-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PiS52ydE6bOoqkQ3AEdMzMHhEcyWM0GJIPdzw5twUdKSLmJhZxjZvFMzkCoVvpBL Xx3ueHKTWxClrhXnm933iw== 0000030822-98-000005.txt : 19980409 0000030822-98-000005.hdr.sgml : 19980409 ACCESSION NUMBER: 0000030822-98-000005 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: DYNAMICS RESEARCH CORP CENTRAL INDEX KEY: 0000030822 STANDARD INDUSTRIAL CLASSIFICATION: 7373 IRS NUMBER: 042211809 STATE OF INCORPORATION: MA FISCAL YEAR END: 1229 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-02479 FILM NUMBER: 98579198 BUSINESS ADDRESS: STREET 1: 60 CONCORD ST CITY: WILMINGTON STATE: MA ZIP: 01887 BUSINESS PHONE: 5084759090 MAIL ADDRESS: STREET 1: 60 CONCORD ST CITY: WILMINGTON STATE: MA ZIP: 01887 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 1-7348 DYNAMICS RESEARCH CORPORATION (Exact Name of Registrant as Specified in Its Charter) Massachusetts 04-2211809 (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 60 FRONTAGE ROAD ANDOVER, MASSACHUSETTS 01810-5498 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (978) 475-9090 Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange on Title of Each Class Which Registered NONE NOT APPLICABLE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.10 Par Value (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of March 20, 1997, the aggregate market value of Common Stock held by nonaffiliates of the Registrant was $62,042,861 and the number of shares of Common Stock, $.10 par value, of the Registrant outstanding was 6,322,521. Documents Incorporated By Reference Portions of the 1997 Annual Report to Shareholders are incorporated by reference in Parts I and II. Portions of the Registrant's Proxy Statement for the 1998 Annual Meeting of Shareholders are incorporated by reference in Part III. The Exhibit Index is on pages 24 and 25. DYNAMICS RESEARCH CORPORATION Form 10-K For the Fiscal Year Ended December 31, 1997 Part I Page Item 1. Business 4 2. Properties 11 3. Legal Proceedings 12 4. Submission of Matters to a Vote of Security Holders 12 4A. Executive Officers of the Registrant 12 Part II 5. Market for Registrant's Common Equity and Related Stockholder Matters 13 6. Selected Financial Data 13 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 8. Financial Statements and Supplementary Data 13 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 14 Part III 10. Directors and Executive Officers of the Registrant 15 11. Executive Compensation 15 12. Security Ownership of Certain Beneficial Owners and Management 15 13. Certain Relationships and Related Transactions 15 Part IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 16 PART I Item 1. Business Dynamics Research Corporation (referred to herein as DRC or the Company) was organized in 1955 under the laws of the Commonwealth of Massachusetts. The Company comprises four divisions: Systems, Test Equipment, Metrigraphics and Encoder. The Company's Systems Division is principally engaged in providing a broad range of technical services, including information systems development and operation, engineering, and management support services. DRC's Test Equipment Division provides a variety of research, engineering, and manufacturing services. The Company's Systems and Test Equipment Division provide services to United States Department of Defense (DoD) organizations, other U.S. and state government agencies, and commercial entities. DRC's Metrigraphics and Encoder Divisions form the Company's Precision Products Group. These divisions design, manufacture, and sell digital instruments and precision components that are primarily used in computer-controlled systems. The Precision Products Group operates principally in the commercial marketplace. Information Systems Development and Operation DRC's Systems Division provides systems analysis, integration, and software design and development services. The Division's information technology offerings also include installation, systems operation, and maintenance. Systems built by DRC are used for aircraft maintenance and parts tracking; supply chain management; training requirements; and for managing state government health and human services commitments. The Company's major DoD information systems programs are often referred to as logistics information systems. These DRC-developed systems are product management information systems that manage information on a product's inventory requirements and control, maintenance and repair, warranty analysis, supply, and distribution. For nearly 30 years, the Company has assisted the U.S. Navy's Fleet Ballistic Missile program office in the design, development, and operation of inertial systems. The Company has extensive experience with the Polaris, Poseidon, and Trident missile guidance systems and submarine inertial navigation systems. The Company develops and maintains performance, reliability, and logistics databases for the inertial guidance instruments housed in those systems. These databases track detailed information on thousands of component parts comprising the systems. In connection with these databases, the Company has successfully integrated customer workflow and database activity information with internet technology. This information is used by the customer for a wide range of operating management tasks and decision making. During 1997, the Company continued to participate in the development of the U.S. Air Force's Integrated Maintenance Data System (IMDS). DRC's IMDS involvement encompasses system interface design, data conversion, and contractor logistics support. IMDS is intended to replace a number of existing legacy systems including the Tactical Interim CAMS and REMIS Reporting System (TICARRS). TICARRS is a system that DRC supported for 16 years with design, development, implementation, and operation. The DRC-developed Weapon Systems Management Information System (WSMIS) assesses the "health" and capability of the U.S. Air Force's weapon systems to meet wartime objectives. For the past sixteen years DRC has served as the overall functional integrator of WSMIS and the developer of most WSMIS modules. The Company currently provides WSMIS operational and software development support. As a decision-support tool for assessing the impacts of logistics status on potential wartime capabilities, WSMIS computes inventory requirements, purchasing needs, and logistics capability assessments for complex, high-priced aircraft spare parts needed to meet aircraft availability requirements. The Company is currently maintaining other decision support systems for solving logistics problems. DRC's Execution and Prioritization of Repair Support System (EXPRESS) is one of the primary systems supporting the Air Force Material Command's Depot Repair Enhancement Program (DREP) processes. EXPRESS identifies parts requirements, prioritizes needs, evaluates the feasibility of repair, aids in driving the right items into repair, and assists in the distribution of the repaired items. Additional support to the DREP initiative to further improve depot- repair processes is being provided by the DRC-developed Supportability Analysis and Visibility (SAV) module. This modernized system will provide key information on problem indicators, locations of assets, key parts data that identify support problems, and a U.S. Air Force "scorecard" to provide a common reference on the status of any given item. During 1997, the Company implemented a distributed computer-based Statewide Automated Child Welfare Information System (SACWIS) for the State of New Hampshire. This system manages child welfare cases handled by the State of New Hampshire's Department of Health and Human Services. The State of New Hampshire then awarded DRC a $4.5 million contract extension to provide additional functional and technical enhancements to the SACWIS system. In February 1997, DRC was awarded a $36.0 million, contract to design, deliver, install, and maintain a statewide IT infrastructure that supports the Ohio Child Support Enforcement Tracking System (SETS). The information technology infrastructure the Company is developing helps automate the work of more than 4,250 Child Support Enforcement workers throughout all of Ohio's 88 counties. In November 1997, the State of Ohio awarded the Company an $18.9 million contract for additional computer network infrastructure and related services. DRC continues to provide computer hardware and software; site preparation and installation; and technical support services for the SACWIS and Ohio Works First system-systems that support Ohio's welfare reform initiatives. In December 1997, DRC also received a $28.3 million, three-year contract from the State of Colorado, Department of Human Services to serve as a prime contractor for its Children, Youth and Families project. The contract is a result of a competitive procurement for the design, development, and implementation of a child welfare and youth corrections system consisting of software, training, and a state-wide computer network infrastructure. The contract includes options for four additional years of system maintenance and support valued at $14.8 million. The Company continues to provide the U.S. Department of Treasury with information technology services for the Internal Revenue Service and other Treasury departments. Most of the activity under this contract came from three large delivery orders involving: 1) Year 2000 software and system certification 2) Enforcement Revenue Information System quality systems testing and quality assurance 3) Compliance Research Information System and associated system support through project management, network design, and software development Critical to the development of information systems is the Company's software development process and related tools. The Company's approach to mission-critical software stresses principles of continuous software quality evaluation and increased visibility throughout the software development life cycle. To this end, DRC has achieved Level-2 certification under the standards of the Software Engineering Institute and is actively pursuing Level-3 certification. Engineering and Management Support Services Under various DoD contracts, the Company has performed a variety of services for its U.S. Government customers to assist them in planning and managing their large system development programs. The business area utilizes a wide range of the Company's technical and management skills to plan, analyze, design, test, support, train, maintain, and dispose of a variety of complex systems. Systems include radar, C3I, missile, aircraft, information, software, and munitions. The Company provides support at all stages of the system's life cycle. In response to emerging requirements, the Company helps its federal Government customers define, develop, and initiate new programs. The Company also helps customers obtain program approval, conduct strategic planning, and evaluate proposals from private contractors. After prime contract awards, the Company helps monitor contractor activities, evaluate progress, and measure performance against program requirements. The System Engineering and Technical Assistance (SETA) Group's products and services include Computer-Based Training, systems integration, and Business Process Improvement/Reengineering. Under a variety of contracts, DRC supports the U.S. Air Force at bases such as Hanscom Air Force Base, Scott Air Force Base, Langley Air Force Base, Maxwell Air Force Base, Gunter Annex, and Peterson Air Force Base. DRC's SETA activities support numerous programs and activities including: Theater Battle Management Core Systems Joint Transportation CIM Center Air Mobility Command Enterprise Architecture MILSTAR Mission Planning Systems Airborne Warning and Control System (AWACS) Joint Surveillance Target Attack Radar System (JSTARS) Air Force Research Lab laboratory and facilities operations Cheyenne Mountain Upgrade Command and Control foreign military sales In 1995 the U.S. Air Force awarded DRC a five-year contract for Technology Task-Order Engineering Services (TTOES). Originally valued at up to $23.7 million, in 1997 the contract ceiling was increased to $31.2 million. DRC has provided engineering, logistics, and software support on programs such as the B-1B, the B-2, the B-52, the KC-135, and the E-3A aircraft repair, maintenance, and upgrade programs. From its origin at the Oklahoma City Air Logistics Center (ALC), DRC has expanded its TTOES task orders to include work at other ALCS located at Warner Robins, GA; Ogden UT; and San Antonio, TX. Recent tasking has centered on providing support to Air Force reengineering and business process improvement initiatives at all of these ALCs. Since 1993 DRC has provided the US Army Aviation and Missile Command (AMCOM) with specialized studies and analyses in aviation/missile system development, acquisition and sustainment. The current $33.0 million technical support prime contract supports a broad range of helicopter and missile systems in varying life cycle stages. Additionally, DRC supports seven other technical contracts based in Huntsville, Alabama with acquisition logistics, systems engineering, and other related program management services. DRC continues to provide logistics modeling and analysis for the U.S. Air Force Air Staff as well as for the Joint Strike Fighter program. Since 1987 the Company has provided acquisition logistics services to the Ballistic Missile Defense Organization. Combining its expertise in weapon system acquisition processes with its expertise in systems analysis, design, training and simulation, and human factors DRC performs human-systems integration and force analysis. Since 1987, DRC has provided force analysis support to the Army Research Laboratory. These activities are focused on developing tools that support analyzing soldier and system effectiveness, identifying and assessing force improvement options (doctrine, training, leader development, organization, and material), and ensuring soldier considerations are addressed in force improvements. Three years ago, DRC won a $22.5 million dollar, five year contract from the U.S. Army Research Laboratory to provide analysis, system development and support in several functional areas which include assessment of manpower, personnel, and training issues; analysis of soldier systems performance; and integration of methods and databases for use by system designers. In addition, DRC developed methods for analyzing training requirements and standardizing training across all branches of the military services. The Company is in its second year of a U.S. Army four-year, contract valued at approximately $13.0 million, to implement, apply, and manage DRC-developed teamwork training principles to improve performance in high-pressure environments. The project focus is on improving teamwork in emergency-room settings at more than 15 hospitals (both civilian and military). As part of a five-year subcontract, DRC provided crew resource management training to the US Air Force Air Combat Command. In 1997, the contract was expanded to include the US Air Forces in Europe. The Air Force has funded the base year and three option years reflecting a value to DRC in excess of $2.5 million. DRC is the developer of the Training System Requirements Analysis (TSRA) Tools, which are a set of computer programs designed to help instructional designers perform the initial phases of the Instructional Systems Development (ISD) process. The TSRA Tools have been developed throughout the Naval Air Warfare Center Training Systems Division (NAWCTSD) and are widely used throughout the Department of Defense by government and contractor organizations. The market for DRC's TSRA Tools has expanded outside the military to include the Federal Aviation Administration and National Mine Health and Safety Academy. As a subcontractor to Lockhead Martin, DRC is supporting the U.S. Army's Warfighter 2000 Simulation (WARSIM). DRC services include conceptual modeling, Manpower and Personnel Analysis and safety engineering efforts associated with WARSIM. The Company is also providing system engineering and software engineering support to the Integrated Development Team. DRC is also a subcontractor to Lockheed Martin for the Close Combat Tactical Trainer (CCTT) program. CCTT simulates Army tank and mechanized infantry units from vehicle crews to the battalion level. CCTT uses distributed, interactive simulation technology to provide a "virtual" training environment. DRC conducts all manpower and personnel integration activities associated with the CCTT. DRC is also playing a similar role in a subcontract to Lockheed Martin on the United Kingdom Combined Arms Tactical Trainer, the UK's version of the CCTT. DRC is a subcontractor to Raytheon on the U.S. Air Force National Air and Space Model (NASM). The Company is developing conceptual models and collecting data on mission space objects and processes. The Company continues to provide independent analysis and monitoring of submarine-based, inertial guidance systems and electronic modules for the U.S. Navy's Fleet Ballistic Missile Program Office. DRC's Inertial Instrument Test Laboratory, is equipped for full-scale performance testing of navigational quality inertial instruments. DRC's Test Equipment Division provides research, engineering, and manufacturing services to the DoD and commercial customers. In the DoD market, the Test Equipment Division designs, constructs, installs, trains, and supports test equipment used in the U.S. Navy Trident program. In addition, DRC is involved in the ongoing design efforts for the U.S. Navy's advanced submarine programs, including their ballistic submarine system scheduled for activation in the 21st century. The Division also developed a scenario generator and training device for the Joint-Tactical Information Distribution System (JTIDS). DRC's device, the JTIDs Training Device (JTD), will be used by the U.S. Air Force and the U.S. Navy to train personnel in field-usage of the JTIDS terminals. In 1996, DRC obtained an exclusive license from SBC Communications to develop and market "Sleuth," its telephone fraud-detection control system. Currently, five regional bell operating companies (RBOCs) located throughout the United States are using "Sleuth" to combat telephone fraud. Recently, the Division upgraded "Sleuth" to broaden the types of suspicious telephone calling patterns that can be detected. The Division is also involved in the design of a closed-loop system used in the field of parameter control in semiconductor manufacture. This process is being developed along with other companies under the auspices of the U.S. Navy in the San Diego, California, Space and Naval Warfare Systems Center. DRC is also performing computer-aided, semiconductor circuit analysis for a number of commercial companies. In cooperation with Rockwell Collins Company, the Division manufactures a highly accurate Global Position System (GPS) receiver. DRC's Precision Products Group The commercial operations of DRC's Precision Products Group are segmented in two divisions: DRC's Encoder Division designs, manufactures, and markets a line of digital encoders that convert analog motion and position information into digital signals used in a wide variety of industrial products and systems which include: machine tools, robotics, engine fuel-control systems, packaging equipment, and pick-and-place machines. DRC's digital encoding devices are essential elements of today's electronically controlled systems and equipment. The Metrigraphics Division uses photolithographic processes to manufacture optical discs, scales and reticles that are used for precision measurement. Metrigraphics also uses various metal deposition processes, including electroplating and electroforming, to produce a variety of precision components. Products include printheads and oriface plates used in electronic printers and in circuitry used in certain medical instruments. Metrigraphics' superior ability to design and manufacture components and hold critical tolerances is an important driver for a wide range of high-technology applications. Metrigraphics' largest market is currently for nozzles used in inkjet printer cartridges. In addition to its electroform parts for printers and medical instruments, Metrigraphics manufactures precision glass parts for computer peripherals, factory automation equipment, electronic instrumentation, and semiconductor equipment. The Company has completed a $6.0 million capital program, including state-of-the-art automated production and inspection equipment, to support high volume customers. United States Government Contracts Contracts for the Company's defense services are obtained by marketing and technical personnel employed by the Company. The Company's other products are sold by sales personnel employed by the Company and sales representatives. During 1997, the Company's revenues from contracts with the DoD, either as prime contractor or subcontractor, accounted for approximately 66% of the Company's total revenues. The Company's government contracts fall into one of three categories: (1) fixed price, (2) time and materials, and (3) cost plus fixed fee. Under a fixed price contract, the customer pays an agreed upon price for the Company's services or products, and the Company bears the risk that increased or unexpected costs may reduce its profits or cause it to incur a loss. Conversely, to the extent the Company incurs actual costs below anticipated costs on these contracts, the Company could realize greater profits. Under a time and materials contract, the government pays the Company a fixed hourly rate intended to cover salary costs and related indirect expenses plus a certain profit margin. Under a cost plus fixed fee contract, the government reimburses the Company for its allowable direct expenses and allowable and allocable indirect costs and pays a negotiated fee. In 1997, approximately 65% of the Company's government contracts revenue was under fixed price or time and material contracts, while approximately 35% of revenue was under costs plus fixed fee contracts. During 1997, the Company's U.S. government business consisted of approximately 115 separate contracts on 60 different programs. The Company's contracts with the government are generally subject to termination at the convenience of the government; however, the Company would be reimbursed for its allowable costs to the time of termination and would be paid a proportionate amount of the stipulated profit attributable to the work actually performed. Although government contracts may extend for several years, they are generally funded on an annual basis and are subject to reduction or cancellation in the event of changes in government requirements or budgetary concerns. If the U.S. government significantly curtails expenditures for research, development and consulting activities, such curtailment might have an adverse impact on the Company's sales and earnings. Backlog At December 31, 1997, the Company's backlog of unfilled orders was approximately $110.0 million compared with $73.2 at December 28, 1996. The Company expects that substantially all of its backlog on December 31, 1997 will be filled during the year ending December 31, 1998. The Company has a number of multi-year contracts with agencies of the U.S. Government on which actual funding generally occurs on an annual basis. The Company's business does not have seasonal characteristics but a portion of its funded backlog is based on annual purchase contracts, and the amount of funded backlog as of any date can be affected by the timing of order receipts and deliveries thereunder. Competition The Company competes with both domestic and foreign firms, including larger diversified companies and smaller specialized firms. The U.S. government's own in-house capabilities are also, in effect, competitors of the Company because various agencies perform certain types of services which might otherwise be performed by the Company. The principal competitive factors for defense services are price, performance, technical competence and reliability. In addition, in the commercial business, the Company also competes with other manufacturers of encoders, electroform vendors and photolithographic suppliers of precision measurement scales. The principal competitive factors effecting the precision components manufacturing business are price, product quality and custom engineering to meet customer system requirements. Research and Development The Company expended approximately $1.4 million (inclusive of overhead and other indirect costs) on new product and service development during the year ended December 31, 1997, as compared to expenditures of $2.7 million during 1996 and $1.9 million during 1995. Raw Materials Raw materials and components are purchased from a large number of independent sources and are generally available in sufficient quantities to meet current requirements. Environmental Matters Compliance with federal, state and local provisions relating to the protection of the environment has not had and is not expected to have a material effect upon the capital expenditures, earnings or competitive position of the Company. Employees At December 31, 1997, the Company had approximately 1,455 employees. Proprietary Information Patents, trademarks and copyrights are not materially important to the business of the Company. The United States Government has certain proprietary rights in processes and data developed by the Company in its performance of government contracts. Item 2. Properties The Company leases offices and other facilities, totaling approximately 330,000 square feet, which are utilized for its defense services, manufacturing and warehousing operations as well as its marketing and engineering offices. The Company has manufacturing and office space in Wilmington, Massachusetts under three leases totaling 113,000 square feet, expiring in 2000, with options to the year 2005. The remaining leased facilities consist of offices in 29 locations across the United States. The Company owns a 135,000 square foot facility in Andover, Massachusetts that is utilized for its defense service operations and corporate administrative offices. The Company's total rental cost for 1997 was $2.5 million. The Company believes its properties are adequate for its present needs. See Note 6 to the Consolidated Financial Statements included in the Company's 1997 Annual Report to Shareholders for a description of the Company's lease obligations. Item 3. Legal Proceedings The Company is not a party to any material litigation. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report. Item 4A. Executive Officers of the Registrant The following is a list of the names and ages of the executive officers of the Company indicating all positions and offices held by each person and each person's principal occupations or employment during the past five years. The executive officers were elected by the Board of Directors and will hold office until the next annual election of officers and their successors are elected and qualified, or until their earlier resignation or removal by the Board of Directors. There are no family relationships between any executive officers and directors. Age Position John S. Anderegg, Jr. 74 Chairman and Director Albert Rand 71 President, and Chief Executive Officer and Director John L. Wilkinson 58 Vice President, Human Resources and Clerk Douglas R. Potter 47 Vice President of Finance, Chief Financial Officer Each of the persons named above has served in the position indicated for more than five years, with the exception of Douglas R. Potter. Mr. Potter was appointed Vice President of Finance and Chief Financial Officer in November 1993. Previously he was Vice President, Treasurer, and Chief Financial Officer of SofTech, Inc. of Waltham, Massachusetts from 1990 to 1993. Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The common stock of the Company is traded on the NASDAQ National Market under the symbol (DRCO). The high and low bid prices for the quarters in 1996 and 1997 and the number of holders of record of the Company's common stock are described in the Company's Annual Report to Shareholders for 1997 under the caption "Stock Prices" and "Number of Shareholders," and such information is incorporated herein by reference. In September 1984, the Board of Directors indicated its intention not to declare cash dividends to preserve cash for the future growth and development of the Company. The Company did not declare any cash dividends between 1984 and 1997 and does not anticipate doing so for the foreseeable future. Item 6. Selected Financial Data The section entitled, "Five Year Summary of Selected Financial Data" in the Company's Annual Report to Shareholders for 1997 is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The section entitled, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report to Shareholders for 1997 is incorporated herein by reference. Item 8. Financial Statements and Supplementary Data The following financial statements are filed as part of this Annual Report: Report of Independent Public Accountants Consolidated Balance Sheets at December 31, 1997, December 28, 1996 and December 30, 1995 Consolidated Statements of Operations for the three years ended December 31, 1997 Consolidated Statements of Shareholders' Investment for the three years ended December 31, 1997 Consolidated Statements of Cash Flows for the three years ended December 31, 1997 Notes to Consolidated Financial Statements (The consolidated financial statements and related notes listed above are incorporated by reference to the Company's Annual Report to Shareholders for the year 1997.) Report of Independent Public Accountants on Schedules to Consolidated Financial Statements Schedule VIII - Valuation and Qualifying Accounts for the three years ended December 31, 1997 The foregoing schedule is included as part of Item 14 of this Annual Report on Form 10-K All other financial statements and schedules have been omitted because the information required to be submitted has been included in the financial statements and related notes or they are either not applicable or not required under the rules of Regulation S-X. Quarterly financial data presented on page 16, and Management's Discussion and Analysis of Financial Condition and Results of Operations presented on pages 17-19, of the Company's Annual Report to Shareholders for the year 1997, are also incorporated herein by reference. With the exception of the portions listed in the above index, the Annual Report referred to above is not to be deemed filed as part of the financial statements. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable. PART III Item 10. Directors and Executive Officers of the Registrant Information with respect to Directors of the Registrant in the section entitled "Election of Directors" in the Company's definitive proxy Statement for the 199765 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year ended December 31, 1997, is incorporated herein by reference. Information relating to the Executive Officers of the Company is included in Item 4A of Part I of this Form 10K. Item 11. Executive Compensation Information called for by this item is incorporated by reference from the section entitled "Compensation and Related Matters" in the Company's definitive Proxy Statement for the 1997 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year ended December 31, 1997. Item 12. Security Ownership of Certain Beneficial Owners and Management Information called for by this item is incorporated by reference from the sections entitled "Common Stock Ownership of Certain Beneficial Owners and Management" in the Company's definitive Proxy Statement for the 19976 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year ended December 31, 1997. Item 13. Certain Relationships and Related Transactions Not applicable. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) (1) and (2) Financial Statements and Schedules - See Item 8. (a) (3) Exhibits. The exhibits that are filed with this Form 10-K, or that are incorporated herein by reference, are set forth in the Exhibit Index, which appears in Part IV of this report on pages 24 and 25. (b) Reports on Form 8-K. No reports on Form 8-K were filed by the Company during the last quarter of fiscal 1997. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES TO CONSOLIDATED FINANCIAL STATEMENTS To Dynamics Research Corporation: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements included in Dynamics Research Corporation's annual report to shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated February 20, 1998. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed in the accompanying index is the responsibility of the company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Boston, Massachusetts, February 20, 1998 Exhibit 99 IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS The following factors, among others, could cause the Company's actual results and performance to differ materially from those contained in forward-looking statements made in this report and presented elsewhere by or on behalf of the Company from time to time. Uncertainties as to Department of Defense and Other Federal Agency Budgets The Company has historically derived a substantial portion of its revenue from contracts and subcontracts with the U.S. Government, and currently more than 66% of the Company's revenue is derived from the Department of Defense business. During the past, the Company's defense business has been adversely affected by significant changes in defense spending. Overall U.S. defense budgets have been declining, and the effects of this general decline and attendant increased competition within the consolidating defense industry is expected to continue. Funding limitations could result in a reduction, delay, or cancellation of existing or emerging programs. These factors, among others, have reduced the Company's revenue and operating margins on its defense contracts in recent fiscal periods. The Company anticipates that competition in all defense-related areas will continue to be intense and that, accordingly, there will be continued significant competition when the Company's defense contracts are rebid and continued significant competitive pressure to lower prices, which may reduce profitability in this area of the Company's business. Any reduction in the level or profitability of the Company's defense business, if not offset by new commercial business or other business with the federal government, will adversely affect the Company's business, financial condition and results of operations. A significant portion of the Company's government contracts are renewable on an annual basis, or are subject to the exercise of contractual options. Also, multi-year contracts often require funding actions by the Government on an annual or more frequent basis. As a result, the Company's business could experience material adverse consequences should the Government budget not include funds required to sustain the programs under which DRC operates. Government Contracting Risks A significant portion of the Company's government contracts are of a time and materials nature, with fixed hourly rates that are intended to cover salaries, benefits, other indirect costs of operating the business and profit. The pricing of such contracts is based upon estimates of future costs and assumptions as to the aggregate volume of business that the Company will perform in a certain business division or other relevant unit. For long term contracts, the Company must estimate the costs necessary to complete the defined statement of work and recognize revenues or losses in accordance with such estimates. However, actual costs may vary materially from the estimates made from time to time, necessitating adjustments to reported revenue and net income. Underestimates of the costs associated with a project would adversely affect the Company's overall profitability and could have a material adverse effect on the Company's business, financial condition and results of operations. Governmental awards of contracts are subject to regulations and procedures that permit formal protests by losing bidders. Such protests may result in significant delays in the commencement of expected contractual effort, or the reversal of a previous award decision, which could have a material adverse effect on the Company's business, financial condition and results of operations. Because of the complexity and scheduling of contracting with the government, from time to time costs are incurred in advance of contractual funding by the government. In some circumstances, such costs may not be recovered in whole or in part under subsequent government contractual actions. Failure to collect such amounts may have material adverse consequences on the Company's business, financial condition and results of operations. Costs incurred in connection with government contracts are generally subject to after-the-fact audits. Such audits may result in material disallowances, which could have an adverse effect on the Company's business, financial condition and results of operations. A substantial portion of the Company's government contracting business is as a subcontractor. In such circumstances, the Company generally bears the risk that the prime contractor will meet its performance obligations to the government under the prime contract and that the prime contractor will have the financial capability to pay the Company amounts due under the subcontract. The inability of a prime contractor to perform or make required payments could have a material adverse effect on the Company's business, financial condition and results of operations. The Government has the right to terminate contracts for convenience. In such a termination, the Company would generally recover costs incurred up to termination, costs required to be incurred in connection with the termination, and a portion of the fee earned commensurate with the work performed to termination. However, significant adverse effects on the Company's indirect cost pools may not be recoverable in connection with a termination for convenience. Contracts with state and other governmental entities are subject to the same or similar risks. Dependence on Key Personnel The Company is dependent on its key technical personnel. In addition, certain technical contributors may have specific knowledge and experience related to various Government customer operations that would be difficult to replace in a timely fashion. The loss of the services of key personnel could have a material adverse effect on the Company's ability to perform required services under certain contracts, or to retain such business after the expiration of the current contract, or to win new business where certain personnel have been identified as key personnel in the proposal, any of which could have a material adverse effect on the Company's business, financial condition and results of operations. Competition The government contracting business is subject to intense competition, both technical and pricing, from numerous companies, many of which have significantly greater financial, technical and marketing resources than the Company. Competition in the market for the Company's commercial products is also intense. There is a significant lead time for developing such business, and it involves significant capital investment including development of prototypes and investment in manufacturing equipment. The Company's precision products business has a number of competitors, many of which have significantly greater financial, technical and marketing resources than the Company. Risks Associates with New Markets and New Products In its efforts to enter new markets, including government agencies other than the Department of Defense and commercial markets, the Company faces significant competition from other companies that have prior experience with such potential customers as well as significantly greater financial, technical and marketing resources than the Company. As a result, the Company's efforts to enter such new markets may be unsuccessful or may not achieve the level of success sought by the Company. The Company has announced software products for commercial markets. There is no assurance that the Company's software products will meet with market acceptance or that the Company will be able to compete in the development and distribution of such products with competitors that have significantly greater resources and experience. Concentration of Customers Within the Department of Defense, individual services and program offices account for a significant portion of the Company's government business. Two customers account for a significant portion of the revenue of the Company's commercial manufacturing divisions. No assurance can be provided that any of these customers will continue as such or will continue at current levels. A decrease in orders from these customers would have an adverse effect on the Company's profitability, and the loss of any large customer could have a material adverse effect on the Company's business, financial condition and results of operations. Risk of Product Claims The Company's precision manufactured products are generally designed to operate as important components of complex systems or products, and defects in DRC products could cause the customer's product or systems to fail or perform below expectations. Like other manufacturing companies, the Company may be subject to claims for alleged performance issues relating to its products. There can be no assurance any such claims, if made, will not have a material adverse effect on the Company's business, financial conditions or results of operations. Risk of Economic Events Effecting the Company's Business Segments Certain of the Company's precision products are components of commercial products. Factors that affect the production and demand for such products, including economic events, competition, technological change and productions stoppages, could adversely affect demand for the Company's products. Certain of the Company's products are incorporated into capital equipment, such as machine tools and other automated production equipment, used in the manufacture of other products. As a result, this portion of the Company's business may be subject to fluctuations in the manufacturing sector of the overall economy. An economic recession could have a material adverse effect on the rate of orders received by the commercial divisions. Significantly lower production volumes resulting in under-utilization of the Company's manufacturing would adversely affectimpact the Company's profitability. Technological Change The Company's knowledge base and skills in the Government contracting area are sophisticated and involve areas in which there have been and are expected to be significant technological change. There is no assurance that the Company will continue to be able to offer services that satisfy its customers' requirements at a competitive price. Many of the Company's products are incorporated into sophisticated machinery, equipment or electronic systems. Technological changes may be incorporated into competitor's products that may adversely affect the market for the Company's products. Further, there can be no assurance that the Company's research and product development efforts will be successful and result in new or improved products that may be required to sustain the Company's market position. Uncertainty of Future Financing Although the Company has no immediate plans to raise additional capital, it may in the future need to raise additional funds through public or private debt or equity financings. There can be no assurance that any such funding will be available or of the terms or timing of any such funding. SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: March 27, 1998 DYNAMICS RESEARCH CORPORATION by: /s/ Albert Rand Albert Rand, President (Principal Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on the 27th of March, 1998. /s/ Albert Rand Albert Rand Director, President, Chief Executive Officer /s/ Douglas R. Potter Douglas R. Potter Vice President of Finance, Chief Financial Officer (Principal Financial and Accounting Officer) /s/ John S. Anderegg, Jr. John S. Anderegg, Jr. Director, Chairman /s/ Francis J. Aguilar Dr. Francis J. Aguilar Director /s/ Martin V. Joyce, Jr. Martin V. Joyce, Jr. Director /s/ Kenneth F. Kames Kenneth F. Kames Director /s/ James P. Mullins Gen. James P.Mullins Director SCHEDULE VIII DYNAMICS RESEARCH CORPORATION AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS FOR THE THREE YEARS ENDED DECEMBER 31, 1997 (in thousands of dollars) ALLOWANCE FOR DOUBTFUL ACCOUNTS AND SALES RETURNS Balance, December 31, 1994 $586 Additions charged to expense (2) Write-off of uncollectible accounts, net (182) Balance, December 30, 1995 $402 Additions charged to expense (54) Write-off of uncollectible accounts, net (8) Balance, December 28, 1996 $340 Additions charged to expense (86) Write-off of uncollectible accounts, net (37) Balance, December 31, 1997 $217 EXHIBIT INDEX 3.0 Certificate of Incorporation and By-Laws. 3.1 Restated Articles of Organization dated May 22, 1987. (Incorporated by reference to the Registrant's Form 10-Q for the quarter ended 6/13/87) 3.2 By-Laws dated May 22, 1987. (Incorporated by reference to the Registrant's Form 10-Q for the quarter ended 6/13/87) 4.0 Instruments defining the rights of security holders, including indentures. 