) Required Payments for the period of four (4) consecutive
fiscal quarters then ending; and
(iii) for each fiscal quarter ending after December 31, 1999, two and
one-quarter to one (2.25:1.00), based on Cash Flow and Required Payments
for the period of four (4) consecutive fiscal quarters then ending.
III. CONDITIONS; NO DEFAULT; REPRESENTATIONS AND WARRANTIES, ETC.
Each Borrower hereby represents and warrants to the Lenders that all of the
conditions of lending specified in 11 of the Credit Agreement and Section
III of this Amendment have been satisfied in all material respects as of the
Effective Date. Without limiting the generality of the foregoing, each
Borrower hereby confirms that: (i) the representations and warranties of
the Borrowers contained in 5 of the Credit Agreement, as amended by and
through this Amendment, are true on and as of the Effective Date as if made
on such date (except to the extent that such representations and warranties
expressly relate to an earlier date); (ii) each Borrower is in compliance in
all material respects with all of the terms and provisions set forth in
the Credit Agreement, as amended by and through this Amendment, on its part
to be observed or performed on or prior to the Effective Date; and (iii) no
Event of Default specified in 9 of the Credit Agreement, as amended by and
through this Amendment, nor any event which with the giving of notice or
expiration of any applicable grace period or both would constitute such an
Event of Default has occurred and is continuing. All fees and expenses of
the Lenders shall be paid by the Borrowers pursuant to the side letter from
the Agent to the Borrowers before this Amendment shall become effective.
IV. AMENDED TERMS.
For all purposes hereafter, the term "Credit Agreement" shall mean the Credit
Agreement as amended by and through this Amendment. For all purposes
hereafter, the terms "Net Income" and "Tangible Net Worth" shall have the
meanings set forth for such terms in the Credit Agreement, as amended by and
through this Amendment.
V. MISCELLANEOUS.
Except as expressly set forth in Section II of this Amendment, the execution,
delivery, and effectiveness of this Amendment shall not (a) limit, impair,
constitute a waiver of, or otherwise affect any right, power, or remedy by
the Lenders, the Swing Line Lender, or the Agent under the Credit Agreement,
as amended by and through this Amendment, (b) constitute a waiver of any
provision in the Credit Agreement, as amended by and through this Amendment,
or (c) alter, modify, amend, or in any way affect any of the terms,
conditions, obligations, covenants, or agreements contained in the Credit
Agreement, as amended by and through this Amendment, all of which are
ratified and affirmed in all respects and shall continue in full force
and effect. This Amendment may be executed in any number of counterparts,
all of which together shall constitute one and the same instrument. This
Amendment shall be governed by the laws of the Commonwealth of Massachusetts
and shall be binding upon and inure to the benefit of the parties hereto and
their respective successors and assigns.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as a
sealed instrument as of the date first set forth above.
DYNAMICS RESEARCH CORPORATION
By:_____/s/ Douglas R. Potter______
Name: Douglas R. Potter
Title: Vice President President of Finance
DRC ENCODER, INC.
By:____/s/ Douglas R. Potter___
Name: Douglas R. Potter
Title: Treasurer
DRC METRIGRAPHICS, INC.
By:_____/s/ Douglas R. Potter____
Name: Douglas R. Potter
Title: Treasurer
DRC SOFTWARE, INC.
By:_____/s/ Douglas R. Potter___
Name: Douglas R. Potter
Title: Treasurer
DRC TELECOM, INC.
By:_____/s/ Douglas R. Potter____
Name: Douglas R. Potter
Title: Treasurer
per pro BROWN BROTHERS HARRIMAN & CO.
By:_____/s/ Timothy T. Telman_____
Name: Timothy T. Telman
Title: Deputy Manager
BANKBOSTON, N.A.
By:_____/s/ Jeff R. Westling____
Name: Jeff R. Westling
Title: Vice President
THE CHASE MANHATTAN BANK
By:_____/s/ A. Neil Sweeny____
Name: A. Neil Sweeny
Title: Vice President
STATE STREET BANK AND TRUST COMPANY
By:_____/s/ Mark Trachy___
Name: Mark Trachy
Title: Vice President
CITIZENS BANK OF MASSACHUSETTS
By:_____/s/ R.E. James Hunter__
Name: R. E. James Hunter
Title: Vice President
CERTIFICATE OF VOTE OF DIRECTORS
ESTABLISHING A CLASS OR SERIES OF STOCK
(General Laws, Chapter 156B, Section 26)
We, Albert Rand, President, and John Wilkinson,
Clerk, of Dynamics Research Corporation located at 60
Frontage Road, Andover, MA 01810-5498 do hereby certify that at a
meeting of the directors of the corporation held on September 10,
1998, the following vote establishing and designating a class or
series of stock and determining the relative rights and preferences
thereof was duly adopted. The directors wish to amend the Series B
Preferred Stock pursuant to Section 26, as no shares of the Series B
Preferred Stock have been issued at this time.
VOTED: That pursuant to the authority vested in the Board of
Directors of this Corporation in accordance with the provisions
of its Restated Articles of Organization, as amended, the voting
powers of the Series B Preferred Stock of the Corporation be and
they hereby are amended as follows:
Section 3(a) shall be amended to read in its entirety as follows:
"Each share of Series B Stock shall entitle the holder thereof
to ten votes on all matters submitted to a vote of the stockholders
of the Corporation."
Section 8 shall be amended to read in its entirety as follows:
"Certain Adjustments. In the event the Corporation shall
at any time declare or pay any dividend on Common Stock
payable in shares of Common Stock, or effect a subdivision
or combination or consolidation of the outstanding
shares of Common Stock (by reclassification or
otherwise than by payment of a dividend in shares
of Common Stock) into a greater or lesser number
of shares of Common Stock, then, in each such
case, the amounts set forth in Sections 2(a) and
(b), 6(a) and 7 hereof with respect to the
multiple of cash and non-cash dividends, the
Series B Liquidation Preference and an aggregate
amount of stock, securities, cash and/or other
property referred to in Section 7 hereof, shall be
adjusted by multiplying such amount by a fraction
the numerator of which is the number of shares of
Common Stock outstanding immediately after such
event and the denominator of which is the number
of shares of Common Stock that were outstanding
immediately prior to such event."
Signed under the penalties of perjury, this 10th day of
September, 1998.
/s/ Albert Rand
Albert Rand, President
/s/ John Wilkinson
John Wilkinson, Clerk