4.1 Common stock certificate. 4.2 Preferred stock certificate. 4.3 Rights Agreement dated as of July 14, 1988 ("Rights Agreement") between the Company and American Stock Transfer & Trust Company, as Rights Agent. (Incorporated by reference to the Registrant's Form 8-K on July 14, 1988) 4.4 Rights Agreement Amendment No. 1 dated as of September 6, 1989. (Incorporated by reference to the Registrant's Form 8-K on September 12, 1989) 10.0 Material Contracts 10.1 Amended 1983 Stock Option Plan. (Incorporated by reference to the Registrant's Form 10-K for the year ended 12/27/87) 10.2 1993 Equity Incentive Plan. (Incorporated by reference to the Registrant's Form 10-Q for the quarter ended 6/12/93) 10.3 1995 Stock Option Plan for non-employee directors. (Incorporated by reference to the Registrant's Form 10-K for the year ended 12/31/94) 10.4 Form of Dynamics Research Corporation Indemnification Agreement for Directors. (Incorporated by reference to the Registrant's Form 10-K for the year ended 12/28/91) 10.5 Form of Dynamics Research Corporation Severance Agreement for Messrs. Anderegg and Rand. (Incorporated by reference to the Registrant's Form 10-K for the year ended 12/28/91) 10.6 Dynamics Research Corporation Deferred Compensation Plan for Non-Employee Directors. (Incorporated by reference to the Registrant's Form 10-K for the year ended 12/28/91) 10.7 Form of Consulting Agreement between Dynamics Research Corporation and Albert Rand. (Incorporated by reference to the Registrant's Form 10-Q for the quarter ended 3/31/97) 10.8 Form of Supplemental Retirement Pension Agreement between Dynamics Research Corporation and Albert Rand. (Incorporated by reference to the Registrant's Form 10-Q for the quarter ended 3/31/97) 10.9 Credit Agreement dated October 2, 1997 between Dynamics Research Corporation and a syndicate of banks and financial institutions, with Brown Brothers Harriman and Company as the agent. 10.10 Amended 1993 Equity Incentive Plan 10.11 Amended 1995 Stock Option Plan for Non-Employee Directors 13.0 Annual Report to security holders, Form 10-Q or quarterly reports to security holders. 13.1 The Company's Annual Report to Shareholders for the year ended December 31, 1997 filed herewith with the exception of the information incorporated by reference in parts I, II and IV of this Form 10-K is not deemed to be filed as part of this report. 23.0 Consents of experts and counscel 23.1 Consent of Independent Accountants (Arthur Andersen LLP) dated March 30, 1998 filed herewith. 99.0 Important Factors Regarding Forward-Looking Statements. EX-27 2
5 1000 12-MOS DEC-31-1997 DEC-31-1997 542 0 49572 0 3377 56037 50326 28098 78859 29637 10000 0 0 737 38410 78859 27598 159377 20700 139317 13815 (123) 108 6137 2008 4129 0 0 0 4129 .66 .64
EX-13 3 financial highlights 1995 1996 1997 (In thousands of dollars, except share and employee data) Revenue $ 103,941 $ 130,163 $ 159,377 Net income 559 1,729 4,129 Net income per share - basic* .09 .28 .66 Net income per share - diluted* .09 .27 .64 Backlog 61,284 73,200 110,001 Number of employees 1,249 1,349 1,455 Number of shares outstanding* 6,185,049 6,263,025 6,288,872 *Restated for the April 1997 10% stock dividend. To Our Shareholders Dynamics Research Corporation (DRC) revenues grew 22 percent in 1997, bringing total sales to a record $159 million for the year. Much of this growth is attributable to initiatives put in place earlier that are now bearing fruit. We enter 1998 with a substantial backlog and are committed to sustaining the strong growth achieved during the past two years. Financial Results Revenues for the year ended December 31, 1997 increased to $159.4 million from $130.2 million for 1996. Net income for 1997 advanced to $4,129,000, or $.66 per basic share and $.64 per diluted share, from $1,729,000, or $.28 per basic share and $.27 per diluted share, the prior year. Results for 1997 include a one-time net income benefit realized during the third quarter amounting to $1.0 million, or $.16 per share, from the refund of income taxes and related interest. Sales for the Systems and Test Equipment divisions totaled $131 million for the year, or 83 percent of revenues, while sales for the Precision Manufactured Products divisions equaled $28 million, or 17 percent of 1997 revenues. Expanding Beyond Core Defense Initiatives We continue to make excellent progress on changing our business mix to promote growth and improve profitability. We are accomplishing this by using the expertise and systems developed in our Department of Defense work for other government agencies and businesses. Approximately 34 percent of this year's revenues were generated from non-defense sources and sales of our precision manufactured products-up from 26 percent last year, while defense-related projects accounted for 66 percent of sales. Our long-stated goal is to achieve a 50/50 balance between defense and non-defense revenues. The most significant area of growth in 1997 was our state government business. We won several major contracts, competing effectively against well-known management consulting firms and computer hardware vendors. Our success in this arena stems from a strong track record with existing clients, an advantageous cost structure, and Systems Engineering Institute Level II certification, a difficult-toobtain classification designed to ensure the consistency, quality and comprehensiveness of DRC's systems integration programs. Major Wins Major non-defense information system contracts awarded to DRC in 1997 include: A $36-million contract for the State of Ohio's Department of Health and Human Services system for tracking child support payments; A second, $19-million contract with Ohio to provide computer hardware and software for an automated child welfare system; A $28-million, seven-year contract with the State of Colorado's child protection and juvenile justice agencies; Expansion of an existing contract supporting a case-management system for New Hampshire's Department of Health and Human Services; and A $3-million contract for evaluating and certifying year 2000 conversions for Internal Revenue Service information systems. Pioneering New Military Niches Reengineering consulting, logistics planning, decision support systems and supply chain management-core DRC competencies-continue to constitute the bulk of our defense business. Significantly, the realignment of military budgets is generating greater demand for DRC's information technology expertise. Opportunities are arising to manage programs that are being privatized and to reengineer customer workflow to achieve better efficiencies. We are also winning projects in new niches where DRC has proven expertise. Key projects in this category include: A three-year, $12-million extension of an existing contract supporting the U.S. Navy's specialized semiconductor production facility in San Diego, California. DRC engineers model and simulate semiconductor performance before the chips are actually produced. Marketing a test device for joint tactical communications, a sophisticated display device that collects and synthesizes positioning information from ships, airplanes and ground stations. A $13 million, four-year program for the U.S. Army known as MedTeams grew to $2.7 million in 1997 from $800,000 in 1996. This innovative program, which draws upon DRC's experience in training combat flight crews, analyzes and improves emergency room teamwork in civilian and military hospitals. Telecommunications Initiative One of the most promising areas of growth at DRC is the Sleuth telecommunications fraud control system, a product initially developed by Pacific Bell and now marketed and maintained by DRC under an exclusive license. Accounting for $2.6 million of DRC revenues in 1997, Sleuth is used to monitor calling card fraud by SBC Communications (formerly Southwest Bell and Pacific Bell), Ameritech, Bell Atlantic, Bell South, U.S. West and is soon to be installed in the NYNEX operations acquired by Bell Atlantic. Precision Manufactured Products Identifying new medical, high technology and consumer applications for electroformed circuits and conductors was a primary focus for the Metrigraphics Division in 1997. DRC is now seeking to develop potential high-volume products in collaboration with household-name manufacturers in several industries. Electroform products expanded beyond consumer and office markets this year, as we produced products to be used in engineering, cartography and industrial packaging applications. Within the Encoder Division, high-volume production of diesel fuel pump encoders for a major auto parts supplier remained strong, and we are pursuing other volume production opportunities with original equipment manufacturers. Laying Groundwork for Future Growth Entering 1998, our goals for the year are to maintain a 20 percent growth curve, further improve margins and continue diversifying into non- defense business. We anticipate that state government work will be a major area of growth again this year. Our greatest emphasis going forward is on the expansion of our commercial base, particularly within the Systems Division. We are constantly balancing the drive to invest in initiatives that will generate strong future returns against the need to bring results to the bottom line today. DRC is aggressively exploring and qualifying potential new markets and technologies in which we expect to have a strong competitive advantage. Our success in securing state health and human service agency contracts is a prime example of how our strategy of migrating core competencies into new, growing markets has paid off. Among the many product and market development initiatives now underway are: Expansion of DoD work for programs undergoing privatization, particularly those involving reengineering and logistics support; Gaining entree through year 2000 date conversion contracts to the market for revitalizing or replacing Bull computers in private corporations and state and local governments; Identifying and developing new applications for electroforming processes for fine precision structures. During the year we established a line of credit of up to $45 million that gives us the flexibility to pursue new opportunities. The strength of our board was augmented with the addition of two new directors: Martin V. Joyce, Jr. and Kenneth F. Kames. Mr. Joyce is a vice president of A.T. Kearney, Inc., a leading management consulting firm, and has far- reaching expertise in the software and information technology industry. Mr. Kames spearheads new business development for The Gillette Company and brings a strong background in acquisitions and joint ventures. As has been our practice in the past, we declared a 10 percent stock dividend in April 1997 to increase the liquidity of DRC stock. DRC is at an exciting point in its history. We are in the right place at the right time to benefit from major changes in the marketplace. Much of the credit for this goes to our employees who are willing and able to move quickly to capitalize on new opportunities, as well as to our shareholders for their ongoing support. Sincerely, John S. Anderegg, Jr. Albert Rand Chairman President and Chief Executive Officer poised to profit from market forces The market for information technology services and devices is changing faster than ever, buffeted by major social, technological and economic trends. DRC is constantly reevaluating and reshaping its capabilities to capitalize on these changing market conditions. Major Market Forces Shifting defense priorities driving demand for sophisticated information systems that improve efficiency and lower costs; Acquisition of information technology among state governments to improve data tracking systems and meet more stringent federal reporting requirements; Telecommunications industry deregulation, resulting in consolidation and the rise of innovative new service providers; and Product advances across a wide range of industries enabled by the miniaturization of electronics. The pages that follow detail only a few of the many initiatives percolating within DRC to take advantage of these trends. Health and Human Services Market Force Recent legislation has mandated comprehensive computerized tracking and management capabilities at state health and human service agencies. The Response Leverage expertise in designing and maintaining complex management information systems to address the burgeoning state market. supporting welfare reform When the State of Ohio needed to establish the computer and communications infrastructure for a statewide system to monitor child support payments, it turned to DRC. In February 1997, DRC received a $36 million contract to design, procure, install and maintain the computer hardware and communications networks supporting 4,400 caseworkers throughout the state's 88 counties. DRC's performance on the initial contract was a key factor in winning additional work from Ohio. In November, it won a second contract totaling nearly $19 million to provide computer hardware, software and technical su pport services in support of the Ohio Works First initiative and its automated child welfare information system. DRC's work for Ohio has primarily focused on providing systems integration services. Its work for health and human service agencies in the states of New Hampshire and Colorado has focused on developing and implementing sophisticated software-based management information systems for child welfare. decision support systems The complex logistics behind day-to-day maintenance and support typically account for two-thirds of the costs of aircraft operations. As the Air Force seeks lower-cost ways to meet its high maintenance standards, it is using innovative decision support software and Internet-based communications systems devised by DRC. DRC software engineers have accessed an existing information system to create a logistics model for managing the location and movement of repair parts to and among the Air Force's five domestic Air Logistics Center maintenance depots. The software tracks the availability of maintenance bays, mechanics and machinery; forecasts space and equipment demand; and schedules all repairs. It also manages the timely delivery of replacement parts, eliminating costly inventory build up. To facilitate fast access to this mission-critical supply chain, DRC has also implemented a highly secure Web site that enables maintenance staff around the country to review schedules and trace the location of parts. Aircraft Maintenance Market Force The Department of Defense is striving to make weapons system maintenance as cost-efficient as possible without jeopardizing readiness or reliability. The Response Devise software-based decision support systems and secure Internet communications to optimize maintenance operations. fraud control system In 1996, DRC obtained an exclusive license to maintain and market a telephone fraud detection system from a unit of SBC Communications that detects potentially fraudulent credit card calls. The system is now used by all five regional Bell operating companies, and is soon to be installed in the NYNEX operations acquired by Bell Atlantic. DRC software engineers have upgraded the Fraud Control System into a comprehensive product that detects suspicious calling patterns in all long-distance calls. With deregulation continuing to blur the lines between Bell operating companies, local exchange carriers and independent telephone companies, all carriers will benefit from putting universal fraud control measures in place. DRC is exploring opportunities with several major computer and telecommunications equipment vendors about marketing the Fraud Control System to local exchange carriers, independents and major international telecommunications companies. Telecommunications Industry Deregulation Market Force Telecommunications industry deregulation has resulted in a wave of consolidations and the rise of innovative new service providers. The Response Enhancing a Fraud Control System currently in use by Regional Bell Operating Companies and making it an attractive cost-control tool for independent telephone companies and local exchange carriers. Miniaturization of Electronics Market Force The miniaturization of electronics is resulting in the deployment of next-generation medical, high technology and consumer products. The Response Partner with product designers at major manufacturers to engineer DRC's electroformed circuits and components into new miniature devices. precision electroforming The miniaturization of electronics is opening new markets for DRC- already one of the largest independent suppliers of high-precision miniature circuits, disks and other optical components. These devices are manufactured through a process known as electroforming, whereby a thin, flexible metal layer is deposited on glass, film or ceramic substrates in patterns with tolerances of less than one micron. DRC currently produces nozzles for controlling the flow of ink for business and industrial ink jet printers, as well as flexible circuits used in imaging electronics for intravascular catheters used in angioplasty. DRC is collaborating with design engineers at major medical, high technology, recreational equipment, automobile and household equipment manufacturers to devise new high volume applications for its electroformed precision parts. Command, Control and Communications Market Force In an effort to better coordinate and streamline operations, branches of the military are seeking to integrate differing communications protocols. The Response A unique DRC workstation tests devices that receive and synthesize tactical data and positioning information from diverse military sources. improving tactical communications Entering the large and fast-growing marketplace for command, control and communications systems, DRC has developed a unique tool that tests critical communications devices and simulates the theater of operation. DRC's test device (Joint Tactical Information Distribution System Test Device), gauges the efficiency and functionality of equipment transmitting and receiving tactical data to or from such diverse sources as satellites, aircraft, ships and groundbased installations. These devices, which identify and locate forces within a particular geographic region-the Persian Gulf, for example-must integrate information that comes in a range of different formats, including voice, data, or scrambled and unscrambled frequencies. Comprised of a computer workstation and sophisticated communications electronics, the test device processes data from these diverse sources and displays the location of forces as icons on a large screen. The test device's simulation capabilities make it an excellent training device. It also represents an area of potential growth for DRC because of its unique ability to integrate data from multiple sources. Currently in use as a training system at Naval and Air Force bases, the next-generation system will operate as an interface device connecting forces within the theater of operation. Five Year Summary of Selected Financial Data
(in thousands of dollars, exceop share and employee data) 1997 1996 1995 1994 1993 Revenue $ 159,377 $ 130,163 $ 103,941 $ 102,964 $ 101,102 Operating income 6,245 3,345 1,018 632 3,242 Net income 4,129 1,729 559 224 1,834 Net income per common share - basic* .66 .28 .09 .04 .30 Net income per common share - diluted* .64 .27 .09 .04 .29 Total assets 78,859 71,102 53,946 53,977 59,494 Long-term debt (excluding current portion) 10,000 300 1,500 2,717 3,900 Shareholders' investment 39,147 35,239 33,206 32,713 32,437 Shareholders' investment per share* 6.22 5.63 5.37 5.28 5.25 Return on shareholders' investment(%) 10.55 4.9 1.7 .7 5.7 Backlog 110,001 73,200 61,284 43,679 51,257 Cash flow from operations 7,980 1,035 7,499 5,721 1,397 Research and development expense 1,441 2,702 1,949 224 2,007 Capital expenditures 5,104 9,266 4,441 2,444 12,144 Number of shares outstanding at end of year* 6,288,872 6,263,025 6,185,049 6,194,593 6,171,966 Number of employees 1,455 1,349 1,249 1,130 1,188
Quarterly Data**
(in thousands of dollars, except per share data) unaudited 1st 2nd 3rd 4th 1997 Revenue $ 33,008 $ 40,146 $ 43,269 $ 42,954 Operating income 764 1,609 1,471 2,401 Net income 326 824 1,723 1,256 Net income per common share - basic* .05 .13 .27 .20 Net income per common share - diluted* .05 .13 .27 .19 1996 Revenue $ 26,627 $ 28,373 $ 29,929 $ 45,234 Operating income 434 873 1,465 573 Net income 209 498 831 191 Net income per common share - basic* .03 .08 .13 .03 Net income per common share - diluted* .03 .08 .13 .03 1995 Revenue $ 21,929 $ 23,936 $ 24,354 $ 33,722 Operating income (loss) (602) 550 544 526 Net income (loss) (388) 318 309 320 Net income (loss) per common share - basic* (.06) .05 .05 .05 Net income (loss) per common share - diluted* (.06) .05 .05 .05
* Restated for the April 1997 10% stock dividend. ** Prior to 1997 the Company used a 13-period accounting year, each with four weeks. The first three quarters contained 12 weeks, and the fourth fiscal quarter contained 16 weeks. The Company now employs a calendar-month accounting year. Management's Discussion and Analysis of Financial Condition and Operating Results Results of Operations This discussion and analysis should be read in conjunction with and is intended to supplement the information set forth in the Company's consolidated financial statements and related notes. The following table sets forth, for the periods indicated, the percentage which certain items in the Consolidated Statements of Operations bear to revenue: 1997 1996 1995 Revenue Contract revenue 82.7% 77.5% 77.7% Product sales 17.3 22.5 22.3 Total revenue 100.0 100.0 100.0 Costs and Expenses Cost of contract revenue* 90.0 91.7 90.5 Cost of product sales* 75.0 69.9 75.8 Total cost of sales 87.4 86.8 87.2 Selling, engineering and administrative expenses 8.7 10.6 11.8 Total operating costs 96.1 97.4 99.0 Operating income 3.9 2.6 1.0 Interest expense, net 0.1 0.4 0.2 Income before income taxes 3.9 2.2 0.8 Provision for income taxes 1.3 0.8 0.3 Net income 2.6% 1.4% 0.5% *These amounts represent a percentage of contract revenue and product sales, respectively. The following comments should be read in conjunction with the foregoing table: Contract Revenue Contract revenue increased by 30.6% or $30,901,000 in 1997 over 1996 and 24.9% or $20,122,000 in 1996 over 1995. Approximately 60% of the 1997 increase is attributable to major contracts with the State of Ohio for statewide network infrastructure for Human Services systems and with the state of Colorado for similar network infrastructure as well as software system implementation services. The remainder of the increase in contract revenue was broad-based with growth contributions from additional work received under the Company's long running core U.S. Navy program, technical and management services programs for the U.S. Army, Air Force and Navy, and services for the U.S. Department of the Treasury. The 1996 increase from 1995 was the result of increases in work for the U.S. Navy, U.S. Air Force, defense logistics and engineering support contracts as well as new state contracts. Much of the Company's defense revenue relates to the development and operation of computer-based management information and logistics support systems, as well as other information technology services. Revenue for this segment also includes tasks to provide Year 2000 validation and compliance services for the Internal Revenue Service. Product Sales Product sales decreased during 1997 by 5.8% or $1,687,000 as compared to 1996. This was principally the result of decreased sales of electroformed components partially offset by increased sales of custom encoders across a wide range of customers. The 26.3% or $6,100,000 growth in product sales in 1996, as compared with 1995, is attributable primarily to increased sales of electroformed components for a line of commercial ink-jet printers, and increased sales of a line of custom encoders for a customer in the automotive industry. Cost of Contract Revenue Cost of contract revenue as a percentage of contract revenue decreased to 90.0% in 1997 from 91.7% in 1996. In the fourth quarter of 1996, the Company incurred a one-time pre-tax charge of $1,800,000 for unrecoverable costs associated with an Air Force contract. Cost of contract revenue, excluding the 1996 one-time charge, increased from 89.9% in 1996 to 90.0% in 1997, principally as a result of increased subcontract costs related to the development of a statewide infrastructure under the state of Ohio Human Services system contract. Cost of contract revenue as a percentage of contract revenue increased to 91.7% in 1996 from 90.5% in 1995. Cost of Goods Cost of goods as a percentage of product sales increased from 69.9% in 1996 to 75.0% in 1997. This increase was primarily the result of decreased production levels of electroformed components during 1997. Cost of goods as a percentage of product sales decreased from 75.8% in 1995 to 69.9% in 1996 as a result of the substantial increase in production levels of electroformed components for a line of ink-jet printers and of a custom encoder product line. Selling, Engineering and Administrative Expenses Selling, engineering and administrative expenses as a percentage of sales decreased by 1.9% in 1997 from 1996, reflecting flat spending while revenue grew 22%. The increased expense in 1996 from 1995 was principally due to increased research and development efforts by the Company in connection with a software design and development tool and research and development spending in connection with the Company's efforts to enter the telecommunication fraud detection market. Excluding research and development, selling, engineering and administrative costs decreased as a percentage of total revenue from 9.9% of sales in 1995 to 8.5% in 1996 and 7.8% in 1997. Interest Expense, (Net) Interest expense, (net) decreased to $108,000 in 1997 from $547,000 in 1996. The change was due to interest income of $740,000 related to an income tax credit which was received during the year, partially offset by increased interest expense resulting from an increase in the average level of the Company's borrowings as a result of additional working capital requirements associated with the substantial increase in revenue. Higher average borrowings resulted in higher interest expense for 1996 from 1995 and resulted from capital expenditures in 1996 of $9,266,000, including $4,900,000 in connection with a program to increase electroforming manufacturing capacity, combined with $2,000,000 expended for a January 1996 acquisition of a defense services business. Provision for Income Taxes The Company's effective income tax rate for 1997 was 32.7% compared to 38.2% for 1996 and 34.0% for 1995. The Company's tax provision for 1997 reflects a one-time benefit of $747,000 resulting from a refund of income taxes relating to the Company's prior years research and development expenses. The 1995 rate was favorably affected by research and development credits as well as somewhat lower net state tax rates. Backlog The Company's funded backlog of unfilled orders at the end of 1997 was $110,000,000, an increase of 50.3% from the $73,200,000 at the end of 1996. The Company's funded backlog at the end of 1995 was $61,300,000. The 1995 balance included $10,000,000 related to a commercial order for inkjet printer components. A portion of the Company's backlog is based on annual purchase contracts and the amount of the backlog as of any date can be affected by the timing of such order receipts and deliveries thereunder. Liquidity and capital resources The Company's primary sources of liquidity have been cash flow from operations and bank credit lines. The principal drivers of cash flow are earnings, adjusted for depreciation and amortization, aggregate billed and unbilled receivables in the Company's government and state businesses, and capital expenditures. The sum of receivables and unbilled expenditures and fees on contracts in process increased in 1997 and 1996 as a result of the substantial increase in revenue during each of the years. However, the 1997 billed and unbilled receivables balance is comparable to 1996 and 1995 when measured in terms of days' sales. Capital expenditures, which had increased from $4,400,000 in 1995 to $9,266,000 in 1996 principally in connection with a program to increase electroforming manufacturing capacity, were $5,104,000 in 1997. The Company announced during October, 1997 that it had signed a long- term credit agreement that provides unsecured loans in an aggregate principal amount of up to $45 million. This credit facility consists of a revolving loan of up to $30 million for working capital purposes and up to $15 million for acquisitions. This facility provides the Company with greater flexibility to finance the growth of its business and to pursue new opportunities. At December 31, 1997, $20,000,000 was available for working capital purposes under the Company's long-term credit facility. The Company believes that its liquid assets, cash flows from operations and availability under its credit facility will be sufficient to support its normal operating and capital requirements for 1998. The Company does not have any significant capital commitments as of December 31, 1997 outside the ordinary course of business. Year 2000 The Company has established a steering committee to coordinate the identification, evaluation and implementation of changes to its entire computer infrastructure necessary to achieve a year 2000 data conversion with no disruption to its business operations or customers. The Company is also communicating with its suppliers and others with whom it does business to coordinate year 2000 conversions. These actions are necessary to ensure that the systems and applications the Company utilizes will recognize and process year 2000 and beyond data. The cost of compliance and its effect on the Company's future results of operations has not yet been determined. Impact of Inflation and Changing Prices Overall, inflation has not had a material impact on the Company's operations. In addition, the terms of Defense contracts, which accounted for approximately 66% of the Company's revenues in 1997, are generally for one year and include salary increase factors for future years, thus reducing the potential impact of inflation on the Company. Forward-Looking Information This report includes certain forward-looking statements about the Company's business including the effect of the federal budget on the Company's sales, response to the Company's product and services offerings, growth in revenues, capital spending, research and development spending and customer mix. Such forward-looking statements are subject to risk and uncertainties that could cause the actual results to vary materially. These risks and uncertainties, discussed in more detail in the Company's Form 10-K for the year ended December 31, 1997, include possible reductions in federal funding for the Company's customers and potential customers, concentration of customers, risks of sustaining existing contracts and orders thereunder at the same or increasing levels and of obtaining new contracts, high levels of competition and difficulties of entering new markets, government contracting issues including audit adjustments and costs of completing fixedprice contracts, supply difficulties, warranty claims, and factors affecting the business segments in which the Company operates and the economy generally. Consolidated Balance Sheets
At December 31, 1997, December 28, 1996 and December 30, 1995 (in thousands of dollars, except share data) 1997 1996 1995 Assets Current assets: Cash and cash equivalents $ 542 $ 234 $ 777 Receivables, less allowances of $217, $340 and $402 17,397 19,436 16,095 Unbilled expenditures and fees on contracts in process 32,175 22,690 16,383 Inventories 3,377 3,211 2,612 Refundable income taxes 878 1,436 286 Prepaid expenses and other current assets 1,668 1,247 1,284 Total current assets 56,037 48,254 37,437 Property, plant and equipment, at cost: Land 1,126 1,126 1,126 Building 7,774 7,774 7,774 Machinery and equipment 39,130 38,861 31,537 Leasehold improvements 2,296 2,109 1,815 Total property, plant and equipment, at cost 50,326 49,870 42,252 Less-accumulated depreciation and amortization 28,098 28,266 25,743 Net property, plant and equipment 22,228 21,604 16,509 Excess of purchase price over net assets of business acquired, net of accumulated amortization 594 1,244 - Total assets $ 78,859 $ 71,102 $ 53,946 Liabilities and Shareholders' Investment Current liabilities: Notes payable $ - $ 10,600 $ - Accounts and drafts payable 8,355 8,925 3,550 Accrued payroll and employee benefits 8,032 6,998 6,416 Deferred contract and other revenue 35 42 983 Other accrued expenses 4,216 852 1,691 Current deferred income taxes 8,999 6,091 4,407 Current portion of long-term debt - 1,201 1,217 Total current liabilities 29,637 34,709 18,264 Long-term debt, less current portion 10,000 300 1,500 Deferred income taxes 75 854 976 Commitments and contingencies Shareholders' Investment Preferred stock, par value, $.10 per share, 5,000,000 shares authorized, none issued - - - Common stock, par value, $.10 per share: Authorized - 15,000,000 shares Issued - 7,366,484 shares in 1997, 6,689,767 shares in 1996 and 6,618,880 shares in 1995 737 669 662 Less: Treasury stock - 1,077,612 shares in 1997, and 996,108 shares in 1996 and 1995, at par value (108) (100) (100) Capital in excess of par value 14,506 9,516 9,219 Retained earnings 24,012 25,154 23,425 Total shareholders' investment 39,147 35,239 33,206 Total liabilities and shareholders' investment $ 78,859 $ 71,102 $ 53,946 The accompanying notes are an integral part of these consolidated financial statements.
Dynamics Research Corporation Consolidated Statements of Operations
For the three years ended December 31, 1997 (in thousands of dollars, except share data) 1997 1996 1995 Revenue: Contract revenue $ 131,779 $ 100,878 $ 80,756 Product sales 27,598 29,285 23,185 Total revenue 159,377 130,163 103,941 Costs and expenses: Cost of contract revenue 118,617 92,512 73,077 Cost of goods 20,700 20,476 17,579 Selling, engineering and administrative expenses 13,815 13,830 12,267 Total operating costs and expenses 153,132 126,818 102,923 Operating income 6,245 3,345 1,018 Interest expense, net 108 547 171 Income before provision for income taxes 6,137 2,798 847 Provision for income taxes 2,008 1,069 288 Net income $ 4,129 $ 1,729 $ 559 Net income per common share - basic* $ .66 $ .28 $ .09 Net income per common share - diluted* $ .64 $ .27 $ .09 Basic weighted average number of common shares outstanding* 6,275,455 6,243,170 6,163,422 Diluted weighted average number of common shares outstanding* 6,506,013 6,466,841 6,261,526 *Restated for the April 1997 10% stock dividend.
For the three years ended December 31, 1997 (in thousands)
Common Stock Capital in Issued Treasury Stock Excess of Retained Shares Par Value Shares Par Value Par Value Earnings Balance at December 31, 1994 6,571 $ 657 (940) $ (94) $ 9,284 $ 22,866 Year 1995 Stock options exercised 48 5 - - 159 - Treasury stock purchased - - (56) (6) (224) - Net income - - - - - 559 Balance at December 30, 1995 6,619 $ 662 (996) $ (100) $ 9,219 $ 23,425 Year 1996 Stock options exercised 71 7 - - 297 - Net income - - - - - 1,729 Balance at December 28, 1996 6,690 $ 669 (996) $ (100) $ 9,516 $ 25,154 Year 1997 Stock options exercised 107 11 - - 540 - Treasury stock purchased - - (82) (8) (760) - 10% Stock dividend 569 57 - - 5,210 (5,271) Net income - - - - - 4,129 Balance at December 31, 1997 7,366 $ 737 (1,078) $ (108) $14,506 $24,012 The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Statements of Cash Flows For the three years ended December 31, 1997 (in thousands of dollars) 1997 1996 1995 Cash provided by operations: Net income $ 4,129 $ 1,729 $ 559 Depreciation and amortization 5,376 4,927 4,002 Increase (decrease) in deferred income taxes (779) (122) 111 Provision for receivable reserves (123) (62) (184) 8,603 6,472 4,488 Cash provided by (used for) working capital: Receivables 2,162 (3,279) (972) Unbilled expenditures and fees on contracts in process (9,485) (6,307) 1,811 Inventories (166) (599) (259) Refundable income taxes 558 (1,150) 599 Prepaid expenses and other current assets (421) 37 46 Accounts and drafts payable (570) 5,375 108 Accrued payroll and employee benefits 1,034 582 1,767 Deferred contract and other revenue (7) (941) 89 Other accrued expenses 3,364 (839) 156 Current deferred income taxes 2,908 1,684 (334) (623) (5,437) 3,011 Net cash provided by operations 7,980 1,035 7,499 Cash used for investing activities: Additions to property and equipment, net (5,104) (9,266) (4,441) Net assets of business acquired, net (250) (2,000) - Net cash used for investing activities (5,354) (11,266) (4,441) Cash provided by (used for) financing activities: Net borrowings (repayments) under line of credit agreements (10,600) 10,600 (1,200) Principal payments under long-term borrowings (1,501) (1,216) (1,221) Proceeds from long-term borrowings 10,000 - - Proceeds from exercise of stock options 551 304 164 Purchase of treasury shares (768) - (230) Net cash provided by (used for) financing activities (2,318) 9,688 (2,487) Net increase (decrease) in cash and cash equivalents 308 (543) 571 Cash and cash equivalents at the beginning of the year 234 777 206 Cash and cash equivalents at the end of the year $ 542 $ 234 $ 777 Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 792 $ 635 $ 435 Income taxes $ 430 $ 1,237 $ 160
The accompanying notes are an integral part of these consolidated financial statements. 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The accompanying consolidated financial statements include the accounts of Dynamics Research Corporation and its wholly-owned subsidiaries (the Company). All material intercompany transactions and balances have been eliminated in consolidation. Revenue Recognition The Company provides services under fixed-price, cost reimbursement, time and material, and level of effort contracts. Revenues under cost-reimbursement and fixed-price contracts are recognized as costs are incurred and include applicable fees in the proportion that costs incurred bear to total estimated costs. When a loss is indicated on any contract in process, provision for the total estimated loss is made at that time. For time and material and level of effort types of contracts, revenues are recorded as the costs are incurred. Costs related to cetain contracts, including applicable indirect costs (for the year after 1995), are subject to audit by the U.S. Government. Revenues from such contracts have been recorded at amounts expected to be realized upon final settlement. Deferred contract revenue represents the amounts billed on certain contracts in excess of costs and fees incurred to date. Income Taxes The Company accounts for income taxes using the liability method as set forth in Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." Under the liability method, deferred taxes are determined based upon the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. The deferred tax provision represents the change in deferred tax asset/liability balance. Cash and Cash Equivalents The Company considers all cash investments with original maturies of three months or less to be cash equivalents. Unbilled Expenditures and Fees on Contracts in Process Unbilled expenditures and fees on contracts in process consist of costs and estimated earnings in excess of billings on uncompleted government contracts and are comprised principally of amounts, including retainage, for which billings could not be presented under the terms of the contracts at the balance sheet dates. Unbilled expenditures and fees on contracts in process with the U.S. Government at December 31, 1997 were $29,437,000 compared to $22,690,000 at December 28, 1996, and $16,383,000 at December 30, 1995. The approximate number of U.S. Government contracts has varied between 100 and 150 during the past five years, with 115 contracts open at December 31, 1997. Receivables under the U.S. Government contacts at December 31, 1997 were $8,808,000 compared to $14,363,000 at December 28, 1996 and $12,551,000 at December 30, 1995. Inventories Inventories are stated at the lower of cost (first-in, first-out) or market, and consist of materials, labor and overhead. There are no amounts in inventories relating to contracts having production cycles longer than one year. (in thousands of dollars) 1997 1996 1995 Work in process $ 1,364 $ 1,411 $ 686 Raw materials and subassemblies 2,013 1,800 1,926 Total $ 3,377 $ 3,211 $2,612 Property, Plant and Equipment Property, plant and equipment are recorded at cost. Depreciation and amortization are provided in amounts sufficient to amortize the cost of such assets over the estimated useful lives using principally the straight-line method for plant and equipment. Leasehold improvements are amortized over the remaining term of the lease of the life of the related asset, whichever is shorter. Fair Value of Financial Instruments The Company's financial instruments consist mainly of cash and equivalents, accounts receivable and accounts payable. The carrying amounts of the Company's cash and equivalents, accounts receivable and accounts payable approximate their fair value due to the short-term nature of these instruments. Use of Estimates The preparation of financial statements in conformity with the generally accepted accounting principles requires management to make estimated and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Stock-Based Compensation Effective January 1, 1996, the Company adopted the provision of SFAS No. 123, "Accounting for Stock-Based Compensation," (See Note 5). The Company has elected to continue to account for stock options at intrinsic value with disclosure of the effects of fair value accounting on net income and earnings per share on a pro forma basis. Net Income Per Common Share SFAS No. 128, "Earnings per Share," requires the computation of basic and diluted earnings per share. Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the year. Diluted earnings per share is determined by giving effect to the excercise of stock options using the treasury stock method. (in thousands of dollars, except per share data) Year Ended December 1997 1996 1995 Net Income $ 4,129 $ 1,729 $ 559 Weighted-average shares* 6,275 6,243 6,163 Dilutive effect of options* 231 224 98 Adjusted weighted-average shares 6,506 6,467 6,261 Basic earnings per share* $ .66 $ .28 $ .09 Diluted earnings per share* $ .64 $ .27 $ .09 SFAS No. 128 was adopted in 1997. As a result, reported primary earnings per share for 1996 and 1995 were restated and there was no effect on fully diluted earnings per share. The effect of this accounting change on previously reported earnings per share was as follows: Years Ended December 1996 1995 Primary earnings per share, as previously reported* $ .27 $ .09 Effect of SFAS No. 128 .01 .00 Basic earnings per share, as restated* $ .28 $ .09 *Restated for the April 1997 10% stock dividend. Accounting Pronouncements The Financial Accounting Standards Board issued two new statements in June 1997. SFAS No. 130, "Reporting Comprehensive Income," establishes standards for reporting and display of comprehensive income and it components. SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information," establishes standard for the way that public business enterprises report information and operating segments in annual financial statements and requires reporting of selected information in interim financial reports. Both statements are effective for fiscal years beginning after December 15, 1997. The required disclosuresfor SFAS No. 130 will be included in the Company's quarterly report on Form 10-Q for the first quarter of 1998. The required disclosures for SFAS No. 131 will be included in the Company's 1998 annual report on Form 10-K. 2. Income Taxes The components of the provisions for federal and state income taxes are as follows: (in thousands of dollars) 1997 1996 1995 Currently payable (refundable) Federal $ (747) $ (513) $ 447 State - (101) 160 Total (747) (614) 607 Deferred Federal 2,387 1,253 (260) State 368 430 (59) Total 2,755 1,683 (319) Total provision $ 2,008 $ 1,069 $ 288 The major items contributing to the difference between the statutory U.S. federal income tax rate of 34% and the Company's effective tax rates are as follows: (in thousands of dollars) 1997 1996 1995 Provision at statutory rate $ 2,086 $ 951 $ 288 State income tax, net of federal tax benefit 365 217 50 Tax Credit refund (747) - - Other, net 304 (99) (50) Provision for income taxes $ 2,008 $ 1,069 $ 288
The tax credit refund resulted from a refund of income taxes relating to the Company's prior year research and development expenses. The tax effects of significant temporary difference that comprise the deferred tax assets and liabilities as of December 31, 1997 and December 28, 1996 are as follows: (in thousands of dollars) 1997 1996 Unbilled costs and fees and deferred contact revenue, net $ (11,074) $ (8,730) Accrued expenses 1,961 2,044 Receivable reserves 88 130 Inventory reserves 16 239 Other 10 226 Current deferred tax liabilities, net (8,999) (6,091) Accelerated tax depreciation 4 (285) State net operating loss carryforwards 213 - Other (292) (569) Non-current deferred tax liabilities (75) (854) Total defferd tax liabilities, net (9,074) (6,945) Total deferred tax assets and total deferred tax liabilities were $4,939,000 and $14,013,000 respectively at December 31, 1997 compared with $2,639,000 and $9,584,000, respectively at December 28, 1996. 3. Employee Benefit Programs The company has a noncontributory defined benefit pension plan covering substantially all of its employees. Pension plan benefits are generally based on years of service and compensation during the final years of employment. The Company's funding policy is to contribute at least the minimum amount required by the Employee Retirement Income Security Act of 1974 or additional amounts to assure that plan assets will be adequate to provide retirement benefits. Contributions are intended to provide not only for benefits attributed to service to date, but also for those expected to be earned in the future. Net pension cost for 1997, 1996 and 1995 included the following components: (in thousands of dollars) 1997 1996 1995 Service cost - benefits earned during the period $ 1,555 $ 1,380 $ 1,042 Interest cost on projected benefit obligation 2,235 2,031 1,822 Actual return on plan assets (3,485) (1,599) (3,074) Net amortization and deferred items 1,436 (255) 2,195 Net periodic pension costs $ 1,741 $ 1,587 $ 1,355 The following table sets forth the plan's funded status and amounts recognized in the Company's consolidated financial statements at December 31, 1997, December 28, 1996 and December 30, 1995: Actuarial present value of benefit obligations (in thousands of dollars) 1997 1996 1995 Vested $ 29,389 $ 26,459 $ 23,845 Nonvested 837 639 560 Accumulated benefit obligation 30,226 27,098 24,405 Effect of projected future salary increases 5,467 3,734 3,608 Projected benefit obligation for service rendered to date 35,693 30,832 28,013 Plan assets at fair market value 30,256 25,609 23,104 Projected benefit obligation in excess of plan assets (5,437) (5,223) (4,909) Unrecognized net loss (gain) from past experience different from that assumed and effect of changes in assumptions 1,377 727 196 Prior service cost not yet recognized in periodic pension cost 1,699 1,919 2,139 Unrecognized net obligation at January 1, 1987 being recognized over 15 years 140 175 211 Net pension liability recognized in the Consolidated Balance Sheets at December 31, 1997, December 28, 1996 and December 30, 1995 $ (2,221) $ (2,402) $ (2,363)
The weighted-average discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation were 7.0% and 4.0% in 1997 and 7.25% and 3.5% in 1996 and 1995. The expected long-term rate of return on assets was 9% in 1997, 1996 and 1995. The Company has established a Supplemental Executive Retirement Plan ("SERP") for a certain key employee providing for annual benefits commencing on the sixth anniversary of the Executive's retirement. The cost of these benefits is being charged to expense and accrued using a projected unit credit method. The charge to expense for the year ended December 31, 1997 was $203,000. The Company also maintains a cash or deferred savings plan (401(k) plan), under which employees may reduce their compensation and have such "elective deferrals" contributed to the plan on their behalf. The Company contributes to the plan an amount equal to 25% of the first 6% of an employee's elective deferrals. The Company contributed $719,000 to the plan for 1997, $634,000 for 1996 and $578,000 for 1995. The elective deferrals are invested in one or more collective investment funds at the participant's direction. The Company's contributions are invested in guaranteed investment contracts and are paid to the employee upon termination, subject to forfeiture of any non-vested portion if termination occurs within the first five years of employment. 4. Lines of Credit and Long-Term Debt Long-term debt consists of the following: (in thousands of dollars) 1997 1996 Long-term credit facility $ 10,000 $ - Mortgage note payable - 1,500 Other - 1 Less - current portion - (1,201) $ 10,000 300 The Company entered into a long-term credit agreement with a syndicate of banks and financial institutions that provide unsecured loans in the aggregate principal amount of up to $45 million. The credit facility consists of a revolving loan of up to $30 million for working capital purposes and up to $15 million for acquisitions. The credit agreement provides for interest at the prime rate or LIBOR plus .50% (at the Company's option) and a fee of .20% of any unused portion of the line. The agreement expires October, 2000 and is renewable annually. The agreement stipulates that the Company maintains minimum levels of tangible net worth and specified fixed coverage ratios. The $15 million acquisition line converts to a three-year term loan in October, 1999, with quarterly principal and interest payments. This long-term credit facility replaced the Company's short-term lines of credit. The Mortgage note payable to a bank, with interest at LIBOR plus 1%, adjusted quarterly, due in quarterly payments of $300,000 plus interest through February 1998, secured by cerain land and buildings, was paid in full in May 1997. The Company had unsecured lines of credit at December 28, 1996, with various banks that provided for maximum borrowings fo $19,000,000, of which $10,600,000 was utilized. Borrowings under these lines of credit were payable upon demand with interest at the prevailing prime interest rate or at a lower rate quoted by the respective banks. The Company's average interest rate on outstanding borrowings at December 28, 1996 was 6.3%. 5. Stock Option Plans The Company has stock option plans which are administered by the Compensation Committee of the Board of Directors who determine which employees receive options and the number and option price of shares covered by each such option. The 1993 Equity Incentive Plan (1993 Plan) permits the Company to grant incentive stock options, stock appreciation rights (SAR), awards of nontransferable shares of restricted common stock and deferred grants of common stock. Options also remain outstanding under the Company's 1983 Stock Option Plan (1983 Plan), which terminated in 1993. Options granted under both plans may be either incentive stock options or non-qualified stock options. The option price shall not be less than the fair market value at the time the option is granted, and the option period may not be greater than 10 years from the date the option is granted. Options under the plans have normally been exercisable in three equal installments commencing one year from the date of the grant. The Company's 1995 Stock Option Plan for Non-Employee Directors provides for each outside director to receive options to purchase 5,000 shares of Common Stock at the first annual meeting at which such director is elected, and options to purchase 1,000 shares of Common Stock at each annual meeting thereafter so long as he or she remains an eligible director. Such directors cannot be an employee of the Company or one of its subsidiaries or a holder of five percent or more of the Company's Common Stock. The excercise price of such options will be the fair market value of the Common Stock on the date of grant. Each option is non-transferable except upon death, expires 10 years after the date of grant and becomes exercisable in three equal installments on the first, second and third anniversary of the date of grant. A total of 110,000 shares has been reserved for issuance of which 78,200 shares remained available for grant at December 31, 1997. Transaction involving the plans are summarizes as follows:* 1997 1996 1995 Weighted Weighted Weighted Number Average Number Average Number Average of shares Price of shares Price of shares Price Outstanding 622,368 $ 5.43 549,457 $ 4.72 396,981 $ 4.24 at beginning of year Granted 59,350 9.05 152,900 7.25 204,600 5.25 Exercised (109,082) 4.97 (77,976) 3.87 (52,124) 3.14 Cancelled - - (2,013) 5.27 - - Outstanding at end of year 572,636 $ 5.91 622,368 $ 5.43 549,457 4.72 Exercisable at end of year 346,453 334,168 332,761 *Restated for the April 1997 10% stock dividend.
At December 31, 1997, under the 1993 Plan, 1,000,000 shares have been reserved, of which 590,750 shares were available for future grants. The Company has computed the pro forma disclosures required under SFAS No. 123 for options granted in 1996 and 1997 using the Black-Scholes option pricing model prescribed by SFAS No. 123. The assumptions in the Black-Scholes calculation was that the risk free interest rate was 6%, the expected life of the option was 9.2 years, the volatility of the Company's stock was 69.7% and there was no expected dividend yield. Options to purchase 59,350 shares were granted in 1997 with a weighted average fair value of $7.1 and options to purchase 152,900 shares were granted in 1996 with a weighted average fair value of $5.65. Options to purchase 204,600 shares were granted in 1995 with a weighted average fair value of $4.16. The Company accounts for the Stock Option Plan under APB Opinion No. 25 under which no compensation cost has been recognized. Had compensation costs for these plans been determined consistent with SFAS No. 123, the Company's net income and earnings per share would have been reduced to the following pro forma amounts: 1997 1996 1995 Net Income As reported 4,129,000 1,729,000 559,000 Pro forma 3,474,000 1,311,000 419,000 Earnings per share - basic As reported .66 .28 .09 Pro forma .55 .21 .07 Earnings per share - diluted As reported .64 .27 .09 Pro forma .52 .20 .07 Because the SFAS No.123 method of accounting has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. 6. Commitments and Contingencies The Company conducts certain of its operations in facilities which are under long-term operating leases expiring at various dates through 2003, with various options to renew through 2005. It is expected that in the normal course of business, leases that expire will be renewed or relaced. Rent expense under these leases (exclusive of real estate taxes, insurance and other expenses payable under the terms of the leases) was approximately $2,524,000 in 1997, $2,130,000 in 1996, and $1,636,000 in 1995. The aggregate minimum lease commitment for the Company's facilities on December 31, 1997 was $7,645,000, payable as follows: $2,922,000 in 1998, $2,225,000 in 1999, $1,585,000 in 2000, $503,000 in 2001, $355,000 in 2002 and $55,000 in 2003. 7. Preferred Stock Purchase Rights On July 14, 1988, and as amended on September 6, 1989, the Company declared a dividend distribution of one preferred stock purchase right (Right) for every outstanding share of common stock. The Rights have attached to all outstanding shares of common stock, and no separate Rights certificates will be issued. The Rights will become exercisable upon the earlier to occur of (i) the date which is the tenth business day following a public announcement that a person of group of affiliated or associated persons has acquired, or obtained the right to acquire, beneficial ownership of 15% or more of the outstanding shares of common stock or (ii) the tenth business day following the commencement or announcement of an intention to make a tender offer or exchange offer that would result in a person or group owning 30% or more of the outstanding common stock. When exercisable, each Right entitles the registered holder to purchase from the Company one tenth of a share of its Series A Participating Preferred Stock, $.10 par value, at a price of $40.00 per each one tenth share of preferred stock. Until a Right is exercised, the holder thereof, as such, will have no rights as a shareholder of the Company including, without limitation, the right to vote or to receive dividends. The Rights may be redeemed by the Company at the discretion of the Board of Directors, at a price of $.01 per Right, and they expire on July 27, 1998. 8. Acquisition On January 23, 1996 the Company acquired the Massachusetts-based operations of Support Systems Associates, Inc. (SSAI), a private company headquartered in Hauppauge, New York. The Company paid $2,000,000 in cash for the acquired business, which had revenue of approximately $5,900,000 in 1995. The acquired assets included a prime contract to provide services to the U.S. Air Force. In January 1997, the Company paid an additional $125,000 to the seller based upon the achievement of certain thresholds as provided for in the acquisition agreement. A final additional payment of $125,000 was made in November 1997. The acquisition was accounted for as a purchase. The excess of the purchase price over the fair market value of the net assets acquired is being amortized over 30 months. 9. Business Segments The Company provides computer systems services, other engineering and management support services and manufactures position and motion sensors and other precision components. The Systems and services segment provides specialized technical services to the Department of Defense and other customers and produced approximately 83%, 77% and 78% of total Company revenues in 1997, 1996 and 1995, respectively. These services include the development and operation of computer-based management information systems where sophisticated software programs are applied to collect, analyze, store and retrieve information regarding the location, design, configuration, maintenance status and performance test history of the individual components parts of major weapons systems. This segment also includes contracts to provide network infrastructure for State Human Services systems as well as software system implementation services. The Precision products segment produces encoders, which are used to measure rotary or linear movement, and precision-patterned glass and electroformed metal products. The Precision products segment's primary market is located in the United States. In 1997, sales to two commercial customers represented 6% of the total Company sales. These customers operate in the automotive and computer-peripheral industries. Identifiable assets by business segment include both assets directly identified with those operations and an allocable share of jointly used assets. General corporate assets consist primarily of cash and the Company's Andover, Massachusetts corporate headquarters. Summarized financial information by business segment for 1997, 1996 and 1995 are as follows: (in thousands of dollars) 1997 1996 1995 Revenue: Systems and services $ 131,779 $ 100,878 $ 80,756 Precision products 27,598 29,285 23,185 Total revenue $ 159,377 $ 130,163 $ 103,941 Operating income: Systems and services $ 3,767 $ (2,263) $ (1,907) Precision products 2,478 5,608 2,925 Total operating income $ 6,245 $ 3,345 $ 1,018 Total Assets Systems and service $ 52,285 $ 44,292 $ 34,953 Precision products 14,637 15,556 9,584 Corporate 11,937 11,254 9,406 Total assets $ 78,859 $ 71,102 $ 53,946 Depreciation and amortization: Systems and services $ 2,963 $ 2,848 $ 2,663 Precision products 1,840 1,640 879 Corporate 573 439 460 Total depreciation and amortization $ 5,376 $ 4,927 $ 4,002 Capital expenditures: Systems and services $ 3,244 $ 2,583 $ 1,753 Precision products 1,065 5,999 2,494 Corporate 795 684 194 Total capital expenditures $ 5,104 $ 9,266 $ 4,441
The management of Dynamics Research Corporation is responsible for the accuracy and internal consistency of all information contained in this annual report, including the consolidated financial statements. Management has followed those generally accepted accounting principles which it believes to be most appropriate to the circumstances of the Company, and has made what it believes to be reasonable and prudent judgments and estimates where necessary. Dynamics Research Corporation operates under a system of internal accounting controls designed to provide reasonable assurance that its financial records are accurate, that the assets of the Company are protected, and that the financial statements present fairly the financial position and results of operations of the Company. The internal accounting control system is tested, monitored and revised as necessary. Three directors of the Company, not members of management, serve as the Audit Committee of the Board of Directors and are the principal means through which the Board supervises the performance of the financial reporting duties of management. The Audit Committee meets with management and the Company's independent auditors several times a year to review the results of external audits of the Company and to discuss plans for future audits. At these meetings the Audit Committee also meets privately with the independent auditors to assure its free access to them. The Company's independent auditors, Arthur Andersen LLP, audited the financial statements prepared by the management of Dynamics Research Corporation. Their report on these statements is presented below. Albert Rand Douglas R. Potter President, Chief Executive Officer Vice President of Finance, Chief Financial Officer To Dynamics Research Corporation: We have audited the accompanying consolidated balance sheets of Dynamics Research Corporation (a Massachusetts corporation) and subsidiaries as of December 31, 1997, December 28, 1996 and December 30, 1995, and the related consolidated statements of operations, shareholders' investment and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Dynamics Research Corporation and subsidiaries as of December 31, 1997, December 28, 1996 and December 30, 1995, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. Boston, Massachusetts, Arthur Andersen LLP February 20, 1998 Directors and Officers Directors Dr. Francis J. Aguilar* Professor of Business Administration, Emeritus Harvard University, Graduate School of Business Administration John S. Anderegg, Jr. Chairman, Dynamics Research Corporation Martin V. Joyce, Jr.* Vice President, A.T. Kearney, Inc. Kenneth F. Kames Vice President, New Business Development, The Gilette Company General James P. Mullins* USAF retired Albert Rand President and Chief Executive Officer, Dynamics Research Corporation *Member of the Audit Committee Member of the Compensation Committees Officers John S. Anderegg, Jr. Chairman Albert Rand President, Chief Executive Officer Arthur Brown Vice President, Contracts, Systems Division William G. Clautice Vice President, Strategic Programs, Test Equipment Division Dr. Martin M. Dresser Vice President, General Manager, Systems Division Victor J. Garber Vice President, Acquisition Engineering, Systems Division Dr. Joseph W. Griffin, Jr. Vice President, Systems Development, Systems Division Edward C. Johnson Vice President, Marketing, Systems Division Chester Ju Vice President, Encoder Division and Metrigraphics Division John M. Nauseef Vice President, Dayton Operations, Systems Division Douglas R. Potter Vice President of Finance and Chief Financial Officer Richard P. Rappaport Vice President, Test Equipment Division John L. Wilkinson Vice President, Human Resources, Clerk David C. Proctor Treasurer, Assistant Clerk CORPORATE HEADQUARTERS 60 Frontage Road Andover, Massachusetts 01810-5498 Telephone: (978) 475-9090 Fax: (978) 475-8205 Internet: www.drc.com AUDITORS Arthur Andersen LLP 225 Franklin Street, Boston, Massachusetts 02110 LEGAL COUNSEL Ropes & Gray One International Place, Boston, Massachusetts 02110 TRANSFER AGENT American Stock Transfer & Trust Company, 46th floor 40 Wall Street, New York, New York 10005 Telephone: (800) 937-5449 STOCK PRICES Bid price by quarter 1997 1996 High Low High Low First quarter $10.13 $8.25 $7.73 $5.23 Second quarter 9.38 7.75 8.18 5.68 Third quarter 11.50 8.13 9.21 6.82 Fourth quarter 14.25 9.75 10.00 7.85 *Restated for the April 1997 10% stock dividend. The bid and asked prices of the Company's common stock on February 24, 1998 were $11.88 and $12.13, respectively. Prices shown reflect inter-dealer prices, without retail mark-up, mark-down, or commission and may not necessarily represent actual transactions. Source: Monthly Statistical Report of the National Association of Securities Dealers, Inc. - NASDAQ. COMMON STOCK The Company's stock is traded on the NASDAQ National Market System, Symbol: DRCO; and listed in newspapers as DynamR., DynRsh. or DynRsearch. NUMBER OF SHAREHOLDERS The approximate number of shareholders of record at February 24, 1998 was 960. As of February 24, 1998 there were 6,291,372 common shares outstanding. FORM 10-K A copy of DRC's Form 10-K, which is filed annually with the Securities and Exchange Commission, will be sent without charge to any shareholder requesting it in writing to the Treasurer's office, Dynamics Research Corporation, 60 Frontage Road, Andover, Massachusetts 01810-5498. ANNUAL MEETING The 1998 Annual Meeting of Shareholders will be held at 3:30 PM on April 28, 1998 at the State Street Bank and Trust Building, 33rd floor, 225 Franklin Street, Boston, Massachusetts 02110.OTHER DRC OFFICE LOCATIONS Alabama 2361 Fairlane Drive, Montgomery Meadow Green Center, Madison California 61 Columbia, Aliso Viejo 4811 Chippendale Drive, Sacramento Colorado 1250 Academy Park Loop, Colorado Springs 900 East Louisiana Ave., Denver 1700 Lincoln Street, Denver Florida 11800 Research Parkway, Orlando Georgia 605 Richard Russell Parkway, Warner Robins Illinois 1 Colony Square, O'Fallon Maryland 45370 Alton Lane, California Massachusetts 93 Border Street, West Newton 50-60 Concord Street, Wilmington 209 Burlington Road, Bedford 293 Boston Post Road, Marlborough 500 Research Drive, Wilmington Missouri Northwest Plaza Office Tower, St. Ann New Hampshire 49 Donovan Street, Concord New Mexico 10010 Indian School Road N.E., Albuquerque Ohio 230 Northland Boulevard, Cincinnati 2900 Presidential Drive, Fairborn 50 West Broad Street, Columbus 460-70 Starr Avenue, Columbus Oklahoma 3000 Tower Drive, Del City Oregon 19545 NW Von Neuman Drive, Beaverton Texas 8000 IH-10 West, San Antonio Virginia 2550 Huntington Ave., Alexandria 1755 Jefferson Davis Highway, Arlington 1919 Commerce Drive, Hampton 612 Nevan Road, Virginia Beach EX-10 4 Amended as of February 17, 1997 DYNAMICS RESEARCH CORPORATION 1993 EQUITY INCENTIVE PLAN 1. PURPOSE The purpose of this 1993 Equity Incentive Plan (the "Plan") is to advance the interests of Dynamics Research Corporation (the "Company") by enhancing its ability to attract and retain employees and other persons or entities who are in a position to make significant contributions to the success of the Company and its subsidiaries through ownership of shares of the Company's common stock ("Stock"). The Plan is intended to accomplish these goals by enabling the Company to grant Awards in the form of Options, Stock Appreciation Rights, Restricted Stock or Unrestricted Stock Awards, Deferred Stock Awards, Performance Awards, Loans or Supplemental Grants, or combinations thereof, all as more fully described below. 2. ADMINISTRATION The Plan will be administered by the Compensation Committee (the "Committee") of the Board of Directors of the Company (the "Board"). The Committee will have authority, not inconsistent with the express provisions of the Plan and in addition to other authority granted under the Plan, to (a) grant Awards at such time or times as it may choose; (b) determine the size of each Award, including the number of shares of Stock subject to the Award; (c) determine the type or types of each Award; (d) determine the terms and conditions of each Award; (e) waive compliance by a Participant (as defined below) with any obligations to be performed by the Participant under an Award and waive any term or condition of an Award; (f) amend or cancel an existing Award in whole or in part (and if an award if canceled, grant another Award in its place on such terms as the Committee shall specify), except that the Committee may not, without the consent of the holder of an Award, take any action under this clause with respect to such Award if such action would adversely affect the rights of such holder; (g) prescribe the form or forms of instruments that are required or deemed appropriate under the Plan, including any written notices and elections required of Participants, and change such forms from time to time; (h) adopt, amend and rescind rules and regulations for the administration of the Plan; and (i) interpret the Plan and decide any questions and settle all controversies and disputes that may arise in connection with the Plan. Such determinations and actions of the Committee, and all other determinations and actions of the Committee made or taken under authority granted by any provision of the Plan, will be conclusive and will bind all parties. Nothing in this paragraph shall be construed as limiting the power of the Committee or the Board to make adjustments under Section 7.3 or Section 8.6. 3. EFFECTIVE DATE AND TERM OF PLAN The Plan will become effective on the date on which it is approved by the stockholders of the Company. Grants of Awards under the plan may be made prior to that date (but after Board adoption of the Plan), subject to such approval of the Plan. No Award may be granted under the Plan after [ ], but Awards previously granted may extend beyond that date. 4. SHARES SUBJECT TO THE PLAN Subject to adjustment as provided in Section 8.6 below, the aggregate number of shares of Stock that may be delivered under the Plan will be 1,000,000. If any Award requiring exercise by the Participant for delivery of Stock terminates without having been exercised in full, or if any Award payable in Stock or cash is satisfied in cash rather than Stock, the number of shares of Stock as to which such Award was not exercised or for which cash was substituted will be available for future grants. Stock delivered under the Plan may be either authorized but unissued Stock or previously issued Stock acquired by the Company and held in treasury. No fractional shares of Stock will be delivered under the Plan. 5. ELIGIBILITY AND PARTICIPATION Those eligible to receive Awards under the Plan ("Participants") will be persons in the employ of the Company or any of its subsidiaries ("Employees") and other persons or entities (including without limitation non-Employee directors of the Company or a subsidiary of the Company) who, in the opinion of the Committee, are in a position to make a significant contribution to the success of the Company or its subsidiaries. A "subsidiary" for purposes of the Plan will be a corporation in which the Company owns, directly or indirectly, stock possessing 50% or more of the total combined voting power of all classes of stock. 6. TYPES OF AWARDS 6.1. OPTIONS (a) Nature of Options. An Option is an Award entitling the recipient on exercise thereof to purchase Stock at a specified exercise price. Both "incentive stock options," as defined in Section 422 of the Internal Revenue Code of 1986, as amended (the "Code") (any Option intended to qualify as an incentive stock option being hereinafter referred to as an "ISO"), and Options that are not incentive stock options, may be granted under the Plan. ISOs shall be awarded only to Employees. (b) Exercise Price. The exercise price of an Option will be determined by the Committee subject to the following: (1) The exercise price of an ISO shall not be less than 100% (110% in the case of an ISO granted to a ten-percent shareholder) of the fair market value of the Stock subject to the Option, determined as of the time the Option is granted. A "ten-percent shareholder" is any person who at the time of grant owns, directly or indirectly, or is deemed to own by reason of the attribution rules of section 424(d) of the Code, stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or of any of its subsidiaries. (2) In no case may the exercise price paid for Stock which is part of an original issue of authorized Stock be less than the par value per share of the Stock. (3) The Committee may reduce the exercise price of an Option at any time after the time of grant, but in the case of an Option originally awarded as an ISO, only with the consent of the Participant. (c) Duration of Options. The latest date on which an Option may be exercised will be the tenth anniversary (fifth anniversary, in the case of an ISO granted to a ten-percent shareholder) of the day immediately preceding the date the Option was granted, or such earlier date as may have been specified by the Committee at the time the Option was granted. (d) Exercise of Options. Options granted under any single Award will become exercisable at such time or times, and on such conditions, as the Committee may specify. The Committee may at any time and from time to time accelerate the time at which all or any part of the Option may be exercised. Any exercise of an Option must be in writing, signed by the proper person and delivered or mailed to the Company, accompanied by (1) any documents required by the Committee and (2) payment in full in accordance with paragraph (e) below for the number of shares for which the Option is exercised. (e) Payment for Stock. Stock purchased on exercise of an Option must be paid for as follows: (1) in cash or by check (acceptable to the Company in accordance with guidelines established for this purpose), bank draft or money order payable to the order of the Company or (2) if so permitted by the instrument evidencing the Option (or in the case of an Option which is not an ISO, by the Committee at or after grant of the Option), (i) through the delivery of shares of Stock which have been outstanding for at least six months (unless the Committee expressly approves a shorter period) and which have a fair market value on the last business day preceding the date of exercise equal to the exercise price, or (ii) by delivery of a promissory note of the Option holder to the Company, payable on such terms as are specified by the Committee, or (iii) by delivery of an unconditional and irrevocable undertaking by a broker to deliver promptly to the Company sufficient funds to pay the exercise price, or (iv) by any combination of the permissible forms of payment; provided, that if the Stock delivered upon exercise of the Option is an original issue of authorized Stock, at least so much of the exercise price as represents the par value of such Stock must be paid other than by the Option holder's promissory note or personal check. (f) Discretionary Payments. If the market price of shares of Stock subject to an Option (other than an Option which is in tandem with a Stock Appreciation Right as described in Section 6.2 below) exceeds the exercise price of the Option at the time of its exercise, the Committee may cancel the Option and cause the Company to pay in cash or in shares of Common Stock (at a price per share equal to the fair market value per share) to the person exercising the Option an amount equal to the difference between the fair market value of the Stock which would have been purchased pursuant to the exercise (determined on the date the Option is cancelled) and the aggregate exercise price which would have been paid. The Committee may exercise its discretion to take such action only if it has received a written request from the person exercising the Option, but such a request will not be binding on the Committee. 6.2. Stock Appreciation Rights. (a) Nature of Stock Appreciation Rights. A Stock Appreciation Right is an Award entitling the recipient on exercise of the Right to receive an amount, in cash or Stock or a combination thereof (such form to be determined by the Committee), determined in whole or in part by reference to appreciation in Stock value. In general, a Stock Appreciation Right entitles the Participant to receive, with respect to each share of Stock as to which the Right is exercised, the excess of the share's fair market value on the date of exercise over its fair market value on the date the Right was granted. However, the Committee may provide at the time of grant that the amount the recipient is entitled to receive will be adjusted upward or downward under rules established by the Committee to take into account the performance of the Stock in comparison with the performance of other stocks or an index or indices of other stocks. The Committee may also grant Stock Appreciation Rights that provide, in such limited circumstances following a change in control as the Committee may specify (as determined by the Committee) the holder of such Right will be entitled to receive, with respect to each share of Stock subject to the Right, an amount equal to the excess of a specified value (which may include an average of values) for a share of Stock during a period preceding such change in control over the fair market value of a share of Stock on the date the Right was granted. (b) Grant of Stock Appreciation Rights. Stock Appreciation Rights may be granted in tandem with, or independently of, Options granted under the Plan. A Stock Appreciation Right granted in tandem with an Option which is not an ISO may be granted either at or after the time the Option is granted. A Stock Appreciation Right granted in tandem with an ISO may be granted only at the time the Option is granted. (c) Rules Applicable to Tandem Awards. When Stock Appreciation Rights are granted in tandem with Options, the following will apply: (1) The Stock Appreciation Right will be exercisable only at such time or times, and to the extent, that the related Option is exercisable and will be exercisable in accordance with the procedure required for exercise of the related Option. (2) The Stock Appreciation Right will terminate and no longer be exercisable upon the termination or exercise of the related Option, except that a Stock Appreciation Right granted with respect to less than the full number of shares covered by an Option will not be reduced until the number of shares as to which the related Option has been exercised or has terminated exceeds the number of shares not covered by the Stock Appreciation Right. (3) The Option will terminate and no longer be exercisable upon the exercise of the related Stock Appreciation Right. (4) The Stock Appreciation Right will be transferable only with the related Option. (5) A Stock Appreciation Right granted in tandem with an ISO may be exercised only when the market price of the Stock subject to the Option exceeds the exercise price of such option. (d) Exercise of Independent Stock Appreciation Rights. A Stock Appreciation Right not granted in tandem with an Option will become exercisable at such time or times, and on such conditions, as the Committee may specify. The Committee may at any time accelerate the time at which all or any part of the Right may be exercised. Any exercise of an independent Stock Appreciation Right must be in writing, signed by the proper person and delivered or mailed to the Company, accompanied by any other documents required by the Committee. 6.3. Restricted and Unrestricted Stock. (a) Nature of Restricted Stock Award. A Restricted Stock Award entitles the recipient to acquire, for a purchase price equal to par value, shares of Stock subject to the restrictions described in paragraph (d) below ("Restricted Stock"). (b) Acceptance of Award. A Participant who is granted a Restricted Stock Award will have no rights with respect to such Award unless the Participant accepts the Award by written instrument delivered or mailed to the Company accompanied by payment in full of the specified purchase price, if any, of the shares covered by the Award. Payment may be by certified or bank check or other instrument acceptable to the Committee. (c) Rights as a Stockholder. A Participant who receives Restricted Stock will have all the rights of a stockholder with respect to the Stock, including voting and dividend rights, subject to the restrictions described in paragraph (d) below and any other conditions imposed by the Committee at the time of grant. Unless the Committee otherwise determines, certificates evidencing shares of Restricted Stock will remain in the possession of the Company until such shares are free of all restrictions under the Plan. (d) Restrictions. Except as otherwise specifically provided by the Plan, Restricted Stock may not be sold, assigned, transferred, pledged or otherwise encumbered or disposed of, and if the Participant ceases to be an Employee or otherwise suffers a Status Change (as defined at Section 7.2(a) below) for any reason, must be offered to the Company for purchase for the amount of cash paid for the Stock, or forfeited to the Company if no cash was paid. These restrictions will lapse at such time or times, and on such conditions, as the Committee may specify. The Committee may at any time accelerate the time at which the restrictions on all or any part of the shares will lapse. (e) Notice of Election. Any Participant making an election under Section 83(b) of the Code with respect to Restricted Stock must provide a copy thereof to the Company within 10 days of the filing of such election with the Internal Revenue Service. (f) Other Awards Settled with Restricted Stock. The Committee may, at the time any Award described in this Section 6 is granted, provide that any or all the Stock delivered pursuant to the Award will be Restricted Stock. (g) Unrestricted Stock. The Committee may, in its sole discretion, approve the sale to any Participant of shares of Stock free of restrictions under the Plan for a price which is not less than the par value of the Stock. 6.4. Deferred Stock. A Deferred Stock Award entitles the recipient to receive shares of Stock to be delivered in the future. Delivery of the Stock will take place at such time or times, and on such conditions, as the Committee may specify. The Committee may at any time accelerate the time at which delivery of all or any part of the Stock will take place. At the time any Award described in this Section 6 is granted, the Committee may provide that, at the time Stock would otherwise be delivered pursuant to the Award, the Participant will instead receive an instrument evidencing the Participant's right to future delivery of Deferred Stock. 6.5. Performance Awards; Performance Goals. (a) Nature of Performance Awards. A Performance Award entitles the recipient to receive, without payment, an amount in cash or Stock or a combination thereof (such form to be determined by the Committee) following the attainment of Performance Goals. Performance Goals may be related to personal performance, corporate performance, departmental performance or any other category of performance deemed by the Committee to be important to the success of the Company. The Committee will determine the Performance Goals, the period or period during which performance is to be measured and all other terms and conditions applicable to the Award. (b) Other Awards Subject to Performance Condition. The Committee may, at the time any Award described in this Section 6 is granted, impose the condition (in addition to any conditions specified or authorized in this Section 6 or any other provision of the Plan) that Performance Goals be met prior to the Participant's realization of any payment or benefit under the Award. 6.6. Loans and Supplemental Grants. (a) Loans. The Company may make a loan to a Participant ("Loan"), either on the date of or after the grant of any Award to the Participant. A Loan may be made either in connection with the purchase of Stock under the Award or with the payment of any Federal, state and local income tax with respect to income recognized as a result of the Award. The Committee will have full authority to decide whether to make a Loan and to determine the amount, terms and conditions of the Loan, including the interest rate (which may be zero), whether the Loan is to be secured or unsecured or with or without recourse against the borrower, the terms on which the Loan is to be repaid and the conditions, if any, under which it may be forgiven. However, no Loan may have a term (including extensions) exceeding ten years in duration. (b) Supplemental Grants. In connection with any Award, the Committee may at the time such Award is made or at a later date, provide for and grant a cash award to the Participant ("Supplemental Grant") not to exceed an amount equal to (1) the amount of any federal, state and local income tax on ordinary income for which the Participant may be liable with respect to the Award, determined by assuming taxation at the highest marginal rate, plus (2) an additional amount on a grossed-up basis intended to make the Participant whole on an after-tax basis after discharging all the Participant's income tax liabilities arising from all payments under this Section 6. Any payments under this subsection (b) will be made at the time the Participant incurs Federal income tax liability with respect to the Award. 7. EVENTS AFFECTING OUTSTANDING AWARDS 7.1. Death. If a Participant dies, the following will apply: (a) All Options and Stock Appreciation Rights held by the Participant immediately prior to death, to the extent then exercisable, may be exercised by the Participant's executor or administrator or the person or persons to whom the Option or Right is transferred by will or the applicable laws of descent and distribution, at any time within the one year period ending with the first anniversary of the Participant's death (or such shorter or longer period as the Committee may determine), and shall thereupon terminate. In no event, however, shall an Option or Stock Appreciation Right remain exercisable beyond the latest date on which it could have been exercised without regard to this Section 7. Except as otherwise determined by the Committee, all Options and Stock Appreciation Rights held by a Participant immediately prior to death that are not then exercisable shall terminate at death. (b) Except as otherwise determined by the Committee, all Restricted Stock held by the Participant must be transferred to the Company (and, in the event the certificates representing such Restricted Stock are held by the Company, such Restricted Stock will be so transferred without any further action by the Participant) in accordance with Section 6.3 above. (c) Any payment or benefit under a Deferred Stock Award, Performance Award, or Supplemental Grant to which the Participant was not irrevocably entitled prior to death will be forfeited and the Award canceled as of the time of death, unless otherwise determined the Committee. 7.2. Termination of Service (Other Than By Death). If a Participant who is an Employee ceases to be an Employee for any reason other than death, or if there is a termination (other than by reason of death) of the consulting, service or similar relationship in respect of which a non-Employee Participant was granted an Award hereunder (such termination of the employment or other relationship being hereinafter referred to as a "Status Change"), the following will apply: (a) Except as otherwise determined by the Committee, all Options and Stock Appreciation Rights held by the Participant that were not exercisable immediately prior to the Status Change shall terminate at the time of the Status Change. Any Options or Rights that were exercisable immediately prior to the Status Change will continue to be exercisable for a period of three months (or such longer period as the Committee may determine), and shall thereupon terminate, unless the Award provides by its terms for immediate termination in the event of a Status Change or unless the Status Change results from a discharge for cause which in the opinion of the Committee casts such discredit on the Participant as to justify immediate termination of the Award. In no event, however, shall an Option or Stock Appreciation Right remain exercisable beyond the latest date on which it could have been exercised without regard to this Section 7. For purposes of this paragraph, in the case of a Participant who is an Employee, a Status Change shall not be deemed to have resulted by reason of (i) a sick leave or other bona fide leave of absence approved for purposes of the Plan by the Committee, so long as the Employee's right to reemployment is guaranteed either by statute or by contract, or (ii) a transfer of employment between the Company and a subsidiary or between subsidiary, or to the employment of a corporation (or a parent or subsidiary corporation of such corporation) issuing or assuming an option in a transaction to which section 424(a) of the Code applies. (b) Except as otherwise determined by the Committee, all Restricted Stock held by the Participant at the time of the Status Change must be transferred to the Company (and, in the event the certificates representing such Restricted Stock are held by the Company, such Restricted Stock will be so transferred without any further action by the Participant) in accordance with Section 6.3 above. (c) Any payment or benefit under a Deferred Stock Award, Performance Award, or Supplemental Grant to which the Participant was not irrevocably entitled prior to the Status Change will be forfeited and the Award cancelled as of the date of such Status Change unless otherwise determined by the Committee. 7.3. Certain Corporate Transactions. In the event of a consolidation or merger in which the Company is not the surviving corporation or which results in the acquisition of substantially all the Company's outstanding Stock by a single person or entity or by a group of persons and/or entities acting in concert, or in the event of the sale or transfer of substantially all the Company's assets or a dissolution or liquidation of the Company (a "covered transaction"), all outstanding Awards (except as provided below) will terminate as of the effective date of the covered transaction; provided, however, that: (a) all outstanding Options shall become exercisable immediately prior to such covered transaction; (b) the Committee may in its sole discretion, prior to the effective date of such covered transaction, (i) make each outstanding Stock Appreciation Right exercisable in full, (ii) remove the restrictions from each outstanding share of Restricted Stock, (iii) cause the Company to make any payment and provide any benefit under each outstanding Deferred Stock Award, Performance Award and Supplemental Grant which would have been made or provided with the passage of time had such covered transaction not occurred and the Participant not suffered a Status Change (or died), and (iv) forgive all or any portion of the principal of or interest on a Loan; and (c) the Committee may arrange, subject to consummation of such covered transaction, for the assumption of any or all Awards by the surviving or acquiring corporation or an affiliate thereof or for the grant of replacement awards for any or all Awards which, in the judgment of the Committee, are substantially equivalent and which in the case of incentive options shall satisfy the requirements of section 424(a) of the Code. 8. GENERAL PROVISIONS 8.1. Documentation of Awards. Awards will be evidenced by such written instruments, if any, as may be prescribed by the Committee from time to time. Such instruments may be in the form of agreements to be executed by both the Participant and the Company, or certificates, letters or similar instruments, which need not be executed by the Participant but acceptance of which will evidence agreement to the terms thereof. 8.2. Rights as a Stockholder, Dividend Equivalents. Except as specifically provided by the Plan, the receipt of an Award will not give a Participant rights as a stockholder; the participant will obtain such rights, subject to any limitations imposed by the Plan or the instrument evidencing the Award, upon actual receipt of Stock. However, the Committee may, on such conditions as it deems appropriate, provide that a Participant will receive a benefit in lieu of cash dividends that would have been payable on any or all Stock subject to the Participant's Award had such Stock been outstanding. Without limitation, the Committee may provide for payment to the Participant of amounts representing such dividends, either currently or in the future, or for the investment of such amounts on behalf of the Participant. 8.3. Conditions on Delivery of Stock. The Company will not be obligated to deliver any shares of Stock pursuant to the Plan or to remove restriction from shares previously delivered under the Plan (a) until all conditions of the Award have been satisfied or removed, (b) until, in the opinion of the Company's counsel, all applicable federal and state laws and regulation have been complied with, (c) if the outstanding Stock is at the time listed on any stock exchange, until the shares to be delivered have been listed or authorized to be listed on such exchange upon official notice of notice of issuance, and (d) until all other legal matters in connection with the issuance and delivery of such shares have been approved by the Company's counsel. If the sale of Stock has not been registered under the Securities Act of 1933, as amended, the Company may require, as a condition to exercise of the Award, such representations or agreements as counsel for the Company may consider appropriate to avoid violation of such Act and may require that the certificates evidencing such Stock bear an appropriate legend restricting transfer. If an Award is exercised by the Participant's legal representative, the Company will be under no obligation to deliver Stock pursuant to such exercise until the Company is satisfied as to the authority of such representative. 8.4. Tax Withholding. The Company will withhold from any cash payment made pursuant to an Award an amount sufficient to satisfy all federal, state and local withholding tax requirements (the "withholding requirements"). In the case of an Award pursuant to which Stock may be delivered, the Committee will have the right to require that the Participant or other appropriate person remit to the Company an amount sufficient to satisfy the withholding requirements, or make other arrangements satisfactory to the Committee with regard to such requirements, prior to the delivery of any Stock. If and to the extent that such withholding is required, the Committee may permit the Participant or such other person to elect at such time and in such manner as the Committee provides to have the Company hold back from the shares to be delivered, or to deliver to the Company, Stock having a value calculated to satisfy the withholding requirement. If at the time an ISO is exercised the Committee determines that the Company could be liable for withholding requirements with respect to a disposition of the Stock received upon exercise, the Committee may require as a condition of exercise that the person exercising the ISO agree (a) to inform the Company promptly of any disposition (within the meaning of section 424(c) of the Code) of Stock received upon exercise, and (b) to give such security as the Committee deems adequate to meet the potential liability of the Company for the withholding requirements and to augment such security from time to time in any amount reasonably deemed necessary by the Committee to preserve the adequacy of such security. 8.5. Nontransferability of Awards. No Award (other than an Award in the form of an outright transfer of cash or Unrestricted Stock) may be transferred other than by will or by the laws of descent and distribution, and during an employee's lifetime an Award requiring exercise may be exercised only by the Participant (or in the event of the Participant's incapacity, the person or persons legally appointed to act on the Participant's behalf). 8.6. Adjustments in the Event of Certain Transactions. (a) In the event of a stock dividend, stock split or combination of shares, recapitalization or other change in the Company's capitalization, or other distribution to common stockholders other than normal cash dividends, after the effective date of the Plan, the Committee will make any appropriate adjustments to the maximum number of shares that may be delivered under the Plan under Section 4 above. (b) In any event referred to in paragraph (a), the Committee will also make any appropriate adjustments to the number and kind of shares of stock or securities subject to Awards then outstanding or subsequently granted, any exercise prices relating to Awards and any other provision of Awards affected by such change. The Committee may also make such adjustments to take into account material changes in law or in accounting practices or principles, mergers, consolidations, acquisitions, dispositions or similar corporate transactions, or any other event, if it is determined by the Committee that adjustments are appropriate to avoid distortion in the operation of the Plan. 8.7. Employment Rights, Etc. Neither the adoption of the Plan nor the grant of Awards will confer upon any person any right to continued retention by the Company or any subsidiary as an Employee or otherwise, or affect in any way the right of the Company or subsidiary to terminate an employment, service or similar relationship at any time. Except as specifically provided by the Committee in any particular case, the loss of existing or potential profit in Awards granted under the Plan will not constitute an element of damages in the event of termination of an employment, service or similar relationship even if the termination is in violation of an obligation of the Company to the Participant. 8.8. Deferral of Payments. The Committee may agree at any time, upon request of the Participant, to defer the date on which any payment under an Award will be made. 8.9. Past Services as Consideration. Where a Participant purchases Stock under an Award for a price equal to the par value of the Stock the Committee may determine that such price has been satisfied by past services rendered by the Participant. 9. EFFECT, DISCONTINUANCE, CANCELLATION, AMENDMENT AND TERMINATION Neither adoption of the Plan nor the grant of Awards to a Participant will affect the Company's right to grant to such Participant awards that are not subject to the Plan, to issue to such Participant Stock as a bonus or otherwise, or to adopt other plans or arrangements under which Stock be issued to Employees. The Board may at any time or times amend the Plan or any outstanding Award for any purpose which may at the time be permitted by law, or may at any time terminate the Plan as to any further grants of Awards, provided that (except to the extent expressly required or permitted by the Plan) no such amendment will, without the approval of the stockholders of the Company, effectuate a change for which stockholder approval is required in order for the Plan to continue to qualify for the award of ISOs under section 422 of the Code and to continue to qualify under Rule 16b-3 promulgated under Section 16 of the 1934 Act. EX-10 5 As Amended April 3, 1997 DYNAMICS RESEARCH CORPORATION 1995 STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS 1. PURPOSE The purpose of this 1995 Stock Option Plan for Non-Employee Directors (the "Plan") is to advance the interests of Dynamics Research Corporation (the "Company") by enhancing the ability of the Company to attract and retain non-employee directors who are in a position to make significant contributions to the success of the Company and to align the interest of those directors more closely with the stockholders. 2. ADMINISTRATION The Plan shall be administered by a committee (the "Committee") of the Board of Directors (the "Board") of the Company designated by the Board for that purpose. Unless and until a Committee is appointed the Plan shall be administered by the entire Board, and references in the Plan to the "Committee" shall be deemed references to the Board. The Committee shall have authority, not inconsistent with the express provisions of the Plan, (a) to grant options in accordance with the Plan to such directors as are eligible to receive options; (b) to prescribe the form or forms of instruments evidencing options and any other instruments required under the Plan and to change such forms from time to time; (c) to adopt, amend and rescind rules and regulations for the administration of the Plan; (d) to accelerate the vesting of or otherwise change the terms of any option granted hereunder; and (e) to interpret the Plan and to decide any questions and settle all controversies and disputes that may arise in connection with the Plan. Such determinations of the Committee shall be conclusive and shall bind all parties. 3. EFFECTIVE DATE AND TERM OF PLAN The Plan shall become effective on the date on which the Plan is approved by the Board of Directors of the Company, subject to approval by the shareholders of the Company. No option shall be granted under the Plan after the completion of ten years from the date on which the Plan was adopted by the Board, but options previously granted may extend beyond that date. 4. SHARES SUBJECT TO THE PLAN (a) Number of Shares. Subject to adjustment as provided in Section 4(c), the aggregate number of shares of the Company's common stock (the "Stock") that may be delivered upon the exercise of options granted under the Plan shall be 100,000. If any option granted under the Plan terminates without having been exercised in full, the number of shares of Stock as to which such option was not exercised shall be available for future grants within the limits set forth in this Section 4(a). (b) Shares to be Delivered. Shares delivered under the Plan shall be authorized but unissued Stock or, if the Board so decides in its sole discretion, previously issued Stock acquired by the Company and held in treasury. No fractional shares of Stock shall be delivered under the Plan. (c) Changes in Stock. In the event of a stock dividend, stock split or combination of shares, recapitalization or other change in the Company's capital stock, after the effective date of the Plan, the number and kind of shares of stock or securities of the Company subject to options then outstanding or subsequently granted under the Plan, the maximum number of shares or securities that may be delivered under the Plan, the exercise price, and other relevant provisions shall be appropriately adjusted by the Committee, whose determination shall be binding on all persons. 5. ELIGIBILITY FOR OPTIONS Directors eligible to receive options under the Plan ("Eligible Directors") shall be those directors who are not employees of the Company or of any subsidiary of the Company. 6. TERMS AND CONDITIONS OF OPTIONS (a) Number of Options. On the date of the first annual meeting of stockholders following the adoption of this Plan each Eligible Director who is elected, reelected or continuing as a director on such date shall be awarded on such date an option covering 5,000 shares of Stock; thereafter, at each annual meeting or meeting of the board of directors at which a new Eligible Director is elected to the Board or following the election by the Board of a new Eligible Director to the Board, he or she shall be awarded an option covering 5,000 shares of Stock; and at each annual meeting subsequent to the annual meeting at which the initial grant was made to an Eligible Director and at which he or she is reelected or is continuing as a director, he or she shall be awarded an additional option covering 1,000 shares of Stock. (b) Exercise Price. The exercise price of each option shall be 100% of the fair market value per share of the Stock on the date the option is granted. In no event, however, shall the option price be less, in the case of an original issue of authorized stock, than par value per share. For purposes of this paragraph, (A) the fair market value of a share of Stock on any date shall be the Closing Price on such day or, if there was no Closing Price on such day, the latest day prior thereto on which there was a Closing Price; and (B) the "Closing Price" of the Stock on any business day will be the last sale price as reported on the principal market on which the Stock is traded or, if no last sale is reported, then the mean between the highest bid and lowest asked prices on that day. (c) Duration of Options. The latest date on which an option may be exercised (the "Final Exercise Date") shall be the date which is ten years from the date the option was granted. (d) Exercise of Options. (1) Each option shall become exercisable to the extent of one- third of the shares covered thereby on the date of the Annual Meeting held in each of the first, second and third years following the date of grant, except that options granted on dates other than the date of the Annual Meeting shall become exercisable to the extent of one-third of the shares covered thereby on each of the first, second and third anniversaries of the date of the grant. (2) Any exercise of an option shall be in writing, signed by the proper person and delivered or mailed to the Company, accompanied by (i) any documentation required by the Committee and (ii) payment in full for the number of shares for which the option is exercised. (3) The Committee shall have the right to require that the individual exercising the option remit to the Company an amount sufficient to satisfy any federal, state, or local withholding tax requirements (or make other arrangements satisfactory to the employer with regard to such taxes) prior to the delivery of any Stock pursuant to the exercise of the option. If permitted by the Committee the individual exercising the option may elect, at such time and in such manner as the Committee may prescribe, to have the Company hold back from the transfer Stock having a value calculated to satisfy such withholding obligation. In the case of an individual subject to Section 16(b) of the Exchange Act, no such election shall be effective unless made in compliance with the applicable requirements of Rule 16b-3 or any successor Rule under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). (4) If an option is exercised by the executor or administrator of a deceased director, or by the person or persons to whom the option has been transferred by the director's will or the applicable laws of descent and distribution, the Company shall be under no obligation to deliver Stock pursuant to such exercise until the Company is satisfied as to the authority of the person or persons exercising the option. (e) Payment for and Delivery of Stock. Stock purchased under the Plan shall be paid for as follows: (i) in cash or by check (acceptable to the Company in accordance with guidelines established for this purpose), bank draft or money order payable to the order of the Company; (ii) through the delivery of shares of Stock (which, in the case of shares of Stock acquired from the Company, have been outstanding for at least six months) having a fair market value on the last business day preceding the date of exercise equal to the purchase price; (iii) by having the Company hold back from the shares transferred upon exercise Stock having a fair market value on the last business day preceding the date of exercise equal to the exercise price; (iv) by delivery of an unconditional and irrevocable undertaking by a broker to deliver promptly to the Company sufficient funds to pay the purchase price; or (v) by any combination of the permissible forms of payment; provided, that if the Stock delivered upon exercise of the option is an original issue of authorized Stock, at least so much of the exercise price as represents the par value of such Stock shall be paid other than with a personal check or promissory note of the option holder. An option holder shall not have the rights of a shareholder with regard to awards under the Plan except as to Stock actually received by him or her under the Plan. The Company shall not be obligated to deliver any shares of Stock (a) until, in the opinion of the Company's counsel, all applicable federal and state laws and regulations have been complied with, and (b) if the outstanding Stock is at the time listed on any stock exchange, until the shares to be delivered have been listed or authorized to be listed on such exchange upon official notice of issuance, and (c) until all other legal matters in connection with the issuance and delivery of such shares have been approved by the Company's counsel. If the sale of Stock has not been registered under the Securities Act of 1933, as amended, the Company may require, as a condition to exercise of the option, such representations or agreements as counsel for the Company may consider appropriate to avoid violation of such Act and may require that the certificates evidencing such Stock bear an appropriate legend restricting transfer. (f) Nontransferability of Options. No option may be transferred other than by will or by the laws of descent and distribution, and during a director's lifetime an option may be exercised only by him or her. (g) Death. Upon the death of any Eligible Director granted options under this Plan, all options not then exercisable shall terminate. All options held by the director that are exercisable immediately prior to death may be exercised by his or her executor or administrator, or by the person or persons to whom the option is transferred by will or the applicable laws of descent and distribution, at any time within one year after the director's death (subject, however, to the limitations of Section 6(c) regarding the maximum exercise period for such option). After completion of that one-year period, such options shall terminate to the extent not previously exercised. (h) Other Termination of Status of Director. If a director's service with the Company terminates for any reason other than death, all options held by the director that are not then exercisable shall terminate. Options that are exercisable on the date of termination shall continue to be exercisable for a period of three months (subject to Section 6(c)). After completion of that three-month period, such options shall terminate to the extent not previously exercised, expired or terminated. (i) Mergers, etc. In the event of a consolidation or merger in which the Company is not the surviving corporation or which results in the acquisition of substantially all the Company's outstanding Stock by a single person or entity or by a group of persons and/or entities acting in concert, or in the event of a sale or transfer of substantially all of the Company's assets or a dissolution or liquidation of the Company, all options hereunder will terminate; provided, that 20 days prior to the scheduled date of the stockholders meeting to vote upon any such merger, consolidation sale, dissolution, or liquidation as set forth in the related proxy statement, or if there shall be no such meeting, 20 days prior to the effective date of any such transaction, all options outstanding hereunder that are not otherwise exercisable shall become immediately exercisable, and provided, further that in the event such a transaction is to be accounted for as a pooling of interests, the Company shall provide for the surviving or acquiring corporation or an affiliate thereof to grant each holder of an option hereunder outstanding at the time of the transaction replacement options on substantially equivalent terms. 7. EFFECT, DISCONTINUANCE, CANCELLATION, AMENDMENT, TERMINATION AND EFFECTIVENESS Neither adoption of the Plan nor the grant of options to a director shall affect the Company's right to grant to such director options that are not subject to the Plan, to issue to such directors Stock as a bonus or otherwise, or to adopt other plans or arrangements under which Stock may be issued to directors. The Committee may at any time terminate the Plan as to any further grants of options. The Committee may at any time or times amend the Plan for any purpose which may at the time be permitted by law. EX-10 6 [EXECUTION COPY] REVOLVING CREDIT AND TERM LOAN AGREEMENT Dated as of October 1, 1997 by and among DYNAMICS RESEARCH CORPORATION, DRC ENCODER, INC., DRC METRIGRAPHICS, INC., DRC SOFTWARE, INC. and DRC TELECOM, INC., as the Borrowers, and THE LENDERS PARTY HERETO and BROWN BROTHERS HARRIMAN & CO., as Agent and as Swing Line Lender DYNAMICS RESEARCH CORPORATION CREDIT AGREEMENT TABLE OF CONTENTS SECTION PAGE 1. DEFINITIONS AND RULES OF INTERPRETATION 1 1.1. Definitions 1 1.2. Rules of Interpretation 10 2. THE CREDIT FACILITIES 11 2.1. Amounts and Terms 11 2.2. Fees 14 2.3. Reduction of Commitments 15 2.4. Revolving Credit Notes 16 2.5. Term Note 16 2.6. Swing Line Note 16 2.7. Interest on Loans 16 2.8. Requests for Loans 17 2.9. Conversion and Continuation 18 2.10. Funds for Loans 19 3. PREPAYMENT OF THE LOANS; RESERVES 19 3.1. Voluntary Prepayments 19 3.2. Mandatory Prepayments 20 4. CERTAIN GENERAL PROVISIONS 20 4.1. Funds for Payments 20 4.2. Computations 21 4.3. Inability to Determine Adjusted LIBOR 21 4.4. Illegality 21 4.5. Additional Costs, Etc 22 4.6. Capital Adequacy 23 4.7. Certificate 23 4.8. Indemnity 23 4.9. Interest on Overdue Amounts 24 4.10. Mitigation 24 4.11. Joint and Several Obligations 24 5. REPRESENTATIONS AND WARRANTIES 24 5.1 Organization, Standing, etc. of the Borrowers 24 5.2 Subsidiaries 25 5.3 Qualification 25 5.4 Financial Information; Disclosure, etc. 25 5.5 Licenses, etc. 25 5.6 Material Agreements 26 5.7 Tax Returns and Payments 26 5.8 Indebtedness, Liens and Investments, etc. 26 5.9 Title to Properties; Liens 26 5.10 Litigation, etc. 26 5.11 Authorization; Compliance with Other Instruments 27 5.12 Governmental Consent 27 5.13 Regulation U, etc 27 5.14 Employee Retirement Income Security Act of 1974 27 5.15 Environmental Matters 28 5.16 Use of Proceeds 28 5.17 Investment Company Act; Public Utility Holding Company Act 29 6. AFFIRMATIVE COVENANTS OF THE BORROWERS 29 6.1 Records and Accounts 29 6.2 Financial Statements, Certificates and Information 29 6.3 Legal Existence; Compliance with Laws, etc. 31 6.4 Insurance 31 6.5 Payment of Taxes 31 6.6 Payment of Other Indebtedness, etc. 32 6.7 Further Assurances 32 6.8 Depository Account 32 6.9 Use of Proceeds 32 6.10 No Further Negative Pledges 32 6.11 Regulation U 33 7. CERTAIN NEGATIVE COVENANTS OF THE BORROWERS 33 7.1 Indebtedness 33 7.2 Mortgages, Liens, etc. 34 7.3 Loans, Guarantees and Investments 35 7.4 Leases 36 7.5 Mergers and Consolidations 37 7.6 Sale of Assets 37 7.7 Capital Expenditures 37 7.8 Distributions 38 7.9 Compliance with ERISA 38 7.10 Transactions with Affiliates 38 7.11 Observance of Subordination Provisions, etc. 38 7.12 Environmental Liabilities 38 7.13 Subsidiaries 39 7.14 Material Adverse Change 39 8. FINANCIAL COVENANTS 39 9. DEFAULTS; REMEDIES 40 9.1 Events of Default; Acceleration 40 9.2 Remedies on Default, etc. 42 10. CLOSING CONDITIONS 42 10.1. Loan Documents, etc 42 10.2. Corporate Action 42 10.3. Incumbency Certificate 42 10.4. Opinions of Counsel 42 10.5. Payment of Fees 43 10.6. Real Estate Mortgage 43 11. CONDITIONS TO ALL LOANS 43 11.1. Accuracy of Representations; No Event of Default 43 11.2. No Legal Impediment 43 11.3. Additional Conditions to Facility B Loans 43 12. THE AGENT. 44 12.1. Appointment, Powers and Immunities 44 12.2. Reliance by Agent 44 12.3. Defaults 44 12.4. Rights as a Lender 45 12.5. Indemnification 45 12.6. NonReliance on Agent and Other Lenders 45 12.7. Failure to Act 46 12.8. Resignation of Agent 46 12.9. Cooperation of Lenders 46 12.10. Amendment of 12 46 12.11. Reliance 46 13. SETOFF, ETC 47 14. EXPENSES 47 15. INDEMNIFICATION 48 16. SURVIVAL OF COVENANTS, ETC 48 17. ASSIGNMENT AND PARTICIPATION 48 17.1. Assignment by the Lenders 48 17.2. Assignment by Borrowers 49 17.3 Participations by the Lenders 49 17.4 Replacement of Lender 49 18. FOREIGN LENDER 50 19. NOTICES, ETC. 51 20. GOVERNING LAW 52 21. HEADINGS 52 22. COUNTERPARTS 52 23. ENTIRE AGREEMENT, ETC 53 24. WAIVER OF JURY TRIAL 53 25. CONSENTS, AMENDMENTS, WAIVERS, ETC 53 26. CONFIDENTIALITY 54 27. SEVERABILITY 54 28. NATURE OF LENDER'S OBLIGATIONS 54 SCHEDULES AND EXHIBITS Schedule 5.2 Subsidiaries Schedule 5.4 Financial Statements Schedule 5.5 Licenses Schedule 5.6 Material Agreements Schedule 5.8 Existing Indebtedness Schedule 5.10 Litigation Schedule 5.12 Consents Schedule 5.15 Hazardous Materials Schedule 7.2 Encumbrances Exhibit A Form of Swing Line Loan Participation Certificate Exhibit B-1 Form of Facility A Revolving Credit Note Exhibit B-2 Form of Facility B Revolving Credit Note Exhibit B-3 Form of Term Note Exhibit B-4 Form of Swing Line Note Exhibit C Form of Loan Request Exhibit D Form of Compliance Certificate Exhibit E Form of Opinion of Borrowers' Counsel REVOLVING CREDIT AND TERM LOAN AGREEMENT This REVOLVING CREDIT AND TERM LOAN AGREEMENT is made as of the 1st day of October, 1997, by and among DYNAMICS RESEARCH CORPORATION, a Massachusetts corporation ("DRC"), DRC ENCODER, INC., a Massachusetts corporation ("Encoder"), DRC METRIGRAPHICS, INC., a Massachusetts corporation ("Metrigraphics"), DRC SOFTWARE, INC., a Massachusetts corporation ("Software"), DRC TELECOM, INC., a Massachusetts corporation ("Telecom"), and BROWN BROTHERS HARRIMAN & CO., a New York limited partnership ("BBH&Co"), as a Lender (as defined below), as Agent (as defined below) for itself and the other Lenders and as Swing Line Lender (as defined below), BANKBOSTON, N.A., a national banking association ("BankBoston"), THE CHASE MANHATTAN BANK, a New York banking corporation ("Chase"), STATE STREET BANK AND TRUST COMPANY, a Massachusetts trust company ("State Street"), CITIZENS BANK OF MASSACHUSETTS, a Massachusetts financial institution ("Citizens") and the other Lenders from time to time party hereto. 1. DEFINITIONS AND RULES OF INTERPRETATION. 1.1. Definitions. The following terms shall have the meanings set forth in this 1 or elsewhere in the provisions of this Credit Agreement referred to below: ABN AMRO Loan. The meaning specified in 8(d). Adjusted LIBOR. With respect to any LIBOR Loan for any Interest Period, an interest rate per annum (rounded upwards, if necessary, to the next 1/100 of 1%) equal to (a) the LIBOR for such Interest Period multiplied by (b) the Statutory Reserve Rate. Affected Lender. The meaning specified in 17.4. Affiliate. As applied to any Person, a spouse of such Person, any relative (by blood, adoption or marriage) of such Person within the third degree, any managing member, director or officer of such Person, any corporation, association, firm or other entity of which such Person is a managing member, director or officer and any other Person directly or indirectly controlling, controlled by or under direct or indirect common control with such Person. Agent. BBH&Co in its capacity as agent for the Lenders hereunder, as well as its successors and assigns in such capacity pursuant to 12.8. Available Facility A Commitment. The Facility A Commitment less the sum of (i) the outstanding principal amounts advanced under Facility A and (ii) the outstanding principal amounts advanced as Swing Line Loans. Available Facility B Commitment. The Facility B Commitment less the outstanding principal amounts advanced under Facility B. Available Total Commitment. The Available Facility A Commitment plus the Available Facility B Commitment. Base Rate. For any date, a rate per annum equal to the higher of (i) the Federal Funds Effective Rate in effect on such day plus one- half of one percent (.50%) or (ii) the annual rate of interest publicly announced from time to time by the Agent as its "commercial base rate" in effect on such day. Base Rate Loans. Loans bearing interest calculated by reference to the Base Rate. Base Rate Margin. The meaning specified in 2.7(a). Borrower. Each of DRC, Encoder, Metrigraphics, Software and Telecom. Business Day. Any day on which banking institutions in Boston, Massachusetts are open for the transaction of banking business and, in the case of LIBOR Loans, also a day which is a LIBOR Business Day. Capital Expenditures. Any payment made directly or indirectly by DRC or any of its Subsidiaries for the purpose of acquiring or constructing fixed assets, real property or equipment which in accordance with GAAP would be added as a debit to the Consolidated fixed asset account of DRC and its Subsidiaries, including without limitation amounts paid or payable under any conditional sale or other title retention agreement or under any lease or other periodic payment arrangement which is of such a nature that payment obligations of a Borrower thereunder would be required by GAAP to be capitalized and shown as liabilities on the Consolidated balance sheet of DRC and its Subsidiaries. Capitalization. As of the date of any determination thereof, the sum of (a) Tangible Net Worth and (b) Indebtedness for borrowed money of DRC and its Subsidiaries on a Consolidated basis. Capitalized Leases. Leases under which a Person is the lessee or obligor, the discounted future rental payment obligations under which are required to be capitalized on the balance sheet of such Person in accordance with GAAP. Change in Control. Shall be deemed to have occurred if any Person or group (within the meaning of Rule 13d-5 of the Securities and Exchange Commission as in effect on the date hereof) shall own directly or indirectly, beneficially or of record, shares representing more than 50%, on a fully-diluted basis, of the aggregate ordinary voting power of DRC. Closing Date. The first date on which the conditions set forth in 10 and 11 have been satisfied and any Loans are made. Code. The Internal Revenue Code of 1986, as amended. Commitment. As to any Lender, such Lender's portion of the Total Commitment equal to such Lender's Percentage. Commitment Fee. The meaning specified in 2.2(b) Consolidated. With reference to any term herein, shall mean that term as applied to the accounts of DRC and its Subsidiaries, consolidated in accordance with GAAP. Conversion Date. October 1, 1999. Credit Agreement. This Credit Agreement, including the Schedules and Exhibits hereto. Current Lines of Business. The lines of business conducted by the Borrower and its Subsidiaries on the Closing Date and any business and activities incidental thereto, including: (i) the provision of computer systems services and other engineering and management support services to the Department of Defense and other customers, including the development and operation of computer-based management information systems in which software programs are applied to collect, analyze, store and retrieve information relating to component parts of weapons systems; (ii) the manufacture of position and motion sensors and other precision components, including encoders that measure movement, and precision-patterned glass and electroformed metal products; (iii) the telephone fraud detection and control business; and (iv) the object- oriented development software business. Debt Coverage Certificate. The meaning specified in 2.7(a) Debt Coverage Ratio. The meaning specified in 2.7(a). Dollars or $. Dollars in lawful currency of the United States of America. Drawdown Date. The date on which any Loan is made or is to be made, and the date on which any Loan is converted or continued in accordance with 2.9. EBITDA. For any period, the Consolidated Net Income of DRC and its Subsidiaries for such period adjusted by adding back thereto amounts deducted in computing such Consolidated Net Income in respect of (a) Interest Expense of DRC and its Subsidiaries, (b) taxes in respect of income and profits of DRC and its Subsidiaries and (c) depreciation and amortization of DRC and its Subsidiaries. Employee Benefit Plan. Any employee benefit plan within the meaning of Section 3(3) of ERISA maintained or contributed to by a Borrower or any ERISA Affiliate, or with respect to which a Borrower or any ERISA Affiliate has actual or contingent liability, in each case other than a Multiemployer Plan. Environmental Laws. Any and all applicable current and future treaties, laws, rules, regulations, codes, ordinances, orders, decrees, judgments, injunctions, notices or binding agreements issued, promulgated or entered into by any governmental authority, relating in any way to the environment, preservation or reclamation of natural resources or human exposure to or the management or Release or threatened Release of any Hazardous Material. ERISA. The Employee Retirement Income Security Act of 1974, as amended. ERISA Affiliate. Any Person which is treated as a single employer with a Borrower under Section 414 of the Code or Section 4001 of ERISA. ERISA Reportable Event. A reportable event with respect to a Guaranteed Pension Plan within the meaning of 4043 of ERISA and the regulations promulgated thereunder as to which the requirement of notice has not been waived. Event of Default. The meaning specified in 9.1. Facility A. The meaning specified in 2.1. Facility A Commitment. The meaning specified in 2.1. Facility A Revolving Credit Note. The meaning specified in 2.4. Facility A Maturity Date. October 1, 2000, subject to extension pursuant to 2.4. Facility B. The meaning specified in 2.1. Facility B Commitment. The meaning specified in 2.1. Facility B Revolving Credit Note. The meaning specified in 2.4. Federal Funds Effective Rate. For any day, the weighted average (rounded upwards, if necessary, to the next 1/100 of 1%) of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average (rounded upwards, if necessary, to the next 1/100 of 1%) of the quotations for such day for such transactions received by the Agent from three Federal funds brokers of recognized standing selected by it. GAAP. Generally accepted accounting principles in the United States of America. Guaranteed Pension Plan. Any Employee Benefit Plan the benefits of which are guaranteed on termination in full or in part by the PBGC pursuant to Title IV of ERISA. Hazardous Materials. All explosive or radioactive substances or wastes, hazardous or toxic substances or wastes, pollutants, solid, liquid or gaseous wastes, including petroleum or petroleum distillates, asbestos or asbestos-containing materials, polychlorinated biphenyls or materials or equipment containing polychlorinated biphenyls, radon gas, infectious or medical wastes and all other substances or wastes of any nature regulated pursuant to any Environmental Law. Indebtedness. All obligations, contingent and otherwise, that in accordance with GAAP should be classified upon a Person's balance sheet as liabilities, including: (a) all debt and similar monetary obligations, whether direct or indirect; (b) all liabilities secured by any mortgage, pledge, security interest, lien, charge, or other encumbrance existing on property owned or acquired by such Person subject thereto, whether or not the liability secured thereby shall have been assumed; (c) all obligations in respect of Capitalized Leases; and (d) all guarantees, endorsements and other contingent obligations whether direct or indirect in respect of indebtedness owed by others, including any obligation to supply funds to or in any manner to invest in, directly or indirectly, the debtor, to purchase indebtedness, or to assure the owner of indebtedness against loss, through an agreement to purchase goods, supplies, or services for the purpose of enabling the debtor to make payment of the indebtedness held by such owner or otherwise, and the obligations to reimburse the issuer in respect of any letters of credit. Interest Expense. For any period, the aggregate amount (determined in accordance with GAAP) of interest paid or payable during such period by any Person in respect of all Indebtedness for borrowed money, Capitalized Leases and the deferred purchase price of property. Interest Payment Date. (a) As to any Base Rate Loan, March 31, June 30, September 30 and December 31 and any date on which such Base Rate Loan is converted to a LIBOR Loan; and (b) as to any LIBOR Loan, the last day of the Interest Period relating to such LIBOR Loan; provided, that in the event that such Interest Period is 180 days, the 90th day and the last day of such Interest Period. Interest Period. With respect to each LIBOR Loan, the period of one, two, three or six months, as selected by a Borrower commencing on the Drawdown Date of such LIBOR Loan; provided that the foregoing provisions relating to Interest Periods are subject to the following: (a) if any Interest Period would otherwise end on a day that is not a LIBOR Business Day, that Interest Period shall be extended to the next succeeding LIBOR Business Day unless the result of such extension would be to carry such Interest Period into another calendar month, in which event such Interest Period shall end on the immediately preceding LIBOR Business Day; and (b) any Interest Period that would otherwise extend beyond the Maturity Date shall end on the Maturity Date. Investments. All expenditures made and all liabilities incurred (contingently or otherwise), without duplication, for the acquisition of stock or Indebtedness of, or for loans, advances, capital contributions or transfers of property to, or in respect of any guaranties (or other commitments as described under Indebtedness), or obligations of, any Person. In determining the aggregate amount of Investments outstanding at any particular time: (a) the amount of any Investment represented by a guaranty shall be taken at not less than the principal amount of the obligations guaranteed and still outstanding; (b) there shall be included as an Investment all interest accrued with respect to Indebtedness constituting an Investment unless and until such interest is paid; (c) there shall be deducted in respect of each such Investment any amount received as a return of capital (but only by repurchase, redemption, retirement, repayment, liquidating dividend or liquidating distribution); (d) there shall not be deducted in respect of any Investment any amounts received as earnings on such Investment, whether as dividends, interest or otherwise, except that accrued interest included as provided in the foregoing clause (b) may be deducted when paid; and (e) there shall not be deducted from the aggregate amount of Investments any decrease in the value thereof. Lenders. Each Person (including the Swing Line Lender) which may from time to time own a Percentage of the Total Commitments, including BBH&Co in its capacity as a Lender and as the Swing Line Lender; provided, however, that the term "Lender" shall not include any Participant. LIBOR. With respect to any LIBOR Loan for any Interest Period, the rate appearing on Page 3750 of the Telerate Service (or on any successor or substitute page of such Service, or any successor to or substitute for such Service, providing rate quotations comparable to those currently provided on such page of such Service, as determined by the Agent from time to time for purposes of providing quotations of interest rates applicable to Dollar deposits in the London interbank market) at approximately 11:00 a.m., London time, three Business Days prior to the commencement of such Interest Period, as the rate for U.S. dollar deposits with a maturity comparable to such Interest Period. In the event that such rate is not available at such time for any reason, the "LIBOR" with respect to such LIBOR Loan for such Interest Period shall be the rate at which dollar deposits of $5,000,000 and for a maturity comparable to such Interest Period are offered by the principal London office of the Agent (or, if the Agent does not have such an office, such office of any other Lender, as selected by the Agent) in immediately available funds in the London interbank market at approximately 11:00 a.m., London time, three Business Days prior to the commencement of such Interest Period. LIBOR Business Day. Any Business Day on which commercial banks are open for international business (including dealings in Dollar deposits) in London, England. LIBOR Loans. Loans bearing interest calculated by reference to the Adjusted LIBOR. LIBOR Margin. The meaning specified in 2.7(a). Licenses. The meaning specified in 5.5. Loan Documents. This Credit Agreement, the Notes and any other document executed and delivered in connection herewith. Loan Request. The meaning specified in 2.8. Loans. The Swing Line Loan and the Revolving Credit Loans made under Facility A and the Revolving Credit Loans and the Term Loans made under Facility B. Maturity Date. October 1, 2002. Moody's. Moody's Investors Service, Inc. Multiemployer Plan. Any multiemployer plan within the meaning of Section 3(37) of ERISA maintained or contributed to by a Borrower or any ERISA Affiliate or with respect to which a Borrower or any ERISA Affiliate has actual or contingent liability. Net Income. Income (or loss), excluding extraordinary items of income (or loss), of a Person for the period in question (taken as a cumulative whole), after deducting therefrom all operating expenses, reserves and other proper deductions (including any minority interest expense), all determined in accordance with GAAP. For purposes hereof, the Consolidated Net Income of DRC and its Subsidiaries shall include the Net Income of any other Persons acquired prior to the date that it either becomes a Subsidiary of such Borrower, is merged into or consolidated with such Borrower, or such other Person's assets are assigned, directly or indirectly, to such Borrower, provided that, in the case of each of the foregoing, (i) the Net Income of such other Person shall only be so included to the extent that such Net Income is attributable to such other Person or to such assets as are acquired from such other Person for the relevant period, all to the satisfaction of the Agent, and (ii) any discrepancies in accounting treatment between such Borrower and such other Person are conformed so as to make the foregoing determination, to the satisfaction of the Agent. Notes. The Swing Line Note, the Revolving Credit Notes and the Term Notes. Obligations. All indebtedness, obligations and liabilities of the Borrowers to the Lenders, individually or collectively, existing on the date of this Credit Agreement or arising thereafter, direct or indirect, joint or several, absolute or contingent, matured or unmatured, liquidated or unliquidated, secured or unsecured, arising by contract, operation of law or otherwise, arising or incurred under the Loan Documents or in respect of any of the Loans or the Notes or other instruments at any time evidencing any thereof. Outstanding. With respect to the Loans, the aggregate unpaid principal thereof as of any date of determination. Participant. The meaning specified in 17.3. PBGC. The Pension Benefit Guaranty Corporation created by 4002 of ERISA and any successor entity or entities having similar responsibilities. Percentage. The meaning specified in 2.1(a). Permitted Liens. The meaning specified in 7.2. Person. Any individual, corporation, partnership, limited liability company, trust, unincorporated association, joint venture, organization, business, or other legal entity, and any government or any governmental agency or political subdivision thereof. Projections. DRC's forecasted balance sheets, profit and loss statements and cash flow statements, all prepared on a basis consistent with DRC's historical financial statements, together with appropriate supporting details and statements of underlying assumptions. Qualified Plan. A pension plan (as defined in Section 3(2) of ERISA) intended to be tax-qualified under Section 401(a) of the IRC which a Borrower or any ERISA Affiliate sponsors, maintains, or to which any such Person makes, is making, or is obligated to make, contributions, or, in the case of a multiple-employer plan (as described in Section 4064(a) of ERISA), has made contributions at any time during the immediately preceding period covering at least five (5) plan years, but excluding any Multiemployer Plan. Record. The grid attached to each Revolving Credit Note, or the continuation of such grid, or any other similar record, including computer records, maintained by the Agent with respect to any Revolving Credit Loan referred to in the Revolving Credit Notes. Refunded Swing Line Loan. The meaning specified in 2.1(d). Release. Any spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping, disposing, depositing, dispersing, emanating or migrating of any Hazardous Material in, into, onto or through the environment. Replacement Lender. The meaning specified in 17.4. Required Lenders. Any two or more Lenders holding in the aggregate at least sixty-six and two-thirds percent (66 2/3%) of the amounts Outstanding on the Loans or, if no amounts are Outstanding under Facility A or Facility B, of the Percentages of the Total Commitment. Revolving Credit Loan. Any revolving credit loan (including any Swing Line Loan) made under Facility A or any revolving credit loan made under Facility B pursuant to 2.1(b). Revolving Credit Notes. The meaning specified in 2.4. S&P. Standard & Poor's Ratings Group, a division of the McGraw Hill Companies, Inc. Senior Debt. All Indebtedness of a Person and its Subsidiaries (without duplication) in respect of borrowed money, Capitalized Leases and the deferred purchase price of property, other than Subordinated Debt. Statutory Reserve Rate. A fraction (expressed as a decimal), the numerator of which is the number one and the denominator of which is the number one minus the aggregate of the maximum reserve percentages (including any marginal, special, emergency or supplemental reserves) expressed as a decimal established by the Board of Governors of the Federal Reserve System of the United States to which any of the Lenders is subject for eurocurrency funding (currently referred to as "Eurocurrency Liabilities" in Regulation D of such Board), as appropriately adjusted by mutual agreement of the Agent and the Required Lenders to the extent that any Lender is not subject to, or is subject to different reserve requirements under, such regulations. Such reserve percentages shall include those imposed pursuant to such Regulation D. LIBOR Loans shall be deemed to constitute eurocurrency funding and to be subject to such reserve requirements without benefit of or credit for proration, exemptions or offsets that may be available from time to time to any Lender under such Regulation D or any comparable regulation. The Statutory Reserve Rate shall be adjusted automatically on and as of the effective date of any change in any reserve percentage. Subordinated Debt: (a) The existing Indebtedness of the Borrowers which is designated as "Subordinated Debt" in Schedule 5.8 attached hereto, and (b) any other Indebtedness of a Borrower which matures in its entirety and by its terms (or by the terms of the instrument under which it is outstanding and to which appropriate reference is made in the instrument evidencing such Subordinated Debt) is made subordinate and junior in right of payment to the Notes and to each Borrower's other obligations to the Lenders hereunder by provisions reasonably satisfactory in form and substance to the Required Lenders and their counsel. Subsidiary. Any partnership, corporation, association, trust, or other business entity of which DRC shall at any time own directly or indirectly through a Subsidiary or Subsidiaries at least a majority (by number of votes) of the outstanding Voting Interests. Swing Line Availability. The meaning specified in 2.1(d). Swing Line Lender. BBH&Co. Swing Line Loan. The meaning specified in 2.1(d). Swing Line Note. The meaning specified in 2.6. Tangible Net Worth. As of the date of any determination thereof, the difference of: (a) DRC's stockholders' equity; minus (b) the sum of: (i) all intangible assets of DRC and its Subsidiaries; and (ii) all amounts due to DRC from any of its Affiliates (other than any other Borrower), in each case calculated on a Consolidated basis. Term Loans. Any term loans made under Facility B pursuant to 2.1(c). Term Note. The meaning specified in 2.5. Total Commitment. The meaning specified in 2.1. Unfunded Benefit Liability means the excess of a Qualified Plan's or a Multiemployer Plan's benefit liabilities (as defined in Section 4001(a)(16) of ERISA) over the current value of such plan's assets, determined in accordance with the assumptions used by the plan's actuaries for funding the plan pursuant to Section 412 of the Code for the applicable plan year. Voting Interests. Stock or similar interests, of any class or classes (however designated), the holders of which are at the time entitled, as such holders, to vote for the election of a majority of the directors (or persons performing similar functions) of the partnership, corporation, association, trust or other business entity involved, whether or not the right so to vote exists by reason of the happening of a contingency. 1.2. Rules of Interpretation. (a) A reference to any document or agreement shall include such document or agreement as amended, modified or supplemented from time to time in accordance with its terms and the terms of this Credit Agreement. (b) The singular includes the plural and the plural includes the singular. (c) A reference to any law includes any amendment or modification to such law. (d) A reference to any Person includes its permitted successors and permitted assigns. (e) Accounting terms not otherwise defined herein have the meanings assigned to them by GAAP applied on a consistent basis by the accounting entity to which they refer. (f) The words "include", "includes" and "including" are not limiting. (g) Reference to a particular "" refers to that section of this Credit Agreement unless otherwise indicated. (h) The words "herein", "hereof", "hereunder" and words of like import shall refer to this Credit Agreement as a whole and not to any particular section or subdivision of this Credit Agreement. (i) Except as otherwise expressly provided herein, all terms of an accounting or financial nature shall be construed in accordance with GAAP, as in effect from time to time; provided that, if a Borrower notifies the Agent that such Borrower requests an amendment to any provision hereof to eliminate the effect of any change occurring after the date hereof in GAAP or in the application thereof on the operation of such provision (or if the Agent notifies a Borrower that the Required Lenders request an amendment to any provision hereof for such purpose), regardless of whether any such notice is given before or after such change in GAAP or in the application thereof, then such provision shall be interpreted on the basis of GAAP as in effect and applied immediately before such change shall have become effective until such notice shall have been withdrawn or such provision amended in accordance herewith. 2. THE CREDIT FACILITIES. 2.1. Amounts and Terms of the Facilities. (a) Commitments. The Borrowers wish to establish one revolving credit facility and one standby facility with the Lenders in an aggregate principal amount at any one time outstanding not in excess of $45,000,000. The two credit facilities shall consist of (i) Facility A, a revolving credit facility in an aggregate principal amount at any one time outstanding not in excess of $30,000,000 (as such amount may be reduced from time to time pursuant to Section 2.3, the "Facility A Commitment") and (ii) Facility B, a standby revolving credit facility, convertible into a term loan on the Conversion Date, in an aggregate principal amount at any one time outstanding not in excess of $15,000,000 (as such amount may be reduced from time to time pursuant to Section 2.3, and on or after the Conversion Date, pursuant to Section 3.1, the "Facility B Commitment"). The Facility A Commitment and the Facility B Commitment are collectively referred to as the "Total Commitment". Each Lender is severally willing to establish such revolving credit facility and such standby credit facility on behalf of the Borrowers, subject to the terms and conditions hereafter set forth, in the aggregate maximum amounts at any one time outstanding set forth opposite each Lender's name and in the respective percentages set forth opposite each Lender's name which shall be applicable to such revolving credit facility and such standby credit facility hereunder (hereinafter referred to as such Lender's "Percentage"): Percentage of Total Lender Commitment Commitment BBH&Co $12,000,000 26.67% BankBoston $9,000,000 20.00% Chase $9,000,000 20.00% State Street $9,000,000 20.00% Citizens $6,000,000 13.33% TOTAL $45,000,000 100.00% (b) Revolving Loans. Subject to the terms and conditions set forth in this Credit Agreement, each Lender hereby severally establishes (i) one revolving credit facility in favor of the Borrowers in the individual principal amount of such Lender's Percentage of the Facility A Commitment and (ii) one standby revolving credit facility in favor of the Borrowers in the individual principal amount of such Lender's Percentage of the Facility B Commitment, the two credit facilities being in the aggregate principal amount of such Lender's Percentage of the Total Commitment. Each Lender agrees to lend to any Borrower, and any Borrower may borrow, repay, and, with respect to Facility A, reborrow from time to time between the Closing Date and the Facility A Maturity Date and, with respect to Facility B, reborrow from time to time between the Closing Date and the Conversion Date, in either case upon notice by any Borrower to the Agent given in accordance with 2.8, such sums as are requested by such Borrower up to a maximum aggregate principal amount outstanding (after giving effect to all amounts requested) at any one time equal to such Lender's Percentage of the Available Total Commitment; provided, however, that the proceeds of any and all borrowings and reborrowings under Facility A and Facility B shall be used solely for the respective purposes described in 5.16. All Revolving Credit Loans shall be made as LIBOR Loans or Base Rate Loans, at a Borrower's option. LIBOR Loans may be converted to Base Rate Loans and Base Rate Loans may be converted to LIBOR Loans. LIBOR Loans shall be continued or converted to Base Rate Loans under the circumstances, and subject to the conditions, specified in 2.9. Each request for a Revolving Credit Loan hereunder shall constitute a representation and warranty by each of the Borrowers that the conditions set forth in 10 and 11, in the case of the initial Revolving Credit Loans to be made on the Closing Date, and 11, in the case of all other Revolving Credit Loans, have been satisfied on the date of such request. (c) Term Loans. Each Lender hereby severally agrees that, at the request of any Borrower, absent an Event of Default and subject to the terms and conditions hereinafter set forth and upon the simultaneous payment in full of principal of, and interest on, all Revolving Credit Loans then outstanding under Facility B, it shall make a Term Loan to such Borrower on the Conversion Date which shall be in a principal amount not exceeding the then outstanding principal amounts which such Lender has advanced under Facility B; provided, however, that such payment in full of the Revolving Credit Loans then outstanding under Facility B and the making of the Term Loans shall occur simultaneously and the proceeds of such Term Loans shall be applied to such payment of the Revolving Credit Loans under Facility B. Any request by a Borrower for the Term Loans hereunder shall be made by written notice to the Agent at least three (3) Business Days prior to the Conversion Date, and shall be made pro rata from each of the Lenders in accordance with their respective Percentages of the Total Commitment. Such notice shall specify the principal amount of the Term Loans. Upon receipt of such request for the Term Loans hereunder, the Agent shall promptly notify the other Lenders, specifying the principal amount thereof. Each Lender shall make its Term Loan hereunder on the Conversion Date by delivering to the Agent the amount thereof in immediately available funds (except to the extent the proceeds of such Term Loan are to be applied simultaneously to the payment of the Revolving Credit Note payable to such Lender as aforesaid), by not later than 1:00 p.m., Boston time, on the Conversion Date. The Agent shall credit the amount of any such funds provided by the Lenders to the account designated by the Borrower requesting a Term Loan or, if such Borrower does not designate any account, to DRC's regular deposit account with the Agent. (d) Swing Line Loans. (i) On any date prior to the Facility A Maturity Date on which the Agent receives any Loan Request in respect of the Available Facility A Commitment pursuant to 2.8, designated as a Swing Line Loan, the Agent promptly shall notify the Swing Line Lender and, subject to the terms and conditions hereof, the Swing Line Lender shall, on the date the Agent receives such Loan Request, make an advance (each a "Swing Line Loan") in accordance with any such notice. The aggregate amount of Swing Line Loans at any time outstanding shall not exceed the lesser of (A) $3,000,000 and (B) the Available Facility A Commitment ("Swing Line Availability"). Until the Facility A Maturity Date, any Borrower may from time to time borrow, repay and reborrow under this 2.1(d). Each Swing Line Loan shall be made pursuant to a Loan Request in respect of the Available Facility A Commitment pursuant to 2.8. Each such Loan Request must be given no later than 12:00 p.m. (Boston time) on the Business Day of the proposed Swing Line Loan. Notwithstanding any other provision of this Agreement or the other Loan Documents, the Swing Line Loans shall constitute Base Rate Loans. The Borrowers shall repay the aggregate outstanding principal amount of each Swing Line Loan upon demand therefor by the Agent, provided that (i) absent an Event of Default or any other event which, with the giving of notice or passage of time or both, would constitue an Event of Default, the Agent shall not make such demand prior to the Business Day next succeeding the date on which such Swing Line Loan is made and (ii) all amounts of principal and accrued interest outstanding on the Facility A Maturity Date or the earlier maturity by acceleration or otherwise shall be paid in full on such date. (ii) The Swing Line Lender, at any time and from time to time in its sole and absolute discretion, may on behalf of each Borrower (and each Borrower hereby irrevocably authorizes the Swing Line Lender to so act on its behalf) request each Lender (including the Swing Line Lender in its capacity as a Lender) to make a Revolving Credit Loan under Facility A to such Borrower (which shall be a Base Rate Loan) in an amount equal to such Lender's Percentage of the aggregate principal amount of the Swing Line Loans made to such Borrower (the "Refunded Swing Line Loan") outstanding on the date such notice is given. Unless any of the events described in 9.1(f) or 9.1(g) shall have occurred (in which event the procedures of 2.1(d)(iii) shall apply) and regardless of whether the conditions precedent set forth in this Credit Agreement to the making of a Revolving Credit Loan are then satisfied, each Lender shall disburse directly to the Agent such Lender's Percentage of the Refunded Swing Line Loan on behalf of the Swing Line Lender, prior to 1:00 p.m. (Boston time), in immediately available funds on the Business Day next succeeding the date such notice is given. The proceeds of such Revolving Credit Loans shall be immediately paid to the Swing Line Lender and applied to repay the Refunded Swing Line Loan. (iii) If, prior to refunding any Swing Line Loan pursuant to 2.1(d)(ii), one of the events described in 9.1(f) or 9.1(g) shall have occurred, then, subject to the provisions of 1.1(d)(iv) below, each Lender will, on the date such Revolving Credit Loan was to have been made for the benefit of a Borrower, purchase from the Swing Line Lender an undivided participation interest in the Swing Line Loan in an amount equal to its Percentage of such Swing Line Loan. Upon request, each Lender will promptly transfer to the Swing Line Lender, in immediately available funds, the amount of its participation and upon receipt thereof the Swing Line Lender will deliver to such Lender a Swing Line Loan Participation Certificate, substantially in the form of Exhibit A attached hereto, dated the date of receipt of such funds and in such amount. (iv) Each Lender's obligation to make Revolving Credit Loans and to purchase participating interests in accordance with this 52.1(d) shall be absolute and unconditional and shall not be affected by any circumstance, including (A) any setoff, counterclaim, recoupment, defense or other right which such Lender may have against the Swing Line Lender, the Agent, any Borrower or any other Person for any reason whatsoever, (B) the occurrence or continuance of any Event of Default or any event which, with the giving of notice or passage of time or both would constitute an Event of Default, (C) any inability of a Borrower to satisfy the conditions precedent to borrowing set forth in this Credit Agreement on the date upon which such participating interest is to be purchased or (D) any other circumstance, happening or event whatsoever, whether or not similar to any of the foregoing. If any Lender does not make available to the Agent or the Swing Line Lender, as applicable, the amount required pursuant to 2.1(d)(ii) or 2.1(d)(iii), as the case may be, the Swing Line Lender shall be entitled to recover such amount on demand from such Lender, together with interest thereon for each day from the date of non-payment until such amount is paid in full at a rate equal to the Base Rate plus the Base Rate Margin. 2.2. Fees. (a) Funding Fee. The Borrowers agree to pay to the Agent for the ratable account of each Lender, on the date of each Revolving Credit Loan under Facility B, a funding fee (the "Funding Fee") calculated at the rate of 0.5% of such Revolving Credit Loan under Facility B. (b) Commitment Fee. The Borrowers agree to pay to the Agent for the ratable account of each Lender, on each date that DRC delivers to the Agent a Debt Coverage Certificate pursuant to 2.7(a) and on the Facility A Maturity Date, a commitment fee (the "Commitment Fee") calculated at the rate per annum set forth below on (i) at any time prior to the Conversion Date, the daily average unused portion of such Lender's portion of the Available Total Commitment during the immediately preceding fiscal quarter of DRC or, if applicable, the portion thereof ending prior to the Conversion Date (adjusted as appropriate for any reduction or termination of any portion of the Total Commitment pursuant to 2.3 during the immediately preceding fiscal quarter or portion thereof), and (ii) at any time on or after the Conversion Date, the daily average unused portion of such Lender's portion of the Available Facility A Commitment during the immediately preceding fiscal quarter of the Borrower or, if applicable, the portion thereof commencing on or after the Conversion Date (adjusted as appropriate for any reduction or termination of any portion of the Facility A Commitment pursuant to 2.3 during the immediately preceding fiscal quarter or portion thereof). The Commitment Fee shall be computed on the basis of the actual number of days elapsed in a year of 360 days and shall be payable in arrears. Debt Commitment Fee Coverage Ratio < 1.5 .20% > 1.5 to < 2.0 .25% > 2.0 to < 2.5 .30% > 2.5 .35% Notwithstanding the foregoing, the Commitment Fee shall be .35 % during any period when (i) an Event of Default shall have occurred and be continuing and shall not have been waived or (ii) the Debt Coverage Certificate in respect of the immediately preceding Fiscal quarter shall not have been delivered when required by 2.7(a). (c) Agent's Fees. The Borrowers agree to pay to the Agent, for the Agent's own account, such other fees as DRC and the Agent have heretofore agreed upon in writing. 2.3. Reduction of Commitments. Subject to the terms and conditions of 3, each Borrower shall have the right at any time and from time to time upon three (3) Business Days' prior written notice to the Agent (which shall in turn give a prompt written notice to each Lender) to reduce by $1,000,000 or a multiple of $1,000,000 in excess thereof or terminate entirely any portion of the Facility A Commitment and/or of the Facility B Commitment, pro rata in accordance with each Lender's Percentage, whereupon the Facility A Commitment and/or the Facility B Commitment, as applicable, shall be reduced accordingly or, as the case may be, terminated. Upon the effective date of any such reduction or termination, the Borrowers shall pay to the Agent for the ratable account of each Lender the full amount of any Commitment Fee payable pursuant to 2.2(b) then accrued on the amount of the reduction. No reduction of the Facility A Commitment and/or the Facility B Commitment, as applicable, may be reinstated. Concurrently with each reduction of any such commitment pursuant to this 2.3, the amount specified in 2.1(a) as the amount of the Facility A Commitment and/or Facility B Commitment, as the case may be, for the period in which such reduction is made and for each subsequent period shall be reduced by an amount equal to the amount of such reduction. 2.4. Revolving Credit Notes. The Revolving Credit Loans made by the Lenders in respect of Facility A and Facility B shall each be evidenced by a single promissory note of the Borrowers in substantially the form of Exhibit B-1 attached hereto (the "Facility A Revolving Credit Note") and Exhibit B-2 attached hereto (the "Facility B Revolving Credit Note" and, collectively with the Facility A Revolving Credit Note, the "Revolving Credit Notes"), each dated as of the Closing Date and completed with appropriate insertions. The Revolving Credit Notes shall be payable to the order of the Agent for the ratable account of each Lender in principal amounts equal to the Facility A Commitment and the Facility B Commitment, respectively, or, if less, the aggregate outstanding amount of all Revolving Credit Loans made by the Lenders in respect of the applicable Facility, plus interest accrued thereon, as set forth below. The Borrowers irrevocably authorize the Agent to make or cause to be made, at or about the time of the Drawdown Date of any Revolving Credit Loans under Facility A and/or Facility B or at the time of receipt of any payment of principal or interest on any Revolving Credit Note, an appropriate notation on its Record reflecting the making of such Revolving Credit Loans or (as the case may be) the receipt of such payment and the respective pro-rata allocations to each Lender in accordance with its respective Percentage of the Total Commitment. The Agent shall record the outstanding amount of the Revolving Credit Loans on the Record as prima facie evidence of the principal amount thereof owing and unpaid to the Agent for the ratable account of the Lenders, but the failure to record, or any error in so recording, any such amount on the Record shall not limit or otherwise affect the obligations of the Borrowers hereunder or under the Revolving Credit Notes to make payments of principal of or interest on the Revolving Credit Notes when due. All Facility A Revolving Credit Notes shall be due and payable on the Facility A Maturity Date, provided that the Facility A Maturity Date may, with the approval of all of the Lenders, be extended annually thereafter for each of the next two twelve-month periods following the Facility A Maturity Date. All Facility B Revolving Credit Notes shall be due and payable on the Conversion Date. 2.5. Term Note. The Term Loans shall be evidenced by a single term note in the form attached hereto as Exhibit B-3 (the "Term Note"), payable to the order of the Agent for the ratable account of each Lender, duly executed on behalf of each Borrower, dated the Conversion Date and in the aggregate principal amount of the Term Loan. The principal amount of the Term Note shall be payable in equal consecutive quarterly installments based upon a three-year amortization schedule beginning on the Conversion Date and ending on the Maturity Date. 2.6. Swing Line Note. The Swing Line Loans shall be evidenced by a single promissory note in the form attached hereto as Exhibit B-4 (the "Swing Line Note"), payable to the order of the Agent for the account of the Swing Line Lender, dated as of the Closing Date and in the aggregate principal amount of $3,000,000 or, if less, the aggregate outstanding amount of all Swing Line Loans. 2.7. Interest on Loans. (a) DRC shall deliver to the Agent on the Closing Date and on or before the 45th day immediately following the end of each fiscal quarter of DRC a certificate duly signed by the chief financial officer or treasurer of DRC and reasonably satisfactory in form and substance to the Lenders (a "Debt Coverage Certificate") setting forth the ratio of (i) the Consolidated Senior Debt of DRC and its Subsidiaries for the immediately preceding fiscal quarter-end to (ii) Consolidated EBITDA and its Subsidiaries for the four (4) consecutive quarters ending on such fiscal quarter-end (the "Debt Coverage Ratio"). Loans shall bear interest at a rate per annum equal to the Adjusted LIBOR or Base Rate, as the case may be, plus the applicable margin set forth below based on the Debt Coverage Ratio (which margin is referred to, in the case of Base Rate Loans, as the "Base Rate Margin" and, in the case of LIBOR Loans, as the "LIBOR Margin"). Subject to subparagraph (b) below, each change in the applicable margin based on a change in the Debt Coverage Ratio shall be effective, with respect to all Loans outstanding on or after the date of delivery of a Debt Coverage Certificate, from and including the date of delivery of such certificate until the date immediately preceding the next date of delivery of a Debt Coverage Certificate indicating another such change. Debt Base Adjusted LIBOR Coverage Rate Margin Margin Ratio <1.5 0 .50% >1.5 to <2.0 0 .75% >2.0 to <2.5 0 1.00% >2.5 0 1.50% (b) During any period when an Event of Default shall have occurred and be continuing or in the event that DRC fails to provide the Agent with the Debt Coverage Certificate for any fiscal quarter of DRC, then until such Event of Default is cured or waived or such certificate is provided, as the case may be, the applicable margin over the Base Rate shall be zero (0) and the applicable margin over the Adjusted LIBOR shall be one and one-half percent (1.5%). (c) Interest on each Base Rate Loan and LIBOR Loan shall be computed on the basis of the actual number of days elapsed in a year of 360 days, in each case without duplication of any day in successive Interest Periods. (d) The Borrowers agree to pay to the Agent, for the pro rata benefit of the Lenders, interest on each Loan in arrears on each Interest Payment Date with respect thereto. 2.8. Requests for Loans. A Borrower shall give to the Agent written notice in the form of Exhibit C hereto (or telephonic notice confirmed in a writing in the form of Exhibit C hereto) of the Loans requested from the Lenders hereunder (a "Loan Request"), no later than 12:00 noon, Boston time, (i) no less than one (1) Business Day prior to the proposed Drawdown Date of any Base Rate Loan and (ii) no less than three (3) LIBOR Business Days prior to the proposed Drawdown Date of any LIBOR Loans; provided, however, that a Borrower may give to the Agent a Loan Request for a Swing Line Loan at any time prior to 12:00 noon, Boston time on the proposed Drawdown Date of such Swing Line Loan. Each such notice shall specify (i) the aggregate principal amount of the Loans requested from the Lenders specifying whether such Loans are in respect of the Available Facility A Commitment (and, if so, whether a Swing Line Loan) and/or the Available Facility B Commitment (and in each case not in excess of the unused portion of the Available Total Commitment), (ii) whether such Loans are to be LIBOR Loans or Base Rate Loans, (iii) whether such Loans are to be Revolving Credit Loans or Term Loans (subject, however, to 2.1(b) and 2.1(c) which respectively provide that, under Facility B, Loans made prior to the Conversion Date shall be Revolving Credit Loans and Loans made on the Conversion Date shall be Term Loans), (iv) the proposed Drawdown Date of such Loans, (v) in the case of LIBOR Loans, the Interest Period for such Loans, (vi) the purpose or purposes to which the proceeds of such Loans shall be applied, and (vii) such other matters as are set forth on Exhibit C. Each Loan Request shall be in a minimum aggregate amount of $1,000,000 or a higher integral multiple of $500,000; provided, however, that each Loan Request for a Swing Line Loan shall be in a minimum aggregate amount of $100,000 or a higher integral multiple of $50,000. The Agent shall then promptly notify each Lender by written notice of its respective Percentage of the Loans requested. 2.9. Conversion and Continuation. Each Borrower shall have the right at any time upon prior irrevocable notice to the Agent (a) not later than 12:00 noon, Boston time, one (1) Business Day prior to the date of conversion, to convert any LIBOR Loan into a Base Rate Loan, (b) not later than 12:00 noon, Boston time, three (3) LIBOR Business Days prior to conversion or continuation, to convert any Base Rate Loan into a LIBOR Loan or to continue any LIBOR Loan as a LIBOR Loan for an additional Interest Period, and (c) not later than 12:00 noon, Boston time, three (3) Business Days prior to conversion, to convert the Interest Period with respect to any LIBOR Loan to another permissible Interest Period, subject in each case to the following: (i) each conversion or continuation shall be made pro rata among the Lenders in accordance with the respective principal amounts of the Loans comprising the converted or continued Loans; (ii) if less than all the outstanding principal amount of any Loans shall be converted or continued, then the resulting Loans shall satisfy the limitations specified in the penultimate sentence of 2.8 regarding the principal amount of Loans; (iii) each conversion shall be effected by the Agent by recording for the account of each Lender the new Loan of such Lender resulting from such conversion and reducing the Loan (or portion thereof) of such Lender being converted by an equivalent principal amount; (iv) accrued interest on a LIBOR Loan (or portion thereof) being converted or continued shall be paid by the Borrowers at the time of conversion or continuation; (v) LIBOR Loans may only be converted at a time that is the end of the Interest Period applicable thereto; (vi) any portion of a Loan maturing or required to be repaid in less than one month may not be converted into or continued as a LIBOR Loan; (vii) any portion of a LIBOR Loan that cannot be converted into or continued as a LIBOR Loan by reason of the immediately preceding clause shall be automatically converted at the end of the Interest Period in effect for such Loan into a Base Rate Loan; and (viii) no Event of Default and no event which, with the giving of notice or passage of time or both, would constitute an Event of Default has occurred and is continuing; provided, however, that the condition set forth in this clause (viii) shall not be applicable to the conversion of any LIBOR Loan into a Base Rate Loan pursuant to 2.9(a). Each notice pursuant to this 2.9 shall be irrevocable and shall refer to this Agreement and specify (i) the identity (including whether such Loan is a Term Loan or a Revolving Credit Loan) and amount of the Loan that a Borrower requests be converted or continued, (ii) whether such Loan is to be converted to or continued as a LIBOR Loan or a Base Rate Loan, (iii) if such notice requests a conversion, the date of such conversion (which shall be a LIBOR Business Day) and (iv) if such Loan is to be converted to or continued as a LIBOR Loan, the Interest Period with respect thereto. If no Interest Period is specified in any such notice with respect to any conversion to or continuation as a LIBOR Loan, the Borrower shall be deemed to have selected an Interest Period of one month's duration. The Agent shall promptly advise the other Lenders of any notice given pursuant to this 2.9 and of each Lender's portion of any converted or continued Loans. If the Borrower shall not have given notice in accordance with this 2.9 to continue any LIBOR Loans into a subsequent Interest Period (and shall not otherwise have given notice in accordance with this 2.9 to convert such LIBOR Loans), such LIBOR Loans shall, at the end of the Interest Period applicable thereto (unless repaid pursuant to the terms hereof), automatically be converted into Base Rate Loans. 2.10. Funds for Loans. Subject to the satisfaction of the other conditions set forth herein, to the extent applicable (including 2.8), each Lender will make available to the Agent on the proposed date of any Loan (other than a Swing Line Loan) by wire transfer of immediately available funds not later than 1:00 P.M., Boston time, the aggregate amount of its Percentage of such Loans requested by the Borrowers, and the Agent shall credit the aggregate amount so received to the respective accounts designated by the Borrowers or, if a Borrower does not designate any account, to DRC's regular deposit account with the Agent. 3. PREPAYMENT OF THE LOANS; RESERVES. 3.1. Voluntary Prepayments. Each Borrower shall have the right, at its election, to prepay the outstanding amount of any Loans, as a whole or in part, at any time without penalty or premium, except as provided in 4.8; provided, however, that once repaid or prepaid, Term Loans made under Facility B may not be reborrowed. A Borrower shall give irrevocable written notice to the Agent, no later than 12:00 noon, Boston time, one Business Day prior to any proposed prepayment of Base Rate Loans pursuant to this 3 and no later than 11:00 a.m., Boston time, three LIBOR Business Days prior to any proposed prepayment of LIBOR Rate Loans pursuant to this 3, in each case specifying the proposed date of prepayment of the Loans and the principal amount and accrued interest to be prepaid, and the Agent shall promptly give notice thereof to each Lender. Each such prepayment of the Base Rate Loans shall be in a minimum amount of the lesser of (i) $1,000,000 and (ii) the aggregate amount outstanding under the Notes being prepaid, and shall be accompanied by the payment of accrued interest on the principal prepaid to the date of such prepayment. Prepayments of Term Loans under Facility B will be applied first to the principal amount of the Term Loan which is due on the Maturity Date and then to the installments required to be paid on the Term Loan pursuant to 2.5 in inverse order of maturity. 3.2. Mandatory Prepayments. If at any time the outstanding principal amount of all Loans in respect of Facility A or Facility B exceeds (or, in the case of any notice of reduction of the Facility A Commitment and/or the Facility B Commitment pursuant to 2.3, would exceed) the Facility A Commitment or the Facility B Commitment, respectively, the Borrowers will immediately prepay the applicable Note or Notes, subject to 4.8, in an amount necessary to cause the outstanding principal amount of all Loans in respect of Facility A or Facility B not to exceed the Facility A Commitment or the Facility B Commitment, as applicable. 4. CERTAIN GENERAL PROVISIONS. 4.1. Funds for Payments. (a) All payments of principal, interest, fees and any other amounts due hereunder or under any of the other Loan Documents shall be made to the Agent for the ratable account of the Lenders at 40 Water Street, Boston, Massachusetts 02109, or at such other location as the Agent may from time to time designate, in each case in Dollars constituting immediately available funds. (b) All payments by the Borrowers hereunder and under any of the other Loan Documents shall be made without setoff or counterclaim and free and clear of and without deduction for any taxes, levies, imposts, duties, charges, fees, deductions, withholdings, compulsory loans, restrictions or conditions of any nature now imposed or levied by any jurisdiction or any political subdivision thereof or taxing or other authority therein unless a Borrower is compelled by law to make such deduction or withholding or if the taxes are based upon or measured by the income or profits of the Lenders, including profits or receipts with respect to the Loans. If any such obligation is imposed upon a Borrower with respect to any amount payable by it hereunder or under any of the other Loan Documents, the Borrowers will pay to the Agent for the ratable account of the Lenders on the date on which such amount is due and payable hereunder or under such other Loan Document, such additional amount in Dollars as shall be necessary to enable the Lenders to receive the same net amount which the Lenders would have received on such due date had no such obligation been imposed upon such Borrower. The Borrowers will deliver promptly to the Agent certificates or other valid vouchers for all taxes or other charges deducted from or paid with respect to payments made by the Borrowers hereunder or under such other Loan Document. In the event any Lender receives a refund of any taxes or other amounts for which it has received payment from a Borrower pursuant to this 4.1(b), such Lender shall, within 30 days from the date of such receipt, pay the amount of such refund to such Borrower but only to the extent of payments made by such Borrower pursuant to this 4.1(b) and net of all costs and expenses of the Agent and such Lender relating thereto and without interest (other than interest, if any, paid by the relevant government authority with respect to such refund); provided, however, that the Borrowers upon request of the Agent or any Lender, agree to repay the amount paid to a Borrower to the Agent or such Lender if the Agent or such Lender is required to repay such refund to such governmental authority. 4.2. Computations. All computations of interest on the LIBOR Loans and the Base Rate Loans and of commitment or other fees shall be based on a 360-day year and paid for the actual number of days elapsed. Except as otherwise provided in the definition of the term "Interest Period" with respect to LIBOR Loans, whenever a payment hereunder or under any of the other Loan Documents becomes due on a day that is not a Business Day, the due date for such payment shall be extended to the next succeeding Business Day, and interest shall accrue during such extension. 4.3. Inability to Determine Adjusted LIBOR. In the event, prior to the commencement of any Interest Period relating to any LIBOR Loan, the Agent shall determine that adequate and reasonable methods do not exist in the marketplace for ascertaining the Adjusted LIBOR that would otherwise determine the rate of interest to be applicable to any LIBOR Loan during any Interest Period, the Agent shall give notice of such determination (which shall be conclusive and binding on the Borrowers) to the Borrowers. In such event (a) any Loan Request with respect to LIBOR Loans shall be automatically withdrawn and shall be deemed a request for Base Rate Loans, (b) each LIBOR Loan will automatically, on the last day of the then current Interest Period thereof, become a Base Rate Loan, and (c) the obligations of the Lenders to make LIBOR Loans shall be suspended until the Agent determines that the circumstances giving rise to such suspension no longer exist, whereupon the Agent shall so notify the Borrowers. 4.4. Illegality. Notwithstanding any other provisions herein, if any present or future law, regulation, treaty or directive or change in the interpretation or application thereof shall make it unlawful for any Lender to make or maintain LIBOR Loans, such Lender shall forthwith give notice of such circumstances to the Agent who shall in turn notify the Borrowers and thereupon (a) the commitment of such Lender to make LIBOR Loans shall forthwith be suspended and (b) the Loans then outstanding as LIBOR Loans from such Lender, if any, shall be converted automatically to Base Rate Loans on the last day of each Interest Period applicable to such LIBOR Loans or within such earlier period as may be required by law. The Borrowers hereby agree promptly to pay the Agent on behalf of such Lender, upon demand by such Lender accompanied by a certificate setting forth in reasonable detail such costs, any additional amounts necessary to compensate such Lender for any costs incurred by such Lender in making any conversion in accordance with this 4.4, including any interest or fees payable by such Lender to lenders of funds obtained by it in order to make or maintain its LIBOR Loans hereunder; provided, that to the extent permitted by applicable law, each Lender shall maintain each LIBOR Loan until the last day of an Interest Period. 4.5. Additional Costs, Etc. If any change in any present applicable law or if any future applicable law, which expression, as used herein, includes statutes, rules and regulations thereunder and interpretations thereof by any competent court or by any governmental or other regulatory body with the administration or the interpretation thereof and directives, instructions and notices at any time or from time to time hereafter made upon or otherwise issued to any Lender by any central bank or other fiscal, monetary or other authority (whether or not having the force of law, but only if it is mandatory that such Lender comply), shall: (a) subject such Lender to any tax, levy, impost, duty, charge, fee, deduction or withholding of any nature with respect to this Credit Agreement, the other Loan Documents, or the Loans (other than taxes based upon or measured by the income or profits of such Lender, including without limitation profits or receipts with respect to the Loans and other than any withholding tax imposed on any payments by the Borrowers to such Lender); or (b) materially change the basis of taxation (except for changes in taxes on income or profits and except for any withholding tax imposed on any payments by the Borrowers to the Lenders) of payments to such Lender of the principal of or the interest on any Loans or any other amounts payable to such Lender under this Credit Agreement or the other Loan Documents; or (c) impose or increase or render applicable (other than to the extent specifically provided for elsewhere in this Credit Agreement) any special deposit, reserve, assessment, liquidity, capital adequacy or other similar requirements (whether or not having the force of law, but only if it is mandatory that such Lender comply) against assets held by, or deposits in or for the account of, or loans by, or commitments of an office of such Lender; or (d) impose on such Lender any other conditions or requirements with respect to this Credit Agreement, the other Loan Documents, the Loans, or any class of loans or commitments of which any of the Loans forms a part; and the result of any of the foregoing is to: (i) increase the cost to such Lender of making, funding, issuing or maintaining any of the Loans or its Percentage of the Total Commitment; or (ii) reduce the amount of principal, interest or other amount payable to such Lender hereunder on account of any of the Loans or its Percentage of the Total Commitment; or (iii) require such Lender to make any payment or to forego any interest or other sum payable hereunder, the amount of which payment or foregone interest or other sum is calculated by reference to the gross amount of any sum receivable or deemed received by such Lender from the Borrower hereunder; then, and in each such case, the Borrower will, within ten (10) Business Days following receipt of written notice from the Agent on behalf of such Lender, which written notice shall include a description of the relevant change in law, calculations of the amounts payable, pay to the Agent on behalf of such Lender such additional amounts as will be sufficient to compensate such Lender for such additional cost, reduction, payment or foregone interest or other sum. 4.6. Capital Adequacy. If any change in any present law, governmental rule, regulation, policy, guideline or directive or if any future law, governmental rule, regulation, policy, guideline or directive (in each case whether or not having the force of law, but only if it is mandatory that the Lender comply) or the interpretation thereof by a court or governmental authority with appropriate jurisdiction or any change in any such law or interpretation (including, without limitation, any change according to a prescribed schedule of increasing requirements, whether or not known on the date of this Credit Agreement) affects the amount of capital required or expected to be maintained by any Lender or any corporation controlling such Lender and such Lender determines that the amount of capital required to be maintained by it is increased by or based upon the existence of the Commitments or Loans made pursuant hereto, then the Agent on behalf of such Lender may notify the Borrower of such fact. To the extent that the costs of such increased capital requirements are not reflected in the applicable rate(s) of interest on the Loans, the Borrower and the Agent on behalf of such Lender shall thereafter attempt to negotiate in good faith, within thirty (30) days of the day on which the Borrower receives such notice, an adjustment payable hereunder that will adequately compensate such Lender in light of these circumstances. If the Borrower and the Agent on behalf of such Lender are unable to agree to such adjustment within thirty (30) days of the date on which the Borrower receives such notice, then commencing on the date Borrower received such notice (but not earlier than the effective date of any such increased capital requirement), from time to time the Borrower will pay to the Agent, on behalf of such Lender after consultation with the affected Lender, such additional amount that will, in the Agent's reasonable determination, provide adequate compensation to such Lender. Such Lender shall allocate such cost increases among its customers in good faith and on an equitable basis. 4.7. Certificate. A certificate setting forth any additional amounts payable pursuant to 4.5, 4.6 or 4.8 and a reasonably detailed explanation of such amounts which are due, including calculation of such amounts, submitted by the Agent on behalf of any Lender to the Borrowers, shall be conclusive, absent manifest error, that such amounts are due and owing. 4.8. Indemnity. The Borrowers agree to indemnify each Lender and to hold each Lender harmless from and against any loss, cost or expense that such Lender may sustain or incur resulting from (a) a default by a Borrower in payment of the principal amount of or any interest on any Loans as and when due and payable, including any such loss or expense arising from interest or fees payable by such Lender to lenders of funds obtained by it in order to maintain its Loans, (b) a default by a Borrower in making a borrowing after such Borrower has given (or is deemed to have given) a Loan Request relating thereto in accordance with 2.8 or (c) the making of any payment or prepayment of a Loan or the conversion of any LIBOR Loan to a Base Rate Loan on a day that is not the last day of the applicable Interest Period with respect thereto, including interest or fees payable by such Lender to lenders of funds obtained by it in order to maintain any such Loans. 4.9. Interest on Overdue Amounts. Overdue principal and (to the extent permitted by applicable law) interest on the Loans and all other overdue amounts payable hereunder or under any of the other Loan Documents shall bear interest payable on demand at a rate per annum equal to (i) in the case of overdue principal and interest (to the extent permitted by law) of any Loan, 2% plus the rate otherwise applicable to such Loan as provided in 2.7 or (ii) in the case of any other amount, 2% plus the then prevailing Base Rate plus the then prevailing applicable margin, in each case until such amount shall be paid in full (after as well as before judgment). 4.10. Mitigation. Each Lender shall take commercially reasonable efforts (which shall not require such Lender to incur an unreimbursed loss or unreimbursed cost or expense or otherwise take any action inconsistent with its internal policies or suffer any disadvantage or burden deemed by it to be significant) to assign its rights and delegate and transfer its obligations hereunder to another of its offices to the extent that such assignment, delegation and transfer would reduce amounts otherwise payable by the Borrowers to such Lender pursuant to 4.1(b), 4.4, 4.5, 4.6 and 4.8 or to make or maintain LIBOR Loans hereunder. The Borrowers agree to pay all costs and expenses incurred by any Lender in connection with any such assignment, delegation and transfer. 4.11. Joint and Several Obligations. Notwithstanding any other provision of this Credit Agreement, (i) each of the covenants, agreements and obligations of any Borrower set forth in this Credit Agreement or in any other Loan Document shall be the joint and several covenants, agreements and obligations of all of the Borrowers, regardless of whether a Borrower was the actual recipient of the proceeds of a Loan, (ii) all representations and warranties of any Borrower contained in this Credit Agreement or in any other Loan Document shall be deemed to be separately made by each of the Borrowers and (iii) any notice, request, consent, report or other information or agreement delivered by any Borrower shall be deemed for all purposes to be consented to, ratified and delivered by each of the Borrowers. In furtherance of the foregoing, each Borrower acknowledges and agrees that each covenant, agreement and obligation of any or all of the Borrowers in this Credit Agreement or any other Loan Document is enforceable against all Borrowers, jointly, or against any Borrower, severally. 5. REPRESENTATIONS AND WARRANTIES. In order to induce the Lenders to enter into this Credit Agreement and to make the Loans provided for hereunder, each Borrower makes the following representations and warranties, which shall survive the execution and delivery hereof and of the Notes: 5.1 Organization, Standing, etc. of the Borrowers. Each Borrower is a corporation duly organized, validly existing and in good standing under the laws of The Commonwealth of Massachusetts and has all requisite corporate power and authority to own and operate its properties, to carry on its business as now conducted and proposed to be conducted, to enter into this Agreement, the other Loan Documents and all other documents to be executed by it in connection with the transactions contemplated hereby, to issue the Notes and to carry out the terms hereof and thereof. 5.2 Subsidiaries. Schedule 5.2 attached hereto correctly sets forth as to each Subsidiary, its name, the jurisdiction of its incorporation, the number of shares of its capital stock of each class outstanding and the number of such outstanding shares owned by DRC and its other Subsidiaries. Each such Subsidiary is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation and has all requisite corporate power and authority to own and operate its properties and to carry on its business as now conducted and proposed to be conducted. All of the outstanding capital stock of each Subsidiary is validly issued, fully-paid and nonassessable, and is owned by DRC or its Subsidiaries as specified in Schedule 5.2, in each case free of any mortgage, pledge, lien, security interest, charge, option or other encumbrance, other than restrictions imposed by applicable federal and state securities laws. 5.3 Qualification. Each Borrower and its Subsidiaries are duly qualified or licensed and in good standing as foreign corporations duly authorized to do business in each jurisdiction in which the character of the properties owned or the nature of the activities conducted makes such qualification or licensing necessary. 5.4 Financial Information; Disclosure, etc. The Borrowers have furnished the Lenders with the financial statements and other reports listed in Schedule 5.4 attached hereto. Such financial statements have been prepared in accordance with GAAP applied on a consistent basis and fairly present the financial position and results of operations of the Persons to which they purport to relate as of the dates and for the periods indicated. Since the end of the most recent fiscal period shown in such financial statements or in the most recent financial statements delivered by DRC under 6.2(a), there has not been any material adverse change in the business, operations, condition (financial or otherwise) or properties of Borrowers and their Subsidiaries, taken as a whole. Neither this Agreement nor any financial statements, reports, projections or other documents or certificates furnished to the Lenders by the Borrowers in connection with the transactions contemplated hereby contain as of their respective dates any untrue statement of a material fact or omit to state any material fact necessary to make the statements herein or therein contained not misleading. None of the Loans will render any Borrower unable to pay its debts as they become due; no Borrower is contemplating either the filing of a petition by it under any state or federal bankruptcy or insolvency laws or, except as set forth on Schedule 5.4, the liquidation of all or a major portion of its property; and no Borrower has knowledge of any Person contemplating the filing of any such petition against it. 5.5 Licenses, etc. Schedule 5.5 attached hereto accurately and completely lists all authorizations, licenses, permits and franchises of any public or governmental regulatory body which are necessary for the conduct of the business of each Borrower and its Subsidiaries as now conducted and the absence of which would result, either in any case or in the aggregate, in a material adverse change in the business, operations, affairs, condition (financial or otherwise) or properties of (i) DRC and its Subsidiaries, taken as a whole, (ii) Encoder and its Subsidiaries, taken as a whole, or (iii) Metrigraphics and its Subsidiaries, taken as a whole (such authorizations, licenses, permits and franchises, together with any extensions or renewals thereof, being herein sometimes referred to collectively as the "Licenses"). All of such Licenses are in full force and effect and each Borrower and its Subsidiaries have fulfilled and performed all of their obligations with respect thereto and have full power and authority to operate thereunder. 5.6 Material Agreements. Schedule 5.6 attached hereto accurately and completely lists all material agreements and contracts which are presently in effect in connection with the conduct of the business of any Borrower and that which was or is required to be filed with the Securities and Exchange Commission as a "material contract" pursuant to Item 601(b)(10) of Registration S-K promulgated by the Securities and Exchange Commission. 5.7 Tax Returns and Payments. Each Borrower and its Subsidiaries have filed all tax returns required by law to be filed and have paid all material taxes, assessments and other governmental charges levied upon any of their respective properties, assets, income or franchises, other than those not yet delinquent and those, not material in aggregate amount, being or about to be contested as provided in 6.7. The charges, accruals and reserves on the books of each Borrower and its Subsidiaries in respect of their respective taxes are adequate in the opinion of the Borrowers, and the Borrowers know of no unpaid assessment for additional taxes or of any basis therefor. 5.8 Indebtedness, Liens and Investments, etc. Schedule 5.8 attached hereto sets forth, as of the date hereof, (a) the amounts of all outstanding Indebtedness of each Borrower and its Subsidiaries in respect of borrowed money, Capitalized Leases and the deferred purchase price of property, (b) all existing mortgages, liens and security interests in respect of such Indebtedness, (c) all agreements which directly or indirectly require any Borrower or its Subsidiaries to make any material investments, loans or advances and (d) all existing material guarantees by each Borrower and its Subsidiaries. 5.9 Title to Properties; Liens. Each Borrower and its Subsidiaries have good and marketable title to all of their respective properties and assets, and none of such properties or assets is subject to any mortgage, pledge, lien, security interest, charge or encumbrance except for (i) Permitted Liens and (ii) minor liens and encumbrances which in the aggregate are not substantial in amount, do not in any case materially detract from the value of the property subject thereto or materially impair the operations of any Borrower and its Subsidiaries and have not arisen otherwise than in the ordinary course of business. Each Borrower and its Subsidiaries enjoy quiet possession under all leases to which they are parties as lessees, and, to the knowledge of each Borrower, all of such leases are valid, subsisting and in full force and effect. None of such leases contains any provision restricting the incurrence of indebtedness by the lessee. 5.10 Litigation, etc. Except as set forth in Schedule 5.10 attached hereto, there is no action, proceeding or investigation pending or threatened (or any basis therefor known to any Borrower) which questions the validity of this Credit Agreement, the Notes or the other documents executed in connection herewith, or any action taken or to be taken pursuant hereto, or which could reasonably be expected to result, either in any case or in the aggregate, in any material adverse change in the business, operations, affairs, condition (financial or otherwise) or properties of DRC and the Subsidiaries, taken as a whole, or any of their respective properties or in any material liability on the part of DRC and the Subsidiaries, taken as a whole. 5.11 Authorization; Compliance with Other Instruments. The execution, delivery and performance of this Agreement and the Notes have been duly authorized by all necessary corporate action on the part of each Borrower, will not result in any violation of or be in conflict with or constitute a default under any term of the charter or by-laws of any Borrower, or of any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to any Borrower, or result in the creation of any mortgage, lien, charge or encumbrance upon any of the properties or assets of any Borrower pursuant to any such term. Neither any Borrower nor any Subsidiary is in violation of any term of its charter or by-laws, or of any term of any material agreement or instrument to which it is a party, or, to each Borrower's knowledge, of any judgment, decree, order, statute, rule or governmental regulation applicable to it. 5.12 Governmental Consent. Except as specified in Schedule 5.12 attached hereto, no order, consent, approval or authorization of, or declaration to or filing with, any governmental authority (collectively, "Consents") is required to be obtained or made by any Borrower or by any Subsidiary in connection with the execution and delivery of this Agreement and the issuance and delivery of the Notes pursuant hereto. Except as set forth in Schedule 5.12, all of the Consents have been obtained and are in full force and effect. 5.13 Regulation U, etc. Neither any Borrower nor any Subsidiary owns or has any present intention of acquiring any "margin stock" within the meaning of Regulation U (12 CFR Part 221) of the Board of Governors of the Federal Reserve System (herein called "margin stock"). None of the proceeds of the Loans will be used, directly or indirectly, by any Borrower or any Subsidiary for the purpose of purchasing or carrying, or for the purpose of reducing or retiring any indebtedness which was originally incurred to purchase or carry, any margin stock or for any other purpose which might constitute the transactions contemplated hereby a "purpose credit" within the meaning of said Regulation U, or cause this Agreement to violate Regulation U, Regulation T, Regulation X, or any other regulation of the Board of Governors of the Federal Reserve System or the Securities Exchange Act of 1934. 5.14 Employee Retirement Income Security Act of 1974. Each Employee Benefit Plan and, to each Borrower's knowledge, each Multiemployer Plan, is in material compliance with applicable provisions of ERISA and the Code. No ERISA Reportable Event has occurred or, to each Borrower's knowledge, is imminent or likely to occur. No Borrower or ERISA Affiliate has incurred any material liability to the PBGC or any Employee Benefit Plan or Multiemployer Plan on account of any failure to meet the contribution requirements of any such plan, minimum funding requirements or prohibited transactions under ERISA or the Code, termination of a single employer plan, partial or complete withdrawal from a Multiemployer Plan, or the insolvency, reorganization or termination of any Multiemployer Plan, and no event has occurred or conditions exist which present a material risk that any Borrower or ERISA Affiliate will incur any material liability on account of any of the foregoing circumstances. The consummation of the transactions contemplated by this Agreement will not result in any prohibited transaction under ERISA or the Code for which an exemption is not available. 5.15 Environmental Matters. Except as set forth in Schedule 5.15 attached hereto, neither any Borrower nor any Subsidiary nor, to each Borrower's knowledge, any other Person has ever caused or permitted any Hazardous Material to be disposed of on or under any real property owned, leased or operated by any Borrower or any Subsidiary or in which any Borrower or any Subsidiary has ever held, directly or indirectly, any legal or beneficial interest or estate, and no such real property has ever been used (either by any Borrower or any Subsidiary or, to each Borrower's knowledge, by any other Person) as (i) a disposal site or permanent storage site for any Hazardous Material or (ii) a temporary storage site for any Hazardous Material. Each Borrower and each of its Subsidiaries have been issued and are in compliance with all material permits, certificates, licenses, approvals and other authorizations relating to environmental matters and necessary or desirable for their respective businesses, and have filed all notifications and reports relating to chemical substances, air emissions, underground storage tanks, effluent discharges and Hazardous Material waste storage, treatment and disposal required in connection with the operation of their respective businesses, the failure to have or comply with which would, individually or in the aggregate, have a material adverse effect on any Borrower or any Subsidiary. All Hazardous Materials used or generated by any Borrower or any Subsidiary or any business merged into or otherwise acquired by any Borrower or any Subsidiary have been generated, accumulated, stored, transported, treated, recycled and disposed of in compliance with all applicable laws and regulations, the violation of which has any reasonable likelihood of having a material adverse effect on any Borrower or any Subsidiary. Neither any Borrower nor any Subsidiary has any liabilities with respect to Hazardous Materials and no facts or circumstances exist which could give rise to liabilities with respect to Hazardous Materials, which in either case, individually or in the aggregate, could have any reasonable likelihood of having a material adverse effect on any Borrower or any Subsidiary. 5.16 Use of Proceeds. Each Borrower will use the proceeds of the Loans solely for the following purposes: (i) with respect to Loans made under Facility A, for working capital and other general corporate purposes of the Borrowers; and (ii) with respect to Loans made under Facility B, for (a) acquisitions and other business combinations involving the acquisition by a Borrower or one of its Subsidiaries of all or substantially all of the stock, assets or business or line of business of any other Person and/or (b) the assumption of, participation in or subcontracting under revenue-generating government contracts and/or (c) for capital expenditures of a Borrower or any of its Subsidiaries, in each case within the Current Lines of Business and as permitted by the terms and conditions of this Credit Agreement; provided, however, that no proceeds of the Loans may be used for the purpose of or in connection with a hostile acquisition by a Borrower or any of its Subsidiaries. 5.17 Investment Company Act; Public Utility Holding Company Act. Neither any Borrower nor any Subsidiary is (a) an "investment company" as defined in, or subject to regulation under, the Investment Company Act of 1940 or (b) a "holding company" as defined in, or subject to regulation under, the Public Utility Holding Company Act of 1935. 6. AFFIRMATIVE COVENANTS OF THE BORROWERS. Each Borrower covenants and agrees that, so long as any Loan or Note is outstanding or the Lenders have any Available Total Commitment: 6.1 Records and Accounts. Each Borrower will (a) keep true and accurate records and books of account in which full, true and correct entries will be made in accordance with GAAP and (b) maintain adequate accounts and reserves for all taxes (including income taxes), depreciation, depletion, obsolescence and amortization of its properties, contingencies, and other reserves, all in accordance with GAAP. 6.2 Financial Statements, Certificates and Information. Each Borrower will furnish or cause to be furnished to each Lender: (a) Within 90 days after the end of each fiscal year of DRC, (i) the consolidated and consolidating balance sheets of DRC and its Subsidiaries as at the end of such year and (ii) the related consolidated and consolidating statements of income and surplus and cash flows for such year, setting forth in comparative form with respect to such consolidated financial statements figures for the previous fiscal year, all in reasonable detail, together with the opinion thereon of independent public accountants selected by DRC and satisfactory to the Lenders, which opinion shall be in a form generally recognized as unqualified and shall state that the financial statements have been prepared in accordance with generally accepted accounting principles applied on a basis consistent with that of the preceding fiscal year (except for changes, if any, which shall be specified and approved in such opinion) and that the audit by such accountants in connection with such financial statements has been made in accordance with generally accepted auditing standards related to reporting; provided, however, that the Borrowers shall be required to furnish the consolidating financial statements referred to above only to the extent that the same are required to be prepared by GAAP or by the Securities and Exchange Commission or by any other applicable regulatory authority; (b) Within 45 days after the end of each of the first three quarterly accounting periods in each fiscal year of DRC, (i) the unaudited consolidated and consolidating balance sheets of DRC and its Subsidiaries as at the end of such period, and (ii) the related unaudited consolidated and consolidating statements of income and surplus and cash flows for such period and for the period from the beginning of the current fiscal year to the end of such period, all in reasonable detail and signed by the chief financial officer or treasurer of DRC; provided, however, that the Borrowers shall be required to furnish the consolidating financial statements only to the extent that the same are required to be prepared by GAAP or by the Securities and Exchange Commission or by any other applicable regulatory authority; (c) Together with the financial statements delivered pursuant to subparagraph (a) above, a statement signed by the accountants who have reported on the same to the effect that in connection with their examination of such financial statements they have reviewed the provisions of this Agreement and have no knowledge of any event or condition which constitutes an Event of Default or which, after notice or expiration of any applicable grace period or both, would constitute such an Event of Default or, if they have such knowledge, specifying the nature and period of existence thereof; provided, however, that in issuing such statement, such independent accountants shall not be required to go beyond normal auditing procedures conducted in connection with their opinion referred to above; (d) Together with the financial statements delivered pursuant to subparagraph (a) above, a detailed list of each Borrower's backlog of revenue-generating government contracts showing services to be provided by each Borrower in connection therewith as of the date of such financial statements; (e) Together with the financial statements delivered pursuant to subparagraph (a) above, DRC's Projections for the next succeeding three (3) fiscal years, year by year, and for the next succeeding fiscal year, quarter by quarter; (f) Together with the financial statements delivered pursuant to subparagraphs (a) and (b) above, a compliance certificate substantially in the form of Exhibit D attached hereto signed by the chief financial officer or treasurer of DRC; (g) Promptly after the same become publicly available, copies of all periodic and other reports, proxy statements and other materials filed by DRC with the Securities and Exchange Commission, or any governmental authority succeeding to any of or all of the functions of said Commission, or with any national securities exchange, or distributed to its shareholders generally, as the case may be (with the exhibits relating thereto to be provided, at DRC's expense, upon the request of the Agent or any Lender); (h) Promptly upon their becoming available, copies of any periodic or special reports filed by any Borrower or any Subsidiary with any federal, state or local governmental agency or authority, if such reports indicate any material change in the business, operations, affairs or condition (financial or otherwise) of the Borrowers and the Subsidiaries, taken as a whole, or if copies thereof are requested by any Lender, and copies of any materially adverse notices and communications from any federal, state or local governmental agency or authority which specifically relate to a Borrower or any Subsidiary; (i) Forthwith upon any officer of any Borrower obtaining knowledge of any condition or event which constitutes an Event of Default or which, after notice or lapse of time or both, would constitute an Event of Default, a certificate signed by such officer specifying in reasonable detail the nature and period of existence thereof and what action any Borrower has taken or proposes to take with respect thereto; and (j) Such other information regarding the business, affairs and condition of the Borrowers and their respective Subsidiaries as such Lender may from time to time reasonably request. Each Borrower will permit each Lender to inspect the books and any of the properties or assets of such Borrower and its Subsidiaries at such reasonable times as such Lender may from time to time request. All costs and expenses of any Lender in connection with or relating to any request made under this 6.2(j) shall, if no Event of Default has occurred and is continuing, be paid by the Lender making such request and, upon the occurrence and during the continuance of an Event of Default, be paid by the Borrowers. 6.3 Legal Existence; Compliance with Laws, etc. Except as otherwise permitted under this Credit Agreement, each Borrower will, and will cause each Subsidiary to: maintain its corporate existence and business; maintain all properties which are reasonably necessary for the conduct of such business, now or hereafter owned, in good repair, working order and condition; take all actions necessary to maintain and keep in full force and effect its Licenses; in the case of DRC, take all steps necessary to maintain its status as a public company and to maintain its status as a company listed on the NASDAQ National Market or a national stock exchange; and, except as otherwise provided herein, comply with all applicable statutes, rules, regulations and orders of, and all applicable restrictions imposed by, all governmental authorities in respect of the conduct of its business and the ownership of its properties; in each case except to the extent that the failure to comply would not, individually or in the aggregate, have a material adverse effect on the business, operations, affairs or condition (financial or otherwise) of the Borrowers and their Subsidiaries, taken as a whole; or any Subsidiary; provided that neither any Borrower nor any Subsidiary shall be required by reason of this 6.3 to comply therewith at any time while such Borrower or such Subsidiary shall be contesting its obligations to do so in good faith by appropriate proceedings promptly initiated and diligently conducted, and if it shall have set aside on its books such reserves, if any, with respect thereto as are required by GAAP and deemed adequate by such Borrower and its independent public accountants. Neither any Borrower nor any Subsidiary will, without the prior written consent of the Lenders, engage in any business other than the Current Lines of Business. 6.4 Insurance. Each Borrower will maintain or cause to be maintained on all insurable properties now or hereafter owned by such Borrower or any Subsidiary insurance against loss or damage by fire or other casualty to the extent customary with respect to like properties of companies conducting similar businesses and will maintain or cause to be maintained public liability and workmen's compensation insurance insuring such Borrower and its Subsidiaries to the extent customary with respect to companies conducting similar businesses and, upon request, will furnish to the Lenders satisfactory evidence of the same. 6.5 Payment of Taxes. Each Borrower will, and will cause each Subsidiary to, pay and discharge promptly as they become due and payable all taxes, assessments and other governmental charges or levies imposed upon it or its income or upon any of its properties or assets, or upon any part thereof, as well as all lawful claims of any kind (including claims for labor, materials and supplies) which, if unpaid, might by law become a lien or a charge upon its property; provided that neither any Borrower nor any Subsidiary shall be required to pay any such tax, assessment, charge, levy or claim if the amount, applicability or validity thereof shall currently be contested in good faith by appropriate proceedings promptly initiated and diligently conducted and if such Borrower or such Subsidiary, as the case may be, shall have set aside on its books such reserves, if any, with respect thereto as are required by GAAP and deemed appropriate by such Borrower and its independent public accountants. 6.6 Payment of Other Indebtedness, etc. Except as to matters being contested in good faith and by appropriate proceedings, each Borrower will, and will cause each Subsidiary to, pay promptly when due, or in conformance with customary trade terms, all other Indebtedness and obligations incident to the conduct of its business. 6.7 Further Assurances. From time to time hereafter, each Borrower will execute and deliver, or will cause to be executed and delivered, such additional instruments, certificates or documents, and will take all such actions, as the Lenders may reasonably request, for the purposes of implementing or effectuating the provisions of this Agreement or the other Loan Documents. Upon the exercise by the Lenders (or the Agent on their behalf) of any power, right, privilege or remedy pursuant to this Agreement or the other Loan Documents which requires any consent, approval, registration, qualification or authorization of any governmental authority or instrumentality, each Borrower will execute and deliver, or will cause the execution and delivery of, all applications, certifications, instruments and other documents and papers that the Lenders may be required to obtain for such governmental consent, approval, registration, qualification or authorization. 6.8 Depository Account. Each Borrower will maintain its principal operating accounts with one or more of the Lenders (including BBH&Co). 6.9 Use of Proceeds. Each Borrower will use the proceeds of the Loans only for the purposes not prohibited by, and subject to the terms and conditions of, 5.13 and 5.16. 6.10 No Further Negative Pledges. Each Borrower hereby covenants and agrees, at all times while any Loans remain outstanding or while there is any Available Total Commitment, not to enter into any agreement prohibiting the creation or assumption of any mortgage, deed of trust, lien, pledge, hypothecation, encumbrance, charge or security interest in favor of the Lenders in assets or properties owned by any Borrower, except for purchase money agreements which contain such provisions, provided that (i) such provisions relate only to the assets being purchased thereunder and (ii) such agreements are entered into by any Borrower in the ordinary course of its business. 6.11 Regulation U. If requested by any Lender, each Borrower will promptly furnish such Lender with a statement in conformity with the requirements of Federal Reserve Form U-1 referred to in said Regulation U. 7. CERTAIN NEGATIVE COVENANTS OF THE BORROWERS. Each Borrower covenants and agrees that, so long as any Loan or Note is outstanding or the Lenders have any Available Total Commitment: 7.1 Indebtedness. None of the Borrowers will, nor will any Borrower permit any Subsidiary to, create, incur, assume or become or remain liable in respect of any Indebtedness, except: (a) Indebtedness to the Lenders hereunder; (b) Indebtedness of any wholly-owned Subsidiary to a Borrower or any other wholly-owned Subsidiary and of a Borrower to any wholly- owned Subsidiary; provided, however, that (i) all moneys due from a Borrower to any Subsidiary which is not a Borrower will be expressly constituted as Subordinated Debt and (ii) no Borrower shall repay any such moneys due to any Subsidiary at any time unless no Event of Default exists and no event which, with the giving of notice or lapse of time or both, would constitute an Event of Default exists or will exist after such repayment; (c) Current liabilities of a Borrower or any Subsidiary (other than for borrowed money) incurred in the ordinary course of its business and in accordance with customary trade practices; (d) Existing Indebtedness of a Borrower or any Subsidiary referred to in Schedule 5.8 attached hereto, and renewals and extensions thereof, provided that (i) the aggregate principal amount of such Indebtedness is not at any time increased, (ii) no material terms applicable to such Indebtedness shall be more favorable to the renewal or extension lenders than the terms that are applicable to the holders of such Indebtedness on the date hereof and (iii) the interest rate applicable to such Indebtedness shall be a market interest rate as of the time of such renewal or extension; (e) Indebtedness of a Borrower or any Subsidiary secured by Permitted Liens; (f) Indebtedness of a Borrower or any Subsidiary in respect of guarantees to the extent the underlying Indebtedness is permitted by this 7.1; and (g) Subordinated Debt; (h) Unfunded Benefit Liabilities so long as each Borrower is in compliance with 7.9, provided that the aggregate amount thereof at any one time shall not exceed $5,000,000; (i) To the extent payment thereof shall not at the time be required by 6.5, Indebtedness in respect of taxes, assessments, governmental changes and claims for labor, material and supplies; (j) Indebtedness in respect of judgments or awards (i) which have been in force for less than the applicable appeal period or (ii) in respect to which any Borrower or any Subsidiary shall at the time in good faith be prosecuting an appeal or proceedings for review, and in each case such Borrower or such Subsidiary shall have taken appropriate reserves therefor in accordance with GAAP; (k) Indebtedness in respect of deferred taxes arising in the ordinary course of business; and (l) Indebtedness of the Borrowers and their respective Subsidiaries (other than for borrowed money) in addition to the foregoing; provided, however, that the aggregate amount of all such Indebtedness at any one time outstanding shall not exceed $750,000. 7.2 Mortgages, Liens, etc. None of the Borrowers will, nor will any Borrower permit any Subsidiary to, directly or indirectly, create, incur, assume or suffer to exist, any mortgage, lien, charge or encumbrance on, or security interest in, or pledge of, or conditional sale or other title retention agreement (including any Capitalized Lease) with respect to, any property or asset now owned or hereafter acquired by any Borrower or any Subsidiary, except for the following (collectively, "Permitted Liens"): (a) Subject to 7.1(b), any lien on property of (i) a Subsidiary securing Indebtedness of such Subsidiary to a Borrower and (ii) a Borrower securing Indebtedness to any other Borrower; (b) The existing mortgages and security interests referred to in Schedule 7.2 attached hereto, or any renewal, extension or refunding of any such mortgage or security interest in an amount not exceeding the amount thereof remaining unpaid immediately prior to such renewal, extension or refunding; (c) Purchase money mortgages, liens and other security interests, including Capitalized Leases, created in respect of property acquired by a Borrower or any Subsidiary after the date hereof or existing in respect of property so acquired at the time of acquisition thereof, provided that (i) each such lien shall at all times be confined solely to the item or items of property so acquired, and (ii) the aggregate principal amount of Indebtedness secured by all such liens shall at no time exceed $500,000; (d) Liens for taxes and other amounts not yet delinquent or being contested in good faith as provided in 6.5; liens in connection with workmen's compensation, unemployment insurance or other social security obligations; liens securing the performance of bids, tenders, contracts, leases, statutory obligations, surety and appeal bonds, liens to secure progress or partial payments and other liens of like nature arising in the ordinary course of business; mechanics', workmen's, materialmen's or other like liens arising in the ordinary course of business in respect of obligations which are not yet due or which are being contested in good faith; and other liens or encumbrances incidental to the conduct of the business of any Borrower or any Subsidiary or to the ownership of their respective properties or assets, which were not incurred in connection with the borrowing of money or the obtaining of credit and which do not, individually or in the aggregate, materially detract from the value of the properties or assets of the Borrowers and their Subsidiaries or materially affect the use thereof in the operation of their business; (e) Encumbrances in the nature of (i) zoning restrictions, (ii) easements, (iii) restrictions of record on the use of real property, (iv) landlords' and lessors' Liens on rented premises and (v) restrictions on transfers or assignments of leases, which in each case do not, individually or in the aggregate, materially detract from the value of the encumbered property or impair the use thereof in the business of any Borrower or any Subsidiary; (f) Liens in respect of judgments or awards, to the extent that such judgments or awards are permitted by 7.1(j); (g) Restrictions under federal and state securities laws on the transfer of securities; and (h) Restrictions under foreign trade regulations on the transfer or licensing of certain assets of the Borrowers and their Subsidiaries. 7.3 Loans, Guarantees and Investments. None of the Borrowers will, nor will any Borrower permit any Subsidiary to, make or permit to remain outstanding any loan or advance to, or guarantee or endorse (except as a result of endorsing negotiable instruments for deposit or collection in the ordinary course of business) or otherwise assume or remain liable with respect to any obligation of, or make or own any investment in, or acquire (except in the ordinary course of business) the properties or assets of, any Person, except: (a) Extensions of credit by a Borrower or any Subsidiary in the ordinary course of business in accordance with customary trade practices; (b) The presently outstanding investments, loans and advances, if any, and the presently existing guarantees, if any, of any Borrower and its Subsidiaries all to the extent set forth on Schedule 5.8 attached hereto and any renewal, extension or refunding thereof, provided that (i) the aggregate principal amount thereof is not at any time increased, (ii) no material terms applicable thereto shall be more favorable to the renewal or extension borrower or recipient, as the case may be, than the terms that are applicable to the borrower or recipient, as the case may be, on the date hereof and (iii) the interest rate (if any) applicable thereto shall be a market interest rate as of the time of such renewal or extension; (c) Direct obligations of the United States of America or any department or agency thereof maturing not more than one year from the date of acquisition thereof; (d) Certificates of deposit, repurchase agreements, time deposits (including sweep accounts), demand deposits, bankers' acceptances, money market deposits or other similar types of investments maturing not more than one year from the date of acquisition thereof and evidencing direct obligations of any Lender or any lender within the United States of America having capital surplus and undivided profits in excess of $50,000,000; (e) Investments in commercial paper maturing within ninety (90) days from the date of acquisition thereof and having, at such date of acquisition, the highest credit rating obtainable from Moody's or S&P; (f) Any mutual fund or other pooled investment vehicle which invests principally in obligations described in subparagraphs (c), (d) or (e) above and having, at the date of investment in such fund or vehicle, one of the two highest credit ratings from Moody's or S&P; (g) Equity investments by any Borrower's wholly-owned Subsidiaries in any other wholly-owned Subsidiary and of a Borrower in any of its wholly-owned Subsidiaries; (h) Loans to the extent permitted by 7.1(b); (i) Acquisitions by a Borrower and its Subsidiaries of all or substantially all of the capital stock or assets of other Persons, provided that without the consent of the Required Lenders (i) the aggregate amount of cash consideration paid by the Borrower and the Subsidiaries in such acquisitions shall not exceed $15,000,000 and (ii) the proceeds of any Loans used in connection with each such acquisition are used as provided in 5.16; (j) Guarantees by a Borrower of Indebtedness and other obligations incurred by Subsidiaries to the extent permitted by 7.1; and (k) Capital Expenditures to the extent permitted by 7.7. 7.4 Leases. None of the Borrowers will, nor will any Borrower permit any Subsidiary to, enter into any Capitalized Lease, except as otherwise permitted under 7.1 and 7.2. Each Borrower will not, and will not permit any Subsidiary to, enter into any lease (other than Capitalized Leases) as lessee if, immediately after giving effect thereto, the aggregate rental obligations (excluding payments required to be made by the lessee in respect of taxes and insurance whether or not denominated as rent) of all of the Borrowers and their respective Subsidiaries for any succeeding 12-month period under all such leases then in effect shall exceed $3,500,000 in the aggregate. 7.5 Mergers and Consolidations. None of the Borrowers will, nor will any Borrower permit any Subsidiary to, enter into any merger or consolidation, except the following: (a) Any wholly-owned Subsidiary of a Borrower may merge or be liquidated into a Borrower or any other wholly-owned Subsidiary of a Borrower so long as after giving effect to any such merger to which a Borrower is a party such Borrower shall be the surviving or resulting Person; and (b) Mergers constituting investments permitted by 7.3(i) so long as after giving effect to any such merger to which a Borrower is a party such Borrower shall be the surviving or resulting Person;. 7.6 Sale of Assets. None of the Borrowers will, nor will any Borrower permit any Subsidiary to, sell, lease or otherwise dispose of all or any substantial part of its properties or assets, except the following: (a) Each Borrower and its Subsidiaries may sell or otherwise dispose of (i) inventory in the ordinary course of business, (ii) assets that are no longer used or useful in the Business of the applicable Borrower or Subsidiary, (iii) the properties and assets constituting the Visual Magic software business, (iv) the properties and assets constituting the telephone fraud detection and control business and (v) capital stock of Software and Telecom provided, however, that, in the case of the foregoing clauses (iii), (iv) and (v), immediately before and after giving effect thereto no Event of Default exists and no event exists which, with the giving of notice or passage of time or both, would constitue an Event of Default; (b) DRC may sell, lease or otherwise transfer any of its properties or assets to any other Borrower, provided that (i) the Borrowers provide a notice thereof to the Agent prior to each such transfer (which notice shall include a description and a good faith estimate of the fair market value of the property or assets being so transferred and, to the extent applicable, the revenues that were generated by such property or assets in the immediately preceding fiscal year of DRC, (ii) such transfers relate solely to a transfer by DRC of its encoder line of business to Encoder, its metrigraphics line of business to Metrigraphics, its Visual Magic software line of business to Software and/or its telephone fraud control line of business to Telecom and (iii) immediately before and after giving effect thereto no Event of Default exists; (c) Each Borrower and its Subsidiaries may license products and intangible assets for fair market value in the ordinary course of business; and (d) In addition to the foregoing, so long as immediately before and after giving effect thereto no Event of Default and no event exists which, with the giving of notice or passage of time or both, would constitute an Event of Default, each Borrower and its Subsidiaries may sell assets (other than inventory) having a fair market value not exceeding, and yielding an aggregate amount of sale proceeds not exceeding, $250,000 in any fiscal year of DRC. 7.7 Capital Expenditures. None of the Borrowers will, nor will any Borrower permit any Subsidiary to, make any Capital Expenditures during any fiscal year of DRC unless the aggregate amount of all Capital Expenditures made by all Borrowers and their respective Subsidiaries in such fiscal year does not exceed $6,250,000; provided, however, that the amount of permitted Capital Expenditures in respect of any fiscal year shall be increased by 50% of the unused permitted Capital Expenditures for the immediately preceding fiscal year (less an amount equal to any unused Capital Expenditures carried forward to such preceding fiscal year). 7.8 Distributions. DRC will not make any distribution or declare or pay any cash dividends on, or purchase, acquire or redeem or retire any of its capital stock, of any class, whether now or hereafter outstanding, except that so long as immediately before and after giving effect thereto no Event of Default exists, DRC may make cash distributions to its stockholders and repurchase shares of its common stock at a price not to exceed the then-current market value for such stock, in an aggregate amount which shall not exceed in any fiscal year of DRC fifty percent (50%) of the Consolidated Net Income of DRC and its Subsidiaries (if positive) for the immediately preceding fiscal year of DRC, provided that such amount shall not include shares of capital stock surrendered upon the exercise of any stock options or other convertible securities. 7.9 Compliance with ERISA. Each Borrower will make, and will cause all ERISA Affiliates to make, all payments or contributions to Employee Benefit Plans and Multiemployer Plans required under the terms thereof and in accordance with applicable minimum funding requirements of ERISA and the Code and applicable collective bargaining agreements. Each Borrower will cause all Employee Benefit Plans sponsored by it or any ERISA Affiliates to be maintained in material compliance with ERISA and the Code. None of the Borrowers will engage, and will not permit or suffer any ERISA Affiliate or any Person entitled to indemnification or reimbursement from a Borrower or any ERISA Affiliate to engage, in any prohibited transaction under ERISA or the Code for which an exemption is not available. No Borrower or ERISA Affiliate will terminate, or permit the PBGC to terminate, any Employee Benefit Plan or withdraw from any Multiemployer Plan, in any manner which could result in material liability of a Borrower or any ERISA Affiliate. 7.10 Transactions with Affiliates. No Borrower will, nor will any Borrower permit any Subsidiary to, directly or indirectly, enter into any lease or other transaction with any Affiliate of such Borrower or such Subsidiary (other than any other Borrower) on terms that are less favorable to such Borrower or such Subsidiary than those which could reasonably be obtained at the time from a non-Affiliate. 7.11 Observance of Subordination Provisions, etc. No Borrower will make, nor will any Borrower cause or permit to be made, any payments in respect of any Subordinated Debt, in contravention of the subordination provisions contained in the evidence of such Subordinated Debt or in contravention of any written agreement pertaining thereto, nor will any Borrower (a) amend, modify or change in any manner any of such subordination provisions or (b) amend, modify or change in any manner adverse to the interests of the Lenders any of the other provisions set forth in the agreements under which such Subordinated Debt is outstanding or contained in the evidence of such Subordinated Debt. 7.12 Environmental Liabilities. No Borrower will, nor will any Borrower permit any Subsidiary to, violate any requirement of any material law, rule or regulation regarding Hazardous Materials; and, without limiting the foregoing, no Borrower will, nor will any Borrower permit any Subsidiary or any other Person to, dispose of any Hazardous Material into or onto, or (except in accordance with applicable law) from, any real property owned, leased or operated by any Borrower or any Subsidiary or in which any Borrower or any Subsidiary holds, directly or indirectly, any legal or beneficial interest or estate, nor allow any lien imposed pursuant to any law, regulation or order relating to Hazardous Materials or the disposal thereof to be imposed or to remain on such real property, except for liens being contested in good faith by appropriate proceedings and for which adequate reserves have been established and are being maintained on the books of a Borrower and its Subsidiaries. 7.13 Subsidiaries. No Borrower will create any new Subsidiaries. 7.14 Material Adverse Change. None of the Borrowers will take nor fail to take any action that could reasonably be expected to result in a material adverse change in a Borrower's business, assets or condition (financial or otherwise). 8. FINANCIAL COVENANTS. Each Borrower covenants and agrees that, so long as any Loan or Note is outstanding or the Lenders have any Available Total Commitment, DRC and its Subsidiaries shall maintain at all times, on a Consolidated basis, each of the following: (a) Tangible Net Worth. Tangible Net Worth, measured on a fiscal quarter-end basis, of (i) for the fiscal quarter in which the Closing Date occurs, $25,000,000 and (ii) for each fiscal quarter thereafter, the sum of (x) $25,000,000 plus (y) fifty percent (50%) of the Net Income of DRC and its Subsidiaries (if positive) for each fiscal quarter from and including the first full fiscal quarter following the Closing Date to and including the most recent fiscal quarter-end; (b) Maximum Leverage. A ratio of Indebtedness of DRC and its Subsidiaries to Capitalization of DRC and its Subsidiaries of less than or equal to one to two (1.0:2.0), measured on a fiscal quarter-end basis; (c) Debt Coverage. A ratio of Senior Debt of DRC and its Subsidiaries to EBITDA of DRC and its Subsidiaries not to exceed three to one (3.0:1.0), measured on a fiscal quarter-end basis, but with EBITDA of DRC and its Subsidiaries for the period of four (4) consecutive fiscal quarters ending on such fiscal quarter-end; and (d) Cash Flow Coverage. A ratio of (i) EBITDA of DRC and its Subsidiaries less Capital Expenditures of DRC and its Subsidiaries not funded by Indebtedness for borrowed money less taxes on income and profits paid in cash by DRC and its Subsidiaries to (ii) required interest and principal payments made by DRC and its Subsidiaries on all Indebtedness of at least two and one-half to one (2.5:1.0), measured at the end of each fiscal quarter, with each such measurement based on the period of four (4) consecutive fiscal quarters ending on such fiscal quarter-end, provided that the cash flow coverage measurement on December 31, 1997, March 31, 1998 and June 30, 1998 will exclude all payments of principal made under the $6,000,000 promissory note, dated February 5, 1993, issued by DRC to ABN AMRO Bank, N.Y., Boston Branch (the "ABN AMRO Loan") during DRC's 1997 fiscal year. 9. DEFAULTS; REMEDIES. 9.1 Events of Default; Acceleration. If any of the following events (each an "Event of Default") shall occur: (a) Any Borrower shall default in the payment of principal of or interest on any Note or any other fee due hereunder, whether at maturity or at a date fixed for the payment of any installment or prepayment thereof or otherwise, and in the case of any such fee payment default, such default shall continue for a period of three (3) Business Days following the date of such default; or (b) Any Borrower shall default in the performance of or compliance with any term contained in 6.2(g), 6.2(h), 6.2(i), 6.3, 6.9, 6.10 and 7.1 to and including 7.14, and 8; or (c) Any Borrower shall default in the performance of or compliance with any term, condition, covenant or agreement (other than those listed in 9.1(b)) to be performed or observed by it under this Credit Agreement or under any other Loan Document and such default shall continue for a period of thirty (30) days or more; or (d) Any representation or warranty made by any Borrower herein or pursuant hereto shall prove to have been false or incorrect in any material respect when made or when deemed to have been made; or (e) Any Borrower or any Subsidiary shall default in (i) the payment of any Indebtedness in respect of borrowed money (other than the Loans), any Capitalized Lease or the deferred purchase price of any property and such default (A) shall continue after giving effect to any applicable grace periods and (B) shall be in respect of an aggregate amount of principal (whether or not due) and accrued interest exceeding $250,000; or (ii) the performance or compliance with any term of any agreement or instrument relating to such Indebtedness and such default (A) shall continue, without having been duly cured, waived or consented to, beyond the period of grace, if any, specified in such agreement or instrument, and (B) shall permit the acceleration of such Indebtedness prior to its stated maturity; or (f) Except as permitted by 7.5, any Borrower or any Subsidiary shall discontinue its business or shall make an assignment for the benefit of creditors, or shall fail generally to pay its debts as such debts become due, or shall apply for or consent to the appointment of or taking possession by a trustee, receiver or liquidator (or other similar official) of any Borrower or such Subsidiary or any substantial part of the property of any Borrower or such Subsidiary, or shall commence a case or have an order for relief entered against it under the federal bankruptcy laws, as now or hereafter constituted, or any other applicable federal or state bankruptcy, insolvency or other similar law, or if any Borrower or any Subsidiary shall take any action to dissolve or liquidate any Borrower or such Subsidiary; or (g) If, within sixty (60) days after the commencement against any Borrower or any Subsidiary of a case under the federal bankruptcy laws, as now or hereafter constituted, or any other applicable federal or state bankruptcy, insolvency or other similar law, such case shall have been consented to or shall not have been dismissed or all orders or proceedings thereunder affecting the operations or the business of any Borrower and such Subsidiary stayed, or if the stay of any such order or proceeding shall thereafter be set aside, or if within sixty (60) days after the entry of a decree appointing a trustee, receiver or liquidator (or other similar official) of any Borrower or any Subsidiary or any substantial part of the property of any Borrower or such Subsidiary, such appointment shall not have been vacated; or (h) A final judgment which, with other outstanding final judgments against any or all of the Borrowers and its Subsidiaries, exceeds an aggregate of $250,000 shall be rendered against any Borrower or any Subsidiary and if, within sixty (60) days after entry thereof, such judgment shall not have been discharged or execution thereof stayed pending appeal, or if, within sixty (60) days after the expiration of any such stay, such judgment shall not have been discharged, or if any such judgment shall not be discharged forthwith upon the commencement of proceedings to foreclose any lien, attachment or charge which may attach as security therefor and before any of the property or assets of any Borrower or any Subsidiary shall have been seized in satisfaction thereof; or (i) Any Borrower or any Subsidiary loses, fails to keep in force, suffers the termination or revocation of or terminates, forfeits or suffers an amendment to any License which would have a material adverse effect on the operations of such Borrower or such Subsidiary; or (j) There shall have occurred a Change in Control; or (k) If with respect to any Employee Benefit Plans or Multiemployer Plans, there shall occur any of the following which could reasonably be expected to have a material adverse effect on the financial condition of any Borrower: (i) the violation of any of the provisions of ERISA; (ii) the loss by such a plan intended to be a Qualified Plan of its qualification under Section 401(a) of the Code; (iii) the incurrence of liability under Title IV of ERISA; (iv) a failure to make full payment when due of all amounts which, under the provisions of any such plan or applicable law, any Borrower or any ERISA Affiliate is required to make; (v) the filing of a notice of intent to terminate such a plan under Sections 4041 or 4041A of ERISA; (vi) a complete or partial withdrawal of a Borrower or an ERISA Affiliate from any such plan; (vii) the receipt of a notice by the plan administrator of such a plan that the PBGC has instituted proceedings to terminate such plan or appoint a trustee to administer such plan; (viii) a commencement or increase of contributions to, or the adoption of or the amendment of, such a plan; and (ix) the assessment against a Borrower or any ERISA Affiliate of a tax under Section 4980B of the Code; then, and in any such event, and at any time thereafter, if any Event of Default (other than an event described in 9(f) or 9(g) shall then be continuing, the Required Lenders may direct the Agent to, by written notice to any Borrower, (i) declare the principal of and accrued interest in respect of the Notes to be forthwith due and payable, whereupon the principal of and accrued interest in respect of the Notes, and all other amounts then due hereunder, shall become forthwith due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived by each Borrower, and/or (ii) terminate the Total Commitment, whereupon the Total Commitment of the Lenders (and the Commitment of each individual Lender) to make Loans hereunder shall forthwith terminate without any other notice of any kind; and with respect to any event described in 9(f) or 9(g) above, the Commitments shall automatically terminate and the principal of the Notes then outstanding, together with accrued interest thereon and all other amounts then due hereunder, shall automatically become due and payable, without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived by each of the Borrowers, anything contained herein or in any other Loan Document to the contrary notwithstanding. 9.2 Remedies on Default, etc. In case any one or more Events of Default shall occur and be continuing, the Lenders may proceed to protect and enforce their rights by an action at law, suit in equity or other appropriate proceeding, whether for the specific performance of any agreement contained herein or in any other Loan Document, or for an injunction against a violation of any of the terms hereof or thereof, or in aid of the exercise of any power granted hereby or thereby or by law. In case of a default in the payment of any principal of or interest on any Note, or in the payment of any fee due hereunder, each Borrower will pay to the Lenders such further amount as shall be sufficient to cover the cost and expense of collection, including the Lenders' attorneys' fees, expenses and disbursements. No course of dealing and no delay on the part of the Lenders in exercising any right shall operate as a waiver thereof or otherwise prejudice the Lenders' rights. No right conferred hereby or by any other Loan Document upon the Lenders shall be exclusive of any other right referred to herein or therein or now or hereafter available at law, in equity, by statute or otherwise. 10. CLOSING CONDITIONS. The obligations of the Lenders to make the initial Loans shall be subject to the satisfaction of the following conditions precedent: 10.1. Loan Documents, etc. Each of the Loan Documents shall have been duly executed and delivered by each of the Borrowers, shall be in full force and effect and shall be in form and substance reasonably satisfactory to the Lenders. The Agent and each Lender shall have received a fully executed copy of each such document. 10.2. Corporate Action. All corporate action necessary for the valid execution, delivery and performance by each Borrower of this Credit Agreement and the other Loan Documents shall have been duly and effectively taken, and evidence thereof reasonably satisfactory to the Agent shall have been provided to the Agent. 10.3. Incumbency Certificate. The Agent shall have received from each Borrower an incumbency certificate, dated as of the Closing Date, signed by a duly authorized officer of such Borrower and giving the name and bearing a specimen signature of each individual who shall be authorized in the name and on behalf of such Borrower, (a) to sign each of the Loan Documents; (b) to make Loan Requests; and (c) to give notices and to take other action under the Loan Documents. 10.4. Opinions of Counsel. The Agent shall have received a favorable opinion addressed to the Lenders, dated as of the Closing Date, in the form of Exhibit E attached hereto, from Ropes & Gray as counsel for the Borrowers. 10.5. Payment of Fees. The Borrowers shall have paid to the Agent (i) the fees and expenses of the Agent's counsel in connection with the documentation of the transactions described in this Credit Agreement and (ii) all fees then due and payable pursuant to 2.2(c). 10.6. Real Estate Mortgage. The Agent shall have received evidence satisfactory to the Agent that, as to the ABN AMRO Loan, (i) no indebtedness or other obligations are owed thereunder by Borrower and (ii) such agreement and all mortgages, liens and encumbrances relating thereto have been terminated in full. 11. CONDITIONS TO ALL LOANS. The obligations of the Lenders to make any Loan whether on or after the Closing Date, shall also be subject to the satisfaction of the following conditions precedent: 11.1. Accuracy of Representations; No Event of Default. After giving effect to the Loans proposed to be made on such Drawdown Date, (i) all representations and warranties of each Borrower contained in this Credit Agreement, the other Loan Documents or in any document or instrument delivered pursuant to or in connection with this Credit Agreement shall be true and correct as of the date as of which they were made and shall also be true and correct at and as of the time of the making of such Loan, with the same effect as if made at and as of that time (except to the extent of changes resulting from transactions contemplated or permitted by this Credit Agreement and the other Loan Documents, or to the extent that such representations and warranties relate expressly to an earlier date) and (ii) no Event of Default or other event which, with the giving of notice or passage of time, would constitute an Event of Default shall have occurred and be continuing. On or before the date of the Loans, the Agent, on behalf of the Lenders, shall have received a certificate of DRC signed by the chief financial officer or treasurer of DRC to such effect. 11.2. No Legal Impediment. No change shall have occurred in any law or regulations thereunder or interpretations thereof that in the reasonable opinion of any Lender would make it illegal for such Lender to make such Loan. 11.3. Additional Conditions to Facility B Loans. The following conditions are applicable to all Revolving Credit Loans made under Facility B: (a) if all or any part of the proceeds of such Revolving Credit Loans are to be used for any of the purposes set forth in clause (ii) of 5.16, then the chief executive officer, chief financial officer or president of DRC shall deliver a certificate to the Agent and the Lenders certifying (i) each target Person involved in such acquisition has a positive EBITDA for the year ending on the immediately preceding fiscal quarter-end of such Person, and (ii) the Borrowers will, after giving effect to such transaction, be in compliance with the terms and obligations of this Agreement and no Event of Default would be triggered thereby; and (b) if the aggregate outstanding principal under Facility B is (or, after giving effect to any Loan Request(s), would be) more than $10,000,000, then no Lender shall be required to make any Revolving Credit Loan under Facility B unless and until the Required Lenders have consented thereto. 12. THE AGENT. 12.1. Appointment, Powers and Immunities. Each Lender hereby irrevocably appoints and authorizes the Agent to act as its agent hereunder and under each of the Loan Documents with such powers as are specifically delegated to the Agent by the terms of this Credit Agreement and the Loan Documents, together with such other powers as are reasonably incidental thereto. The Agent (which term as used in this sentence and in 12.5 and the first sentence of 12.6 shall include reference to its Affiliates and the respective officers, directors, employees and agents of the Agent and its Affiliates): (a) shall have no duties or responsibilities except those expressly set forth in this Credit Agreement to be a trustee for any Lender; (b) shall not be responsible to the Lenders for any recitals, statements, representations or warranties contained in this Credit Agreement, or in any certificate or other document referred to or provided for in, or received by any of them under, this Credit Agreement, or for the value, validity, effectiveness, genuineness, enforceability, perfection or sufficiency of this Credit Agreement, any Note or any other document referred to or provided for herein or for any failure by any Borrower or any other Person to perform any of its obligations hereunder or thereunder; (c) shall not be required to initiate or conduct any litigation or collection proceedings hereunder except to the extent requested by or consented to by the Required Lenders; and (d) shall not be responsible for any action taken or omitted to be taken by it hereunder or under any other document or instrument referred to or provided for herein or in connection herewith, except for its own gross negligence or willful misconduct. The Agent may employ agents and attorneys-in-fact and shall not be responsible for the negligence or misconduct of any such agents or attorneys-in-fact selected by it with reasonable care. Subject to the foregoing, the Agent shall, on behalf of the Lenders, exercise any and all rights, powers and remedies of the Lenders under this Credit Agreement and any other Loan Documents, including the giving of any consent or waiver or the entering into of any amendment, subject to the provisions of 25. 12.2. Reliance by Agent. The Agent shall be entitled to rely upon any certifications, notices or communications (including any communications by telephone, telex, telegram or cable) believed by it to be genuine and correct and to have been signed or sent by or on behalf of the proper Person or Persons, and upon advice and statements of legal counsel, independent accountants and other experts selected by the Agent. As to any matters not expressly provided for by this Credit Agreement, the Agent shall in all cases be fully protected in acting, or in refraining from acting, hereunder in accordance with the instructions of the Lenders, and any action taken or failure to act pursuant thereto shall be binding on all of the Lenders. 12.3. Defaults. The Agent shall not be deemed to have knowledge of the occurrence of an Event of Default (other than the nonpayment of principal of or interest on the Notes) unless the Agent has received written notice from a Lender a Borrower specifying such Event of Default. In the event that the Agent receives such a notice of the occurrence of an Event of Default, the Agent shall give notice thereof to the Lenders (and shall give each Lender prompt notice of each such nonpayment). The Agent shall (subject to the provisions of 24 and 12.7) take such action with respect to such Event of Default as shall be directed by the Lenders, provided that, unless and until the Agent shall have received such directions, the Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Event of Default as it shall deem advisable and in the best interests of the Required Lenders. 12.4. Rights as a Lender. With respect to its Percentage of the Total Commitment and the Loans made by it, BBH&Co, in its capacity as a Lender hereunder shall have the same rights and powers hereunder as any other Lender and may exercise the same as though it were not acting as the Agent, and the term "Lender" or "Lenders" shall, unless the context otherwise indicates, include the Agent in its individual capacity. The Agent and its Affiliates may (without having to account therefor to any Lender) accept deposits from, lend money to and generally engage in any kind of banking, trust or other business with any Borrower or any of its Affiliates, as if the Agent were not acting as the agent hereunder, and the Agent may accept fees and other consideration from any of such Persons for services as the Agent or otherwise without having to account for the same to the Lenders. 12.5. Indemnification. The Lenders agree to indemnify the Agent ratably in accordance with the aggregate principal amount of the Notes held by the Lenders (or, if no such principal is at the time outstanding, ratably in accordance with their respective Percentages), for any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind and nature whatsoever which may be imposed on, incurred by or asserted against the Agent in any way relating to or arising out of this Credit Agreement or referred to herein or the transactions contemplated by or referred to herein or therein (including the costs and expenses which any Borrower is obligated to pay but excluding, unless an Event of Default has occurred and is continuing, normal administrative costs and expenses incident to the performance of its agency duties hereunder) or the enforcement of any of the terms of this Credit Agreement or of any such other documents, provided that no Lender shall be liable for any of the foregoing to the extent they arise from the gross negligence or willful misconduct of the Agent. 12.6. Non-Reliance on Agent and Other Lenders. Each Lender agrees that it has, independently and without reliance on the Agent or any other Lender, and based on such documents and information as it has deemed appropriate, made its own credit analysis of the Borrowers and its own decision to enter into this Credit Agreement and that it will, independently and without reliance upon the Agent or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own analysis and decisions in taking or not taking action under this Credit Agreement. The Agent shall not be required to keep itself informed as to the performance or observance by the Borrowers of this Credit Agreement or any other document referred to or provided for herein or to inspect the properties or books of the Borrowers. Except for notices, reports and other documents and information expressly required to be furnished to the Lenders by the Agent hereunder, the Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the affairs, financial condition or business of the Borrowers which may come into the possession of the Agent or any of its Affiliates. Notwithstanding the foregoing, the Agent will use its best efforts to provide to the Lenders any and all information reasonably requested by them and reasonably available to the Agent promptly upon such request. 12.7. Failure to Act. Except for action expressly required of the Agent hereunder, the Agent shall in all cases be fully justified in failing or refusing to act hereunder unless it shall be indemnified to its satisfaction by the Lenders against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. 12.8. Resignation of Agent. Subject to the appointment and acceptance of a successor Agent as provided below, the Agent may resign at any time by giving notice thereof to the Lenders and DRC. Upon any such resignation, the Lenders shall appoint a successor Agent which shall be reasonably satisfactory to DRC. If no successor Agent shall have been so appointed by the Lenders and shall have accepted such appointment within 30 days after the retiring Agent's giving of notice of resignation, then the retiring Agent may, on behalf of the Lenders, appoint a successor Agent which shall be a Lender which has a combined capital and surplus of at least $500,000,000 and which shall be reasonably satisfactory to DRC. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations hereunder. After the retiring Agent's resignation hereunder as Agent, the provisions of this 12 shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as the Agent. 12.9. Cooperation of Lenders. Each Lender shall (a) endeavor to and shall not be liable for any failure to promptly notify the other Lenders and the Agent of any Events of Default known to such Lender under this Credit Agreement and not reasonably believed to have been previously disclosed to the other Lenders; and (b) provide the other Lenders and the Agent with such information and documentation as such other Lender or the Agent shall reasonably request in the performance of their respective duties hereunder, including all information relative to the outstanding balance of principal, interest and other sums owed to such Lender. 12.10. Amendment of 12. Each Borrower hereby agrees that the provisions of this 12 (other than 12.8 and 12.11) generally constitute an agreement among the Agent and the Lenders and that any and all of the provisions of this 12 (other than 12.8 and 12.11) may be amended at any time by the Lenders without the consent or approval of, or notice to, any Borrower (other than the requirement of notice to DRC of the resignation of the Agent and other than any provision in addition to 12.8 and 12.11 which directly affects the Borrowers). 12.11. Reliance. As to any consent that is granted or any other action that is taken by the Agent hereunder, or under the Loan Documents, the Borrowers shall be entitled to rely upon any of the foregoing granted, delivered or taken by the Agent and the Lenders shall be bound thereby, without the necessity of inquiring or confirming the Agent's authority. 13. SETOFF, ETC. Regardless of the adequacy of any collateral, during the continuance of any Event of Default, any deposits or other sums credited by or due from any Lender to any Borrower and any securities or other property of any Borrower in the possession of any Lender may be applied to or set off against the pro rata payment of Obligations and any and all other liabilities, direct, or indirect, absolute or contingent, due or to become due, now existing or hereafter arising, of the Borrowers to the Lenders. The Lenders agree among themselves that, with respect to all sums received by the Lenders applicable to the payment of principal of or interest on the Notes, equitable adjustment will be made among the Lenders so that, in effect, all such sums shall be shared ratably by each of the Lenders whether received by voluntary payment, by the exercise of the right of setoff or banker's lien, by counterclaim or crossclaim or by the enforcement of any or all of the Notes. If any Lender receives any payment on its Notes of a sum or sums in excess of its pro rata portion, then such Lender receiving such excess payment shall purchase for cash from the other Lenders an interest in their Notes in such amounts as shall result in a ratable participation by each of the Lenders in the aggregate unpaid amount of the Notes then outstanding; provided, however, that if all or any portion of such excess payment is thereafter recovered from such Lender, the purchase shall be rescinded and the purchase price restored to the extent of such recovery, but without interest. 14. EXPENSES. Whether or not the transactions contemplated hereby shall be consummated, each Borrower agrees to pay (a) the reasonable direct, out-of-pocket costs of reproducing this Credit Agreement, the other Loan Documents and the other agreements at and instruments mentioned herein, (b) any taxes (including any interest and penalties in respect thereto) payable by the Lenders (other than taxes based upon the Lender's net income) on or with respect to the transactions contemplated by this Credit Agreement (the Borrowers hereby agreeing to indemnify the Lenders with respect thereto), (c) the fees, expenses and disbursements of the Agent's counsel incurred in connection with the preparation of the Loan Documents and other instruments mentioned herein and the reasonable fees, expenses and disbursements of the Agent's counsel and any local counsel to the Lenders in connection with any amendments, modifications, approvals, consents, waivers or Replacement Lenders hereto or hereunder and (d) all reasonable out-of-pocket expenses (including attorney fees and costs for external counsel to the Lenders and the allocated costs and disbursements of internal counsel of the Lenders) incurred by the Lenders in connection with (i) the enforcement of or preservation of rights under any of the Loan Documents against the Borrowers or the administration thereof after the occurrence of an Event of Default or any event which, with the giving of notice or passage of time or both, would constitute an Event of Default, (ii) any replacement of a Lender pursuant to 17.4 and (iii) any litigation, proceeding or dispute arising hereunder; provided, however, that the Borrowers shall have no obligation to pay for the expenses of the Agent or the Lenders to the extent such expenses result from the Agent's or any Lender's gross negligence, fraud or willful misconduct. 15. INDEMNIFICATION. Each Borrower agrees to indemnify and hold harmless each Lender from and against any and all claims, actions and suits whether groundless or otherwise, and from and against any and all liabilities, losses, damages and expenses of every nature and character arising out of this Credit Agreement or any of the other Loan Documents or the transactions contemplated hereby or thereby, including (a) any actual or proposed use by any Borrower of the proceeds of any of the Loans, (b) any Borrower entering into or performing this Credit Agreement or any of the other Loan Documents or (c) with respect to any Borrower and its properties and assets, the violation of any Environmental Law, the presence, disposal, escape, seepage, leakage, spillage, discharge, emission, release or threatened release of any Hazardous Substances or any action, suit, proceeding or investigation brought or threatened with respect to any Hazardous Substances (including, but not limited to claims with respect to wrongful death, personal injury or damage to property), in each case including the reasonable fees and disbursements of counsel for the Agent, incurred in connection with any such investigation, litigation or other proceeding; provided, however, that no Borrower shall have any obligation to indemnify the Agent or the Lenders for any liabilities, losses, damages or other expenses (I) incurred in connection with any litigation commenced by any Borrower against the Agent or any Lender, or by the Agent or any Lender against any Borrower, which seeks enforcement of any rights hereunder or under any other Loan Document and is determined adversely to the Agent or the Lenders in a final nonappealable judgment or (II) to the extent such liabilities, losses, damages or other expenses result from the Agent's or any Lender's gross negligence, fraud or willful misconduct. If, and to the extent that the obligations of any Borrower under this 15 are unenforceable for any reason, each Borrower hereby agrees to make the maximum contribution to the payment in satisfaction of such obligations which is permissible under applicable law. 16. SURVIVAL OF COVENANTS, ETC. All covenants, agreements, representations and warranties made herein in any of the other Loan Documents or in any documents or other papers delivered by or on behalf of each Borrower pursuant hereto shall be deemed to have been relied upon by each Lender, notwithstanding any investigation heretofore or hereafter made by it, and shall survive the making by the Lenders of the Loans, as herein contemplated, and shall continue in full force and effect so long as any amount due under this Credit Agreement or any of the other Loan Documents remains outstanding or the Lenders have any obligation to make any Loans. All statements contained in any certificate or other paper delivered to the Lenders at any time by or on behalf of any Borrower pursuant hereto shall constitute representations and warranties as of the date thereof by the Borrowers hereunder. 17. ASSIGNMENT AND PARTICIPATION. 17.1. Assignment by the Lenders. No Lender shall assign or transfer any of its rights or obligations under any of the Loan Documents (i) without the prior written consent of DRC, which shall not be unreasonably withheld or delayed, and (ii) in amounts of less than $5,000,000 unless such Lender assigns its entire remaining interest under the Loan Documents; provided, however, that any Lender may, at any time and from time to time, sell, transfer, assign or otherwise grant an interest in any Loan to a Subsidiary or any Affiliate of such Lender or to a Federal Reserve Bank of the United States; and provided, further, that upon the occurrence and during the continuance of an Event of Default, no consent of DRC shall be required to any assignment. 17.2. Assignment by Borrowers. No Borrower shall assign or transfer any of its rights or obligations under any of the Loan Documents without the prior written consent of the Lenders. 17.3 Participations by the Lenders. Any Lender may, without the consent of any Borrower, the Agent or any other Lender, sell participations to one or more banks or other entities (each a "Participant") in all or a portion of such Lender's rights and obligations under this Credit Agreement (including all or a portion of its Commitment and the Loans owing to it); provided that (i) such Lender's obligations under this Credit Agreement shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) each Borrower, the Agent, and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Credit Agreement and (iv) such participation shall be in an amount of not less than $5,000,000. Any agreement or instrument pursuant to which a Lender sells such a participation shall provide that such Lender shall retain the sole right to enforce this Credit Agreement and to approve any amendment, modification or waiver of any provision of this Credit Agreement. Each Borrower agrees that each Participant shall be entitled to the benefits of 4.5 to the same extent as if it were a Lender and had acquired its interest by assignment pursuant to 17.1. 17.4 Replacement of Lender. In the event that any Lender (other than the Agent in its capacity as a Lender) or, to the extent applicable, any Participant (the "Affected Lender"): (a) fails to perform its obligations to fund any portion of any Loan on or after the Closing Date when required to do so by the terms of this Credit Agreement, or fails to provide its portion of any LIBOR Loan pursuant to 2 or on account of any legal requirement as contemplated by 4.4; (b) refuses to consent to a proposed extension of the Maturity Date that is consented to by all of the other Lenders; or (c) refuses to consent to a proposed amendment, modification, waiver or other action requiring consent of all of the Lenders under 25 that is consented to by Lenders owning at least 75% of the Percentages of the Total Commitment; then, so long as no Event of Default exists, DRC shall have the right to seek, at its own cost and expense, a replacement lender which is reasonably satisfactory to the Agent and the Required Lenders (the "Replacement Lender"). The Replacement Lender shall purchase the interests of the Affected Lender in the Loans and its Commitment and shall assume the obligations of the Affected Lender hereunder and under the other Loan Documents upon execution by the Replacement Lender of an assignment agreement in form and substance reasonably satisfactory to the Replacement Lender and Affected Lender, and the tender by the Replacement Lender to the Affected Lender of a purchase price agreed between the Replacement Lender and the Affected Lender. Such assignment by any Affected Lender who has performed its obligations hereunder shall be deemed an early termination of any Loans to the extent of such Affected Lender's portion thereof, and the Borrowers will pay to such Affected Lender any resulting amounts due under 4.8. Upon consummation of such assignment, (i) the Replacement Lender shall become party to this Credit Agreement as a signatory hereto and shall have all the rights and obligations of the Affected Lender under this Credit Agreement and the other Loan Documents with a Percentage equal to the Percentage of the Affected Lender, (ii) the Affected Lender shall be released from its obligations hereunder and under the other Loan Documents and (iii) no further consent or action by any party shall be required. The Borrowers shall sign such documents and take such other actions reasonably requested by the Replacement Lender to enable it to share in the benefits of the rights created by the Loan Documents. Until the consummation of an assignment in accordance with the foregoing provisions of this 17.4, the Borrowers shall continue to pay to the Affected Lender any Obligations as they become due and payable. 18. FOREIGN LENDER. If any Lender is not incorporated or organized under the laws of the United States of America or a state thereof, such Lender shall deliver to DRC and the Agent the following: (a) Two duly completed copies of United States Internal Revenue Service Form 1001 or 4224 or successor form, as the case may be, certifying in each case that such Lender is entitled to receive payments under this Credit Agreement and the Notes without deduction or withholding of any United States federal income taxes; provided, however, that if such Lender is not a "bank" within the meaning of Section 881(c)(3)(A) of the Code and cannot deliver Form 1001 or 4224, such Lender shall deliver to DRC and the Agent a certificate to such effect; and (b) A duly completed Internal Revenue Service Form W-8 or W-9 or successor form, as the case may be, to establish an exemption from United States backup withholding tax. Each such Lender that delivers to DRC and the Agent a Form 1001 or 4224 and Form W-8 or W-9 pursuant to this 18 further undertakes to deliver to DRC and the Agent two further copies of Form 1001 or 4224 and Form W-8 or W-9, or successor applicable form, or other manner of certification, as the case may be, on or before the date that any such form expires or becomes obsolete or after the occurrence of any event requiring a change in the most recent form previously delivered by it to DRC and the Agent. Such Forms 1001 or 4224 shall certify that such Lender is entitled to receive payments under this Credit Agreement without deduction or withholding of any United States federal income taxes. The foregoing documents need not be delivered in the event any change in treaty, law or regulation or official interpretation thereof has occurred which renders all such forms inapplicable or which would prevent such Lender from delivering any such form with respect to it, or such Lender advises DRC that it is not capable of receiving payments without any deduction or withholding of United States federal income tax and, in the case of a Form W-8 or W-9, establishing an exemption from United States backup withholding tax. Until such time as DRC and the Agent have received such forms indicating that payments hereunder are not subject to United States withholding tax or are subject to such tax at a rate reduced by an applicable tax treaty, the Borrowers shall withhold taxes from such payments at the applicable statutory rate without regard to 4.1(b). 19. NOTICES, ETC. Except as otherwise expressly provided in this Credit Agreement, all notices and other communications made or required to be given pursuant to this Credit Agreement or the other Loan Documents shall be in writing and shall be delivered in hand, mailed by United States registered or certified first class mail, postage prepaid, sent by overnight courier, or sent by telecopy, and confirmed by delivery via courier or registered or certified first class mail, postage prepaid, addressed as follows: (a) if to any Borrower, to such Borrower c/o Dynamics Research Corporation, 60 Frontage Road, Andover, MA 01810, Attention: Chief Financial Officer (Telecopy No. (978) 475-8205), or at such other address for notice as such Borrower shall last have furnished in writing to the Person giving the notice; with a copy to: Ropes & Gray One International Place Boston, MA 02110 Telecopy No. (617) 951-7050 Attention: Mary E. Weber, Esq. (b) if to the Agent or BBH&Co in its capacity as a Lender, at Brown Brothers Harriman & Co., 40 Water Street, Boston, MA 02109, Attention: Timothy T. Telman, Deputy Manager (Telecopy No. (617) 589- 3178) or such other address for notice as BBH&Co shall last have furnished in writing to the Person giving the notice; with a copy to: Choate, Hall & Stewart Exchange Place 53 State Street Boston, MA 02109 Telecopy No. (617) 248-4000 Attention: Lyman G. Bullard, Jr., Esq. (c) if to BankBoston, at BankBoston, N.A., 100 Federal Street, Boston, MA 02110, Attention: Daniel R. Gillette, Vice President (Mail Stop: MA BOS 01-07-04) (Telecopy No. (617) 434-5825), or such other address for notice as BankBoston shall last have furnished in writing to the Person giving the notice; (d) if to State Street, at State Street Bank and Trust Company, High Technology Group, 225 Franklin Street, Boston, MA 02110, Attention: Mark Trachy, Vice President (Telecopy No. (617) 664-4971), or such other address as State Street shall last have furnished in writing to the Person giving the notice; (e) if to Chase, at The Chase Manhattan Bank, 999 Broad Street, Bridgeport, CT 06604, Attention: A. Neil Sweeny, Vice President (Telecopy No. (203) 382-6573), or such other address as Chase shall last have furnished in writing to the Person giving the notice; and (f) if to Citizens, at Citizens Bank of Massachusetts, Edgewater Office Park, 401 Edgewater Place, Suite 105, Wakefield, MA 01880, Attention: R.E. James Hunter, Vice President (Telecopy No. (781) 224-2435), or such other address as Citizens shall last have furnished in writing to the Person giving the notice. Any such notice or demand shall be deemed to have been duly given or made and to have become effective (i) if delivered by hand, overnight courier or facsimile (so long as a confirmation receipt is received) to a responsible officer of the party to which it is directed, at the time of the receipt thereof by such officer or the sending of such facsimile and (ii) if sent by registered or certified first-class mail, postage prepaid, on the third Business Day following the mailing thereof. 20. GOVERNING LAW. THIS CREDIT AGREEMENT AND EACH OF THE OTHER LOAN DOCUMENTS ARE CONTRACTS UNDER THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS AND SHALL FOR ALL PURPOSES BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF SAID COMMONWEALTH OF MASSACHUSETTS (EXCLUDING THE LAWS APPLICABLE TO CONFLICTS OR CHOICE OF LAW). EACH OF THE BORROWERS, THE AGENT AND THE LENDERS AGREES THAT ANY SUIT FOR THE ENFORCEMENT OF THIS CREDIT AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS MAY BE BROUGHT IN THE COURTS OF THE COMMONWEALTH OF MASSACHUSETTS OR ANY FEDERAL COURT SITTING THEREIN AND CONSENTS TO THE NONEXCLUSIVE JURISDICTION OF SUCH COURTS AND THE SERVICE OF PROCESS IN ANY SUCH SUIT BEING MADE UPON SUCH PERSON BY MAIL AT ITS ADDRESS SPECIFIED IN 19. EACH OF THE BORROWERS, THE AGENT AND THE LENDERS HEREBY WAIVES ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH SUIT OR ANY SUCH COURT OR THAT SUCH SUIT IS BROUGHT IN AN INCONVENIENT COURT. 21. HEADINGS. The captions in this Credit Agreement are for convenience of reference only and shall not define or limit the provisions hereof. 22. COUNTERPARTS. This Credit Agreement and any amendment hereof may be executed in several counterparts and by each party on a separate counterpart, each of which when so executed and delivered shall be an original, and all of which together shall constitute one instrument. In proving this Credit Agreement it shall not be necessary to produce or account for more than one such counterpart signed by the party against whom enforcement is sought. 23. ENTIRE AGREEMENT, ETC. The Loan Documents and any other documents executed in connection herewith or therewith express the entire understanding of the parties with respect to the transactions contemplated hereby and thereby. Neither this Credit Agreement nor any term hereof may be changed, waived, discharged or terminated, except as provided in 25. 24. WAIVER OF JURY TRIAL. EACH OF THE BORROWERS, THE AGENT AND THE LENDERS HEREBY WAIVES ITS RIGHT TO A JURY TRIAL WITH RESPECT TO ANY ACTION OR CLAIM ARISING OUT OF ANY DISPUTE IN CONNECTION WITH THIS CREDIT AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS, ANY RIGHTS OR OBLIGATIONS HEREUNDER OR THEREUNDER OR THE PERFORMANCE OF SUCH RIGHTS AND OBLIGATIONS. EXCEPT AS PROHIBITED BY LAW, AND, EXCEPT IN THE CASE OF THE GROSS NEGLIGENCE, FRAUD, BAD FAITH OR WILLFUL MISCONDUCT OF THE AGENT OR ANY LENDER. EACH BORROWER HEREBY WAIVES ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY LITIGATION REFERRED TO IN THE PRECEDING SENTENCE ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES OR ANY DAMAGES OTHER THAN, OR IN ADDITION TO, ACTUAL DAMAGES. EACH BORROWER (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF THE AGENT OR THE LENDERS HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT EACH OF THE AGENT AND THE LENDERS WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVERS AND (B) ACKNOWLEDGES THAT EACH OF THE LENDERS HAVE BEEN INDUCED TO ENTER INTO THIS CREDIT AGREEMENT AND THE OTHER LOAN DOCUMENTS TO WHICH IT IS A PARTY BY, AMONG OTHER THINGS, THE WAIVERS AND CERTIFICATIONS CONTAINED HEREIN. 25. CONSENTS, AMENDMENTS, WAIVERS, ETC. Except as otherwise expressly provided in this Credit Agreement, any consent or approval required or permitted by this Credit Agreement to be given by the Lenders or the Agent may be given, and any term of this Credit Agreement or of any other instrument related hereto or mentioned herein may be amended, and the performance or observance by any Borrower of any terms of this Credit Agreement or such other instrument or the continuance of any Default or Event of Default may be waived (either generally or in a particular instance and either retroactively or prospectively) with, but only with, the written consent of DRC and the written consent of the Required Lenders. Notwithstanding the foregoing, no amendment or waiver shall, without the prior written consent of the Agent and all of the Lenders, (a) extend the fixed maturity or reduce the principal amount of, or reduce the rate or extend the time of payment of interest on, or reduce the amount or extend the time of payment of any principal or interest of, any Note (including any extensions of the Facility A Revolving Credit Note pursuant to 2.4); (b) change or waive the Total Commitment or any Commitment (other than reductions in Commitments pursuant to 2.3) or Percentage; (c) amend or waive this 25 or amend or waive the definition of Required Lenders; (d) change or waive the amount or payment terms of any fees due hereunder; or (e) amend or waive 8(c) or 9.1(a), (f) or (g) or 11. No waiver shall extend to or affect any obligation not expressly waived nor impair any right consequent thereon. No course of dealing or delay or omission on the part of the Lenders in exercising any right shall operate as a waiver thereof or otherwise be prejudicial thereto. No notice to or demand upon a Borrower shall entitle a Borrower to other or further notice or demand in similar or other circumstances. 26. CONFIDENTIALITY. No Lender will make any disclosure of confidential information furnished to it any Borrower or any of its Subsidiaries unless such information shall have become public, except: (a) in connection with operations under or the enforcement of or the protection of a Lender's interest in this Credit Agreement or any other Loan Document to Persons who have a reasonable need to be furnished such information; (b) pursuant to any law, rule or statutory or regulatory requirement or any court order, subpoena or other legal process; (c) to any parent or corporate Affiliate of such Lender or to any Participant, proposed Participant, assignee, proposed assignee, Replacement Lender or proposed Replacement Lender; provided, however, that any such Person shall agree to comply with the restrictions set forth in this 26 with respect to such information; (d) to its directors, officers, employees, agents, independent counsel, auditors and other professional advisors and consultants with an instruction to such Person to keep such information confidential; (e) to any other Lender and to the Agent and any successor Agent or prospective successor Agent; and (f) with the prior written consent of the Borrower, to any other Person. 27. SEVERABILITY. The provisions of this Credit Agreement are severable and if any one clause or provision hereof shall be held invalid or unenforceable in whole or in part in any jurisdiction, then such invalidity or unenforceability shall affect only such clause or provision, or part thereof, in such jurisdiction, and shall not in any manner affect such clause or provision in any other jurisdiction, or any other clause or provision of this Credit Agreement in any jurisdiction. 28. NATURE OF LENDER'S OBLIGATIONS. The Lenders obligations to make their respective Loans are several and not joint or joint and several. Any Lender which is not in default in the performance of its obligations may, in its discretion, assume the obligations of any other Lender which is in default. IN WITNESS WHEREOF, the undersigned have duly executed this Credit Agreement as a sealed instrument as of the date first set forth above. DYNAMICS RESEARCH CORPORATION By: Name: Douglas R. Potter Title: Vice President of Finance and Chief Financial Officer DRC ENCODER, INC. By: Name: Title: DRC METRIGRAPHICS, INC. By: Name: Title: DRC SOFTWARE, INC. By: Name: Title: DRC TELECOM, INC. By: Name: Title: per pro BROWN BROTHERS HARRIMAN & CO. By: Name: Mark W. Johnson Title: Manager BANKBOSTON, N.A. By: Name: Daniel R. Gillette Title: Vice President THE CHASE MANHATTAN BANK By: Name: A. Neil Sweeny Title: Vice President STATE STREET BANK AND TRUST COMPANY By: Name: Mark Trachy Title: Vice President CITIZENS BANK OF MASSACHUSETTS By: Name: R. E. James Hunter Title: Vice President -----END PRIVACY-ENHANCED MESSAGE-----